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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended March 31, 2011

OR



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

For the transition period from             to

Commission file number 000-50795







LOGO

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 75-2770432                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                             |  |           
|-------------------------------------------- |  | ----------
|4450 Sojourn Drive, Suite 500
Addison, Texas |  | 75001     
|(Address of principal executive offices)     |  | (Zip Code)

(972) 728-6300

(Registrants telephone number, including area code)

Not
Applicable

(Former name, former address and former fiscal year, if changed since last report)





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No   ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.



|                        |  |   |  |                                               |  |                           |  |  
|----------------------- |  | - |  | --------------------------------------------- |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈ |  |                                               |  | Accelerated filer         |  |  ̈
|                        |  |   |  |                                              
|Non-accelerated filer   |  |  ̈ |  | (Do not check if a smaller reporting company) |  | Smaller reporting company |  | x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     ̈  Yes    No  x

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.

The number of shares outstanding of the registrants common stock, $.01 par value, as of May 6, 2011: 15,841,858









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AFFIRMATIVE INSURANCE HOLDINGS, INC.

THREE MONTHS ENDED MARCH 31, 2011

INDEX TO FORM 10-Q



|                                                                                                     |  |  |    | 
|---------------------------------------------------------------------------------------------------- |  |  | -- | 
|PART I  FINANCIAL INFORMATION                                                                       |  |  | 3  | 
|Item 1. Financial Statements                                                                         |  |  | 3  | 
|Consolidated Balance Sheets  March 31, 2011 and December 31, 2010                                   |  |  | 3  | 
|Consolidated Statements of Income (Loss)  Three Months Ended March 31, 2011 and
2010                |  |  | 4  | 
|Consolidated Statements of Stockholders Equity  March 31, 2011 and
2010                            |  |  | 5  | 
|Consolidated Statements of Comprehensive Income (Loss)  Three Months Ended March 
31, 2011 and 2010 |  |  | 5  | 
|Consolidated Statements of Cash Flows  Three Months Ended March 31, 2011 and
2010                   |  |  | 6  | 
|Notes to Consolidated Financial Statements                                                           |  |  | 7  | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations        |  |  | 20 | 
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                   |  |  | 27 | 
|Item 4. Controls and Procedures                                                                      |  |  | 29 | 
|PART II  OTHER INFORMATION                                                                          |  |  | 29 | 
|Item 1. Legal Proceedings                                                                            |  |  | 29 | 
|Item 1A. Risk Factors                                                                                |  |  | 29 | 
|Item 6. Exhibits                                                                                     |  |  | 30 | 
|SIGNATURES                                                                                           |  |  | 30 | 



2



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##### Table of Contents

PART I  FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

AFFIRMATIVE INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands,
except share data)



