Exhibit 10.1
EXECUTIVE EMPLOYMENT AGREEMENT
     THIS EXECUTIVE EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered
into as of the 5th day of October, 2006 (the “Effective Date”) by and between
Affirmative Insurance Holdings, Inc. (the “Company”) and Kevin R. Callahan
(“Executive”).
PRELIMINARY STATEMENTS
     A. Executive has served as interim Chief Executive Officer, and the Company
now desires to employ Executive as Chief Executive Officer, and Executive
desires to be employed by the Company in this capacity; and
     B. Each party desires to set forth in writing the terms and conditions of
their understandings and agreements.
     NOW, THEREFORE, in consideration of the mutual covenants and obligations
contained herein, the Company hereby agrees to employ Executive and Executive
hereby accepts such employment upon the terms and conditions set forth in this
Agreement:
STATEMENT OF AGREEMENT
     1. Position.
          (a) The Company agrees to employ Executive in the position of Chief
Executive Officer. Executive shall serve and perform the duties which may from
time to time be assigned to him by the Company’s Board of Directors (the
“Board”).
          (b) Executive agrees to serve as Chief Executive Officer and agrees
that he will devote his best efforts and all of his business time and attention
to all facets of the business of the Company and will faithfully and diligently
carry out the duties of these positions; provided, however, that Executive may
participate on the Board of Directors for Corus Bankshares, Inc. and the
Advisory Board for AlphaConnect (or its affiliates), so long as neither entity
beneficially owns or disposes of or acquires beneficial ownership in the stock
of a Competitor or operates a Competitor, as defined in Section 8(b)(i) below,
and so long as such participation does not interfere with the performance of his
duties hereunder. Executive agrees to comply with all Company policies in effect
from time to time, and to comply with all laws, rules and regulations applicable
to the Company, including, but not limited to, those established by the
Department of Insurance, the Securities and Exchange Commission, or any
self-regulatory organization having jurisdiction or authority over Executive or
the Company.
          (c) Executive will serve on the Company’s Board of Directors
(“Board”), at the continuing discretion of the stockholders, during the Term of
this Agreement. Further and upon request by the Board of the Company and consent
by Executive, Executive shall serve as a Director of any and all of Company’s
subsidiaries, provided, however, such consent shall not be unreasonably
withheld.
          (d) Executive agrees to travel as necessary to perform his duties
under this Agreement.

 

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          (e) The Company, in its sole discretion, may require that Executive be
designated an employee of one or more of the Company’s subsidiaries or
affiliates for such purposes as payroll and benefits administration. The
employment of Executive by any such subsidiary or affiliate to facilitate the
Company’s internal administrative purposes shall be considered employment by the
Company within the meaning of this Agreement and shall not otherwise affect any
of the rights or responsibilities of the Company or Executive hereunder,
including, but not limited to, Executive’s level of compensation.
Notwithstanding the foregoing, the Company shall not be entitled to redesignate
Executive’s employment as contemplated in this Section, if such redesignation
would preclude him from being represented in all public filings as the Chief
Executive Officer of the Company.
          (f) The position of Chief Executive Officer shall be located at the
Company’s administrative offices, presently located in Chicago, Illinois.
     2. Term of Agreement.
          (a) Initial Term. The initial term of this Agreement shall be three
(3) years from the Effective Date (“Initial Term”), unless otherwise terminated
pursuant to Section 5 of this Agreement. The Initial Term, and any extension
thereof shall be referred to herein as the “Term.”
          (b) Expiration of Term. This Agreement will terminate automatically
upon the expiration of the Initial Term, or any extension thereof. In the event
that the parties do not renew this Agreement at the end of Initial Term,
Executive shall immediately vest in fifty percent (50%) of the then-unvested
equity and equity-based awards made in Section 3(c) of this Agreement.
     3. Compensation and Benefits.
          (a) Base Salary. The Company shall pay Executive an annual salary rate
of Six Hundred Fifty Thousand Dollars ($650,000), with such amounts to be paid
on a bi-weekly basis (“Base Salary”) pursuant to the Company’s standard payroll
practices. Executive’s Base Salary shall be reviewed at least annually for
consideration of appropriate merit increases and, once established, the Base
Salary shall not be decreased during the Term without the consent of Executive.
          (b) Bonus Opportunities. In addition to the Base Salary, Executive
will be eligible to participate in the Company’s bonus plan(s) (“Bonus”) on a
basis no less favorable than any other senior executive of the Company, with an
annual target bonus of no less than Three Hundred Fifty Thousand Dollars
($350,000) (the “Target Bonus”), through the end of 2006, to be paid on a
prorated basis based on the number of months Executive is employed by Company
during 2006 under this Agreement, pursuant to the criteria set forth as
Exhibit A attached hereto. Thereafter, Executive’s annual incentive
opportunities shall be as determined by the Compensation Committee pursuant to
criteria set forth on or before March 31 of each fiscal year.
          (c) Stock. Executive will also be eligible to participate in the
Company’s 2004 Amended and Restated Stock Incentive Plan (“Stock Plan”), as may
be amended from time

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to time. Notwithstanding the foregoing, the Company’s Compensation Committee has
authorized, and pursuant to the authority of the Compensation Committee, the
Company hereby grants to Executive the following:
               (i) Restricted Stock. As of the Effective Date, the Company
hereby grants to Executive Seventy Thousand (70,000) restricted shares of common
stock of the Company under the terms of the Stock Plan subject to such
restrictions and limitations as are set forth in the Restricted Stock Agreement
attached hereto as Exhibit B.
               (ii) Stock Options. As of the Effective Date, the Company hereby
grants to Executive the following options to purchase shares of common stock of
the Company under the terms of the Stock Plan subject to the restrictions and
limitations as are set forth in the Stock Option Agreement attached hereto as
Exhibit C.
               a) Option 1 – Covering 100,000 shares with an exercise price of
Fifteen and 60/100 dollars ($15.60) per share.
               b) Option 2 – Covering 100,000 shares with an exercise price of
Twenty dollars ($20.00) per share.
               c) Option 3 – Covering 115,000 shares with an exercise price of
Twenty-five dollars ($25.00) per share.
               d) Option 4 – Covering 115,000 shares with an exercise price of
Thirty dollars ($30.00) per share.
          (d) Automobile Allowance. The Company shall provide Executive an
automobile allowance in an amount to be determined from time to time by the
Board or the Company’s Compensation Committee, provided that such amount shall
be no less than one thousand two hundred dollars ($1,200) per month.
          (e) Payment. Payment of all compensation to Executive hereunder shall
be made in accordance with the terms of this Agreement and applicable Company
policies in effect from time to time, including normal payroll practices, and
shall be subject to all applicable withholdings and taxes.
          (f) Benefits Generally. The Company shall make available to Executive,
throughout the term of this Agreement, benefits as are generally provided by the
Company to its executive officers, including but not limited to any group life,
health, dental, vision, disability or accident insurance, 401(k) plan,
supplemental retirement plan, deferred compensation plan, or other such benefit
plan or policy which may presently be in effect or which may hereafter be
adopted by the Company for its executive officers and key management personnel;
provided, however, that nothing herein contained shall be deemed to require the
Company to adopt or maintain any particular plan or policy.
          (g) Vacation. Executive shall be entitled to paid time off (“PTO”) of
no less than thirty (30) days during each calendar year, consistent with the
policies then applicable to executive officers.

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     4. Reimbursement of Expenses. The Company shall reimburse Executive for all
business expenses, which are reasonable and necessary and are incurred by
Executive while performing his duties under this Agreement, upon presentation of
expense statements, receipts and/or vouchers, or such other information and
documentation as the Company may reasonably require. The Board reserves the
right to deny any unreasonable business expense.
     5. Termination.
          (a) Termination by the Company.
               (i) Without Cause. The Company may terminate this Agreement for
any reason or no reason upon thirty (30) days written notice to Executive. If
the Company terminates this Agreement pursuant to this provision, the Company
will provide Executive with the following: (1) the payment of all earned but
unpaid Base Salary and PTO (“Accrued Compensation”), (2) an amount equal to the
previous year’s Bonus paid to Executive prorated on a daily basis for the number
of days employed in year of termination through the date of termination (the
“Pro Rata Bonus”), (3) the payment of an amount equal to two (2) times the sum
of (a) the Executive’s then-current Base Salary and (b) an amount equal to the
previous year’s Bonus paid to Executive (provided, however, that if Executive is
terminated without cause during the first year of this Agreement only, this
amount will be Three Hundred Fifty Thousand ($350,000)) (this item
(3) constituting the “Additional Severance Payment”), and (4) the continuation
of substantially similar medical, life, dental, vision and disability insurance
for Executive and Executive’s eligible spouse and family members, for the
twenty-four (24) month period following termination or until Executive accepts
new employment and becomes eligible for any such insurance, whichever time
period is shortest. Executive shall provide Company with written notice within
five (5) business days after he accepts new employment. The continued medical
benefits will initially be provided through COBRA, and will subsequently be
provided through coverage purchased by the Company for Executive and his
eligible spouse and family members.
               (ii) For Cause. The Company may terminate this Agreement at any
time for Cause. Upon termination by the Company for Cause, Executive shall only
be entitled to Accrued Compensation. “Cause” means any of the following:
               a) Executive’s commission of theft, embezzlement, any other act
of dishonesty relating to his employment with the Company, or any material
violation of Company policies (including the Company’s ethics policies), or any
law, rules, or regulations applicable to the Company, including, but not limited
to, those established by the Department of Insurance, the Securities and
Exchange Commission, or any self-regulatory organization having jurisdiction or
authority over Executive or the Company or any failure by Executive to inform
the Company of any violation of any law, rule or regulation by the Company or
one of its direct or indirect subsidiaries of which Executive has knowledge;
               b) Executive’s conviction of, or pleading guilty or nolo
contendere to, a felony or any lesser crime having as its predicate element
fraud, dishonesty, misappropriation, or moral turpitude;

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               c) Executive’s neglect of duties or failure to perform
obligations under this Agreement (other than due to disability) that materially
causes harm to the Company or that has materially damaged or interfered with the
Company’s relationships with its customers, suppliers, employees or other
agents; provided, however, that the Company shall give the Executive written
notice of any actions or omissions alleged to constitute Cause under this
subsection (c) and the Executive shall have thirty (30) days to cure any such
alleged Cause;
               d) Executive’s substance abuse or illegal use of drugs that
impairs Executive’s performance, that materially causes harm to the Company or
that, in the reasonable judgment of the Board, has damaged or interfered with
the Company’s relationships with its customers, suppliers, employees or other
agents;
               e) Executive’s commission of an act or acts in the performance of
his duties under this Agreement amounting to gross negligence or willful
misconduct; or
               f) Executive’s breach of Sections 7 or 8 of this Agreement.
               g) The Company may place Executive on paid administrative leave
from work during any investigation by the Company of a “cause” reason for
Executive’s termination, and may prohibit Executive from coming into work,
accessing the Company’s computer system, and contacting its employees or
customers during this time; provided, however, upon a failure of the Board of
Directors to find that Cause exists, such placing of Executive on leave two
times during the Term shall constitute Good Reason under Section 5 below.
               h) Cause shall be determined by the affirmative vote of at least
a majority of the members of the Board (excluding the Executive, if a Board
member). Executive shall be given fifteen (15) days written notice of the Board
meeting at which Cause shall be decided, and shall be given an opportunity prior
to the vote on Cause to appear before the Board, with or without counsel, at
Executive’s election, to present arguments on his own behalf. The notice to
Executive of the Board meeting shall identify with reasonable detail the reasons
for such consideration of Cause. The pendency of the notice period described
herein shall not prevent or delay the Company’s ability to enforce the
restrictive covenants contained herein.
               (iii) Change in Control. If following a Change in Control,
(A) the Company terminates this Agreement for reasons other than Cause, or,
(B) Executive terminates this Agreement for Good Reason, the Company shall
provide Executive with the following: (1) Accrued Compensation, (2) a Pro Rata
Bonus, (3) an amount equal to the Additional Severance Payment, (4) the full and
immediate vesting of all outstanding equity or equity based awards, and (5) the
continuation of all medical, life, dental, vision and disability insurance for
Executive and Executive’s eligible spouse and family members, for the
twenty-four (24) month period following termination. The term “Change in
Control” shall mean a transaction or event (or series of transactions or events)
as a result of which any “person” as such term is used in Section 13(d) and
14(d) of the Exchange Act (other than any Excluded Person, the Company or any
Company employee benefit plan, including its trustees) is or becomes the
“beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of all of the securities of the Company held by New Affirmative
LLC held immediately prior to such transaction or event (or

