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Geoff Gannon

27 Allen Street
Basking Ridge, NJ 07920
July 23, 2010

Board of Directors
Bancinsurance Corporation
250 East Broad Street
7th Floor
Columbus, Ohio 43215

Gentlemen:

I am writing to you about the $7.25 per share revised proposal Mr. Sokol made to you on June 30th.

Revised Offer

Mr. Sokol is now offering $7.25 in cash for each share of Bancinsurance he does not already own. In exchange for
this $7.25 in cash shareholders are being asked to give up $9.09 in tangible book value, $1.22 in pre-tax earnings,
and $0.97 in after-tax earnings.

Mr. Sokol’s Revised Offer


Tangible Book Value 0.80x
Pre-Tax Earnings 5.94x
After-Tax Earnings 7.47x

In his June 30th letter, Mr. Sokol wrote: “in our experience, public insurance companies typically trade at a
substantial discount to book value.” That is true of most public insurance companies. It is not true of Bancinsurance.

Bancinsurance Book Value and Stock Price Range: 1996-2009


$8.50
$8.00
$7.50
$7.00
$6.50
$6.00
$5.50
$5.00
$4.50
$4.00
$3.50
$3.00
$2.50
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Book Value Low Price High Price

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Price to Book

From 1996-2009, the market price of Bancinsurance stock has, on average, been slightly higher than its book value.
The stock’s 10-year average price-to-book ratio is 1.05. The median is 0.94. These numbers are very close to a ratio
of 1-to-1 between book value and market value. Much closer than Mr. Sokol’s revised offer of 0.8 times book value.
In fact, Mr. Sokol’s offer is actually lower than Bancinsurance’s average price-to-book ratio from 1996-2009, even
if you take only the lowest price from each year. On average, Bancinsurance’s lowest market price for each of the
last 10 years was still 0.81 times book value.

In 2003, Bancinsurance’s board authorized a share repurchase plan that spent $3.5 million to buy back close to
700,000 shares of stock. Those repurchases were made at a 13% discount to that year’s starting book value. Mr.
Sokol is now proposing to buy out his fellow shareholders at a 20% discount to book value.

Nothing in the historical data suggests Bancinsurance tends to trade at a discount to its book value. And nothing in
the board’s past behavior suggests Bancinsurance shares are worth less than their book value.

Return on Equity

There is only one reason for a stock to trade below book value: because it can’t earn an adequate return on that book
value. Most insurers trade below book value, because most insurers earn low returns on equity. However, the few
insurers that earn adequate returns on book value trade at prices equal to or greater than that book value.
Bancinsurance is one of those few.

Return on Starting Statutory Surplus: Bancinsurance vs. P&C Industry


20.00%
18.00%
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
-2.00%
-4.00%
-6.00%
-8.00%
-10.00%
-12.00%
-14.00%
-16.00%
-18.00%
-20.00%
-22.00%
-24.00%
-26.00%
-28.00%
-30.00%
-32.00%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Bancinsurance Industry

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This graph illustrates the problem with Mr. Sokol’s revised offer. The offer only looks fair and reasonable when
seen in the long shadow of the 2004 bail bond loss. The unspoken assumption in Mr. Sokol’s revised offer of 0.8
times book value and his statement that “public insurance companies typically trade at a substantial discount to book
value” is that Bancinsurance is a typical insurance company.

The evidence says otherwise. Bancinsurance is an atypical insurance company. Over any stretch of years that does
not include 2004, Bancinsurance outperforms its peers in the two metrics that matter most: the combined ratio and
the return on statutory surplus. Bancinsurance regularly writes at a combined ratio most insurers only dream of. For
example: Bancinsurance has posted a combined ratio under 95 in 6 of the last 10 years (60% of the time). The
property and casualty industry has posted a combined ratio under 95 in just 2 of the last 60 years (3% of the time).

Bancinsurance’s median return on its starting statutory surplus from 2000 through 2009 was 10.48%. During those
10 years, the P&C industry averaged a 7.17% return on its starting statutory surplus. Most insurers trade at a
discount to their book value, because their normal earning power is only 7% of their book value. Bancinsurance’s
normal earning power is more than 10% of its book value.

To equalize their P/E ratios, a stock that earns 10% on book value needs to trade at a 40% premium to a stock that
earns 7%. Therefore, Bancinsurance stock would be worth book value even if the average insurer traded at 0.7 times
book value. Most insurers are not comparable to Bancinsurance. The only true comparables to Bancinsurance are
insurers that write at combined ratios under 100 and earn returns on statutory surplus over 10%.

Combined Ratio

Most insurers are worth less than book value, because most insurers combine an investment portfolio with
underwriting losses. Bancinsurance combines an investment portfolio with underwriting profits. Therefore,
Bancinsurance is worth book value.