|                                                                                                                                                                                                                           |  |               |         |   |                  |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                                                                           |  | March 31,2011 |         |   | December 31,2010 |  
|                                                                                                                                                                                                                           |  | (Unaudited)   |         |   |                  |  
|Assets                                                                                                                                                                                                                     |  |               |         |   |                  |   |         |  
|Available-for-sale securities, at fair value                                                                                                                                                                               |  | $             | 192,767 |   |                  | $ | 210,263 |  
|Other invested assets                                                                                                                                                                                                      |  |               | 2,735   |   |                  |   | 2,564   |  
|Cash and cash equivalents                                                                                                                                                                                                  |  |               | 43,293  |   |                  |   | 46,364  |  
|Fiduciary and restricted cash                                                                                                                                                                                              |  |               | 2,808   |   |                  |   | 3,866   |  
|Accrued investment income                                                                                                                                                                                                  |  |               | 1,978   |   |                  |   | 1,829   |  
|Premiums and fees receivable, net                                                                                                                                                                                          |  |               | 37,364  |   |                  |   | 43,313  |  
|Premium finance receivable, net                                                                                                                                                                                            |  |               | 51,833  |   |                  |   | 43,143  |  
|Commissions receivable                                                                                                                                                                                                     |  |               | 1,201   |   |                  |   | 1,652   |  
|Receivable from reinsurers                                                                                                                                                                                                 |  |               | 141,608 |   |                  |   | 140,211 |  
|Deferred acquisition costs                                                                                                                                                                                                 |  |               | 11,543  |   |                  |   | 11,742  |  
|Federal income taxes receivable                                                                                                                                                                                            |  |               | 568     |   |                  |   | 1,803   |  
|Investment in real property, net                                                                                                                                                                                           |  |               | 12,173  |   |                  |   | 11,896  |  
|Property and equipment (net of accumulated depreciation of $43,980 for 2011 and $41,678 for 2010)                                                                                                                          |  |               | 37,719  |   |                  |   | 39,197  |  
|Goodwill                                                                                                                                                                                                                   |  |               | 163,570 |   |                  |   | 163,570 |  
|Other intangible assets (net of accumulated amortization of $7,538 for 2011 and $7,495 for 2010)                                                                                                                           |  |               | 16,425  |   |                  |   | 16,468  |  
|Prepaid expenses                                                                                                                                                                                                           |  |               | 6,008   |   |                  |   | 5,295   |  
|Other assets, (net of allowance for doubtful accounts of $7,213 for 2011 and 2010)                                                                                                                                         |  |               | 2,298   |   |                  |   | 2,545   |  
|                                                                                                                                                                                                                           |  |               |         |   |                  |   |         |  
|Total assets                                                                                                                                                                                                               |  | $             | 725,891 |   |                  | $ | 745,721 |  
|                                                                                                                                                                                                                           |  |               |         |   |                  |   |         |  
|                                                                                                                                                                                                                           |  |              
|Liabilities and Stockholders Equity                                                                                                                                                                                       |  |               |         |   |                  |   |         |  
|Liabilities:                                                                                                                                                                                                               |  |               |         |   |                  |   |         |  
|Reserves for losses and loss adjustment expenses                                                                                                                                                                           |  | $             | 250,418 |   |                  | $ | 252,084 |  
|Unearned premium                                                                                                                                                                                                           |  |               | 90,889  |   |                  |   | 92,202  |  
|Amounts due to reinsurers                                                                                                                                                                                                  |  |               | 31,058  |   |                  |   | 38,172  |  
|Deferred revenue                                                                                                                                                                                                           |  |               | 7,639   |   |                  |   | 7,894   |  
|Capital lease obligation                                                                                                                                                                                                   |  |               | 24,081  |   |                  |   | 25,302  |  
|Senior secured credit facility                                                                                                                                                                                             |  |               | 95,823  |   |                  |   | 95,974  |  
|Notes payable                                                                                                                                                                                                              |  |               | 76,869  |   |                  |   | 76,873  |  
|Deferred tax liability                                                                                                                                                                                                     |  |               | 12,414  |   |                  |   | 12,095  |  
|Other liabilities (Includes swap of $567 for 2011 and $1,453 for 2010)                                                                                                                                                     |  |               | 53,667  |   |                  |   | 52,117  |  
|                                                                                                                                                                                                                           |  |               |         |   |                  |   |         |  
|Total liabilities                                                                                                                                                                                                          |  |               | 642,858 |   |                  |   | 652,713 |  
|                                                                                                                                                                                                                           |  |               |         |   |                  |   |         |  
|Stockholders equity:                                                                                                                                                                                                      |  |               |         |   |                  |   |         |  
|Common stock, $0.01 par value; 75,000,000 shares authorized, 18,202,221 shares issued and 15,841,858 shares outstanding at
March 31, 2011; 17,768,721 shares issued and 15,408,358 shares outstanding at December 31, 2010 |  |               | 182     |   |                  |   | 178     |  
|Additional paid-in capital                                                                                                                                                                                                 |  |               | 165,869 |   |                  |   | 165,776 |  
|Treasury stock, at cost (2,360,363 shares at March 31, 2011 and December 31, 2010)                                                                                                                                         |  |               | (32,906 | ) |                  |   | (32,906 | )
|Accumulated other comprehensive income                                                                                                                                                                                     |  |               | 21      |   |                  |   | 445     |  
|Retained deficit                                                                                                                                                                                                           |  |               | (50,133 | ) |                  |   | (40,485 | )
|                                                                                                                                                                                                                           |  |               |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                                                                                                 |  |               | 83,033  |   |                  |   | 93,008  |  
|                                                                                                                                                                                                                           |  |               |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                                                                                                 |  | $             | 725,891 |   |                  | $ | 745,721 |  
|                                                                                                                                                                                                                           |  |               |         |   |                  |   |         |  