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series of transactions or events) and all director designees of New Affirmative
LLC are no longer on the Company’s Board; provided, however, that in no event
shall the distribution, sale, transfer, or acquisition of securities of the
Company held by New Affirmative LLC or any Excluded Persons (or any successor
thereof) to any Excluded Person trigger a “Change in Control.” “Excluded Person”
shall mean any of New Affirmative LLC, Affirmative Investment LLC, The Enstar
Group, Inc. and any of their respective stockholders, members, affiliates,
subsidiaries, or any such persons under common control.
          (b) Termination by Executive.
               (i) No Good Reason. Executive may terminate this Agreement for
any reason upon providing thirty (30) days written notice to the Company. If
Executive terminates this Agreement pursuant to this provision, the Company will
pay Executive the Accrued Compensation.
               (ii) For Good Reason. For purposes of this Agreement, the term
“Good Reason” shall mean termination of Executive’s employment with the Company
by the Executive by giving at least thirty (30) days advance written notice
within thirty (30) days of the occurrence of one of the following events:
               a) the Company’s material breach of any provision of this
Agreement or any of the covenants contained herein that, if capable of being
cured, remains uncured after Executive has delivered a written notice of breach
to the Company and after the Company has had thirty (30) days after receipt of
such written notice to cure such breach;
               b) in the event of a requirement that Executive relocate
Executive’s principal office to a location that is more than forty (40) miles
from the location of the Company’s administrative offices in Chicago, Illinois;
provided, however, that travel as necessary to perform duties under this
Agreement shall not be deemed a violation of this subsection (b).
               c) without the Executive’s written consent: (A) a material
adverse change in the Executive’s status, office, title, position or
responsibilities (including reporting responsibilities) as Chief Executive
Officer which represents a material adverse change from his status, office,
title, position or responsibilities as Chief Executive Officer as in effect at
any time within 90 days preceding such occurrence or at any time thereafter;
provided, however, that if Executive holds the position of Chairman of the Board
at any time during this Agreement, then any such change as to the position of
Chairman of the Board shall not be deemed a violation of this subsection (c);
(B) the assignment to Executive of any duties or responsibilities which are
materially inconsistent with and adverse to his status, office, title, position
or responsibilities as Chief Executive Officer in effect at any time within
90 days preceding such occurrence or at any time thereafter; provided, however,
that if Executive holds the position of Chairman of the Board at any time during
this Agreement, then any such assignment as to the position of Chairman of the
Board shall not be deemed a violation of this subsection (c); or (C) any removal
of the Executive from any such material status, office, title, position or
responsibility as Chief Executive Officer; provided, however, that if Executive
holds the position of Chairman of the

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Board at any time during this Agreement, then any such removal as to the
position of Chairman of the Board shall not be deemed a violation of this
subsection (c);
               d) without the Executive’s written consent, a reduction in the
Executive’s base salary or any failure to pay the Executive any compensation or
benefits to which he is entitled within five days of the date due; provided,
however, that the Executive shall give the Company written notice of any actions
or omissions alleged to constitute Good Reason under this subparagraph (d) and
the Company shall have ten (10) business days to cure any such alleged Good
Reason; or
               e) without the Executive’s written consent, the Company fails to
nominate Executive for a position on the Board in connection with the Company’s
regularly scheduled annual stockholders’ meeting.
Upon termination for “Good Reason” pursuant to this provision, Executive shall
be entitled to all benefits and payments as provided in Section 5(a)(i) hereof
for a termination by the Company without Cause. Executive shall only be required
to give notice one time under this Section 5(b)(ii) and shall not be required to
provide notice and a cure period for any breach or other action that is not
capable of cure.
          (c) Disability. The Company may terminate this Agreement at any time
Executive shall be deemed by the Board to have sustained a “disability.”
Executive shall be deemed to have sustained a “disability” if he shall have been
unable, with reasonable accommodation, to perform his duties for a period of
more than ninety (90) consecutive days in any twelve (12) month period. Upon
termination of this Agreement for disability, the Company shall pay Executive
his Accrued Compensation, and the Pro Rata Bonus.
          (d) Death. This Agreement will terminate automatically upon
Executive’s death. Upon termination of this Agreement because of Executive’s
death, the Company shall pay Executive’s estate his Accrued Compensation, and
the Pro Rata Bonus.
          (e) Employment. Upon termination of this Agreement for any reason,
including expiration of the Term, written notice of intent not to renew this
Agreement pursuant to Section 2, or a termination for a reason specified in this
Section 5, Executive’s employment shall also terminate and cease, and Executive
will voluntarily resign any Director or Board positions he holds, unless
otherwise requested by the Company.
          (f) Transition Period. Upon termination of this Agreement, and for a
period of thirty (30) days thereafter (the “Transition Period”), Executive
agrees to make himself available to assist the Company with transition projects
reasonably assigned to him by the Board. Executive will be paid at a daily rate
of Two Thousand Five Hundred Dollars ($2,500.00) dollars per day, for each day
which Executive worked on behalf of the Company pursuant to this Section 5(f).
          (g) Severance Payment. Any payment to Executive under this Section 5
(other than pursuant to Section 5(a)(iii)) will be payable in equal monthly
installments due on the first day of each month during the course of the
Non-Interference Period. In the event of a payment to be made to Executive
pursuant to Section 5(a)(iii), such payment shall be made

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within five (5) business days of such termination. Executive shall not be
entitled to, and the Company shall not pay, any severance under any other plan,
program or policy of the Company.
          (h) Notwithstanding the foregoing severance provisions, if the Board
(or its delegate) determines in its or his or her discretion that Executive is a
“Specified Employee” (as defined in Section 409A of the United States Internal
Revenue Code of 1986, as amended (“Section 409A”)), as of the date of
termination, and that Section 409A applies with respect to any payment(s) to
Executive pursuant to any of the paragraphs of this Section 5, such payment(s)
shall not (solely to the extent required by Section 409A) begin until the six
(6) month anniversary of the date of termination, and at which time Executive
shall be paid a single lump sum equal to those payment(s) he would otherwise
have received during such six (6) months, and then the balance of the payment(s)
will continue in monthly installments thereafter through completion of the
Non-Interference Period (with each monthly installment being paid in the gross
sum of the full payment(s) divided by 24) as may be provided herein; provided,
however, that if the Board (or its delegate) determines in its or his or her
discretion that Executive is not a Specified Employee as of the date of
termination (or that Section 409A does not apply with respect to a payment to
Executive pursuant to Section 5), such payment shall be made in accordance with
the provisions of this Section 5, provided that the requirements set forth in
Section 6 have been met by Executive.
     6. Release. Notwithstanding any other provision in this Agreement to the
contrary, as a condition precedent to receiving any payment set forth in
Section 5 of this Agreement, Executive agrees to execute (and not revoke) a
severance and release agreement in the form attached hereto as Exhibit D (the
“Release”). If Executive fails to execute and deliver the Release, or revokes
the Release, Executive agrees that he shall not be entitled to receive the
above-stated severance payments. For purposes of this Agreement, the Release
shall be considered to have been executed by Executive if it is signed by his
legal representative in the case of legal incompetence or on behalf of
Executive’s estate in the case of his death. No payments shall be made under
Section 5 until the period to revoke the release has terminated.
     7. Nondisclosure.
          (a) The Company shall, immediately after executing this Agreement,
provide Executive with some or all of the Company’s various trade secrets and
confidential or proprietary information, including information he has not
received before, consisting of, but not limited to, all information: that is
non-public or proprietary to the Company, or its affiliates including, but not
limited to, information concerning its business activities including, but not
limited to, the present marketing and administration of certain insurance
business and processes, including but not limited to any and all information
concerning non-standard automobile insurance business, financial information,
administrative procedures, pricing methods and policies, client lists and
information, business and marketing strategies, claims and underwriting
procedures and guidelines, claims and underwriting files, utilization review and
manuals, data format, data gathering retrieval systems and methods, ideas about
current and future services. Confidential Information shall not include:
(i) information that Executive may furnish to third parties regarding his
obligations under Sections 7 and 8; or (ii) information that becomes generally
available to the public by means other than Executive’s breach of Section 7 (for
example, not as a result of Executive’s unauthorized release of marketing
materials).

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          (b) Executive agrees that all Confidential Information, whether
prepared by Executive or otherwise coming into his possession, shall remain the
exclusive property of the Company during Executive’s employment with the Company
and thereafter. Executive further agrees that he shall not, without the prior
written consent of the Company, use or disclose to any third party any of the
Confidential Information described herein, directly or indirectly, either during
Executive’s employment with the Company or at any time following the termination
of Executive’s employment with the Company, except as Executive may be required
by Court Order. If such Court Order is issued, Executive shall inform the
Company a reasonable time prior to compliance.
          (c) Upon termination of this Agreement, Executive agrees that all
Confidential Information and other files, documents, materials, records,
notebooks, customer lists, business proposals, contracts, agreements and other
repositories containing information concerning the Company or the business of
the Company (including all copies thereof) in Executive’s possession, custody or
control, whether prepared by Executive or others, shall remain with or be
returned to the Company promptly (within seventy-two (72) hours) after the
termination or expiration of this Agreement for any reason.
     8. Noncompete, Nonsolicitation, and Non-Disparagement.
          (a) Business Relationships and Goodwill. Executive acknowledges and
agrees that, as an employee and representative of the Company, Executive will be
given Confidential Information. Executive acknowledges and agrees that this
creates a special relationship of trust and confidence between the Company,
Executive and the Company’s current and prospective customers, limited partners,
and investors. Executive further acknowledges and agrees that there is a high
risk and opportunity for any person given such responsibility and Confidential
Information to misappropriate the relationship and goodwill existing between the
Company and the Company’s current and prospective customers, limited partners,
and investors. Executive therefore acknowledges and agrees that it is fair and
reasonable for the Company to take steps to protect itself from the risk of such
misappropriation. Consequently, Executive agrees to the following noncompetition
and nonsolicitation covenants.
          (b) Scope of Noncompetition Obligation.
               (i) Executive acknowledges and agrees that the period of two
(2) years following the termination or expiration of this Agreement for any
reason will constitute the non-compete, non-solicit and non-divert period (the
“Non-Interference Period”). During his employment and during the
Non-Interference Period, Executive will not engage in duties or provide services
to a Competitor which are substantially similar to those Executive provided to
the Company under this Agreement, in any capacity, upon the termination or
expiration of this Agreement in states where the Company is doing business or
has expended resources in pursuit of, or in preparation to do, business
(“Prohibited Market”). The term “Competitor” means (i) insurance companies
providing non-standard automobile insurance coverage of any type or class as a
primary line of business (in excess of fifteen percent (15%) of aggregate
revenues), (ii) underwriting agencies (or managing general agencies) that
produce and administer non-standard automobile insurance as a primary line of
business, and (iii) retail agencies that sell non-standard automobile insurance
policies as a primary line of business.

