##### 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, 2005
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from___to___
 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 exchange
on which registeredNONE
    
    NONE
   
   o þ
  o þ
  þ o
 o
  o o þ
  o þ




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##### 



PagePART IItem 1. Business
    
    
    3Item 1A. Risk Factors
    
    
    7Item 2. Properties
    
    
    11Item 3. Legal Proceedings
    
    
    11Item 4. Submission of Matters to a Vote of Security Holders
    
    
    11PART IIItem 5. Market for the Registrants Common Shares, Related
Shareholder Matters and Issuer Purchases of Equity Securities
    
    
    12Item 6. Selected Financial Data
    
    
    13Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    14Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    30Item 8. Consolidated Financial Statements and Supplementary Data
    
    
    31Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
    
    
    56Item 9A. Controls and Procedures
    
    
    56Item 9B. Other Information
    
    
    56PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    57Item 11. Executive Compensation
    
    
    57Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Shareholder Matters
    
    
    57Item 13. Certain Relationships and Related Transactions
    
    
    57Item 14. Principal Accounting Fees and Services
    
    
    57PART IVItem 15. Exhibits, Financial Statement Schedules
    
    
    58Exhibit 21Exhibit 23(A)Exhibit 31.1Exhibit 31.2Exhibit 32.1
  2




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##### Table of Contents



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




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##### Table of Contents



Unemployment Compensation Products.
  Waste Surety Bond Program.
    American Legal Publishing Corporation
   4




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##### Table of Contents



Ultimate Services Agency, LLC
  COMPETITION
   REINSURANCE
      REGULATION
 Insurance Company Regulation
   5




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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.
 6




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##### Table of Contents



EMPLOYEES
  SERVICE MARKS
  
 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
  7




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##### Table of Contents



Possible Inadequacy of Loss Reserves
  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 monitoring insurance risk with respect to certain surety bond business; and
    
    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.
  Importance of Industry Ratings
  8




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Importance of Treasury Listing
  Regulation
 General.
 Required Licensing.
 Premium Rate Filings.
 Risk-Based Capital.
 Transactions Between Our Insurance Subsidiary and Affiliates.
 9




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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
  Dependence on Key Executives
  10




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##### Table of Contents



Reliance on Information Technology and Telecommunications Systems
  Controlling Interest of the Sokol Family
  The Ongoing SEC Investigation
   
 ITEM 2. PROPERITES
  
 ITEM 3. LEGAL PROCEEDINGS
    
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  11




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##### Table of Contents



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 SaleQuarterly period ended March 31, 2004
    
    $
    8.34
    
    
    $
    7.77Quarterly period ended June 30, 2004
    
    
    8.10
    
    
    
    7.65Quarterly period ended September 30, 2004
    
    
    7.72
    
    
    
    7.27Quarterly period ended December 31, 2004
    
    
    7.42
    
    
    
    7.02January 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
  HOLDERS
  DIVIDENDS
  12




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##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA
  2005
    
    2004
    
    2003
    
    2002
    
    2001Income Statement DataNet premiums earned
    
    $
    51,716,945
    
    
    $
    50,064,185
    
    
    $
    50,071,966
    
    
    $
    42,590,321
    
    
    $
    33,152,888Net investment income
    
    
    3,302,659
    
    
    
    2,164,115
    
    
    
    1,599,064
    
    
    
    1,236,138
    
    
    
    1,450,761Net realized gains (losses) on investments
    
    
    1,281,755
    
    
    
    1,094,174
    
    
    
    822,161
    
    
    
    (1,220,477
    )
    
    
    22,542Codification and subscription fees
    
    
    3,474,668
    
    
    
    4,005,415
    
    
    
    3,819,221
    
    
    
    3,324,037
    
    
    
    2,652,231Management fees
    
    
    713,697
    
    
    
    33,710
    
    
    
    114,094
    
    
    
    749,442
    
    
    
    846,446Other revenue
    
    
    146,786
    
    
    
    43,123
    
    
    
    81,653
    
    
    
    197,278
    
    
    
    161,544Total revenues
    
    
    60,636,510
    
    
    
    57,404,722
    
    
    
    56,508,159
    
    
    
    46,876,739
    
    
    
    38,286,412Cumulative effect of change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,481,858
    )
    
    
    Net income (loss)
    
    
    6,294,074
    
    
    
    (8,500,620
    )
    
    
    3,909,817
    
    
    
    889,613
    
    
    
    3,075,190Balance Sheet Data at Year EndTotal cash and investments
    
    $
    100,085,781
    
    
    $
    86,580,595
    
    
    $
    76,929,462
    
    
    $
    57,293,361
    
    
    $
    51,758,885Total assets
    
    
    128,335,835
    
    
    
    117,060,472
    
    
    
    115,869,736
    
    
    
    72,703,204
    
    
    
    64,670,677Notes payable
    
    
    27,119
    
    
    
    540,198
    
    
    
    53,276
    
    
    
    2,166,355
    
    
    
    5,696,839Trust preferred debt issued to affiliates
    
    
    15,465,000
    
    
    
    15,465,000
    
    
    
    15,465,000
    
    
    
    8,248,000
    
    
    
    Shareholders equity
    
    
    30,079,626
    
    
    
    24,846,288
    
    
    
    33,365,028
    
    
    
    28,901,838
    
    
    
    31,391,909Common shares outstanding
    
    
    4,972,700
    
    
    
    4,972,700
    
    
    
    4,920,050
    
    
    
    5,000,291
    
    
    
    5,770,185Per Common Share DataDiluted income (loss) before cumulative
effect of change in accounting principle
    
    $
    1.26
    
    
    $
    (1.72
    )
    
    $
    .77
    
    
    $
    .41
    
    
    $
    .53Diluted net income (loss)
    
    
    1.26
    
    
    
    (1.72
    )
    
    
    .77
    
    
    
    .16
    
    
    
    .53Year-end book value
    
    
    6.05
    
    
    
    5.00
    
    
    
    6.78
    
    
    
    5.78
    
    
    
    5.44GAAP RatiosLoss ratio
    
    
    45.8
    %
    
    
    95.1
    %
    
    
    66.1
    %
    
    
    67.0
    %
    
    
    65.9
    %Expense ratio
    
    
    47.8
    %
    
    
    34.6
    %
    
    
    26.0
    %
    
    
    24.4
    %
    
    
    25.4
    %Combined ratio
    
    
    93.6
    %
    
    
    129.7
    %
    
    
    92.1
    %
    
    
    91.4
    %
    
    
    91.3
    %Statutory RatiosLoss ratio
    
    
    45.8
    %
    
    
    95.1
    %
    
    
    66.1
    %
    
    
    67.0
    %
    
    
    65.9
    %Expense ratio
    
    
    50.9
    %
    
    
    33.3
    %
    
    
    25.9
    %
    
    
    25.0
    %
    
    
    19.3
    %Combined ratio
    
    
    96.7
    %
    
    
    128.4
    %
    
    
    92.0
    %
    
    
    92.0
    %
    
    
    85.2
    %Net premiums written to statutory surplus
    
    
    1.5
    x
    
    
    1.9
    x
    
    
    1.6
    x
    
    
    1.4
    x
    
    
    1.5
    x
 13




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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
      Municipal Code Publishing
 14




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Insurance Agency
 Discontinued Bond Program
    Arbitrations.
 Aegis Arbitration
 Sirius Arbitration.
 Harco Arbitration.
 15




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##### Table of Contents



Highlands Arbitration.
 2005 Reserve Developments.
     Loss and LAE Reserves.
 December 31,
    
    
    December 31,2005
    
    
    2004Bail Bonds:Case reserves
    
    $
    12.1
    
    
    $
    6.9Incurred but not reported (IBNR) reserves
    
    
    5.4
    
    
    
    8.7Total bail bond reserves
    
    
    17.5
    
    
    
    15.6Immigration Bonds:Case reserves
    
    
    0.7
    
    
    
    IBNR reserves
    
    
    1.4
    
    
    
    3.6Total immigration bond reserves
    
    
    2.1
    
    
    
    3.6Total loss and LAE reserves
    
    $
    19.6
    
    
    $
    19.2
 16




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Reinsurance Transactions
        17




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SUMMARY RESULTS
  Period-to-Period Increase (Decrease)Years ended December 31,2004-2005
    
    2003-2004Amount
    
    % Change
    
    Amount
    
    % ChangeNet premiums earned
    
    $
    1,652,760
    
    
    
    3.3
    %
    
    $
    (7,781
    )
    
    
    Net realized gains (losses) on investments
    
    
    187,581
    
    
    
    17.1
    %
    
    
    272,013
    
    
    
    33.1
    %Total revenues
    
    
    3,231,788
    
    
    
    5.6
    %
    
    
    896,563
    
    
    
    1.6
    %Losses and LAE
    
    
    (23,901,695
    )
    
    
    (50.6
    )%
    
    
    14,154,143
    
    
    
    42.8
    %Commissions, other insurance expenses, and general and
administrative expenses
    
    
    6,932,467
    
    
    
    38.0
    %
    
    
    4,145,672
    
    
    
    29.4
    %Income (loss) before federal income taxes
    
    
    21,438,697
    
    
    
    161.6
    %
    
    
    (18,792,034
    )
    
    
    (340.2
    )%Net income (loss)
    
    
    14,794,694
    
    
    
    174.0
    %
    
    
    (12,410,437
    )
    
    
    (317.4
    )%
    2005
    
    2004
    
    2003GAAP:Loss ratio
    
    
    45.8
    %
    
    
    95.1
    %
    
    
    66.1
    %Expense ratio
    
    
    47.8
    %
    
    
    34.6
    %
    
    
    26.0
    %Combined ratio
    
    
    93.6
    %
    
    
    129.7
    %
    
    
    92.1
    %Statutory:Loss ratio
    
    
    45.8
    %
    
    
    95.1
    %
    
    
    66.1
    %Expense ratio
    
    
    50.9
    %
    
    
    33.3
    %
    
    
    25.9
    %Combined ratio
    
    
    96.7
    %
    
    
    128.4
    %
    
    
    92.0
    %
 18




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##### Table of Contents



RESULTS OF OPERATIONS
 2005 Compared to 2004
 Net Premiums Earned
   ®
    Investment Income
  Codification and Subscription Fees.
 Management Fees
 19




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##### Table of Contents

\

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
 20




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##### Table of Contents



2004 Compared to 2003
 Net Premiums Earned
       Investment Income
  Codification and Subscription Fees
 Management Fees
 Losses and Loss Adjustment Expenses
 21




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##### Table of Contents



Commissions, Other Insurance Expenses and General and Administrative Expenses
 Codification and Subscription Expenses.
 Interest Expense
 Goodwill Impairment
 Federal Income Taxes.
 GAAP Combined Ratio
 22




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##### Table of Contents



BUSINESS OUTLOOK
 Lender/Dealer Products
     Unemployment Compensation and Other Specialty Products
  Expenses and Investments
    23




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
  2005
    
    
    2004
    
    
    2003Trust 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
    
    
    
    
    
    
    500,000
    
    
    
    Total debt obligations
    
    
    15,465,000
    
    
    
    15,965,000
    
    
    
    15,465,000Total shareholders equity
    
    
    30,079,626
    
    
    
    24,846,288
    
    
    
    33,365,028Total capitalization
    
    $
    45,544,626
    
    
    $
    40,811,288
    
    
    $
    48,830,028Ratio of total debt obligations to total capitalization
    
    
    34.0
    %
    
    
    39.1
    %
    
    
    31.7
    %
     24




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25




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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
    
    
    1,077,152
    
    
    
    305,185
    
    
    
    652,540
    
    
    
    119,427
    
    
    
    Loss and LAE reserves(2)
    
    
    27,304,223
    
    
    
    23,218,301
    
    
    
    4,085,922
    
    
    
    
    
    
    
    Total
    
    $
    43,846,375
    
    
    $
    23,523,486
    
    
    $
    4,738,462
    
    
    $
    119,427
    
    
    $
    15,465,000
 
 (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 market value.
 