See accompanying Notes to Consolidated Financial Statements



3



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AFFIRMATIVE INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(in thousands, except per share data)



|                                             |  |                             |        |   |      |   |         |  
|-------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------- | -
|                                             |  | Three Months EndedMarch 31, |       
|                                             |  | 2011                        |        |   | 2010 |  
|                                             |  | (Unaudited)                 |       
|Revenues                                     |  |                             |        |   |      |   |         |  
|Net premiums earned                          |  | $                           | 50,551 |   |      | $ | 92,722  |  
|Commission income and fees                   |  |                             | 20,030 |   |      |   | 23,595  |  
|Net investment income                        |  |                             | 1,523  |   |      |   | 1,459   |  
|Net realized gains                           |  |                             | 152    |   |      |   | 3,655   |  
|Other income (loss)                          |  |                             | 28     |   |      |   | (1,813  | )
|                                             |  |                             |        |   |      |   |         |  
|Total revenues                               |  |                             | 72,284 |   |      |   | 119,618 |  
|                                             |  |                             |        |   |      |   |         |  
|                                             |  |                            
|Expenses                                     |  |                             |        |   |      |   |         |  
|Losses and loss adjustment expenses          |  |                             | 40,405 |   |      |   | 71,025  |  
|Selling, general and administrative expenses |  |                             | 33,701 |   |      |   | 42,539  |  
|Depreciation and amortization                |  |                             | 2,377  |   |      |   | 2,432   |  
|                                             |  |                             |        |   |      |   |         |  
|Total expenses                               |  |                             | 76,483 |   |      |   | 115,996 |  
|                                             |  |                             |        |   |      |   |         |  
|Operating income (loss)                      |  |                             | (4,199 | ) |      |   | 3,622   |  
|Loss on interest rate swaps                  |  |                             | (2     | ) |      |   | (521    | )
|Interest expense                             |  |                             | 5,003  |   |      |   | 6,120   |  
|                                             |  |                             |        |   |      |   |         |  
|Loss before income tax expense               |  |                             | (9,204 | ) |      |   | (3,019  | )
|Income tax expense                           |  |                             | 444    |   |      |   | 445     |  
|                                             |  |                             |        |   |      |   |         |  
|Net loss                                     |  | $                           | (9,648 | ) |      | $ | (3,464  | )
|                                             |  |                             |        |   |      |   |         |  
|                                             |  |                            
|Basic loss per common share:                 |  |                             |        |   |      |   |         |  
|Net loss                                     |  | $                           | (0.62  | ) |      | $ | (0.22   | )
|                                             |  |                             |        |   |      |   |         |  
|                                             |  |                            
|Diluted loss per common share:               |  |                             |        |   |      |   |         |  
|Net loss                                     |  | $                           | (0.62  | ) |      | $ | (0.22   | )
|                                             |  |                             |        |   |      |   |         |  
|                                             |  |                            
|Weighted average common shares outstanding:  |  |                             |        |   |      |   |         |  
|Basic                                        |  |                             | 15,483 |   |      |   | 15,415  |  
|                                             |  |                             |        |   |      |   |         |  
|Diluted                                      |  |                             | 15,483 |   |      |   | 15,415  |  
|                                             |  |                             |        |   |      |   |         |  