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               (ii) Executive agrees that he shall not at any time during his
employment divert away or attempt to divert away any business from the Company
to another company, business, or individual. Additionally, Executive shall not,
during the Non-Interference Period, solicit, divert away or attempt to divert
away business from any Company Customer, either directly or indirectly. “Company
Customer” is defined as any then-current customer that Executive contacted,
solicited, serviced, or had accessed Confidential Information about. “Solicit”
is defined as soliciting, inducing, attempting to induce, or assisting any other
person, firm, entity, business or organization, whether direct or indirect, in
any such solicitation, inducement or attempted inducement, in all cases
regardless of whether the initial contact was by Executive, the Company
Customer, or any other person, firm, entity, business, or organization.
               (iii) Executive further agrees that during the Non-Interference
Period, he will not directly or indirectly: (a) solicit, entice, persuade or
induce any employee, agent or representative of the Company, who was an
employee, agent or representative of the Company upon the termination or
expiration of this Agreement, to terminate such person’s relationship with the
Company or to become employed by any business or person other than the Company;
(b) approach any such person for any of the foregoing purposes; (c) authorize,
solicit or assist in the taking of such actions by any third party; or (d) take
actions to hire any such person.
               (iv) Executive further agrees that, during the Non-Interference
Period, he shall not own, manage, operate, control, invest or acquire an
interest in, or otherwise similarly engage or participate in (whether as a
proprietor, owner, member, partner, stockholder, director, officer, employee,
consultant, joint venturer, investor, sales representative or other participant)
any Competitor or business or entity that owns or operates, or controls another
business or entity that owns or operates a Competitor located in the Prohibited
Market; provided, however, that the foregoing provisions shall not prohibit the
Employee from: (a) being a passive investor in any publicly traded entity, as
long as any such investment does not exceed ten percent (10%) of the outstanding
equity securities of such entity; (b) continuing as a non controlling investor
in any entity which subsequent to the date of the Executive’s investment therein
becomes the owner or operator of, or acquires control of another business or
entity that owns or operates, a Competitor in a Prohibited Market (provided that
if any entity in which the Executive is a non controlling investor acquires a
non-standard automobile insurance in a Prohibited Market, the Executive shall
limit his participation in such entity to a passive role); or (c) investing in
or becoming employed by any entity whose ownership, operation or control of a
Competitor is not material relative to its principal business activities
provided Executive’s participation in such a Competitor is not a material part
of Executive’s duties.
          (c) Non-Disparagement. During the term of Executive’s employment with
the Company and following the termination or expiration of this Agreement for
any reason, Executive shall not disparage, discredit or otherwise criticize,
directly or indirectly, verbally or in writing, the Company or any of its
subsidiaries, or any of their respective businesses, products, practices,
trademarks, employees, officers, or directors. Further, during the term of
Executive’s employment with the Company and following the termination or
expiration of this Agreement, the officers of the Company shall not disparage,
discredit or otherwise criticize, directly or indirectly, verbally or in
writing, including issuing a public statement, Executive.

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          (d) Acknowledgement. Executive acknowledges that the compensation and
Confidential Information provided to Executive pursuant to this Agreement, give
rise to the Company’s interest in restraining Executive from competing with the
Company, that the noncompetition and nonsolicitation covenants are designed to
enforce such consideration and that any limitations as to time, geographic scope
and scope of activity to be restrained as defined herein are reasonable and do
not impose a greater restraint than is necessary to protect the goodwill or
other business interest of the Company.
          (e) Survival of Covenants. Sections 7 and 8 shall survive the
expiration or termination of this Agreement for any reason. Executive agrees not
to challenge the enforceability or scope of Sections 7 and 8. Executive further
agrees to notify all future persons, businesses, or other entities, with which
he becomes affiliated or employed by, of the restrictions set forth in
Sections 7 and 8, prior to the commencement of any such affiliation or
employment.
     9. Severability and Reformation. If any one or more of the terms,
provisions, covenants or restrictions of this Agreement shall be determined by a
court of competent jurisdiction to be invalid, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions shall remain in
full force and effect, and the invalid, void or unenforceable provisions shall
be deemed severable. Moreover, if any one or more of the provisions contained in
this Agreement shall for any reason be held to be excessively broad as to
duration, geographical scope, activity or subject, it shall be reformed by
limiting and reducing it to the minimum extent necessary, so as to be
enforceable to the extent compatible with the applicable law as it shall then
appear.
     10. Entire Agreement. This Agreement sets forth the entire agreement
between the parties hereto and fully supersedes any and all prior agreements or
understandings, written or oral, between the parties hereto pertaining to the
subject matter hereof.
     11. Notices. All notices and other communications required or permitted to
be given hereunder shall be in writing and shall be deemed to have been duly
given if delivered personally, mailed by certified mail (return receipt
requested) or sent by overnight delivery service, or electronic mail, or
facsimile transmission (with electronic confirmation of successful transmission)
to the parties at the following addresses or at such other addresses as shall be
specified by the parties by like notice, in order of preference of the
recipient: if to the Company, General Counsel, 4450 Sojourn Drive, Suite 500,
Addison, TX 75001 and if to Executive, to such address as specified by the
Executive to the Company from time to time in writing. Notice so given shall, in
the case of mail, be deemed to be given and received on the fifth calendar day
after posting, in the case of overnight delivery service, on the date of actual
delivery and, in the case of facsimile transmission or personal delivery, on the
date of actual transmission or, as the case may be, personal delivery.

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     12. Governing Law and Venue. This Agreement will be governed by and
construed in accordance with the laws of the State of Illinois, without regard
to any conflict of laws rule or principle which might refer the governance or
construction of this Agreement to the laws of another jurisdiction. Any action
or arbitration in regard to this Agreement or arising out of its terms and
conditions, pursuant to Sections 26 and 27, shall be instituted and litigated
only in Chicago, Illinois.
     13. Assignment. This Agreement is personal to Executive and may not be
assigned in any way by Executive without the prior written consent of the
Company. The Company may assign its rights and obligations under this Agreement.
     14. Counterparts. This Agreement may be executed in counterparts, each of
which will take effect as an original, and all of which shall evidence one and
the same Agreement.
     15. Amendment. This Agreement may be amended only in writing signed by
Executive and by a duly authorized representative of the Company (other than
Executive).
     16. Construction. The headings and captions of this Agreement are provided
for convenience only and are intended to have no effect in construing or
interpreting this Agreement. The language in all parts of this Agreement shall
be in all cases construed in accordance to its fair meaning and not strictly for
or against the Company or Executive.
     17. Non-Waiver. The failure by either party to insist upon the performance
of any one or more terms, covenants or conditions of this Agreement shall not be
construed as a waiver or relinquishment of any right granted hereunder or of any
future performance of any such term, covenant or condition, and the obligation
of either party with respect hereto shall continue in full force and effect,
unless such waiver shall be in writing signed by the Company (other than
Executive) and Executive.
     18. Announcement. Company shall have the right to make public announcements
concerning the execution of this Agreement and the terms contained herein, at
the Company’s discretion.
     19. Use of Name, Likeness and Biography. Company shall have the right (but
not the obligation) to use, publish and broadcast, and to authorize others to do
so, the name, approved likeness and approved biographical material of Executive
to advertise, publicize and promote the business of Company and its affiliates,
but not for the purposes of direct endorsement without Executive’s consent. This
right shall terminate upon the termination of this Agreement. An “approved
likeness” and “approved biographical material” shall be, respectively, any
photograph or other depiction of Executive, or any biographical information or
life story concerning the professional career of Executive that is approved in
advance by Executive.
     20. Corporate Opportunities. Executive acknowledges that during the course
of Executive’s employment by Company, Executive may be offered or become aware
of business or investment opportunities in which Company may or might have an
interest (a “Corporate Opportunity”) and that Executive has a duty to advise
Company of any such Corporate Opportunities before acting upon them.
Accordingly, Executive agrees: (a) that Executive will disclose to the Board any
Corporate Opportunity offered to Executive or of which Executive

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becomes aware, and (b) that Executive will not act upon any Corporate
Opportunity for Executive’s own benefit or for the benefit of any Person other
than Company without first obtaining consent or approval of the Board (whose
consent or approval may be granted or denied solely at the discretion of the
Board; provided, that Executive, at Executive’s election, may act upon any such
Corporate Opportunity for Executive’s benefit or the benefit of any other Person
if the Board has not caused Company to act upon any such Corporate Opportunity
within sixty (60) days after disclosure of such Corporate Opportunity to Company
by Executive.
     21. Right to Insure. Company shall have the right to secure, in its own
name or otherwise, and at its own expense, life, health, accident or other
insurance covering Executive, and Executive shall have no right, title or
interest in and to such insurance. Executive shall assist Company in procuring
such insurance by submitting to reasonable examinations and by signing such
applications and other instruments as may be reasonably required by the
insurance carriers to which application is made for any such insurance.
     22. Assistance in Litigation. Executive shall reasonably cooperate with the
Company in the defense or prosecution of any claims or actions now in existence
or that may be brought in the future against or on behalf of the Company that
relate to events or occurrences that transpired while Executive was employed by
the Company. Executive’s cooperation in connection with such claims or actions
shall include, but not be limited to, being available to meet with counsel to
prepare for discovery or trial and to act as a witness on behalf of the Company
at mutually convenient times. Executive also shall reasonably cooperate with the
Company in connection with any investigation or review by any federal, state, or
local regulatory authority as any such investigation or review relates to events
or occurrences that transpired while Executive was employed by the Company. The
Company will pay Executive a reasonable hourly rate for Executive’s cooperation
pursuant to this Section 22.
     23. No Inconsistent Obligations. Executive represents and warrants that to
his knowledge he has no obligations, legal, in contract, or otherwise,
inconsistent with the terms of this Agreement or with his undertaking employment
with the Company to perform the duties described herein. Executive will not
disclose to the Company, or use, or induce the Company to use, any confidential,
proprietary, or trade secret information of others. Executive represents and
warrants that to his knowledge he has returned all property and confidential
information belonging to all prior employers, if he is obligated to do so.
     24. Notification of New Employer. Upon termination of this Agreement for
any reason, or expiration of this Agreement, Executive hereby consents to the
notification by the Company to Executive’s new employer of the provisions of
Sections 7, 8, and 9 of this Agreement. In addition, in the event that Executive
plans to render services to a company that works in a similar field as the
Company, Executive agrees to provide the Company with as much notice as possible
of Executive’s intention to join that company or business but in no event will
Executive provide less than two weeks notice of that intention; provided,
however, the provision of such notice and the Company’s receipt thereof shall
not constitute a waiver of any breach of any provision of this Agreement.