 26




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##### Table of Contents



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;
    
    rating agency announcements; and
    
    our ability and intent to hold the security for a period of time sufficient to allow for recovery in the market value.
  Loss and Loss Adjustment Expense Reserves
   Assumed Business.
   Direct Business
 27




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##### Table of Contents




    
    ULI  limited liability
    
    ULI  non-limited liability
    
    CPI
    
    GAP
     Loss and LAE Reserves at Year End
 December 31, 2005
    
    
    December 31, 2004IBNR
    
    
    Case
    
    
    IBNR
    
    
    CaseULI  limited liability
    
    $
    1,655,241
    
    
    $
    245,840
    
    
    $
    2,788,585
    
    
    $
    455,346ULI  non-limited liability
    
    
    206,567
    
    
    
    1,146,213
    
    
    
    1,864,668
    
    
    
    1,175,363CPI
    
    
    233,212
    
    
    
    33,879
    
    
    
    669,840
    
    
    
    70,162GAP
    
    
    2,110,875
    
    
    
    184,766
    
    
    
    2,272,747
    
    
    
    65,164UC
    
    
    1,057,716
    
    
    
    
    
    
    
    1,310,504
    
    
    
    643,867Waste surety bond program
    
    
    778,445
    
    
    
    
    
    
    
    224,259
    
    
    
    Discontinued bond program
    
    
    6,827,179
    
    
    
    12,798,950
    
    
    
    12,297,247
    
    
    
    6,906,109Other
    
    
    21,840
    
    
    
    3,500
    
    
    
    19,106
    
    
    
    3,500Total
    
    $
    12,891,075
    
    
    $
    14,413,148
    
    
    $
    21,446,956
    
    
    $
    9,319,511
    28




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##### Table of Contents



Codification and Subscription Revenue and Expense Recognition
  OFF-BALANCE SHEET TRANSACTIONS
  FORWARD-LOOKING INFORMATION
  29




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##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Interest Rate Risk
  Investments.
  Projected Cash FlowsDecember 31, 2005There-
    
    
    
    
    
    
    Estimated2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    after
    
    
    Total
    
    
    Fair ValueAssetsFixed maturity securities:Held to maturity
    
    $
    1,758,000
    
    
    $
    580,000
    
    
    $
    
    
    
    $
    
    
    
    $
    1,250,000
    
    
    $
    1,170,000
    
    
    $
    4,758,000
    
    
    $
    4,856,624Available for sale
    
    $
    7,890,000
    
    
    $
    7,005,000
    
    
    $
    8,745,000
    
    
    $
    10,865,000
    
    
    $
    13,690,000
    
    
    $
    23,939,000
    
    
    $
    72,134,000
    
    
    $
    73,012,240Weighted-average interest rate:Fixed maturity securities
    
    
    4.14
    %
    
    
    4.46
    %
    
    
    4.03
    %
    
    
    4.39
    %
    
    
    4.58
    %
    
    
    3.92
    %
    
    
    4.21
    %
 Debt.
 Credit Risk
  Equity Risk
  30




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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 Report of Independent Registered Public Accounting Firm
 
     
 31




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##### Table of Contents



BANCINSURANCE CORPORATION AND SUBSIDIARIES
 
 Consolidated Statements of Operations
 Years ended December 31,2005
    
    
    2004
    
    
    2003Revenues:Net premiums earned
    
    $
    51,716,945
    
    
    $
    50,064,185
    
    
    $
    50,071,966Net investment income
    
    
    3,302,659
    
    
    
    2,164,115
    
    
    
    1,599,064Net realized gains (losses) on investments
    
    
    1,281,755
    
    
    
    1,094,174
    
    
    
    822,161Codification and subscription fees
    
    
    3,474,668
    
    
    
    4,005,415
    
    
    
    3,819,221Management fees
    
    
    713,697
    
    
    
    33,710
    
    
    
    114,094Other income
    
    
    146,786
    
    
    
    43,123
    
    
    
    81,653Total revenues
    
    
    60,636,510
    
    
    
    57,404,722
    
    
    
    56,508,159Expenses:Losses and loss adjustment expenses
    
    
    22,912,887
    
    
    
    27,076,212
    
    
    
    32,650,827Discontinued bond program losses and loss adjustment expenses
    
    
    422,733
    
    
    
    20,161,103
    
    
    
    432,345Commission expense
    
    
    13,750,996
    
    
    
    11,285,050
    
    
    
    7,891,016Other insurance operating expenses
    
    
    9,989,798
    
    
    
    6,030,136
    
    
    
    4,982,456Codification and subscription expenses
    
    
    2,809,700
    
    
    
    3,551,544
    
    
    
    3,269,714General and administrative expenses
    
    
    1,427,388
    
    
    
    920,529
    
    
    
    1,216,571Interest expense
    
    
    1,152,363
    
    
    
    894,463
    
    
    
    541,248Goodwill impairment
    
    
    
    
    
    
    753,737
    
    
    
    Total expenses
    
    
    52,465,865
    
    
    
    70,672,774
    
    
    
    50,984,177Income (loss) before federal income taxes
    
    
    8,170,645
    
    
    
    (13,268,052
    )
    
    
    5,523,982Federal income tax expense (benefit)
    
    
    1,876,571
    
    
    
    (4,767,432
    )
    
    
    1,614,165Net income (loss)
    
    $
    6,294,074
    
    
    $
    (8,500,620
    )
    
    $
    3,909,817Net income (loss) per share:Basic
    
    $
    1.27
    
    
    $
    (1.72
    )
    
    $
    .79Diluted
    
    $
    1.26
    
    
    $
    (1.72
    )
    
    $
    77
 See accompanying notes to consolidated financial statements.
 32




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##### Table of Contents



BANCINSURANCE CORPORATION AND SUBSIDIARIES
 
 Consolidated Balance Sheets
 December 31,2005
    
    
    2004AssetsInvestments:Held to maturity:Fixed maturities, at amortized cost (fair value $4,856,624 in 2005 and $5,034,173 in 2004)
    
    $
    4,821,629
    
    
    $
    4,909,873Available for sale:Fixed maturities, at fair value (amortized cost $72,562,204 in 2005 and $53,406,973 in 2004)
    
    
    73,012,240
    
    
    
    54,139,496Equity securities, at fair value (cost $7,597,066 in 2005 and $8,545,757 in 2004)
    
    
    8,043,299
    
    
    
    10,312,382Short-term investments, at cost which approximates fair value
    
    
    8,964,738
    
    
    
    12,712,577Other invested assets
    
    
    715,000
    
    
    
    715,000Total investments
    
    
    95,556,906
    
    
    
    82,789,328Cash
    
    
    4,528,875
    
    
    
    3,791,267Premiums receivable
    
    
    5,403,960
    
    
    
    7,911,379Accounts receivable, net
    
    
    674,357
    
    
    
    710,525Reinsurance recoverables
    
    
    1,235,043
    
    
    
    1,943,602Prepaid reinsurance premiums
    
    
    6,011,496
    
    
    
    2,859,710Deferred policy acquisition costs
    
    
    9,678,821
    
    
    
    7,223,995Costs and estimated earnings in excess of billings on uncompleted codification contracts
    
    
    248,035
    
    
    
    182,441Loans to affiliates
    
    
    892,523
    
    
    
    836,022Intangible assets, net
    
    
    771,013
    
    
    
    845,531Accrued investment income
    
    
    1,128,104
    
    
    
    887,467Current federal income tax recoverable
    
    
    
    
    
    
    3,688,228Net deferred tax asset
    
    
    485,461
    
    
    
    1,637,813Taxes, licenses and fees receivable
    
    
    
    
    
    
    72,520Other assets
    
    
    1,721,241
    
    
    
    1,680,644Total assets
    
    $
    128,335,835
    
    
    $
    117,060,472
 See accompanying notes to consolidated financial statements.
 33




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##### Table of Contents



BANCINSURANCE CORPORATION AND SUBSIDIARIES
 Consolidated Balance Sheets, Continued
 December 31,2005
    
    
    2004Liabilities and Shareholders EquityReserve for unpaid losses and loss adjustment expenses
    
    $
    7,678,094
    
    
    $
    11,563,111Discontinued bond program reserve for unpaid losses and loss adjustment expenses
    
    
    19,626,129
    
    
    
    19,203,356Unearned premiums
    
    
    35,579,349
    
    
    
    27,719,148Ceded reinsurance premiums payable
    
    
    3,605,394
    
    
    
    493,963Experience rating adjustments payable
    
    
    2,302,850
    
    
    
    1,456,403Retrospective premium adjustments payable
    
    
    2,201,706
    
    
    
    7,276,225Funds held under reinsurance treaties
    
    
    735,341
    
    
    
    1,253,796Contract funds on deposit
    
    
    3,201,124
    
    
    
    811,358Taxes, licenses and fees payable
    
    
    386,936
    
    
    
    Current federal income tax payable
    
    
    570,078
    
    
    
    Deferred ceded commissions
    
    
    1,337,098
    
    
    
    1,034,931Commissions payable
    
    
    2,710,582
    
    
    
    4,022,811Billings in excess of estimated earnings on uncompleted codification contracts
    
    
    75,108
    
    
    
    60,227Notes payable
    
    
    27,119
    
    
    
    540,198Other liabilities
    
    
    2,754,301
    
    
    
    1,313,657Trust preferred debt issued to affiliates
    
    
    15,465,000
    
    
    
    15,465,000Total liabilities
    
    
    98,256,209
    
    
    
    92,214,184Commitments 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,
2005 and 2004, 4,972,700 shares outstanding at December 31, 2005 and December 31, 2004
    
    
    1,794,141
    
    
    
    1,794,141Additional paid-in capital
    
    
    1,336,073
    
    
    
    1,336,073Accumulated other comprehensive income
    
    
    588,703
    
    
    