Stock market investors cannot buy a piece of the average insurer’s investment portfolio without also getting a piece
of that insurer’s future underwriting losses. Investors can, however, buy a piece of Bancinsurance’s investment
portfolio without also getting a piece of Bancinsurance’s future underwriting losses, because – over a full cycle –
Bancinsurance does not produce underwriting losses. Even during the last 10 years, which include the 2004 bail
bond losses, Bancinsurance wrote at an average combined ratio of 96.1 versus 102.7 for the P&C industry.

Combined Ratio: Bancinsurance vs. P&C Industry


130.0
125.0
120.0
115.0
110.0
105.0
100.0
95.0
90.0
85.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Bancinsurance Combined Ratio Industry

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Special Business

Accepting Mr. Sokol’s offer on the basis that most insurers trade at a discount to book value would be as unfair as
taking a landlord’s Manhattan office building and compensating him according to the statewide price per square
foot. He did not own an office building on some generic island. He owned an office building on a very special
island.

Bancinsurance has a niche. It is a small niche. But it is a profitable niche. The company’s shareholders do not own
$9.09 a share of book value in a generic insurance business. They own $9.09 a share of book value in a very special
insurance business. They own a piece of that niche. And it is no fairer to offer them $7.25 a share for their piece of
that niche than it would be to offer a Manhattan landlord some office space in Albany.

The fair value of an office building can be found by looking at both historical market prices and historical rents.
Bancinsurance’s fair value can be found the same way. Just as office space in Manhattan earns more in monthly
rents than office space in Albany, Bancinsurance earns higher returns on its statutory surplus than other insurers.
And while Mr. Sokol is correct in saying “public insurance companies typically trade at a substantial discount to
book value”, there is no evidence that Bancinsurance itself typically trades at a discount to book value.

Over the last 10 years, Bancinsurance has traded above, at, and below book value. The stock’s 10-year average
price-to-book ratio is 1.05. That period includes the 2004 bail bond losses, the company’s delisting, and the 2008
stock market crash. None of those things inspired irrational exuberance. And yet Bancinsurance’s market price has
only stayed below its book value in the last couple years. There is no empirical evidence of a long-term tendency for
Bancinsurance stock to trade below book value. And the theoretical evidence, that Bancinsurance writes at a lower
combined ratio and earns a higher return on its equity than other insurers, supports exactly the opposite conclusion.

Both the long-term average of Bancinsurance’s market price and the company’s returns on equity suggest it is worth
book value. I see no evidence supporting the opposite conclusion other than the recently depressed market price.
And time will heal that wound.

Zero Sum Game

Whatever the board gives to Mr. Sokol, it takes from his fellow shareholders. If the board accepts his revised offer,
it will be giving Mr. Sokol shares with a normal earning power equal to 10% of their book value. And it will be
giving him those shares at a 20% discount to that book value. In other words, the board will be handing Mr. Sokol a
chance at 12.5% annual returns. And it will be taking those potential double-digit returns from investors who face a
world of single-digit alternatives.

What the board would be taking from minority shareholders could not be replaced. I do not object to Bancinsurance
going private. There are advantages in that. I do not object to Mr. Sokol as the buyer. He is the best man for the job.
I object to only one thing: the price.

Minority shareholders who receive $7.25 in cash for their $9.09 in Bancinsurance book value, cannot take that $7.25
in cash and replace the earning power of the $9.09 in book value they lost. Yes, if Bancinsurance was a typical
insurance company, the cash gained would offset the earning power lost. But, Bancinsurance is not a typical
insurance company. It has always written at a lower combined ratio and earned more per dollar of book value than
other insurers.

For an offer to be fair, it must give the seller enough value to replace – in a general sense – that which has been lost.
The fact that other insurers typically sell at a discount to book value means only that Bancinsurance’s minority
shareholders could take their $7.25 in cash and buy $9.09 in book value in some other insurer. They can replace the
lost book value. But they cannot replace the lost earning power.

In judging Mr. Sokol’s offer fair or unfair, I hope the board will consider three questions:

1. Do insurers with combined ratios similar to Bancinsurance sell for 0.8 times book value?
2. Do insurers with returns on equity similar to Bancinsurance sell for 0.8 times book value?

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3. Could a competitor replace Bancinsurance’s operations for an amount equal to $7.25 per share?

The board knows Bancinsurance’s business better than I do. You are in a better position to judge the company’s
future prospects. If you believe future events will render the company’s past underwriting history meaningless, if
you believe a company that has always written at a lower combined ratio than other insurers and earned higher
returns on its book value than other insurers, will now write at the same prices and earn the same profits other
insurers do, then you should accept Mr. Sokol’s offer.

However, if the board believes as I do, that while every company’s future is uncertain, its past is the only guide we
have, I ask that you reject Mr. Sokol’s offer and make it clear that Bancinsurance’s minority shareholders cannot be
bought out below book value.

Regardless of your decision, I thank you for your time.

Sincerely,

Geoff Gannon