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     25. Binding Agreement. This Agreement shall inure to the benefit of and be
binding upon Executive, his heirs and personal representatives, and the Company,
its successors and assigns.
     26. Remedies. The parties recognize and affirm that in the event of a
breach of Sections 7 and 8 of this Agreement, money damages would be inadequate
and the Company would not have an adequate remedy at law. Accordingly, the
parties agree that in the event of a breach or a threatened breach of Sections 7
and 8, the Company may, in addition and supplementary to other rights and
remedies existing in its favor, apply to any court of law or equity of competent
jurisdiction for specific performance and/or injunctive or other relief in order
to enforce or prevent any violations of the provisions hereof (without posting a
bond or other security). In addition, Executive agrees that in the event a court
of competent jurisdiction or an arbitrator finds that Executive violated
Sections 7 or 8, the time periods set forth in those Sections shall be tolled
until such breach or violation has been cured. Executive further agrees that the
Company shall have the right to offset the amount of any damages resulting from
a breach by Executive of Sections 7 or 8 against any payments due Executive
under this Agreement; provided, however, that any such amount offset will be
deposited into an escrow account pending adjudication of the dispute giving rise
to the offset. The parties agree that if one of the parties is found to have
breached this Agreement by a court of competent jurisdiction, the breaching
party will be required to pay the non-breaching party’s attorneys’ fees.
     27. Arbitration. Other than as stated in Section 26, the parties agree that
any controversy or claim arising out of or relating to this Agreement, or the
breach thereof, shall be resolved by arbitration administered by the American
Arbitration Association (“AAA”) under its Commercial Arbitration Rules. The
arbitration will take place in Chicago, Illinois. All disputes shall be resolved
by a one (1) arbitrator. The method for selecting the arbitrator is set forth in
the AAA’s Commercial Arbitration Rules. The arbitrator will have the authority
to award the same remedies, damages, and costs that a court could award, and
will have the additional authority to award those remedies set forth in
Section 26. The arbitrator shall issue a reasoned award explaining the decision,
the reasons for the decision, and any damages awarded, including those set forth
in Section 26 where the arbitrator finds Executive violated Sections 7 or 8. The
arbitrator’s decision will be final and binding. The judgment on the award
rendered by the arbitrator may be entered in any court having jurisdiction
thereof. The arbitration proceedings, any record of the same, and the award
shall be considered Confidential Information under this Agreement. This
provision and any decision and award hereunder can be enforced under the Federal
Arbitration Act.
     28. Fees and Expenses. To induce the Executive to execute this Agreement
and to provide the Executive with reasonable assurance that the purposes of this
Agreement will not be frustrated by the cost of its enforcement should the
Company fail to perform its obligations under this Agreement:
          (a) In the event that the Executive’s employment is terminated by the
Company prior to a Change in Control either for Cause or without Cause, the
Company shall reimburse the Executive for any reasonable attorneys’ fees,
expenses and court costs incurred by the Executive as a result of any litigation
by the Executive regarding the validity, enforceability or interpretation of any
provision of this Agreement (including as a result of any litigation by the

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Executive regarding the benefits payable to the Executive pursuant to this
Agreement); provided, however, that such reimbursement shall only be payable by
the Company (i) if the Executive prevails on any material issues involved in
such litigation and (ii) upon receipt of proof of such expenses.
          (b) In the event that the Executive’s employment is terminated after a
Change in Control either by the Company either for Cause or without Cause or by
the Executive for Good Reason, the Company shall reimburse the Executive for any
reasonable attorneys’ fees, expenses and court costs incurred by the Executive
as a result of any litigation by the Executive regarding the validity,
enforceability or interpretation of any provision of this Agreement (including
as a result of any litigation by the Executive regarding the benefits payable to
the Executive pursuant to this Agreement) upon receipt of proof of such expenses
regardless of which party, if any, prevails in the contest.
     29. Tax Gross Up.
          (a) If, as a result of payments provided for under or pursuant to this
Agreement together with all other payments in the nature of compensation
provided to or for the benefit of Executive under any other agreement in
connection with a Change in Control, Executive becomes subject to taxes of any
state, local or federal taxing authority that would not have been imposed on
such payments but for the occurrence of a Change in Control, including any
excise tax under Section 4999 of the Code an any successor or comparable
provision, then, in addition to any other benefits provided under or pursuant to
this Agreement or otherwise, Company (including any successor to Company) shall
pay to Executive at the time any such payments are made under or pursuant to
this or the other agreements, an amount equal to the amount of any such taxes
imposed or to be imposed on Executive (the amount of any such payment, the
“Parachute Tax Reimbursement”).
          (b) In addition, Company (including any successor to Company) shall
“gross up” such Parachute Tax Reimbursement by paying to Executive at the same
time an additional amount equal to the aggregate amount of any additional taxes
(whether income taxes, excise taxes, special taxes, employment taxes or
otherwise) that are or will be payable by Executive as a result of the Parachute
Tax Reimbursement being paid or payable to Executive and/or as a result of the
additional amounts paid or payable to Executive pursuant to this sentence, such
that after payment of such additional taxes Executive shall have been paid on a
net after-tax basis an amount equal to the Parachute Tax Reimbursement.
          (c) The amount of any Parachute Tax Reimbursement and of any such
gross-up amounts shall be determined by a nationally recognized accounting firm
selected by the Company (with all such cost borne by the Company), whose
determination, absent manifest error, shall be treated as conclusive and binding
absent a binding determination by a governmental taxing authority that a greater
amount of taxes is payable by Executive.
     30. Voluntary Agreement. Each party to this Agreement has read and fully
understands the terms and provisions hereof, has had an opportunity to review
this Agreement with legal counsel, has executed this Agreement based upon such
party’s own judgment and advice of counsel (if any), and knowingly, voluntarily,
and without duress, agrees to all of the

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terms set forth in this Agreement. The parties have participated jointly in the
negotiation and drafting of this Agreement. If an ambiguity or question of
intent or interpretation arises, this Agreement will be construed as if drafted
jointly by the parties and no presumption or burden of proof will arise favoring
or disfavoring any party because of authorship of any provision of this
Agreement. Except as expressly set forth in this Agreement, neither the parties
nor their affiliates, advisors and/or their attorneys have made any
representation or warranty, express or implied, at law or in equity with respect
of the subject matter contained herein. Without limiting the generality of the
previous sentence, the Companies, their affiliates, advisors, and/or attorneys
have made no representation or warranty to Executive concerning the state or
federal tax consequences to Executive regarding the transactions contemplated by
this Agreement.
     31. No Set-Off; No Mitigation. Except as provided herein, the Company’s
obligation to make the payments provided for in this Agreement and otherwise to
perform its obligations hereunder shall not be affected by any circumstances,
including any set-off, counterclaim, recoupment, defense or other right which
the Company may have against Executive or others. In no event shall Executive be
obligated to seek other employment or take any other action by way of mitigation
of the amounts payable to Executive under any of the provisions of this
Agreement, and such amounts shall not be reduced whether or not Executive
obtains other employment.
     31. Indemnification. The Company agrees that if Executive is made a party
to or involved in, or is threatened to be made a party to or otherwise to be
involved in, any action, suit or proceeding, whether civil, criminal,
administrative or investigative (a “Proceeding”), by reason of the fact that he
is or was an officer or employee of the Company or is or was serving at the
request of the Company as an officer, member, employee or agent of another
corporation, limited liability corporation, partnership, joint venture, trust or
other enterprise, including service with respect to employee benefit plans,
whether or not the basis of such Proceeding is Executive’s alleged action in an
official capacity while serving as an officer, member, employee or agent,
Executive shall be indemnified and held harmless by the Company against any and
all liabilities, losses, expenses, judgments, penalties, fines and amounts
reasonably paid in settlement in connection therewith, and shall be advanced
reasonable expenses (including attorneys’ fees) as and when incurred in
connection therewith, to the fullest extent legally permitted or authorized by
the Company’s By-laws or, if greater, by the laws of the State of Delaware, as
may be in effect from time to time, except that this Section 31 shall not apply
to the following Proceedings: (a) any Proceeding initiated or brought
voluntarily by Executive against the Company or its directors, officers
employees or other indemnitees, unless the Board of Directors has authorized or
consented to the initiation of the Proceeding (or any part of the Proceeding),
and (b) for an accounting of profits made from the purchase and sale (or sale
and purchase) by Executive of securities of the Company within the meaning of
Section 16(b) of the Exchange Act or any similar successor statute. The rights
conferred on Executive by this Section 31 shall not be exclusive of any other
rights which Executive may have or hereafter acquire under any statute, the
By-laws, agreement, vote of stockholders or disinterested directors, or
otherwise. The indemnification and advancement of expenses provided for by this
Section 31 shall continue until and terminate upon the latest of: (a) the
statute of limitations applicable to any claim that could be asserted against
Executive with respect to which he may be entitled to indemnification under this
Section 31, (b) ten years after the date that Executive has ceased to serve as a
director or officer of the Company or as a director, officer, employee, member,
or agent of any other corporation, limited liability corporation, partnership,
joint venture, trust or

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other enterprise at the request of the Company, or (c) if, at the later of the
dates referred to in (a) and (b) above, there is a pending Proceeding in respect
of which Executive is granted rights of indemnification under this Section 31,
one year after the final termination of such Proceeding, including any and all
appeals. The indemnification and advancement of expenses provided for by this
Section 31 shall inure to the benefit of his heirs, executors and
administrators.
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     IN WITNESS WHEREOF, the Company and Executive have executed this Agreement,
effective as of the day and year first above written.

                              COMPANY
 
               
Dated:
  October 5, 2006        By:   /s/ Mark E. Pape
 
               
 
          Name:   Mark E. Pape
 
          Title:   Executive Vice President
 
                            EXECUTIVE
 
               
Dated:
  October 5, 2006        By:   /s/ Kevin R. Callahan 
 
               
 
          Name:   Kevin R. Callahan

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Exhibit A
Bonus Opportunities
As determined by the Compensation Committee of the Board.

 

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Exhibit B
Restricted Stock Agreement

 

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AFFIRMATIVE INSURANCE HOLDINGS, INC.
AMENDED AND RESTATED 2004 STOCK INCENTIVE PLAN
as amended
RESTRICTED STOCK AWARD AGREEMENT
     This Restricted Stock Award Agreement (this “Agreement”), made as of the
5th day of October, 2006 (the “Grant Date”) by and between Affirmative Insurance
Holdings, Inc. (the “Company”), and Kevin R. Callahan (the “Grantee”), evidences
the grant by the Company of a Stock Award (the “Award”) of restricted Common
Stock, par value $0.01 per share (the “Common Stock”) to the Grantee on such
date and the Grantee’s acceptance of the Award in accordance with the provisions
of the Company’s Amended and Restated 2004 Stock Incentive Plan, as amended (the
“Plan”), a copy of which is attached hereto as Exhibit A.
     NOW, THEREFORE, in consideration of the premises and the benefits to be
derived from the mutual observance of the covenants and promises contained
herein and other good and valuable consideration, the sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
     1.     Basis for Award. This Award is made pursuant to the Plan for
services rendered to the Company by the Grantee.
     2.     Restricted Stock Award. The Company hereby awards and grants to
Grantee, in consideration for past services rendered to the Company or an
Affiliate of the Company which services have a value in excess of the aggregate
par value of the Common Stock awarded to Grantee, 70,000 shares of Common Stock
of the Company (the “Restricted Stock Award”) which shall be subject to the
restrictions and conditions set forth in the Plan and in this Agreement.
     3.     Vesting. The Restricted Stock Award (the “Restricted Stock”) shall
vest and be held subject to the following:
              (a)     provided Grantee continues to provide Continuous Service
to the Company or any Affiliate, the Restricted Stock Award will become vested
and exercisable with respect to twenty percent (20%) of the Restricted Stock on
the first anniversary of October 5, 2006 (the “Vesting Commencement Date”) and
thereafter, at the end of each full succeeding year, for four years, on the
anniversary date of the Vesting Commencement Date, will become vested and
exercisable as to twenty percent (20%) of the Restricted Stock until the
Restricted Stock is vested and exercisable with respect to one hundred percent
(100%) of the Restricted Stock. If application of the vesting percentage causes
a fractional share, such share shall be rounded down to the nearest whole share
for each vesting period except for the last period in such vesting period, at
the end of which last period this Restricted Stock Award shall become
exercisable for the full remainder of the Restricted Stock; and
              (b)     notwithstanding the foregoing, the Restricted Stock shall
become immediately vested and free of all restrictions hereunder upon the
earliest of the following to occur:
                       (i)     Termination by the Company other than for Cause;

 