    1,649,439Retained earnings
    
    
    32,132,786
    
    
    
    25,838,71235,851,703
    
    
    
    30,618,365Less: Treasury shares, at cost (1,197,641 common shares at December 31, 2005 and
December 31, 2004)
    
    
    (5,772,077
    )
    
    
    (5,772,077
    )Total shareholders equity
    
    
    30,079,626
    
    
    
    24,846,288Total liabilities and shareholders equity
    
    $
    128,335,835
    
    
    $
    117,060,472
 See accompanying notes to consolidated financial statements.
 34




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##### 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, 2002
    
    
    
    
    
    
    
    
    
    $
    1,794,141
    
    
    $
    1,337,138
    
    
    $
    995,186
    
    
    $
    30,429,515
    
    
    $
    (5,654,142
    )
    
    $
    28,901,838Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,909,817
    
    
    
    
    
    
    
    3,909,817Unrealized gains, net of tax and
reclassification adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    925,079
    
    
    
    
    
    
    
    
    
    
    
    925,079Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,834,896Purchase of 80,241 treasury shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (371,706
    )
    
    
    (371,706
    )Balance 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
    )
    
    $
    30,079,626
 See accompanying notes to consolidated financial statements.
 35




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##### Table of Contents



BANCINSURANCE CORPORATION AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
 Years ended December 31,2005
    
    
    2004
    
    
    2003Cash flows from operating activities:Net income (loss)
    
    $
    6,294,074
    
    
    $
    (8,500,620
    )
    
    $
    3,909,817Adjustments to reconcile net income (loss) to net cash provided by operating activities:Goodwill impairment
    
    
    
    
    
    
    753,737
    
    
    
    Net realized gains on investments
    
    
    (1,281,755
    )
    
    
    (1,094,174
    )
    
    
    (822,161
    )Net realized (gains) losses on disposal of property and equipment
    
    
    658
    
    
    
    (183
    )Depreciation and amortization
    
    
    621,282
    
    
    
    712,002
    
    
    
    457,915Deferred federal income tax (benefit) expense
    
    
    1,697,332
    
    
    
    (2,350,920
    )
    
    
    294,042Change in assets and liabilities:Premiums receivable
    
    
    2,507,419
    
    
    
    2,750,387
    
    
    
    (4,751,047
    )Accounts receivable, net
    
    
    36,168
    
    
    
    282,568
    
    
    
    (149,034
    )Reinsurance recoverables
    
    
    708,559
    
    
    
    2,982,844
    
    
    
    (4,643,029
    )Prepaid reinsurance premiums
    
    
    (3,151,786
    )
    
    
    9,384,878
    
    
    
    (11,015,956
    )Deferred policy acquisition costs
    
    
    (2,454,826
    )
    
    
    (2,261,845
    )
    
    
    (2,308,324
    )Other assets, net
    
    
    3,304,895
    
    
    
    (3,070,832
    )
    
    
    (737,559
    )Reserve for unpaid losses and loss adjustment expenses
    
    
    (3,462,244
    )
    
    
    16,380,548
    
    
    
    6,826,416Unearned premiums
    
    
    7,860,201
    
    
    
    2,595,011
    
    
    
    14,819,368Ceded reinsurance premiums payable
    
    
    3,111,431
    
    
    
    (1,228,000
    )
    
    
    1,671,143Experience rating adjustments payable
    
    
    846,447
    
    
    
    (5,541,381
    )
    
    
    2,233,455Retrospective premium adjustments payable
    
    
    (5,074,519
    )
    
    
    1,905,952
    
    
    
    1,418,375Funds held under reinsurance treaties
    
    
    (518,455
    )
    
    
    (1,392,897
    )
    
    
    1,133,396Contract funds on deposit
    
    
    2,389,766
    
    
    
    (1,096,826
    )
    
    
    590,521Deferred ceded commissions
    
    
    302,167
    
    
    
    (190,007
    )
    
    
    1,224,938Other liabilities, net
    
    
    1,076,354
    
    
    
    (2,362,438
    )
    
    
    3,603,715Net cash provided by operating activities
    
    
    14,813,168
    
    
    
    8,657,804
    
    
    
    13,755,991Cash flows from investing activities:Proceeds from held to maturity fixed maturities due to redemption or maturity
    
    
    170,000
    
    
    
    695,000
    
    
    
    1,405,000Proceeds from available for sale fixed maturities sold, redeemed or matured
    
    
    25,194,401
    
    
    
    16,143,330
    
    
    
    21,430,449Proceeds from available for sale equity securities sold
    
    
    22,441,671
    
    
    
    12,112,580
    
    
    
    16,688,164Cost of investments purchased:Held to maturity fixed maturities
    
    
    (98,699
    )
    
    
    (750,820
    )
    
    
    (1,811,114
    )Available for sale fixed maturities
    
    
    (44,709,564
    )
    
    
    (41,041,113
    )
    
    
    (34,634,639
    )Available for sale equity securities
    
    
    (20,211,925
    )
    
    
    (11,859,943
    )
    
    
    (17,834,184
    )Net change in short-term investments
    
    
    3,747,839
    
    
    
    16,192,103
    
    
    
    (3,769,375
    )Net change in other invested assets
    
    
    
    
    
    
    
    
    
    
    (466,999
    )Other
    
    
    (109,283
    )
    
    
    (60,006
    )
    
    
    (647,967
    )Net cash used in investing activities
    
    
    (13,575,560
    )
    
    
    (8,568,869
    )
    
    
    (19,640,665
    )Cash flows from financing activities:Proceeds from note payable to bank
    
    
    
    
    
    
    3,500,000
    
    
    
    5,900,000Repayments of note payable to bank
    
    
    (500,000
    )
    
    
    (3,000,000
    )
    
    
    (8,000,000
    )Proceeds from issuance of trust preferred debt to an affiliate
    
    
    
    
    
    
    
    
    
    
    7,000,000Acquisition of treasury stock
    
    
    
    
    
    
    
    
    
    
    (371,706
    )Proceeds from stock options exercised
    
    
    
    
    
    
    252,705
    
    
    
    Net cash provided by (used in) financing activities
    
    
    (500,000
    )
    
    
    752,705
    
    
    
    4,528,294Net increase (decrease) in cash
    
    
    737,608
    
    
    
    841,640
    
    
    
    (1,356,380
    )Cash at beginning of year
    
    
    3,791,267
    
    
    
    2,949,627
    
    
    
    4,306,007Cash at end of year
    
    $
    4,528,875
    
    
    $
    3,791,267
    
    
    $
    2,949,627Supplemental disclosures of cash flow information:Cash paid (received) during the year for:Interest
    
    $
    1,137,200
    
    
    $
    886,115
    
    
    $
    540,300Federal income taxes
    
    $
    (4,079,067
    )
    
    $
    1,782,807
    
    
    $
    600,000
 See accompanying notes to consolidated financial statements.
 36




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##### Table of Contents



BANCINSURANCE CORPORATION AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements  December 31, 2005, 2004 and 2003
 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 (a)
    
    OrganizationBancinsurance Corporation (Bancinsurance) is a specialty property/casualty insurance
holding company incorporated in the State of Ohio in 1970. Bancinsurance Corporation and its
subsidiaries (collectively, the Company) have three reportable business segments: (1)
property/casualty insurance; (2) municipal code publishing; and (3) insurance agency. 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 written and income generated from our
investment portfolio. Ohio Indemnity, an Ohio corporation, is licensed in 48 states and the
District of Columbia. As such, Ohio Indemnity is subject to the regulations of the Ohio
Department of Insurance (the Department) and the regulations of each state in which it
operates. The majority of Ohio Indemnitys premiums are derived from three distinct lines of
business: (1) products designed for automobile lenders/dealers; (2) unemployment compensation
products; and (3) other specialty products.Our automobile lender/dealer line offers three types of products. First, ULTIMATE LOSS
INSURANCE® (ULI), a blanket vendor single interest coverage, is the primary product we
offer to financial institutions nationwide. This product insures banks and financial
institutions against damage to pledged collateral in cases where the collateral is not
otherwise insured. A ULI policy is generally written to cover a lenders complete portfolio
of collateralized personal property loans, typically automobiles. Second, creditor placed
insurance (CPI) is an alternative to our traditional blanket vendor single interest
product. While both products cover the risk of damage to uninsured collateral in a lenders
automobile loan portfolio, CPI covers the portfolio through tracking individual borrowers
insurance coverage. The lender purchases physical damage coverage for loan collateral after
a borrowers insurance has lapsed. Third, our guaranteed auto protection insurance (GAP)
pays the difference or gap between the amount owed by the customer on a loan or lease and
the amount of primary insurance company coverage in the event a vehicle is damaged beyond
repair or stolen and never recovered. The GAP product is sold to auto dealers, lenders and
lessors and provides coverage on either an individual or portfolio basis.Our unemployment compensation (UC) products are utilized by qualified entities that elect
not to pay the unemployment compensation taxes and instead reimburse state unemployment
agencies for benefits paid by the agencies to the entities former employees. Through our
UCassure® and excess of loss products, we indemnify the qualified entity for liability
associated with their reimbursing obligations. In addition, we underwrite surety bonds that
certain states require employers to post in order to obtain reimbursing status for their
unemployment compensation obligations.Other specialty products consist primarily of our waste surety bond program (WSB). In the
second quarter of 2004, the Company entered into a 50% quota share reinsurance arrangement
whereby the Company assumed waste surety bond coverage with certain insurance carriers.
Effective January 1, 2005, the reinsurance arrangement was amended whereby the Companys
assumed participation was reduced from 50% to 25%. In addition to assuming business, the
Company also writes surety bonds on a direct basis and then cedes 50% of that business under
the 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. The majority of the surety bonds under the program satisfy
the closure/post-closure financial responsibility imposed on hazardous and solid waste
treatment, storage and disposal facilities pursuant to Subtitles C and D of the Federal
Resource Conservation and Recovery Act (RCRA). Closure/post-closure bonds cover future
costs to close and monitor a regulated site such as a landfill. All of the surety bonds are
indemnified by the principal and collateral is maintained on the majority of the bonds. The
indemnifications and collateralization of this program reduces the risk of loss.In addition to the above product lines, beginning in 2001, the Company entered into a
reinsurance program covering bail and immigration bonds issued by several insurance carriers
and sold by a bail bond agency. 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, approximately thirty independent agents and direct sales.Municipal Code Publishing. Our wholly-owned subsidiary, American Legal Publishing
Corporation (ALPC), codifies, publishes, supplements and distributes ordinances for
approximately 1,900 local government units in 40 states. Ordinance
 37