See accompanying Notes to Consolidated Financial Statements



4



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AFFIRMATIVE INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands, except share data)



|                                                                      |  |                              |            |  |         |   |         |        |  |  |            |  |  |   |         |  
|--------------------------------------------------------------------- |  | ---------------------------- | ---------- |  | ------- | - | ------- | ------ |  |  | ---------- |  |  | - | ------- | -
|                                                                      |  | Three Months Ended March 31, |           
|                                                                      |  | 2011                         |            |  | 2010    |  
|                                                                      |  | Shares                       |            |  | Amounts |   |         | Shares |  |  | Amounts    | 
|                                                                      |  | (Unaudited)                  |           
|Common stock                                                          |  |                              |            |  |         |   |         |        |  |  |            |  |  |   |         |  
|Balance at beginning of year                                          |  |                              | 17,768,721 |  |         | $ | 178     |        |  |  | 17,768,721 |  |  | $ | 178     |  
|Issuance of restricted stock awards                                   |  |                              | 433,500    |  |         |   | 4       |        |  |  |           |  |  |   |        |  
|                                                                      |  |                              |            |  |         |   |         |        |  |  |            |  |  |   |         |  
|Balance at end of period                                              |  |                              | 18,202,221 |  |         |   | 182     |        |  |  | 17,768,721 |  |  |   | 178     |  
|                                                                      |  |                              |            |  |         |   |         |        |  |  |            |  |  |   |         |  
|                                                                      |  |                              |            | 
|Additional paid-in capital                                            |  |                              |            |  |         |   |         |        |  |  |            |  |  |   |         |  
|Balance at beginning of year                                          |  |                              |            |  |         |   | 165,776 |        |  |  |            |  |  |   | 164,752 |  
|Stock-based compensation                                              |  |                              |            |  |         |   | 93      |        |  |  |            |  |  |   | 192     |  
|                                                                      |  |                              |            |  |         |   |         |        |  |  |            |  |  |   |         |  
|Balance at end of period                                              |  |                              |            |  |         |   | 165,869 |        |  |  |            |  |  |   | 164,944 |  
|                                                                      |  |                              |            |  |         |   |         |        |  |  |            |  |  |   |         |  
|                                                                      |  |                              |            | 
|Retained earnings (deficit)                                           |  |                              |            |  |         |   |         |        |  |  |            |  |  |   |         |  
|Balance at beginning of year                                          |  |                              |            |  |         |   | (40,485 | )      |  |  |            |  |  |   | 48,446  |  
|Net loss                                                              |  |                              |            |  |         |   | (9,648  | )      |  |  |            |  |  |   | (3,464  | )
|                                                                      |  |                              |            |  |         |   |         |        |  |  |            |  |  |   |         |  
|Balance at end of period                                              |  |                              |            |  |         |   | (50,133 | )      |  |  |            |  |  |   | 44,982  |  
|                                                                      |  |                              |            |  |         |   |         |        |  |  |            |  |  |   |         |  
|                                                                      |  |                              |            | 
|Treasury stock                                                        |  |                              |            |  |         |   |         |        |  |  |            |  |  |   |         |  
|Balance at beginning of year and end of period                        |  |                              | 2,360,363  |  |         |   | (32,906 | )      |  |  | 2,353,363  |  |  |   | (32,880 | )
|                                                                      |  |                              |            |  |         |   |         |        |  |  |            |  |  |   |         |  
|                                                                      |  |                              |            | 
|Accumulated other comprehensive income (loss)                         |  |                              |            |  |         |   |         |        |  |  |            |  |  |   |         |  
|Balance at beginning of year                                          |  |                              |            |  |         |   | 445     |        |  |  |            |  |  |   | 2,859   |  
|Change in unrealized gain on available-for-sale investment securities |  |                              |            |  |         |   | (424    | )      |  |  |            |  |  |   | (1,746  | )
|                                                                      |  |                              |            |  |         |   |         |        |  |  |            |  |  |   |         |  
|Balance at end of period                                              |  |                              |            |  |         |   | 21      |        |  |  |            |  |  |   | 1,113   |  
|                                                                      |  |                              |            |  |         |   |         |        |  |  |            |  |  |   |         |  
|Total stockholders equity                                            |  |                              |            |  |         | $ | 83,033  |        |  |  |            |  |  | $ | 178,337 |  
|                                                                      |  |                              |            |  |         |   |         |        |  |  |            |  |  |   |         |  