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                       (ii)     Termination by the Grantee for Good Reason; or
                       (iii)     Non-renewal of Participant’s employment
agreement, to the extent and only to the extent provided in Section 2(b) of
Participant’s employment agreement.
For purposes of clarity, a termination due to death or disability of Participant
shall not cause the Award to become immediately vested and fully exercisable.
For purposes of this Agreement, the terms Cause, Good Reason, death or
disability shall have the meaning ascribed to them under the Participant’s
employment agreement.
     4.     Compliance with Laws and Regulations. The issuance and transfer of
Common Stock shall be subject to compliance by the Company and Grantee with all
applicable requirements of federal and state securities laws and with all
applicable requirements of any stock exchange on which the Company’s Common
Stock may be listed at the time of such issuance or transfer. Grantee
understands that the Company is under no obligation to register or qualify the
Common Stock with the SEC, any state securities commission or any stock exchange
to effect such compliance.
     5.     Tax Withholding.
              (a)     Grantee agrees that, subject to Section 5(b) below, no
later than the first to occur of (i) the date as of which the restrictions on
the Restricted Stock shall lapse with respect to all or any of the Restricted
Stock covered by this Agreement or (ii) the date required by Section 5(b) below,
Grantee shall pay to the Company (in cash or to the extent permitted by the
Board, Company Stock held by the Grantee whose Fair Market Value on the date the
Restricted Stock vests is equal to the amount of Grantee’s tax withholding
liability) any federal, state or local taxes of any kind required by law to be
withheld, if any, with respect to the Restricted Stock for which the
restrictions shall lapse. The Company shall, to the extent permitted by law,
have the right to deduct from any payment of any kind otherwise due to Grantee
any federal, state or local taxes of any kind required by law to be withheld
with respect to the shares of such Company Stock.
              (b)     Grantee has the right to elect, within thirty (30) days of
the Grant Date, to include in gross income for federal income tax purposes an
amount equal to the Fair Market Value of the Restricted Stock less the amount,
if any, paid by the Grantee for the Restricted Stock, which was granted
hereunder pursuant to Section 83(b) of the Internal Revenue Code of 1986, as
amended. Grantee shall pay to the Company, or make other arrangements
satisfactory to the Board to pay to the Company on the date of such grant, any
federal, state or local taxes required to be withheld with respect to such
Company Stock. If Grantee fails to make such payments, the Company shall, to the
extent permitted by law, have the right to deduct from any payment of any kind
otherwise due to Grantee any federal, state or local taxes of any kind required
by law to be withheld with respect to such Restricted Stock.
     6.     No Right to Continued Service. Nothing in this Agreement shall be
deemed by implication or otherwise to impose any limitation on any right of the
Company to terminate the Grantee’s service at any time. In the event Grantee’s
employment with the Company is

 

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terminated by the Company, by Grantee or as a result of Grantee’s death or
disability, no unvested shares of Common Stock shall become vested after such
termination of employment.
     7.     Representations and Warranties of Grantee. Grantee represents and
warrants to the Company that:
              (a)     Agrees to Terms of the Plan. Grantee has received a copy
of the Plan and has read and understands the terms of the Plan and this
Agreement, and agrees to be bound by their terms and conditions. Grantee
acknowledges that there may be adverse tax consequences upon the vesting of
Restricted Stock or disposition of the shares of Common Stock once vested, and
that Grantee should consult a tax advisor prior to such time.
              (b)     Stock Ownership. Grantee is the record and beneficial
owner of the shares of Restricted Stock with full right and power to transfer
the Unvested Shares defined below, to the Company free and clear of any liens,
claims or encumbrances and Grantee understands that the stock certificates
evidencing the Restricted Stock will bear a legend referencing this Agreement.
              (c)     SEC Rule 144. Grantee understands that Rule 144
promulgated under the Securities Act may indefinitely restrict transfer of the
Common Stock so long as Grantee remains an “affiliate” of the Company or if
“current public information” about the Company (as defined in Rule 144) is not
publicly available.
     8.     Dividends. Grantee shall be entitled to receive dividends and
distributions paid on all unvested Restricted Stock; provided, however, that no
dividends or distributions shall be payable to or for the benefit of Grantee
with respect to record dates for such dividends or distributions occurring
before or prior to the Vesting Commencement Date, or with respect to record
dates for such dividends or distributions occurring on or after the date, if
any, on which Grantee has forfeited the Restricted Stock.
     9.     Voting Rights. Grantee shall be entitled to vote all unvested
Restricted Stock; provided, however, that Grantee shall not be entitled to vote
Restricted Stock with respect to record dates for any Restricted Stock occurring
on or after the date, if any, on which the Grantee has forfeited the Restricted
Stock.
     10.     Compliance with U.S. Federal Securities Laws. Grantee understands
and acknowledges that notwithstanding any other provision of the Agreement to
the contrary, the vesting and holding of the Common Stock is expressly
conditioned upon compliance with the Securities Act and all applicable state
securities laws. Grantee agrees to cooperate with the Company to ensure
compliance with such laws.
     11.     Forfeiture of Unvested Stock. In the event that the Restricted
Stock was issued to Grantee solely in consideration for services rendered and
shares of unvested Common Stock (“Unvested Shares”) standing the in name of
Grantee on the books of the Company do not become vested on or before the
expiration of the period during which the applicable vesting conditions must
occur, such Unvested Shares shall be automatically forfeited and cancelled as
outstanding shares of Common Stock immediately upon the occurrence of the event
or time period after which such Unvested Shares may no longer become vested.

 

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     12.     Restrictions on Unvested Shares.
              (a)     Deposit of the Unvested Shares. Grantee shall deposit all
of the Unvested Shares with the Company to hold until the Unvested Shares become
vested, at which time such vested shares shall no longer constitute Unvested
Shares. The Company will deliver to Grantee the shares of Common Stock that
become vested upon vesting of such shares. Grantee shall execute and deliver to
the Company, concurrently with the execution of this Agreement blank stock
powers for use in connection with the transfer to the Company or its designee of
Unvested Shares that do not become vested.
              (b)     Restriction on Transfer of Unvested Shares. Grantee shall
not transfer, assign, grant a lien or security interest in, pledge, hypothecate,
encumber or otherwise dispose of any of the Unvested Shares, or any economic
interest or voting rights with respect to the foregoing except as permitted by
this Agreement.
     13.     Adjustments. The number of Unvested Shares shall be automatically
adjusted to reflect any stock split, stock dividend, recapitalization, merger,
consolidation, reorganization, combination or exchanges of shares or other
similar event affecting the Company’s outstanding Common Stock subsequent to the
date of this Agreement. If Grantee becomes entitled to receive any additional
shares of Common Stock or other securities (“Additional Securities”) in respect
of the Unvested Shares, the total number of Unvested Shares shall be equal to
the sum of (i) the initial Unvested Shares; and, (ii) the number of Additional
Securities issued or issuable in respect of the initial Unvested Shares and any
Additional Securities previously issued to Grantee.
     14.     Restrictive Legends and Stop-Transfer Orders.
              (a)     Legends. Grantee understands and agrees that the Company
will place the legends set forth below or similar legends on any stock
certificate(s) evidencing the Common Stock, together with any other legends that
may be required by state or U.S. Federal securities laws, the Company’s
Certificate of Incorporation or Bylaws, any other agreement between Grantee and
the Company or any agreement between Grantee and any third party:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS
ON PUBLIC RESALE AND TRANSFER AS SET FORTH IN A RESTRICTED STOCK AWARD AGREEMENT
BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES. SUCH PUBLIC SALE AND
TRANSFER RESTRICTIONS ARE BINDING ON TRANSFEREES OF THESE SHARES.
              (b)     Stop-Transfer Instructions. Grantee agrees that, to ensure
compliance with the restrictions imposed by this Agreement, the Company may
issue appropriate “stop-transfer” instructions to its transfer agent, if any,
and if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
              (c)     Refusal to Transfer. The Company will not be required
(i) to transfer on its books any shares of Common Stock that have been sold or
otherwise transferred in violation of any of the provisions of this Agreement or
(ii) to treat as owner of such shares, or to accord the right to vote or pay
dividends to any purchaser or other transferee to whom such shares have been so
transferred.

 

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     15.     Modification. The Agreement may not be modified except in writing
signed by both parties.
     16.     Plan. Except as otherwise provided herein, or unless the context
clearly indicates otherwise, capitalized terms herein which are defined in the
Plan have the same definitions as provided in the Plan. The terms and provisions
of the Plan are incorporated herein by references, and the Grantee hereby
acknowledges receiving a copy of the Plan. In the event of a conflict or
inconsistency between the terms and provisions of the Plan and the provisions of
this Agreement, the Plan shall govern and control.
     17.     Interpretation. Any dispute regarding the interpretation of this
Agreement shall be submitted by Grantee or the Company to the Plan Administrator
for review. The resolution of such a dispute by the Plan Administrator shall be
final and binding on the Company and Grantee.
     18.     Entire Agreement. The Plan and Grantee’s employment agreement are
incorporated herein by reference. This Agreement and the Plan constitute the
entire agreement of the parties and supercede all prior undertakings and
agreements with respect to the subject matter hereof. If any inconsistency
should exist between the nondiscretionary terms and conditions of this Agreement
and the Plan, the Plan shall govern and control.
     19.     Notices. Any notice required to be given or delivered to the
Company under the terms of this Agreement shall be in writing and addressed to
the Corporate Secretary of the Company at its principal corporate offices. Any
notice required to be given or delivered to Grantee shall be in writing and
addressed to Grantee at the address indicated on the signature page hereof or to
such other address as such party may designate in writing from time to time to
the Company. All notices shall be deemed to have been given or delivered upon:
(a) personal delivery; (b) three (3) days after deposit in the United States
mail by certified or registered mail (return receipt requested); (c) one
(1) business day after deposit with any return receipt express courier
(prepaid); or (d) one (1) business day after transmission by facsimile or
telecopier.
     20.     Successors and Assigns. The Company may assign any of its rights
under this Agreement. This Agreement shall be binding upon and inure to the
benefit of the successors and assigns of the Company. Subject to the
restrictions on transfer set forth herein, this Agreement shall be binding upon
Grantee and Grantee’s heirs, executors, administrators, legal representatives,
successors and assigns.
     21.     Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without giving effect to its
conflict of law principles. If any provision of this Agreement is determined by
a court of law to be illegal or unenforceable, then such provision will be
enforced to the maximum extent possible and the other provisions will remain
fully effective and enforceable.

 

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     22.     Acceptance. Grantee hereby acknowledges receipt of a copy of the
Plan and this Agreement. Grantee has read and understands the terms and
provisions thereof, and accepts the Award subject to all the terms and
conditions of the Plan and this Agreement. Grantee acknowledges that there may
be adverse tax consequences upon vesting of the Award or disposition of the
underlying shares and that Grantee should consult a tax advisor prior to such
exercise or disposition.
[SIGNATURE PAGE FOLLOWS]

 

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     IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the
date first above written.

              AFFIRMATIVE INSURANCE HOLDINGS, INC.
 
       
 
  By:   /s/ Mark E. Pape
 
       
 
  Name:   Mark E. Pape
 
       
 
  Title:   Chief Financial Officer
 
       

         
 
  GRANTEE    
 
      /s/ Kevin R. Callahan      
 
       
 
  Address:    
 
       
 
       
 
       
 
       
 
       

      Affirmative Insurance Holdings, Inc. Restricted Stock Award Agreement  
Page 7

 

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EXHIBIT A
Affirmative Insurance Holdings, Inc. 2004 Amended and Restated Stock Incentive
Plan
as amended

 

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Exhibit C
Stock Option Agreement

 

--------------------------------------------------------------------------------

 

AFFIRMATIVE INSURANCE HOLDINGS, INC.
AMENDED AND RESTATED 2004 STOCK INCENTIVE PLAN
as amended
STOCK OPTION AGREEMENT
     This Stock Option Agreement (the “Agreement”) is made and entered into as
of the date of grant set forth below (the “Date of Grant”) by and between
Affirmative Insurance Holdings, Inc., a Delaware corporation (the “Company”),
and the participant named below (the “Participant”). Capitalized terms not
defined herein shall have the meaning ascribed to them in the Company’s Amended
and Restated 2004 Stock Incentive Plan, as amended (the “Plan”).