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##### Table of Contents



codification is the process of collecting, organizing and publishing legislation for state and local governments.
ALPC also provides information management services which includes electronic publishing,
document imaging and internet hosting services.Insurance Agency. In July 2002, we formed Ultimate Services Agency, LLC (USA), a
wholly-owned subsidiary. We formed USA to act as an agency for placing property/casualty
insurance policies offered and underwritten by Ohio Indemnity and potentially by other
property/casualty insurance companies.In December 2002, we organized BIC Statutory Trust I (BIC Trust I), a Connecticut special
purpose business trust. In September 2003, we organized BIC Statutory Trust II (BIC Trust
II), a Delaware special purpose business trust. BIC Trust I and BIC Trust II were formed
for the sole purpose of issuing and selling floating rate trust preferred capital securites
in exempt private placement transactions and investing the proceeds from such securities in
junior subordinated debentures of the Company.
 (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 us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ
materially from these estimates.(c)
    
    New Accounting StandardsIn December 2004, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standard (SFAS) No. 123R, Share-Based Payment, that will require compensation
costs related to share-based payment transactions to be recognized in the financial
statements. With limited exceptions, the amount of compensation cost will be measured based
on fair value of the equity instrument issued on the grant date. Compensation cost will be
recognized over the period that an employee provides service in exchange for the award. SFAS
No. 123R replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes
Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to
Employees, the principles that the Company employed through 2005 to account and report its
employee stock option awards. SFAS No. 123R is effective at the beginning of the entitys
first fiscal year that begins after December 15, 2005. The Company will implement this
standard in the first quarter of 2006. The Company believes the impact of implementing this
standard will result in higher compensation expense and the standard would have reduced 2005
net income by approximately $0.02 per diluted share (see Note 1(r) to the Consolidated
Financial Statements).In March 2004, the Emerging Issues Task Force (EITF) reached a consensus on Issue No.
03-01, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. EITF 03-01 provides guidance on other-than-temporary impairment models for
marketable debt and equity securities accounted for under SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities, and non-marketable equity securities
accounted for under the cost method. The EITF developed a basic three-step model to evaluate
whether an investment is other-than-temporarily impaired. In September 2004, the FASB issued
FASB Staff Position EITF 03-01-1, which delays the effective date until additional guidance
is issued for the application of the recognition and measurement provisions of EITF 03-01 to
investments in securities that are impaired; however, the disclosure requirements are
effective for annual periods ending after June 15, 2004. The adoption of the disclosure
provisions of EITF 03-01 did not have a material effect on the Companys results of
operations and/or financial condition.(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.(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.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.
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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 is comprised of ALPCs municipal code contract billings. We estimate our
allowance for doubtful accounts and bad debts based upon our assessment of the collectibility
of receivables and prior experience.(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 recorded non-cash impairment charges in the fourth quarter of 2004 in
the aggregate amount of $753,737.(h)
    
    Intangible AssetIntangible assets represent databases acquired by ALPC and a non-compete agreement. The
databases are comprised of municipal code data and related files, which are amortized on
a straight-line basis over the estimated economic useful lives of twenty years. The
non-compete agreement is amortized on a straight-line basis over the contractual life of
five years.(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 is recognized on the percentage-of-completion
method. Completion is measured based on the percentage of direct labor costs incurred-to-date
compared to estimated direct labor costs for each contract. While we use available
information to estimate total direct labor costs on each contract, actual experience may vary
from estimated amounts. Revenue from code supplements is recognized on the
completed-contract method because the typical supplement is completed in a few months.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.(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 represent quota share arrangements for certain
lender/dealer producers. In addition, the Company participates in a waste surety bond
program under a quota share arrangement in which the Company
assumes and cedes business. As discussed in Note 16 to the Consolidated Financial
Statements, the Company assumed bail and immigration bond business through the second quarter
of 2004 after which the program was discontinued.(m)
    
    Experience Rating and Retrospective Premium AdjustmentsCertain ULI policies are eligible for premium adjustments based on loss experience. For
certain policies, return premiums are
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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 a cost containment service firm 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 firm as management fees. Management fees are recognized when earned based on the
development of benefit charges. Management fees of $713,697, $33,710 and $114,094 were
recognized in 2005, 2004 and 2003, 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 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, 2005
and 2004, property, equipment, computer software and leasehold improvements, net of
accumulated depreciation, was $484,525 and $512,435, 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. Accounts at each institution are insured by the Federal Deposit
Insurance Corporation (FDIC) up to $100,000. At December 31, 2005 the Company had
uninsured cash of $3,834,056.(r)
    
    Stock Option AccountingWe use the intrinsic value method under APB No. 25 and related interpretations in
accounting for stock options issued to employees, officers and directors under our equity
compensation plans. SFAS No. 123 requires the fair value method for recognition of cost on
equity compensation plans similar to those used by the Company. Adoption of SFAS No. 123 is
optional in 2005 (required in 2006, see Note 1(c) to the Consolidated Financial Statements);
however, pro forma disclosures as if we had adopted the fair value method under SFAS No. 123
in 2005, 2004 and 2003 are presented below.
 As Reported
    
    
    Pro Forma2005
    
    
    2004
    
    
    2003
    
    
    2005
    
    
    2004
    
    
    2003Net income (loss)
    
    $
    6,294,074
    
    
    $
    (8,500,620
    )
    
    $
    3,909,817
    
    
    $
    6,209,433
    
    
    $
    (8,589,282
    )
    
    $
    3,822,188Basic net income (loss) per share
    
    $
    1.27
    
    
    $
    (1.72
    )
    
    $
    .79
    
    
    $
    1.25
    
    
    $
    (1.74
    )
    
    $
    .77Diluted net income (loss) per share
    
    $
    1.26
    
    
    $
    (1.72
    )
    
    $
    .77
    
    
    $
    1.24
    
    
    $
    (1.74
    )
    
    $
    .76
 The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of
future amounts. Additional awards in future years are anticipated.(s)
    
    ReclassificationCertain prior year amounts have been reclassified in order to conform to the 2005
presentation.
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(2)
    
    INVESTMENTSThe 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, 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
    
    
    
    4,115,760Subtotal
    
    
    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, 2004Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    faircost
    
    
    gains
    
    
    losses
    
    
    valueHeld to maturity:Fixed maturities:US Treasury securities and obligations of
US Government corporations and agencies
    
    $
    1,051,927
    
    
    $
    
    
    
    $
    10,427
    
    
    $
    1,041,500Obligations of states and political
subdivisions
    
    
    3,857,946
    
    
    
    140,880
    
    
    
    6,153
    
    
    
    3,992,673Total held to maturity
    
    
    4,909,873
    
    
    
    140,880
    
    
    
    16,580
    
    
    
    5,034,173Available for sale:Fixed maturities:US Treasury securities and obligations of
US Government corporations and agencies
    
    
    500,000
    
    
    
    
    
    
    
    8,750
    
    
    
    491,250Obligations of states and political
subdivisions
    
    
    46,529,714
    
    
    
    835,097
    
    
    
    85,979
    
    
    
    47,278,832Corporate securities
    
    
    1,163,640
    
    
    
    8,945
    
    
    
    6,919
    
    
    
    1,165,666Asset-backed securities
    
    
    3,573,619
    
    
    
    
    
    
    
    23,531
    
    
    
    3,550,088Redeemable preferred stock
    
    
    1,640,000
    
    
    
    13,660
    
    
    
    
    
    
    
    1,653,660Subtotal
    
    
    53,406,973
    
    
    
    857,702
    
    
    
    125,179
    
    
    
    54,139,496Equity securities
    
    
    8,545,757
    
    
    
    1,822,539
    
    
    
    55,914
    
    
    
    10,312,382Total available for sale
    
    
    61,952,730
    
    
    
    2,680,241
    
    
    
    181,093
    
    
    
    64,451,878Total
    
    $
    66,862,603
    
    
    $
    2,821,121
    
    
    $
    197,673
    
    
    $
    69,486,051
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The amortized cost and estimated fair value of fixed maturity investments in held to
maturity and available for sale securities at December 31, 2005, by contractual maturity, are
shown below. Expected maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment penalties.
 December 31, 2005Held to Maturity
    
    
    Available for SaleAmortized
    
    
    Estimated
    
    
    Amortized
    
    
    Estimatedcost
    
    
    fair value

    
    cost
    

fair valueDue in one year or less
    
    $
    1,050,895
    
    
    $
    1,034,547
    
    
    $
    554,672
    
    
    $
    555,646Due after one year but less than five years
    
    
    2,371,766
    
    
    
    2,407,125
    
    
    
    9,270,364
    
    
    
    9,241,999Due after five years but less than ten years
    
    
    677,393
    
    
    
    667,084
    
    
    
    9,473,042
    
    
    
    9,473,099Due after ten years
    
    
    721,575
    
    
    
    747,868
    
    
    
    53,264,126
    
    
    
    53,741,496Total
    
    $
    4,821,629
    
    
    $
    4,856,624
    
    
    $
    72,562,204
    
    
    $
    73,012,240
 Net investment income for the year ended December 31 is summarized below:
 2005
    
    
    2004
    
    
    2003Fixed maturities
    
    $
    2,732,635
    
    
    $
    1,826,432
    
    
    $
    1,240,248Equity securities
    
    
    555,414
    
    
    
    236,528
    
    
    
    255,672Short-term investments
    
    
    239,643
    
    
    
    225,190
    
    
    
    256,450Other
    
    
    34,531
    
    
    
    25,926
    
    
    
    30,468Expenses
    
    
    (259,564
    )
    
    
    (149,961
    )
    
    
    (183,774
    )Net investment income
    
    $
    3,302,659
    
    
    $
    2,164,115
    
    
    $
    1,599,064
 The proceeds from sales of available for sale securities were $47,636,072, $28,255,910 and
$38,118,613 for the years ended December 31, 2005, 2004 and 2003, respectively.Pre-tax net realized gains (losses) on investments and changes in unrealized gains (losses) on
available for sale investments were as follows for each of the years ended December 31:
 2005
    
    
    2004
    
    
    2003Gross realized gains:Fixed maturities
    
    $
    157,808
    
    
    $
    55,923
    
    
    $
    236,224Equity securities
    
    
    1,388,129
    
    
    
    1,781,330
    
    
    
    869,307Other
    
    
    
    
    
    
    983
    
    
    
    162,094Total gains
    
    
    1,545,937
    
    
    
    1,838,236
    
    
    
    1,267,625Gross realized losses:Fixed maturities
    
    
    157,109
    
    
    
    69,659
    
    
    
    132,574Equity securities
    
    
    107,073
    
    
    
    138,916
    
    
    
    183,161Other-than-temporary impairments
    
    
    
    
    
    
    535,487
    
    
    
    129,729Total losses
    
    
    264,182
    
    
    
    744,062
    
    
    
    445,464Net realized gains
    
    $
    1,281,755
    
    
    $
    1,094,174
    
    
    $
    822,161Changes in unrealized gains (losses) on available for sale
investments:Fixed maturities
    
    $
    (282,487
    )
    
    $
    437,009
    
    
    $
    (59,736
    )Equity securities
    
    
    (1,324,689
    )
    
    
    (847,352
    )
    