             
 
  Participant:   Kevin R. Callahan    
 
           
 
           
 
  Address:        
 
           
 
           
 
           
 
           
 
           
 
  Total Option Shares:   <number>    
 
           
 
           
 
  Exercise Price Per Share:   <price>    
 
           
 
           
 
  Date of Grant:   October 5, 2006    
 
           
 
           
 
  Expiration Date:   October 5, 2016    
 
           
 
           
 
  Vesting Commencement Date:   October 5, 2006    
 
           
 
                Vesting Schedule:   The Option will become vested and
exercisable with respect to twenty percent (20%) of the Shares (defined below)
on the first anniversary of the Vesting Commencement Date set forth above and
thereafter, at the end of each full succeeding year, for four years, on the
anniversary date of the Vesting Commencement Date the Option will become vested
and exercisable as to twenty percent (20%) of the Shares until the Option is
vested and exercisable with respect to one hundred percent (100%) of the Shares.
 
                Type of Stock Option:   o Incentive Stock Option
 
                    þ Nonstatutory Stock Option

     1. Grant of Option. The Company hereby grants to Participant an option
(this “Option”) to purchase the total number of shares of Common Stock of the
Company set forth

Page 1

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above as Total Option Shares (the “Shares”) at the Exercise Price Per Share set
forth above (the “Exercise Price”), subject to all of the terms and conditions
of this Agreement and the Plan. If designated as an Incentive Stock Option
above, the Option is intended to qualify as an “incentive stock option” (an
“ISO”) within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the “Code”), although the Company makes no representation or
guarantee that such Option will qualify as an ISO.
     2. Exercise Period; Vesting.
          2.1. Exercise Period. Unless expired as provided in Section 3 of this
Agreement, this Option may be exercised from time to time after the Date of
Grant set forth above (the “Date of Grant”) to the extent the Option has vested
in accordance with the vesting schedule in Subsection 2.2.
          2.2. Vesting. Provided Participant’s employment pursuant to his
employment agreement has not terminated prior to such vesting dates, the Option
will become vested and exercisable according to the Vesting Schedule. If
application of the vesting percentage causes a fractional share, such share
shall be rounded down to the nearest whole share for each vesting period except
for the last period in such vesting period, at the end of which last period this
Option shall become exercisable for the full remainder of the Shares. The Shares
issued upon exercise of the Option will be subject to the restrictions on
transfer set forth in Sections 8 and 9 below.
          2.3. Acceleration of Vesting. Notwithstanding the foregoing, any
unvested portion of the Option shall become immediately vested and fully
exercisable upon the earliest of the following to occur:
               (a) Termination by the Company other than for Cause;
               (b) Termination by the Participant for Good Reason; or
               (c) Non-renewal of Participant’s employment agreement, to the
extent and only to the extent provided in Section 2(b) of Participant’s
employment agreement.
For purposes of clarity, a termination due to death or disability of Participant
shall not cause the Option to become immediately vested and fully exercisable.
For purposes of this Option, the terms Cause, Good Reason, death or disability
shall have the meaning ascribed to them under the Participant’s employment
agreement.
     3. Expiration. The Option shall expire on the Expiration Date set forth
above or earlier as provided in Section 4 below or, if applicable, pursuant to
Section 11 of the Plan.
     4. Termination of Continuous Service.
          4.1. Termination for Any Reason Except Death, Disability or Cause.
Unless otherwise provided in an employment agreement the terms of which have
been approved by the Administrator, if Participant’s Continuous Service is
terminated for any reason, except death, disability or for Cause, the Option, to
the extent (and only to the extent) that it would have been

Page 2

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exercisable by Participant on the date of termination, may be exercised by
Participant no later than the one (1) month anniversary of the date of
termination, but in any event no later than the Expiration Date.
          4.2. Termination Because of Death or Disability. If Participant’s
Continuous Service is terminated because of death or disability of Participant,
the Option, to the extent that it would have been exercisable by Participant on
the date of termination, may be exercised by Participant (or Participant’s legal
representative) no later than twelve (12) months after the date of termination,
but in any event no later than the Expiration Date. If permitted by this
Agreement, any exercise beyond twelve (12) months after the date of termination
when the termination is for Participant’s disability is deemed to be a
Nonstatutory Stock Option (an “NSO”) and not an ISO.
          4.3. Termination for Cause. If Participant’s Continuous Service is
terminated for Cause, then the Option will expire on the Participant’s date of
termination.
          4.4. No Obligation to Employ. Nothing in the Plan or this Agreement
shall confer on Participant any right to continue in the employ of, or other
relationship with, the Company or any Affiliate, or limit in any way the right
of the Company or any Affiliate to terminate Participant’s employment or other
relationship at any time, with or without Cause.
     5. Manner of Exercise.
          5.1. Stock Option Exercise Agreement. To exercise this Option,
Participant (or in the case of exercise after Participant’s death or incapacity,
Participant’s executor, administrator, heir or legatee, as the case may be) must
deliver to the Company an executed stock option exercise agreement in the form
attached hereto as Exhibit A, or in such other form as may be approved by the
Administrator from time to time (the “Exercise Agreement”), which shall set
forth, inter alia, (a) Participant’s election to exercise the Option, (b) the
number of Shares being purchased, (c) any restrictions imposed on the Shares and
(d) any representations, warranties, and agreements regarding Participant’s
investment intent and access to information as may be required by the Company to
comply with applicable securities laws. If someone other than Participant
exercises the Option, then such person must submit documentation reasonably
acceptable to the Company verifying that such person has the legal right to
exercise the Option.
          5.2. Limitations on Exercise. The Option may not be exercised unless
such exercise is in compliance with all applicable federal and state securities
laws, as they are in effect on the date of exercise. The Option may not be
exercised for fewer than one (1) Share unless it is exercised as to all Shares
as to which the Option is then exercisable.
          5.3. Payment. The Exercise Agreement shall be accompanied by full
payment of the Exercise Price for the shares being purchased in cash (by
certified check or wire transfer), or where permitted by law and upon written
approval by the Administrator:
               (a) by surrender of shares of the Company’s Common Stock that
(i) either (1) have been owned by Participant for more than six (6) months and
have been paid for within the meaning of SEC Rule 144 (and, if such shares were
purchased from the Company by use of promissory note, such note has been fully
paid with respect to such shares); or (2) were

Page 3

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obtained by Participant in the open public market; and (ii) are clear of all
liens, claims, encumbrances or security interests;
               (b) provided that a Listing Date has occurred: (i) through a
“same day sale” commitment from Participant and a broker-dealer that is a member
of the National Association of Securities Dealers (an “NASD Dealer”) whereby
Participant irrevocably elects to exercise the Option and to sell a portion of
the Shares so purchased sufficient to pay for the total Exercise Price and
whereby the NASD Dealer irrevocably commits upon receipt of such Shares to
forward the total Exercise Price directly to the Company, or (ii) through a
“margin” commitment from Participant and an NASD Dealer whereby Participant
irrevocably elects to exercise the Option and to pledge the Shares so purchased
to the NASD Dealer in a margin account as security for a loan from NASD Dealer
in the amount of the total Exercise Price, and whereby the NASD Dealer
irrevocably commits upon receipt of such Shares to forward the total Exercise
Price directly to the Company; provided, however, a cashless exercise by a
Director or executive officer that involves or may involve a direct or indirect
extension of credit or arrangement of an extension of credit by the Company or
an Affiliate in violation of Section 402(a) of the Sarbanes-Oxley Act (codified
as Section 13(k) of the Securities Exchange Act of 1934, 15 U.S.C. § 78m(k))
shall be prohibited;
               (c) by any other form of legal consideration that may be
acceptable to the Administrator; or
               (d) by any combination of the foregoing.
          5.4. Tax Withholding. Prior to the issuance of the Shares upon
exercise of the Option, Participant must pay or provide for any applicable
federal, state and local withholding obligations of the Company.
          5.5. Issuance of Shares. Provided that the Exercise Agreement and
payment are in form and substance satisfactory to counsel for the Company, the
Company shall issue the Shares registered in the name of Participant,
Participant’s authorized assignee, or Participant’s legal representative, and
shall deliver certificates representing the Shares with the appropriate legends
affixed thereto.
     6. Notice of Disqualifying Disposition of ISO Shares. If the Option is an
ISO, and if Participant sells or otherwise disposes of any of the Shares
acquired pursuant to the ISO on or before the later of (a) the date two
(2) years after the Date of Grant, and (b) the date one (1) year after transfer
of such Shares to Participant upon exercise of the Option, Participant shall
immediately notify the Company in writing of such disposition. Participant
agrees that Participant may be subject to income tax withholding by the Company
on the compensation income recognized by Participant from the early disposition
by payment in cash or out of the current wages or other compensation payable to
Participant.
     7. Compliance with Laws and Regulations. The exercise of the Option and the
issuance and transfer of Shares shall be subject to compliance by the Company
and Participant with all applicable requirements of federal and state securities
laws and with all applicable requirements of any stock exchange on which the
Company’s Common Stock may be listed at

Page 4

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the time of such issuance or transfer. Participant understands that the Company
is under no obligation to register or qualify the Shares with the SEC, any state
securities commission or any stock exchange to effect such compliance.
     8. Nontransferability of Option. If the Option is an ISO, the Option may
not be transferred in any manner other than by will or by the laws of descent
and distribution and may be exercised during the lifetime of Participant only by
Participant or in the event of Participant’s incapacity, by Participant’s legal
representative. The terms of the Option shall be binding upon the executors,
administrators, successors and assigns of Participant. If the Option is not an
ISO, upon written approval by the Administrator, it may be transferred by gift
or domestic relations order to a member of the Participant’s immediate family
(child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former
spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law,
daughter-in-law, brother-in-law, or sister-in-law, including adoptive
relationships, any person sharing the Participant’s household (other than a
tenant or employee), a trust in which these persons have more than 75% of the
beneficial interest, a foundation in which these persons (or the Participant)
control the management of assets, and any other entity in which these persons
(or the Participant) own more than 75% of the voting interests.
     9. Privileges of Stock Ownership. Participant shall not have any of the
rights of a stockholder with respect to any Shares until the Shares are issued
to Participant.
     10. General.
          10.1. Interpretation. Any dispute regarding the interpretation of this
Agreement shall be submitted by Participant or the Company to the Administrator
for review. The resolution of such a dispute by the Administrator shall be final
and binding on the Company and Participant.
          10.2. Entire Agreement. The Plan and Participant’s employment
agreement are incorporated herein by reference. This Agreement and the Plan
constitute the entire agreement of the parties and supercede all prior
undertakings and agreements with respect to the subject matter hereof. If any
inconsistency should exit between the nondiscretionary terms and conditions of
this Agreement and the Plan, the Plan shall govern and control.
          10.3. Notices. Any notice required to be given or delivered to the
Company under the terms of this Agreement shall be in writing and addressed to
the Corporate Secretary of the Company at its principal corporate offices. Any
notice required to be given or delivered to Participant shall be in writing and
addressed to Participant at the address indicated above or to such other address
as such party may designate in writing from time to time to the Company. All
notices shall be deemed to have been given or delivered upon: (a) personal
delivery; (b) five (5) days after deposit in the United States mail by certified
or registered mail (return receipt requested); (c) two (2) business day after
deposit with any return receipt express courier (prepaid); or (d) one
(1) business day after transmission by facsimile.
          10.4. Successors and Assigns. The Company may assign any of its rights
under this Agreement. This Agreement shall be binding upon and inure to the
benefit of the successors and assigns of the Company. Subject to the
restrictions on transfer set forth herein, this

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Agreement shall be binding upon Participant and Participant’s heirs, executors,
administrators, legal representatives, successors and assigns.
          10.5. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware without giving effect to
its conflict of law principles. If any provision of this Agreement is determined
by a court of law to be illegal or unenforceable, then such provision will be
enforced to the maximum extent possible and the other provisions will remain
fully effective and enforceable.
     11. Acceptance. Participant hereby acknowledges receipt of a copy of the
Plan and this Agreement. Participant has read and understands the terms and
provisions thereof, and accepts the Option subject to all the terms and
conditions of the Plan and this Agreement. Participant acknowledges that there
may be adverse tax consequences upon exercise of the Option or disposition of
the Shares and that Participant should consult a tax advisor prior to such
exercise or disposition.
[SIGNATURE PAGE FOLLOWS]

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     IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by
its duly authorized representative and Participant has executed this Agreement,
effective as of the Date of Grant.

              AFFIRMATIVE INSURANCE HOLDINGS, INC.
 
       
 
  By:   /s/ Mark E. Pape
 
       
 
  Name:   Mark E. Pape
 
  Title:   Executive Vice President
 
            PARTICIPANT
 
      /s/ Kevin R. Callahan           (Signature)
 
            Printed Name: Kevin R. Callahan

Page 7

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EXHIBIT A
FORM OF STOCK OPTION EXERCISE AGREEMENT

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AFFIRMATIVE INSURANCE HOLDINGS, INC.
AMENDED AND RESTATED 2004 STOCK INCENTIVE PLAN
as amended
STOCK OPTION EXERCISE AGREEMENT
     This Stock Option Exercise Agreement (the “Exercise Agreement”) is made and
entered into as of                                          (the “Effective
Date”), by and between Affirmative Insurance Holdings, Inc., a Delaware
corporation (the “Company”), and the purchaser named below (the “Purchaser”).
Capitalized terms not defined herein shall have the meanings ascribed to them in
the Company’s Amended and Restated 2004 Stock Incentive Plan, as amended (the
“Plan”) or the Stock Option Agreement.

             
 
  Participant:        
 
           
 
           
 
  Social Security Number:        
 
           
 
           
 
  Address:        
 
     
 
   
 
           
 
           
 
           
 
  Option Shares Being Purchased:        
 
           
 
           
 
  Exercise Price Per Share:        
 
           
 
           
 
  Date of Grant:        
 
           
 
           
 
  Expiration Date:        
 
           
 
           
 
  Type of Stock Option:   o Incentive Stock Option    
 
           
 
      o Nonstatutory Stock Option    

     1. Exercise of Option.
          1.1. Exercise. Pursuant to exercise of that certain option (the
“Option”) granted to Purchaser under the Plan and the Stock Option Agreement and
subject to the terms and conditions of this Exercise Agreement, Purchaser hereby
purchases from the Company, and the Company hereby sells to Purchaser, the Total
Number of Shares set forth above (the “Shares”) of the Company’s Common Stock at
the Exercise Price Per Share set forth above (the “Exercise Price”). As used in
this Exercise Agreement, the term “Shares” refers to the Shares purchased under
this Exercise Agreement and includes all securities received (a) in replacement
of the Shares, (b) as a result of stock dividends or stock splits with respect
to the Shares, and (c) all securities received in replacement of the Shares in a
merger, recapitalization, reorganization or similar corporate transaction.

      Affirmative Insurance Holdings, Inc. Stock Option Exercise Agreement  
Page 1      

 

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          1.2. Title to Shares. The exact spelling of the name(s) under which
Purchaser will take title to the Shares
is:                                                            
          Purchaser desires to take title to the Shares as follows:
          o Individual, as separate property
          o Husband and wife, as community property
          o Joint Tenants
          o Other; please
specify:                                                            
          1.3. Payment. Purchaser hereby delivers payment of the Exercise Price
in cash (by check), whether or not acquired through a loan from the Company, in
the amount of $                                        , receipt of which is
acknowledged by the Company.
     2. Delivery.
          2.1. Deliveries by Purchaser. Purchaser hereby delivers to the Company
(a) this Exercise Agreement, (b) if Purchaser is married, a consent of spouse in
the form of Exhibit A attached hereto executed by Purchaser’s spouse, (c) the
Exercise Price and payment or other provision for any applicable tax obligations
in the form of a check, or, if permitted under applicable law and permitted by
the Administrator, a secured full recourse promissory note (“Note”) and (d) if
the Purchaser has provided a Note for exercise of the Shares, a stock pledge
agreement executed by Purchaser (“Pledge Agreement”) and two (2) copies of a
blank stock power (“Stock Power”), both executed by Purchaser (and Purchaser’s
spouse, if any).
          2.2. Deliveries by the Company. Upon its receipt of the Exercise
Price, payment or other provision for any applicable tax obligations and all the
documents to be executed and delivered by Purchaser to the Company under
Section 2.1 hereof, the Company will issue a duly executed stock certificate
evidencing the Shares in the name of Purchaser, provided, however, if the
Purchaser has provided a Note for exercise of the Shares, such stock certificate
shall be placed in escrow as provided in Section 10 hereof to secure payment of
Purchaser’s obligation under the Note.
     3. Representations and Warranties of Purchaser. Purchaser represents and
warrants to the Company that:
          3.1. Agrees to Terms of the Plan. Purchaser has received a copy of the
Plan and the Stock Option Agreement, has read and understands the terms of the
Plan, the Stock Option Agreement and this Exercise Agreement, and agrees to be
bound by their terms and conditions. Purchaser acknowledges that there may be
adverse tax consequences upon exercise of the Option or disposition of the
Shares, and that Purchaser should consult a tax advisor prior to such exercise
or disposition.
          3.2. SEC Rule 144. Purchaser understands that Rule 144 promulgated
under the Securities Act may indefinitely restrict transfer of the Shares so
long as Purchaser remains an

      Affirmative Insurance Holdings, Inc. Stock Option Exercise Agreement  
Page 2      

 

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“affiliate” of the Company or if “current public information” about the Company
(as defined in Rule 144) is not publicly available.
     4. Compliance with Securities Laws. Purchaser understands and acknowledges
that, notwithstanding any other provision of the Stock Option Agreement to the
contrary, the exercise of any rights to purchase any Shares is expressly
conditioned upon compliance with the Securities Act and all applicable state
securities laws. Purchaser agrees to cooperate with the Company to ensure
compliance with such laws.
     5. Rights as a Stockholder. Subject to the terms and conditions of this
Exercise Agreement, Purchaser will have all of the rights of a stockholder of
the Company with respect to the Shares from and after the date that Shares are
issued to Purchaser until such time as Purchaser disposes of the Shares.
     6. Escrow. If the Purchaser has provided a Note for exercise of the Shares,
as security for Purchaser’s faithful performance of this Exercise Agreement,
Purchaser agrees, immediately upon receipt of the stock certificate(s)
evidencing the Shares, to deliver such certificate(s), together with the Stock
Powers executed by Purchaser and by Purchaser’s spouse, if any (with the date
and number of Shares left blank), to the Secretary of the Company or other
designee of the Company (the “Escrow Holder”), who is hereby appointed to hold
such certificate(s) and Stock Powers in escrow and to take all such actions and
to effectuate all such transfers and/or releases of such Shares as are in
accordance with the terms of this Exercise Agreement. Purchaser and the Company
agree that Escrow Holder will not be liable to any party to this Exercise
Agreement (or to any other party) for any actions or omissions unless Escrow
Holder is grossly negligent or intentionally fraudulent in carrying out the
duties of Escrow Holder under this Exercise Agreement. Escrow Holder may rely
upon any letter, notice or other document executed with any signature purported
to be genuine and may rely on the advice of counsel and obey any order of any
court with respect to the transactions contemplated by this Exercise Agreement.
The Shares will remain in escrow so long as they are subject to the Pledge
Agreement.
     7. Tax Consequences. PURCHASER UNDERSTANDS THAT PURCHASER MAY SUFFER
ADVERSE TAX CONSEQUENCES AS A RESULT OF PURCHASER’S PURCHASE OR DISPOSITION OF
THE SHARES. PURCHASER REPRESENTS: (a) THAT PURCHASER HAS CONSULTED WITH ANY TAX
ADVISOR THAT PURCHASER DEEMS ADVISABLE IN CONNECTION WITH THE PURCHASE OR
DISPOSITION OF THE SHARES AND (b) THAT PURCHASER IS NOT RELYING ON THE COMPANY
FOR ANY TAX ADVICE.
     8. Compliance with Laws and Regulations. The issuance and transfer of the
Shares will be subject to and conditioned upon compliance by the Company and
Purchaser with all applicable state, local and U.S. Federal laws and regulations
and with all applicable requirements of any stock exchange or automated
quotation system on which the Company’s Common Stock may be listed or quoted at
the time of such issuance or transfer.
     9. Successors and Assigns. The Company may assign any of its rights under
this Exercise Agreement. This Exercise Agreement shall be binding upon and inure
to the benefit of

      Affirmative Insurance Holdings, Inc. Stock Option Exercise Agreement  
Page 3      

 

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the successors and assigns of the Company. This exercise Agreement will be
binding upon Purchaser and Purchaser’s heirs, executors, administrators, legal
representatives, successors and assigns.
     10. Governing Law; Severability. This Exercise Agreement shall be governed
by and construed in accordance with the laws of the State of Delaware without
giving effect to its conflict of law principles. If any provision of this
Exercise Agreement is determined by a court of law to be illegal or
unenforceable, then such provision will be enforced to the maximum extent
possible and the other provisions will remain fully effective and enforceable.
     11. Notices. Any notice required to be given or delivered to the Company
shall be in writing and addressed to the Corporate Secretary of the Company at
its principal corporate offices. Any notice required to be given or delivered to
Purchaser shall be in writing and addressed to Purchaser at the address
indicated above or to such other address as Purchaser may designate in writing
from time to time to the Company. All notices shall be deemed effectively given
upon personal delivery, (a) five (5) days after deposit in the United States
mail by certified or registered mail (return receipt requested), (b) two
(2) business day after its deposit with any return receipt express courier
(prepaid), or (c) one (1) business day after transmission by facsimile.
     12. Further Instruments. The parties agree to execute such further
instruments and to take such further action as may be reasonably necessary to
carry out the purposes and intent of this Exercise Agreement.
     13. Headings. The captions and headings of this Exercise Agreement are
included for ease of reference only and will be disregarded in interpreting or
construing this Exercise Agreement.
     14. Entire Agreement. The Plan, the Stock Option Agreement and this
Exercise Agreement, together with all Exhibits thereto, constitute the entire
agreement and understanding of the parties with respect to the subject matter of
this Exercise Agreement, and supersede all prior understandings and agreements,
whether oral or written, between the parties hereto with respect to the specific
subject matter hereof. If there is any inconsistency between the terms of this
Exercise Agreement and the terms of the Plan and Stock Option Agreement, the
terms of the Plan and Stock Option Agreement shall govern and control.
[SIGNATURE PAGE FOLLOWS]

      Affirmative Insurance Holdings, Inc. Stock Option Exercise Agreement  
Page 4      

 

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     IN WITNESS WHEREOF, the Company has caused this Exercise Agreement to be
executed in triplicate by its duly authorized representative and Purchaser has
executed this Exercise Agreement in triplicate as of the Effective Date,
indicated above.

                  AFFIRMATIVE INSURANCE HOLDINGS, INC.    
 
           
 
  By:        
 
  Name:  
 
   
 
  Title:  
 
   
 
           

                  PARTICIPANT    
 
                     
 
  (Signature)        
 
  Printed Name:        
 
     
 
   

      Affirmative Insurance Holdings, Inc. Stock Option Exercise Agreement  
Page 5      

 

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EXHIBIT A
SPOUSE CONSENT
     The undersigned spouse of
                                                             (the “Purchaser”)
has read, understands, and hereby approves the Stock Option Exercise Agreement
(the “Agreement”) between Purchaser and Affirmative Insurance Holdings, Inc., a
Delaware corporation (the “Company”). In consideration of the Company’s granting
my spouse the right to purchase the Shares as set forth in the Agreement, the
undersigned hereby agrees to be irrevocably bound by the Agreement and further
agrees that any community property interest I may have in the Shares shall
similarly be bound by the Agreement. The undersigned hereby appoints Purchaser
as my attorney-in-fact with respect to any amendment or exercise of any rights
under the Agreement.