    
    1,461,371Net change in
unrealized gains (losses)
    
    $
    (1,607,176
    )
    
    $
    (410,343
    )
    
    $
    1,401,635
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The following table summarizes, for all securities in an unrealized loss position at
December 31, 2005, the estimated fair value, pre-tax gross unrealized loss and number of
securities by length of time those securities have been continuously in an unrealized loss
position.
 GrossEstimated
    
    
    unrealized
    
    
    Number offair value
    
    
    loss
    
    
    securitiesFixed maturities:0-6 months
    
    $
    20,965,931
    
    
    $
    152,895
    
    
    
    747-12 months
    
    
    3,449,578
    
    
    
    54,928
    
    
    
    13Greater than 12 months
    
    
    3,786,673
    
    
    
    58,666
    
    
    
    12Total fixed maturities
    
    
    28,202,182
    
    
    
    266,489
    
    
    
    99Equities:0-6 months
    
    
    935,061
    
    
    
    37,917
    
    
    
    57-12 months
    
    
    4,146,562
    
    
    
    364,336
    
    
    
    8Greater than 12 months
    
    
    420,964
    
    
    
    40,655
    
    
    
    1Total equities
    
    
    5,502,587
    
    
    
    442,908
    
    
    
    14Total
    
    $
    33,704,769
    
    
    $
    709,397
    
    
    
    113
 All of the above 99 fixed maturity securities had a fair value to cost ratio equal to or
greater than 97% as of December 31, 2005. Out of the 14 equity securities listed above, 11
securities had a fair value to cost ratio equal to or greater than 86%, 1 security had a fair
value to cost ratio of 77%, 1 security had a fair value to cost ratio of 71% and 1 security had
a fair value to cost ratio of 66% as of December 31, 2005.The Company continually monitors developments affecting our invested assets, paying particular
attention to events that might give rise to impairment write-downs, including but not limited
to: (1) the length of time and extent to which the estimated fair value has been less than book
value; (2) whether the decline appears to be related to general market or industry conditions or
is issuer-specific; and (3) our ability and intent to hold the security for a period of time
sufficient to allow for recovery in the estimated fair value. There were $0, $535,487 and
$129,729 in impairment charges included in net realized gains on investments for the years ended
December 31, 2005, 2004 and 2003, respectively. Included in impairment charges for 2004 is a
write down of $334,136 related to a private equity investment due to its financial uncertainty.
As part of the Companys normal assessment of other-than-temporary impairments of investments,
the securities listed above were evaluated and no further impairments were deemed necessary as
of December 31, 2005.At December 31, 2005, investments having a carrying value of $4,536,478 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:
 2005
    
    
    2004
    
    
    2003Deferred, January 1
    
    $
    7,223,995
    
    
    $
    4,962,150
    
    
    $
    2,653,826Additions:Commissions
    
    
    10,215,611
    
    
    
    7,124,437
    
    
    
    5,380,025Premium tax
    
    
    604,559
    
    
    
    397,168
    
    
    
    400,315Total additions
    
    
    10,820,170
    
    
    
    7,521,605
    
    
    
    5,780,340Amortization to expense
    
    
    8,365,344
    
    
    
    5,259,760
    
    
    
    3,472,016Deferred, December 31
    
    $
    9,678,821
    
    
    $
    7,223,995
    
    
    $
    4,962,150
 (4)
    
    UNCOMPLETED CONTRACTSRevenues earned on uncompleted codification contracts by ALPC were $1,452,739 and $1,829,586 and
billings to date on those contracts were $1,279,812 and $1,707,372 at December 31, 2005 and
2004, respectively. The excess of costs and estimated earnings over billings were $248,035 and
$182,441 at December 31, 2005 and 2004, respectively.(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
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goodwill existed at its property/casualty insurance segment. The
Company performed impairment testing in accordance with SFAS No. 142. 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 non-cash impairment
charges in the fourth quarter of 2004 in the aggregate amount of $753,737.
 Intangible assets as of December 31 were as follows:
 December 31, 2005
    
    
    December 31, 2004Accumulated
    
    
    
    
    
    
    
    
    
    
    AccumulatedCost
    
    
    amortization
    
    
    Net
    
    
    Cost
    
    
    amortization
    
    
    NetAmortizing intangibles:Databases
    
    $
    1,008,773
    
    
    $
    (253,879
    )
    
    $
    754,894
    
    
    $
    1,008,773
    
    
    $
    (203,440
    )
    
    $
    805,333Noncompete agreement
    
    
    120,394
    
    
    
    (104,275
    )
    
    
    16,119
    
    
    
    120,394
    
    
    
    (80,196
    )
    
    
    40,198Total intangible assets
    
    $
    1,129,167
    
    
    $
    (358,154
    )
    
    $
    771,013
    
    
    $
    1,129,167
    
    
    $
    (283,636
    )
    
    $
    845,531
 Amortization expense related to amortizable intangible assets was $74,518, $74,517 and
$74,518 during 2005, 2004 and 2003, respectively. The estimated amortization expense of
intangible assets for the next five fiscal years is as follows:
 2006
    
    $
    66,5182007
    
    
    50,4772008
    
    
    50,4392009
    
    
    50,4392010
    
    
    50,439$
    268,312
 (6)
    
    NOTES PAYABLEAs of December 31, 2005, we had an unsecured $10,000,000 revolving line of credit with a
maturity date of June 30, 2007 with no outstanding balance ($500,000 at December 31, 2004). The
revolving credit agreement provides for interest payable quarterly, at an annual rate equal to
0.75% less than the prime rate (6.50% and 4.52% per annum at December 31, 2005 and 2004,
respectively). The Company was in compliance with all provisions of our debt covenants under
the agreement at December 31, 2005. The bank that provides the credit line is also a
policyholder of the Company.(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. During 2004, ALPC renewed a lease in Cincinnati, Ohio for office
space, which will expire on February 28, 2010. Rental expenses under operating leases were
$265,852, $274,300 and $271,656 during 2005, 2004 and 2003, respectively.The future minimum lease payments required under these operating leases for the next five fiscal
years are as follows:
 2006
    
    $
    305,1852007
    
    
    322,3222008
    
    
    330,2182009
    
    
    102,3172010
    
    
    17,110$
    1,077,152
 (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
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##### Table of Contents



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 (8.44% and 6.44% at December 31, 2005 and 2004, respectively), are
redeemable at par on or after December 4, 2007 and mature on December 4, 2032. BIC Trust IIs
floating rate trust preferred capital securities, and the junior subordinated debentures issued
in connection therewith, pay dividends and interest, as applicable, on a quarterly basis at a
rate equal to three month LIBOR plus four hundred and five basis points (8.58% and 6.61% at
December 31, 2005 and 2004, respectively), are redeemable at par on or after September 30, 2008
and mature on September 30, 2033. Interest on the junior subordinated debentures is charged to
income as it accrues. Interest expense related to the junior subordinated debentures for the
period ended December 31, 2005, 2004 and 2003 was $1,148,431, $862,256 and $538,056,
respectively. The Company was in compliance with all provisions of our debt covenants at
December 31, 2005.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. The Company adopted FIN
46 on July 1, 2003. Upon adoption, BIC Trust I was deconsolidated effective July 1, 2003 with
prior periods reclassified in the consolidated financial statements. The deconsolidation did
not have any impact on net income. In accordance with FIN 46, BIC Trust II was not consolidated
upon formation in September 2003.
 (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:
 2005
    
    
    2004Deferred tax assets:Unpaid loss and LAE reserves
    
    $
    417,169
    
    
    $
    499,066Unearned premium reserves
    
    
    2,010,614
    
    
    
    1,690,442Net operating loss carryforward
    
    
    733,158
    
    
    
    2,174,085Alternative minimum tax
    
    
    508,562
    
    
    
    204,862Other-than-temporary impairment of investments
    
    
    3,386
    
    
    
    40,899Deferred ceded commissions
    
    
    454,613
    
    
    
    351,876Other
    
    
    256,579
    
    
    
    205,934Subtotal
    
    
    4,384,081
    
    
    
    5,167,164Deferred tax liabilities:Net unrealized gains on available for sale securities
    
    
    (304,732
    )
    
    
    (849,711
    )Deferred policy acquisition costs
    
    
    (3,290,799
    )
    
    
    (2,456,158
    )Accrued dividends receivable
    
    
    (10,321
    )
    
    
    (12,297
    )Other
    
    
    (292,768
    )
    
    
    (211,185
    )Subtotal
    
    
    (3,898,620
    )
    
    
    (3,529,351
    )Net deferred tax asset
    
    $
    485,461
    
    
    $
    1,637,813
 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.As of December 31, 2005, the Company has a net operating loss carryforward of $2,156,347 which
originated in 2004 and will expire in 2024.The provision for federal income taxes for the period ended December 31 consists of the
following:
 2005
    
    
    2004
    
    
    2003Current expense (benefit)
    
    $
    179,239
    
    
    $
    (2,416,512
    )
    
    $
    1,320,123Deferred expense (benefit)
    
    
    1,697,332
    
    
    
    (2,350,920
    )
    
    
    294,042Federal income tax expense (benefit)
    
    $
    1,876,571
    
    
    $
    (4,767,432
    )
    
    $
    1,614,165
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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:
 2005
    
    
    2004
    
    
    2003Federal income tax at statutory rate
    
    $
    2,778,019
    
    
    $
    (4,511,138
    )
    
    $
    1,878,154Dividends received deduction and tax exempt interest
    
    
    (842,952
    )
    
    
    (566,581
    )
    
    
    (379,099
    )Business meals and entertainment
    
    
    21,914
    
    
    
    35,042
    
    
    
    22,489Goodwill impairment
    
    
    
    
    
    
    256,271
    
    
    
    Other
    
    
    (80,410
    )
    
    
    18,974
    
    
    
    92,621Federal income tax expense (benefit)
    
    $
    1,876,571
    
    
    $
    (4,767,432
    )
    
    $
    1,614,165
 (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 $126,640, $224,548 and $164,057 for the years ended December 31,
2005, 2004 and 2003, respectively.(11)
    
    STOCK OPTION PLANSWe have stock options outstanding and exercisable at December 31, 2005 under two equity
compensation plans, each of which has been approved by our security holders.The 1994 Stock Option Plan (the 1994 Stock Option Plan) provides 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 are eligible to participate in the 1994 Stock Option Plan. The 1994 Stock
Option Plan is administered by the Companys Compensation Committee which determines to whom
and when options will be granted along with the terms and conditions of the options. Under the
1994 Stock Option Plan, options for 284,500 common shares were outstanding at December 31, 2005
and expire at various dates from 2006 to 2013 and range in option price per share from $3.375
to $6.75. Of the options for 284,500 common shares outstanding, 40,000 have been granted to our
non-employee directors and 244,500 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 award. Under
the 2002 Plan, options for 329,000 common shares were outstanding at December 31, 2005 and
expire at various dates from 2012 to 2014 and range in option price per share from $4.50 to
$8.00. All of the options outstanding were granted to employees for compensatory purposes.A summary of the status of our stock options as of December 31, 2005, 2004 and 2003 and changes
during the year ended on those dates is presented below:
 2005
    