             
 
  Dated:        
 
     
 
   
 
  SPOUSE        
 
           
 
                     
 
  (Signature)        
 
                          Printed Name    
 
           
 
  Address:        
 
     
 
             
 
                     

 

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Exhibit D
SEVERANCE AND RELEASE AGREEMENT

 

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SEPARATION AGREEMENT AND RELEASE
     THIS SEPARATION AGREEMENT AND RELEASE (“Agreement”) is made and entered
into by and between Kevin R. Callahan (“Executive”) and Affirmative Insurance
Holdings, Inc. (“the Company”).
     WHEREAS the parties acknowledge and agree that Executive and the Company
entered into an Employment Agreement effective on October 5, 2006 (“Employment
Agreement”);
     WHEREAS the Employment Agreement has been terminated and Executive’s last
date of employment was                      (“Separation Date”); and
     WHEREAS Executive and the Company desire to settle fully and finally any
and all differences between them, including, but not limited to, any and all
differences arising from or in any way connected with Executive’s employment
with the Company or the termination of that employment.
     NOW, THEREFORE, in consideration of the mutual promises, agreements and
valuable consideration contained herein, the sufficiency of which is hereby
acknowledged, it is agreed as follows:
     1. Separation Payments and Benefits.
          (a) Pursuant to Section 6 of the Employment Agreement, and in exchange
for execution of this Agreement and Executive’s release of claims against the
Releasees in Paragraph 2, Executive will receive the appropriate severance
payment and/or benefits, as applicable, pursuant to Section 5 of the Employment
Agreement;
          (b) If Executive does not execute this Agreement within twenty-one
(21) calendar days from the Separation Date pursuant to Paragraph 4(a) below, or
if Executive revokes this Agreement pursuant to Paragraph 4(b) below, or if
Executive is otherwise in non-compliance with this Agreement, the Company will
have no obligation to provide severance payments and/or benefits, as specified
in this Paragraph 1.
          (c) Executive acknowledges that the separation payments and/or
benefits, as applicable, described in Paragraphs 1(a) and (b), are good and
valuable consideration for the release and other covenants he is making in this
Agreement and are in addition to any consideration to which he may already be
entitled. Executive also acknowledges and agrees that neither the Company nor
its attorneys have made any representations regarding the tax consequences, if
any, of the severance payments and/or benefits referenced in this Paragraph 1.
          (d) Nothing contained herein shall limit or otherwise impair
Executive’s right to receive pension or similar benefit payments which are
vested as of the Separation Date under any applicable tax qualified pension or
other tax qualified or non-qualified benefit plans, pursuant to the terms and
conditions of the applicable plan.

1

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     2. Release.
          (a) General Release. As a material inducement for the Company to enter
this Agreement, except for (i) a claim based upon a breach of this Agreement,
and (ii) a claim which is expressly preserved by this Agreement, Executive does
hereby agree to release and forever discharge the Company (including, without
limitation, the Company’s affiliates, owners, stockholders, agents, directors,
officers, members, partners, employees, insurers, representatives, lawyers,
management consultants, human resource consultants, employee welfare benefit
plans, pension plans and/or deferred compensation plans and their trustees,
administrators, or other fiduciaries, the successors or assigns of any of the
foregoing, and all persons acting by, through, under, or in concert with them,
or any of them) (hereinafter the “Releasees”) from any and all claims,
complaints, liabilities or obligations of any kind whatsoever, whether known or
unknown, arising in tort or contract, which Executive may have, now has, or has
ever had arising from Executive’s employment with the Company or any predecessor
or the termination of that employment, or any other matter or event which may
have occurred as of the date of this Agreement, other than as provided in under
(i) and (ii) above (“Released Claims”). Executive understands and agrees that
the Released Claims include, without limitation, any and all claims, complaints,
liabilities or obligations under applicable federal, state or local law,
including, but not limited to, Title VII of the Civil Rights Act of 1964, as
amended by the Civil Rights Act of 1991, the Americans With Disabilities Act,
the Employee Retirement Income Security Act, and the Age Discrimination in
Employment Act (“ADEA”), or any other federal, state, or local statute,
regulation, or ordinance governing employment, discrimination in employment,
and/or the payment of wages or benefits, other than as provided in (i) and
(ii) above.
          (b) Warranty That Claims Have Not Been Assigned Or Conveyed. Executive
represents and warrants that he is the only person who may be entitled to assert
any claims against the Company arising from his former employment with the
Company and the termination of such employment, and that he has not assigned or
conveyed to anyone else any part of or interest in such claims against the
Company. Executive agrees to indemnify and hold the Company harmless from any
liability, demand, cost, expense, or attorneys’ fee incurred as the result of
the assertion of any such claim or claims by any other person based on such an
assignment or conveyance from Executive.
          (c) Waiver of Right to Bring Released Claims. Executive further agrees
not to bring any Released Claims against the Releasees, either individually or
collectively; provided however, that Executive may file a lawsuit to challenge
the validity of the release of his ADEA claims under this Agreement, including
the knowing and voluntary nature of the ADEA release under the OWBPA. Nothing in
this Paragraph 2(b) shall interfere with Executive’s right to file a charge
with, or cooperate or participate in an investigation or proceeding conducted
by, the Equal Employment Opportunity Commission (“EEOC”) or other federal or
state regulatory or law enforcement agency. However, the consideration provided
to Executive in this Agreement shall be the sole relief provided for the
Released Claims and Executive will not be entitled to recover and Executive
agrees to waive any monetary benefits or recovery against the Releasees in
connection with any such charge or proceeding without regard to who has brought
such charge or proceeding.

2

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          (d) Costs of Enforcement. Executive agrees that if he breaches this
Agreement and brings a Released Claim against any of the Releasees or otherwise
breaches this Agreement, Executive shall be liable for any and all expenses
incurred by the person or entity who has to defend the action, including
reasonable attorney’s fees; provided however, that this Paragraph 2(c) shall not
apply to charges filed by Executive with the EEOC or other federal or state
regulatory or law enforcement agency or to claims initiated by Executive to
challenge the validity of the release of ADEA claims under this Agreement,
including the knowing and voluntary nature of the ADEA release under the OWBPA.
     3. Return of Company Property. By the close of business on Executive’s
Separation Date, Executive agrees to return to the Company all property and
Confidential Information (as defined in the Employment Agreement) belonging to
the Releasees in his possession or under his control.
     4. Knowing and Voluntary Execution. Executive understands and agrees as
follows:

  (a)   Executive may take up to twenty-one (21) calendar days from the
Separation Date to consider whether or not he desires to execute this Agreement;
    (b)   Executive may revoke this Agreement at any time during the seven
(7) calendar day period after he signs and delivers this Agreement to the
Company’s General Counsel. Any such revocation must be in writing and personally
delivered to the Company’s General Counsel by the end of the seventh (7th)
calendar day. Executive understands that this Agreement is not effective, and
Executive is not entitled to the separation payments and benefits specified in
Paragraph 1, until the expiration of this seven (7) calendar day revocation
period. Executive understands that upon the expiration of such seven
(7) calendar day revocation period, this entire Agreement will be binding upon
Executive and will be irrevocable;     (c)   Executive has carefully read and
fully understands all of the provisions of this Agreement;     (d)   Executive
knowingly and voluntarily agrees to all of the terms set forth in this Agreement
and to be bound by this Agreement;     (e)   Executive is hereby advised in
writing to consult with an attorney and tax advisor of his choice prior to
executing this Agreement and has had the opportunity and sufficient time to seek
such advice;     (f)   Executive understands that rights or claims under the Age
Discrimination in Employment Act that may arise after the date this Release is
executed are not waived; and     (g)   Executive agrees that the separation pay
provided in this Agreement is in addition to any consideration to which he may
already be entitled.

3

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     7. Interpretation. The language of this Agreement shall in all cases be
construed as a whole, according to its fair meaning, and not strictly for or
against any of the parties.
     8. Governing Law and Consent to Venue. This Agreement will be governed by
and construed in accordance with the laws of the State of Illinois, without
regard to any conflict of laws rule or principle which might refer the
governance or construction of this Agreement to the laws of another
jurisdiction. The Parties agree that any dispute relating to or arising out of
this Agreement will be heard and decided in a state or federal court of
competent jurisdiction in Chicago, Illinois.
     9. Representations. The parties to this Agreement represent and acknowledge
that in entering and executing this Agreement, they have not relied upon any
representations or statements made by any other party to this Agreement, or by
the agents, representatives, or attorneys of any other party, with regard to the
subject matter, basis, or effect of this Agreement.
     10. Entire Agreement. This Agreement sets forth the entire agreement
between the parties hereto and fully supersedes any and all prior agreements or
understandings, written or oral, between the parties hereto pertaining to the
subject matter hereof, except for Executive’s continuing obligations under the
Employment Agreement, including, without limitation, Sections 7 and 8 of the
Employment Agreement. This Agreement cannot be amended or modified, unless such
amendment or modification is in writing and signed by the Company and the
Executive.
     11. Third-Party Beneficiaries. Executive acknowledges and agrees that the
terms of this Agreement, including, without limitation, the releases of claims
by Executive, will inure to the benefit of all Releasees.
     12. Severability. Should any court of competent jurisdiction declare any
provision of this Agreement to be wholly or partially illegal, invalid, or
unenforceable, the offending provision shall be stricken and all remaining
provisions shall remain in full force and effect and shall be unaffected by such
declaration.
     13. No Admission of Liability. Nothing in this Agreement is intended to be,
or will be deemed to be, an admission of liability by Executive or the Company
to each other, or an admission that they or any of their agents, affiliates, or
employees have violated any state, federal or local statute, regulation or
ordinance or any principle of common law of any jurisdiction, or that they have
engaged in any wrongdoing towards each other.
     14. Waiver of Breach. The failure by either party to insist upon the
performance of any one or more terms, covenants or conditions of this Agreement
shall not be construed as a waiver or relinquishment of any right granted
hereunder or of any future performance of any such term, covenant or condition,
and the obligation of either party with respect hereto shall continue in full
force and effect, unless such waiver shall be in writing and signed by the Chief
Financial Officer of the Company and the Executive.
     15. Non-Disparagement. The Executive agrees that on and after the date of
this Agreement, he will not make any disparaging, critical or derogatory
statement about the Company or any affiliate or their shareholders or any of
their officers, directors or employees or otherwise make any disparaging comment
on any aspects of Executive’s employment with the

4

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Company, and the officers of the Company agree not to issue a public statement
containing, or otherwise make, any disparaging, critical or derogatory statement
about the Executive or Executive’s employment with the Company; provided that
the provisions of this paragraph shall not apply to testimony as a witness, any
disclosure required by law to be made by the Company or the Executive, the
assertion of or defense against any claim of breach of this Agreement and shall
not require either party to make false statements or disclosures.
     PLEASE READ CAREFULLY. THIS SEPARATION AGREEMENT AND RELEASE INCLUDES THE
RELEASE OF ALL CLAIMS AGAINST THE COMPANY, KNOWN OR UNKNOWN, THAT MAY HAVE
OCCURRED AS OF THE DATE OF THIS AGREEMENT, INCLUDING ALL CLAIMS ARISING UNDER
THE AGE DISCRIMINATION IN EMPLOYMENT ACT.
     IN WITNESS WHEREOF, the Company and Executive have executed this Agreement,
effective as of the day and year first above written.

                              COMPANY
 
               
Dated:
          By:    
 
                            Name: [                                        ]    
        Title: [Title]
 
                            EXECUTIVE
 
               
Dated:
          By:    
 
                            Name: Kevin R. Callahan

5