    
    2004
    
    
    2003Weighted-average
    
    
    
    
    
    
    Weighted-average
    
    
    
    
    
    
    Weighted-averageShares
    
    
    exercise price
    
    
    Shares
    
    
    exercise price
    
    
    Shares
    
    
    exercise priceOutstanding at beginning of year
    
    
    650,400
    
    
    $
    5.26
    
    
    
    586,400
    
    
    $
    4.81
    
    
    
    487,900
    
    
    $
    4.73Granted
    
    
    
    
    
    
    
    
    
    
    129,000
    
    
    
    7.11
    
    
    
    159,000
    
    
    
    5.23Exercised
    
    
    
    
    
    
    
    
    
    
    (56,000
    )
    
    
    4.90
    
    
    
    (18,000
    )
    
    
    4.92Expired
    
    
    (14,500
    )
    
    
    2.55
    
    
    
    
    
    
    
    
    
    
    
    (20,000
    )
    
    
    6.00Canceled
    
    
    (22,400
    )
    
    
    5.11
    
    
    
    (9,000
    )
    
    
    4.85
    
    
    
    (22,500
    )
    
    
    4.95Outstanding at end of year
    
    
    613,500
    
    
    
    5.33
    
    
    
    650,400
    
    
    
    5.26
    
    
    
    586,400
    
    
    
    4.81Shares reserved for issuance
    
    
    880,500
    
    
    
    
    
    
    
    917,400
    
    
    
    
    
    
    
    982,400Options available for future grant
    
    
    267,000
    
    
    
    
    
    
    
    267,000
    
    
    
    
    
    
    
    396,000Weighted-average fair value of options
granted during the year
    
    $
    
    
    
    
    
    
    
    $
    2.4990
    
    
    
    
    
    
    $
    1.7068
 There were no options granted during 2005. The fair value of each option granted during
2004 and 2003 is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (1)
expected volatility of 27.10% for 2004 and 27.44% for 2003; (2) risk-free interest rate of
4.26% for options granted May 17, 2004, 3.88% for options granted December 21, 2004, 3.09% for
options granted March 14, 2003, 2.82% for options granted May 16, 2003, 2.74% for options
granted June 2, 2003, and 2.64% for options granted June 3, 2003; (3) expected life of six
years for all years; and (4) 0% dividend yield for all years.
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The following table summarizes weighted-average information by range of exercise prices for
stock options outstanding and exercisable at December 31, 2005:
 Options Outstanding
    
    Options ExercisableNumber
    
    Weighted-average
    
    Weighted-average
    
    Number
    
    Weighted-averageoutstanding
    
    remaining
    
    exercise
    
    exercisable
    
    exerciseRange of Exercise Prices
    
    at 12/31/05
    
    contractual life (years)
    
    price
    
    at 12/31/05
    
    price$3.375 - 3.875
    
    
    27,000
    
    
    
    0.96
    
    
    
    3.84
    
    
    
    27,000
    
    
    
    3.844.00 - 4.82
    
    
    243,000
    
    
    
    4.75
    
    
    
    4.57
    
    
    
    192,200
    
    
    
    4.595.00 - 5.375
    
    
    200,500
    
    
    
    6.33
    
    
    
    5.23
    
    
    
    117,900
    
    
    
    5.276.00 - 6.25
    
    
    14,000
    
    
    
    6.00
    
    
    
    6.07
    
    
    
    14,000
    
    
    
    6.077.04 - 8.00
    
    
    129,000
    
    
    
    8.93
    
    
    
    7.11
    
    
    
    25,800
    
    
    
    7.113.375 - 8.00
    
    
    613,500
    
    
    
    6.00
    
    
    
    5.33
    
    
    
    376,900
    
    
    
    4.98
 (12)
    
    STATUTORY RESTRICTIONSGenerally, Ohio Indemnity is restricted by the insurance laws of the State of Ohio as to
amounts that can be transferred to the parent in the form of dividends, loans, or advances
without the approval of the Department. Under these restrictions, during 2006, dividends,
loans or advances in excess of $3,478,274 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, 2005.(13)
    
    STATUTORY SURPLUS AND NET INCOMEOhio Indemnity is statutorily required to file financial statements with state 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 accounting practices prescribed by the Department differed from
shareholders equity and net income determined in accordance with GAAP by the following:
 Shareholders Equity/Surplus
    
    
    Net Income (Loss)2005
    
    
    2004
    
    
    2003
    
    
    2005
    
    
    2004
    
    
    2003Statutory
    
    $
    34,782,737
    
    
    $
    30,879,673
    
    
    $
    36,293,102
    
    
    $
    5,780,803
    
    
    $
    (11,300,632
    )
    
    $
    2,427,321Reconciling items:Non-admitted assets
    
    
    744,219
    
    
    
    586,668
    
    
    
    33,682
    
    
    
    
    
    
    
    
    
    
    
    Deferred policy acquisition costs
    
    
    9,678,821
    
    
    
    7,223,995
    
    
    
    4,962,150
    
    
    
    2,454,826
    
    
    
    2,261,845
    
    
    
    2,308,324Deferred ceded commissions
    
    
    (994,459
    )
    
    
    (465,457
    )
    
    
    (371,323
    )
    
    
    (529,002
    )
    
    
    (94,134
    )
    
    
    (371,323
    )Deferred taxes
    
    
    (3,105,697
    )
    
    
    (2,539,073
    )
    
    
    (1,660,512
    )
    
    
    (1,570,402
    )
    
    
    2,004,269
    
    
    
    (37,523
    )Unrealized gain on available for sale fixed
maturities
    
    
    450,037
    
    
    
    709,323
    
    
    
    293,031
    
    
    
    
    
    
    
    
    
    
    
    Provision for reinsurance
    
    
    10,000
    
    
    
    
    
    
    
    47,000
    
    
    
    
    
    
    
    
    
    
    
    Subsequent capital contribution from parent
    
    
    
    
    
    
    (4,200,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    GAAP
    
    $
    41,565,658
    
    
    $
    32,195,129
    
    
    $
    39,597,130
    
    
    $
    6,136,225
    
    
    $
    (7,128,652
    )
    
    $
    4,326,799
 47




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(14)
    
    OTHER COMPREHENSIVE INCOME (LOSS)The related federal income tax effects of each component of other comprehensive income
(loss) are as follows:
 Year ended December 31, 2005Before-tax
    
    
    Income
    
    
    Net-of-taxamount
    
    
    tax effect
    
    
    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, 2004Before-tax
    
    
    Income
    
    
    Net-of-taxamount
    
    
    tax effect
    
    
    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
    )
 Year ended December 31, 2003Before-tax
    
    
    Income
    
    
    Net-of-taxamount
    
    
    tax effect
    
    
    amountNet unrealized holding gains on securities:Unrealized holding gains arising during 2003
    
    $
    2,061,702
    
    
    $
    700,979
    
    
    $
    1,360,723Less: reclassification adjustments for gains realized in net income
    
    
    660,067
    
    
    
    224,423
    
    
    
    435,644Net unrealized holding gains
    
    
    1,401,635
    
    
    
    476,556
    
    
    
    925,079Other comprehensive income
    
    $
    1,401,635
    
    
    $
    476,556
    
    
    $
    925,079
 (15)
    
    RESERVE FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSESActivity in the reserve for unpaid losses and LAE is summarized as follows (dollars in
thousands):
 2005
    
    
    2004
    
    
    2003Balance at January 1
    
    $
    30,766
    
    
    $
    14,386
    
    
    $
    7,559Less reinsurance recoverables
    
    
    1,944
    
    
    
    4,926
    
    
    
    283Net Balance at January 1
    
    
    28,822
    
    
    
    9,460
    
    
    
    7,276Incurred related to:Current year
    
    
    27,033
    
    
    
    52,620
    
    
    
    35,888Prior years
    
    
    (3,697
    )
    
    
    (5,383
    )
    
    
    (2,805
    )Total incurred
    
    
    23,336
    
    
    
    47,237
    
    
    
    33,083Paid related to:Current year
    
    
    20,678
    
    
    
    23,690
    
    
    
    21,120Prior years
    
    
    5,411
    
    
    
    4,185
    
    
    
    9,779Total paid
    
    
    26,089
    
    
    
    27,865
    
    
    
    30,899Net Balance at December 31
    
    
    26,069
    
    
    
    28,822
    
    
    
    9,460Plus reinsurance recoverables
    
    
    1,235
    
    
    
    1,944
    
    
    
    4,926Balance at December 31
    
    $
    27,304
    
    
    $
    30,766
    
    
    $
    14,386Reserve for unpaid losses and LAE
    
    $
    7,678
    
    
    $
    11,563
    
    
    $
    13,971Discontinued bond program reserve for unpaid losses and LAE
    
    
    19,626
    
    
    
    19,203
    
    
    
    415Total reserve for unpaid losses and LAE
    
    $
    27,304
    
    
    $
    30,766
    
    
    $
    14,386
 As a result of changes in estimates of insured events in prior years, the provision for
unpaid loss and LAE decreased by approximately $3,697,000, $5,383,000 and $2,805,000 in 2005,
2004 and 2003, respectively, due to favorable loss development, primarily attributable to 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
 48




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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. Under this arrangement, the Company ceded premiums earned of
$115,790, $4,435,659 and $13,331,861 during 2005, 2004 and 2003, 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
$1,727,303, $894,717 and $8,124,672 during 2005, 2004 and 2003, respectively.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 the applicable business. Effective January 1, 2005, the reinsurance arrangement was
amended whereby the assumed participation was reduced from 50% to 25%. Under this program, the
Company assumed premiums earned of 4,302,509 and $1,980,492 during 2005 and 2004, respectively.
Also, the Company ceded premiums earned of $679,563 and $131,051 during 2005 and 2004,
respectively.Effective January 1, 2005, the Company entered into a producer-owned reinsurance
arrangement with a GAP agent whereby 100% of that agents premiums (along with the associated
risk) were ceded to its PORC. For this reinsurance arrangement, 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 $734,435 during 2005.A reconciliation of direct to net premiums, on both a written and earned basis, for the year
ended December 31 is as follows:
 2005
    
    
    2004
    
    
    2003Premiums
    
    
    Premiums
    
    
    Premiums
    
    
    Premiums
    
    
    Premiums
    
    
    Premiumswritten
    
    
    earned
    
    
    written
    
    
    earned
    
    
    written
    
    
    earnedDirect
    
    $
    56,013,503
    
    
    $
    51,743,182
    
    
    $
    56,234,221
    
    
    $
    54,069,958
    
    
    $
    85,697,160
    
    
    $
    72,120,769Assumed
    
    
    3,580,422
    
    
    
    4,218,416
    
    
    
    4,301,004
    
    
    
    2,569,293
    
    
    
    367,466
    
    
    
    409,024Ceded
    
    
    (7,396,438
    )
    
    
    (4,244,653
    )
    
    
    (2,126,555
    )
    
    
    (6,575,066
    )
    
    
    (28,537,419
    )
    
    
    (22,457,827
    )$
    52,197,487
    
    
    $
    51,716,945
    
    
    $
    58,408,670
    
    
    $
    50,064,185
    
    
    $
    57,527,207
    
    
    $
    50,071,966
 The amounts of recoveries pertaining to reinsurance that were deducted from losses
and LAE incurred during 2005, 2004 and 2003 were $1,789,439, $2,465,643 and $9,917,371,
respectively. During 2005, 2004 and 2003, ceded reinsurance decreased commission expense
incurred by $1,054,259, $597,927 and $6,155,335, 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
 49




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##### Table of Contents



Arbitrations.
 Aegis Arbitration
 Sirius Arbitration.
 Harco Arbitration.
 Highlands Arbitration.
 2005 Reserve Developments.
 50




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##### Table of Contents



Loss and LAE Reserves.
 December 31,
    
    
    December 31,2005
    
    
    2004Bail Bonds:Case reserves
    
    $
    12.1
    
    
    $
    6.9Incurred but not reported (IBNR) reserves
    
    
    5.4
    
    
    
    8.7Total bail bond reserves
    
    
    17.5
    
    
    
    15.6Immigration Bonds:Case reserves
    
    
    0.7
    
    
    
    IBNR reserves
    
    
    1.4
    
    
    
    3.6Total immigration bond reserves
    
    
    2.1
    
    
    
    3.6Total loss and LAE reserves
    
    $
    19.6
    
    
    $
    19.2
   51




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##### Table of Contents



(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 wife. 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, 2005 and
2004, we had loaned the trustee $860,934 and $789,215, 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 paid premiums of $30,000 relating to this agreement;
however, the Company is no longer paying premiums under the agreement. At December 31, 2005
and 2004, $30,000 was included in loans to affiliates in the accompanying balance sheet for
payment of insurance premiums in accordance with this agreement.During 2003, we agreed to repurchase common shares of the Company from an officer and director
of the Company concurrent with the issuance of such common shares through exercise of stock
options. The $10,812 of payments in 2003 to settle the option grants were recorded as
compensation expense.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 two separate managing
general agents within our property/casualty insurance business segment for the years ended
December 31:
 2005
    
    2004
    
    2003Product  Customer TypeLender/Dealer-Managing General Agent
    
    $
    10,078,546
    
    
    $
    11,081,680
    
    
    $
    10,877,002Lender/Dealer-Managing General Agent
    
    
    5,429,780
    
    
    
    7,266,209
    
    
    
    6,508,717
 (19)
    
    COMMON SHARE REPURCHASE PROGRAMOn April 25, 2002, the Board of Directors adopted a common share repurchase program. On May
23, 2002, the Board of Directors increased the aggregate number of common shares available for
repurchase under the repurchase program to 700,000 common shares from 600,000 common shares
originally approved. The repurchase program expired on December 31, 2003. Through December
31, 2003, we repurchased 699,465 common shares at an average price per share of $5.00 under
this program. Repurchases were funded by cash flows from operations and financing activities.(20)
    
    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:
 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.Accounts receivable:The carrying amounts are reasonable estimates of fair value.Notes payable:Rates currently available to us for debt with similar terms and remaining
maturities are used to estimate fair value of existing debt. As the interest rate adjusts
regularly, the carrying amount is a reasonable estimate of fair value.
 52




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Trust preferred debt issued to affiliates:
  2005
    
    2004Carrying
    
    Estimated
    
    Carrying
    
    Estimatedamount
    
    fair value
    
    amount
    
    fair valueAssets:Held to maturity fixed maturities
    
    $
    4,821,629
    
    
    $
    4,856,624
    
    
    $
    4,909,873
    
    
    $
    5,034,173Available for sale fixed maturities
    
    
    73,012,240
    
    
    
    73,012,240
    
    
    
    54,139,496
    
    
    
    54,139,496Available for sale equity securities
    
    
    8,043,299
    
    
    
    8,043,299
    
    
    
    10,312,382
    
    
    
    10,312,382Short-term investments
    
    
    8,964,738
    
    
    
    8,964,738
    
    
    
    12,712,577
    
    
    
    12,712,577Cash
    
    
    4,528,875
    
    
    
    4,528,875
    
    
    
    3,791,267
    
    
    
    3,791,267Liabilities:Notes payable
    
    
    27,119
    
    
    
    27,119
    
    
    
    540,198
    
    
    
    540,198Trust preferred debt issued to affiliates
    
    
    15,465,000
    
    
    
    15,465,000
    
    
    
    15,465,000
    
    
    
    15,465,000
 (21)
    
    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. 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:
 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
 2004First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    QuarterTotal revenues
    
    $
    12,806,688
    
    
    $
    16,350,722
    
    
    $
    14,344,451
    
    
    $
    13,902,861Income (loss) before federal income taxes
    
    
    1,603,438
    
    
    
    (6,014,337
    )
    
    
    (5,236,153
    )
    
    
    (3,621,000
    )Net income (loss)
    
    
    1,158,593
    
    
    
    (3,846,066
    )
    
    
    (3,320,829
    )
    
    
    (2,492,318
    )Net income (loss) per common share:Basic
    
    
    .24
    
    
    
    (.79
    )
    
    
    (.67
    )
    
    
    (0.50
    )Diluted
    
    
    .22
    
    
    
    (.79
    )
    
    
    (.67
    )
    
    
    (0.50
    )
 (22)
    
    LITIGATIONAs discussed in Notes 16 and 25 to the Consolidated Financial Statements, the Company is a
party to various arbitration proceedings arising from claims made under reinsurance contracts
relating to the discontinued bond program.In addition to the above, we are involved from time to time in ordinary routine litigation
incidental to our business. We do not
believe any of this litigation will have a material adverse effect on the Companys financial
condition and/or results of operations.
 53




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##### Table of Contents



(23)
    
    SUPPLEMENTAL DISCLOSURE FOR EARNINGS PER SHARE
 2005
    
    
    2004
    
    
    2003Net income (loss)
    
    $
    6,294,074
    
    
    $
    (8,500,620
    )
    
    $
    3,909,817Income (loss) available to common shareholders,
assuming dilution
    
    $
    6,294,074
    
    
    $
    (8,500,620
    )
    
    $
    3,909,817Weighted-average common shares outstanding
    
    
    4,972,700
    
    
    
    4,950,437
    
    
    
    4,941,731Dilutive effect of outstanding options
    
    
    34,638
    
    
    
    
    
    
    
    108,282Diluted common shares
    
    
    5,007,338
    
    
    
    4,950,437
    
    
    
    5,050,013Basic net income (loss) per common share
    
    $
    1.27
    
    
    $
    (1.72
    )
    
    $
    .79Diluted net income (loss) per common share
    
    $
    1.26
    
    
    $
    (1.72
    )
    
    $
    .77
 (24)
    
    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;
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 methods were applied.
Depreciation and capital expenditures are not considered material. Segment results for 2005,
2004 and 2003 are as follows:
 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
 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
 December 31, 2003Municipal
    
    
    
    
    
    ReportableProperty/Casualty
    
    Code
    
    Insurance
    
    SegmentInsurance
    
    Publishing
    
    Agency
    
    TotalRevenues from external customers
    
    $
    51,203,340
    
    
    $
    3,819,221
    
    
    $
    3,735
    
    
    $
    55,026,296Intersegment revenues
    
    
    5,880
    
    
    
    
    
    
    
    370,871
    
    
    
    376,751Interest revenue
    
    
    1,685,726
    
    
    
    
    
    
    
    9
    
    
    
    1,685,735Interest expense
    
    
    549
    
    
    
    2,032
    
    
    
    
    
    
    
    2,581Depreciation and amortization
    
    
    222,280
    
    
    
    92,609
    
    
    
    
    
    
    
    314,889Segment profit
    
    
    6,072,662
    
    
    
    457,490
    
    
    
    310,813
    
    
    
    6,840,965Federal income tax expense
    
    
    1,745,863
    
    
    
    187,881
    
    
    
    106,564
    
    
    
    2,040,308Segment assets
    
    
    105,342,377
    
    
    
    2,551,413
    
    
    
    547,206
    
    
    
    108,440,996
 54




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##### Table of Contents



2005
    
    
    2004
    
    
    2003RevenuesTotal revenues for reportable segments
    
    $
    61,570,987
    
    
    $
    57,851,339
    
    
    $
    57,088,782Parent company gain (loss)
    
    
    258,611
    
    
    
    (62,844
    )
    
    
    (203,872
    )Elimination of intersegment revenues
    
    
    (1,193,088
    )
    
    
    (383,773
    )
    
    
    (376,751
    )Total consolidated revenues
    
    $
    60,636,510
    
    
    $
    57,404,722
    
    
    $
    56,508,159ProfitTotal profit (loss) for reportable segments
    
    $
    9,494,057
    
    
    $
    (10,663,042
    )
    
    $
    6,840,965Parent company loss, net of intersegment eliminations
    
    
    (1,323,412
    )
    
    
    (2,605,010
    )
    
    
    (1,316,983
    )Total consolidated net income (loss) before income taxes
    
    $
    8,170,645
    
    
    $
    (13,268,052
    )
    
    $
    5,523,982AssetsTotal assets for reportable segments
    
    $
    125,778,333
    
    
    $
    110,941,889
    
    
    $
    108,440,996Parent company assets
    
    
    3,771,162
    
    
    
    11,096,804
    
    
    
    8,122,851Elimination of intersegment receivables
    
    
    (1,213,660
    )
    
    
    (4,978,221
    )
    
    
    (694,111
    )Total consolidated assets
    
    $
    128,335,835
    
    
    $
    117,060,472
    
    
    $
    115,869,736
 (25)
    
    SUBSEQUENT EVENTSOn 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 relieves the Company from any potential future liabilities with respect to bail
and immigration bonds issued by Aegis. As a result of this settlement agreement, the Company
reduced its loss and LAE reserves for the discontinued bond program by $0.2 million during the
first quarter of 2006. In accordance with SFAS No. 60, management recorded this change in
reserves during the first quarter of 2006 as a change in estimate.
 55




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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
  56




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##### Table of Contents



PART III
 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
  
 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 securities remainingNumber of securities to
    
    
    Weighted-average
    
    
    available for future issuancebe issued upon exercise
    
    
    exercise price of
    
    
    under equity compensation plansof outstanding options,
    
    
    outstanding options,
    
    
    (excluding securities reflected inPlan category
    
    warrants and rights
    
    
    warrants and rights
    
    
    column (a))Equity compensation plans
approved by security holders
    
    
    613,500
    
    
    $
    5.33
    
    
    
    267,000Equity compensation plans
not approved by security holders
    
    None
    
    None
    
    NoneTotal
    
    
    613,500
    
    
    $
    5.33
    
    
    
    267,000
  
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  57




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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
  (1)
    
    Financial Statements
 Page inthisReportThe following financial statements, which are included in Item 8 of Part II of this report:Report of Independent Registered Public Accounting Firm
    
    
    31Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003
    
    
    32Consolidated Balance Sheets as of December 31, 2005 and 2004
    
    
    33Consolidated Statements of Shareholders Equity for the years ended December 31, 2005, 2004 and 2003
    
    
    35Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003
    
    
    36Notes to Consolidated Financial Statements
    
    
    37
 (2) Financial Statement Schedules
 The 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
    
    
    61Schedule II  Condensed financial information of Bancinsurance Corporation (Parent Company Only)
    
    
    62
  (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).
 58




---



##### 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).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).
 59




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##### Table of Contents



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).21
    *
    
    Subsidiaries of the Registrant as of December 31, 2005.23(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).
 60




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##### Table of Contents



Column A
    
    Column B
    
    
    Column C
    
    
    Column DEstimated
    
    
    Amount at whichfair
    
    
    shown in theType of Investment
    
    Cost (1)
    
    
    value
    
    
    balance sheetHeld to maturity:Fixed maturities:Governments
    
    $
    1,149,676
    
    
    $
    1,133,328
    
    
    $
    1,149,676States, territories and
possessions
    
    
    705,419
    
    
    
    713,479
    
    
    
    705,419Political subdivisions
    
    
    2,044,959
    
    
    
    2,061,642
    
    
    
    2,044,959Special revenue and assessments
    
    
    921,575
    
    
    
    948,175
    
    
    
    921,575Total held to maturity
    
    
    4,821,629
    
    
    
    4,856,624
    
    
    
    4,821,629Available for sale:Fixed maturities:Governments
    
    
    4,126,893
    
    
    
    4,094,266
    
    
    
    4,094,266States, territories and
possessions
    
    
    5,615,977
    
    
    
    5,674,864
    
    
    
    5,674,864Political subdivisions
    
    
    1,936,374
    
    
    
    1,980,364
    
    
    
    1,980,364Special revenue and assessments
    
    
    56,692,809
    
    
    
    57,146,986
    
    
    
    57,146,986Industrial and miscellaneous
    
    
    4,190,151
    
    
    
    4,115,760
    
    
    
    4,115,760Total available for sale fixed
maturities
    
    
    72,562,204
    
    
    
    73,012,240
    
    
    
    73,012,240Equity securities:Preferred stock:Banks, trusts and insurance
companies
    
    
    375,003
    
    
    
    415,498
    
    
    
    415,498Common stock:Banks, trusts and insurance
companies
    
    
    6,292,057
    
    
    
    6,398,151
    
    
    
    6,398,151Industrial and miscellaneous
    
    
    930,006
    
    
    
    1,229,650
    
    
    
    1,229,650Total available for sale equity securities
    
    
    7,597,066
    
    
    
    8,043,299
    
    
    
    8,043,299Short-term investments
    
    
    8,964,738
    
    
    
    8,964,738
    
    
    
    8,964,738Other invested assets
    
    
    715,000
    
    
    
    851,650
    
    
    
    715,000Total investments
    
    $
    97,660,637
    
    
    $
    95,728,551
    
    
    $
    95,556,906
 
 
 (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. 61




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##### Table of Contents



December 31,Assets
    
    2005
    
    
    2004Cash
    
    $
    172,751
    
    
    $
    196,950Unaffiliated investments
    
    
    807,531
    
    
    
    4,456,457Investments in subsidiaries (at equity)
    
    
    43,379,394
    
    
    
    35,261,696Federal income tax recoverable
    
    
    
    
    
    
    3,688,228Other
    
    
    2,308,401
    
    
    
    2,755,16946,668,077
    
    
    
    46,358,500Liabilities and Shareholders EquityNote payable to bank
    
    
    
    
    
    
    500,000Trust preferred debt issued to affiliates
    
    
    15,465,000
    
    
    
    15,465,000Federal income tax payable
    
    
    2,060
    
    
    
    Payable to subsidiaries, net
    
    
    525,271
    
    
    
    4,918,119Other
    
    
    596,120
    
    
    
    629,093Shareholders equity
    
    
    30,079,626
    
    
    
    24,846,288$
    46,668,077
    
    
    $
    46,358,500
 62




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##### Table of Contents



Years ended December 31,2005
    
    
    2004
    
    
    2003Other income
    
    $
    288,842
    
    
    $
    406,318
    
    
    $
    388,406Interest expense
    
    
    (1,150,315
    )
    
    
    (892,804
    )
    
    
    (538,667
    )General and administrative expenses
    
    
    (461,938
    )
    
    
    (1,364,788
    )
    
    
    (1,165,677
    )Loss before tax benefit
and equity in earnings of
subsidiaries
    
    
    (1,323,411
    )
    
    
    (1,851,274
    )
    
    
    (1,315,938
    )Federal income tax benefit
    
    
    269,416
    
    
    
    643,568
    
    
    
    426,143Loss before equity in
earnings of subsidiaries
    
    
    (1,053,995
    )
    
    
    (1,207,706
    )
    
    
    (889,795
    )Equity in distributed and undistributed earnings
of subsidiaries
    
    
    7,348,069
    
    
    
    (7,292,914
    )
    
    
    4,799,612Net income (loss)
    
    $
    6,294,074
    
    
    $
    (8,500,620
    )
    
    $
    3,909,817
 63




---



##### Table of Contents



Years ended December 31,2005
    
    
    2004
    
    
    2003Cash flows from operating activities:Net income (loss)
    
    $
    6,294,074
    
    
    $
    (8,500,620
    )
    
    $
    3,909,817Adjustments to reconcile net income (loss) to net cash used in
operating activities:Equity in distributed and undistributed net earnings of subsidiaries
    
    
    (7,348,069
    )
    
    
    7,292,914
    
    
    
    (4,799,612
    )Net realized (gains) losses on disposal of furniture and equipment
    
    
    (658
    )
    
    
    (183
    )
    
    
    Net realized (gains) losses on sale of investments
    
    
    (139,979
    )
    
    
    286,313
    
    
    
    (164,674
    )Depreciation and amortization
    
    
    145,045
    
    
    
    147,428
    
    
    
    143,025Deferred federal income tax expense (benefit)
    
    
    254,057
    
    
    
    (306,506
    )
    
    
    139,762Change in operating assets and liabilities:Notes receivable
    
    
    102,718
    
    
    
    58,664
    
    
    
    57,109Loans to affiliates
    
    
    (71,719
    )
    
    
    (71,719
    )
    
    
    (71,719
    )Accounts receivable/payable from/to subsidiaries
    
    
    (4,392,848
    )
    
    
    5,398,125
    
    
    
    (413,090
    )Other assets
    
    
    4,138,556
    
    
    
    (3,731,229
    )
    
    
    225,393Other liabilities
    
    
    (32,974
    )
    
    
    (685,312
    )
    
    
    283,870Net cash provided by (used in) operating activities
    
    
    (1,051,797
    )
    
    
    (112,125
    )
    
    
    (690,119
    )Cash flows from investing activities:Proceeds from available for sale fixed maturities
sold, redeemed or matured
    
    
    1,393,341
    
    
    
    764,257
    
    
    
    174,250Proceeds from available for sale equity
securities sold
    
    
    2,000,673
    
    
    
    735,683
    
    
    
    677,083Cost of investments purchased:Available for sale fixed maturities
    
    
    
    
    
    
    (964,535
    )
    
    
    (958,062
    )Available for sale equity securities
    
    
    (79,051
    )
    
    
    (859,367
    )
    
    
    (2,512,513
    )Other
    
    
    (49,928
    )
    
    
    (171,646
    )
    
    
    (1,137,855
    )Net cash provided by (used in) investing activities
    
    
    3,265,035
    
    
    
    (495,608
    )
    
    
    (3,757,097
    )Cash flows from financing activities:Proceeds from note payable to bank
    
    
    
    
    
    
    3,500,000
    
    
    
    5,900,000Repayments of note payable to bank
    
    
    (500,000
    )
    
    
    (3,000,000
    )
    
    
    (8,000,000
    )Proceeds from stock options exercised
    
    
    
    
    
    
    252,705
    
    
    
    Acquisition of treasury stock
    
    
    
    
    
    
    
    
    
    
    (371,706
    )Dividends from subsidiaries
    
    
    2,462,563
    
    
    
    
    
    
    
    Capital contribution to subsidiary
    
    
    (4,200,000
    )
    
    
    
    
    
    
    Proceeds from issuance of trust preferred debt
to affiliates
    
    
    
    
    
    
    
    
    
    
    7,000,000Net cash provided by (used in) financing activities
    
    
    (2,237,437
    )
    
    
    752,705
    
    
    
    4,528,294Net increase (decrease) in cash
    
    
    (24,199
    )
    
    
    144,972
    
    
    
    81,078Cash (overdraft) at beginning of year
    
    
    196,950
    
    
    
    51,978
    
    
    
    (29,100
    )Cash at end of year
    
    $
    172,751
    
    
    $
    196,950
    
    
    $
    51,978Supplemental disclosures of cash flow information:Cash paid (received) during the year for:Interest
    
    $
    1,137,074
    
    
    $
    539,390
    
    
    $
    539,390Federal income taxes
    
    $
    (58,842
    )
    
    $
    600,000
    
    
    $
    600,000
 64




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##### Table of Contents



Signatures
  Bancinsurance CorporationDated:
March 1, 2006
    
    By
    
    /s/ Si SokolSi SokolChairman of Board of Directorsand Chief Executive Officer(Principal Executive Officer)
  Dated:
March 1, 2006
    
    /s/ Si SokolSi SokolChairman of Board of Directorsand Chief Executive Officer(Principal Executive Officer)Dated: March 1, 2006
    
    /s/  John S. SokolJohn S. SokolPresident and DirectorDated: March 1, 2006
    
    /s/ Matthew C. NolanMatthew C. NolanChief Financial Officer,Treasurer and Secretary(Principal Financial Officerand Principal Accounting Officer)Dated: March 1, 2006
    
    /s/  Douglas G. BorrorDouglas G. BorrorDirectorDated: March 1, 2006
    
    /s/ Kenton R. BowenKenton R. BowenDirectorDated: March 1, 2006
    
    /s/  Daniel D. HarkinsDaniel D. HarkinsDirectorDated: March 1, 2006
    
    /s/ William S. SheleyWilliam S. SheleyDirectorDated: March 1, 2006
    
    /s/  Saul SokolSaul SokolDirectorDated: March 1, 2006
    
    /s/ Matthew D. WalterMatthew D. WalterDirector
 65




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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).
 66




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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).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).21
 *
    
    Subsidiaries of the Registrant as of December 31, 2005.23(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. 67