AFFIRMATIVE INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)



|                                                           |  |                             |         |   |      |   |        |  
|---------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------ | -
|                                                           |  | Three Months EndedMarch 31, |        
|                                                           |  | 2011                        |         |   | 2010 |  
|                                                           |  | (Unaudited)                 |        
|Net loss                                                   |  | $                           | (9,648  | ) |      | $ | (3,464 | )
|Other comprehensive loss:                                  |  |                             |         |   |      |   |        |  
|Unrealized loss arising during period                      |  |                             | (272    | ) |      |   | (553   | )
|Reclassification adjustment for gains included in net loss |  |                             | (152    | ) |      |   | (1,193 | )
|                                                           |  |                             |         |   |      |   |        |  
|Other comprehensive loss, net                              |  |                             | (424    | ) |      |   | (1,746 | )
|                                                           |  |                             |         |   |      |   |        |  
|Total comprehensive loss                                   |  | $                           | (10,072 | ) |      | $ | (5,210 | )
|                                                           |  |                             |         |   |      |   |        |  

See accompanying Notes to Consolidated Financial Statements



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AFFIRMATIVE INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                              |  |                             |         |   |      |   |         |  
|----------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                              |  | Three Months EndedMarch 31, |        
|                                                                              |  | 2011                        |         |   | 2010 |  
|                                                                              |  | (Unaudited)                 |        
|Cash flows from operating activities                                          |  |                             |         |   |      |   |         |  
|Net loss                                                                      |  | $                           | (9,648  | ) |      | $ | (3,464  | )
|Adjustments to reconcile net income to net cash used in operating activities: |  |                             |         |   |      |   |         |  
|Depreciation and amortization                                                 |  |                             | 2,377   |   |      |   | 2,432   |  
|Stock-based compensation expense                                              |  |                             | 64      |   |      |   | 285     |  
|Amortization of debt issuance and modification costs                          |  |                             | 95      |   |      |   | 128     |  
|Amortization of debt discount                                                 |  |                             | 1,188   |   |      |   | 1,744   |  
|Net realized gains from sales of available-for-sale securities                |  |                             | (152    | ) |      |   | (1,193  | )
|Realized gain on trading securities                                           |  |                             |        |   |      |   | (2,462  | )
|Fair value loss on settlement rights for auction-rate securities              |  |                             |        |   |      |   | 2,339   |  
|Fair value gain on investment in hedge fund                                   |  |                             | (171    | ) |      |   |        |  
|Amortization of premiums on investments, net                                  |  |                             | 856     |   |      |   | 833     |  
|Provision for doubtful premiums receivable                                    |  |                             | (124    | ) |      |   | 199     |  
|Loss on interest rate swaps                                                   |  |                             | 2       |   |      |   | 521     |  
|Change in operating assets and liabilities:                                   |  |                             |         |   |      |   |         |  
|Fiduciary and restricted cash                                                 |  |                             | 1,058   |   |      |   | 5,543   |  
|Premiums, fees and commissions receivable                                     |  |                             | 6,524   |   |      |   | (7,198  | )
|Reserves for losses and loss adjustment expenses                              |  |                             | (1,666  | ) |      |   | (16,559 | )
|Amounts due from reinsurers                                                   |  |                             | (8,511  | ) |      |   | 90      |  
|Premium finance receivable, net (related to our insurance premiums)           |  |                             | (5,754  | ) |      |   | (10,453 | )
|Deferred revenue                                                              |  |                             | (255    | ) |      |   | 21      |  
|Unearned premium                                                              |  |                             | (1,313  | ) |      |   | 23,771  |  
|Deferred acquisition costs                                                    |  |                             | 199     |   |      |   | (4,715  | )
|Deferred tax liability                                                        |  |                             | 319     |   |      |   | 319     |  
|Federal income taxes receivable                                               |  |                             | 1,235   |   |      |   | 316     |  
|Other                                                                         |  |                             | 1,408   |   |      |   | 5,470   |  
|                                                                              |  |                             |         |   |      |   |         |  
|Net cash used in operating activities                                         |  |                             | (12,269 | ) |      |   | (2,033  | )
|                                                                              |  |                             |         |   |      |   |         |  
|                                                                              |  |                            
|Cash flows from investing activities                                          |  |                             |         |   |      |   |         |  
|Proceeds from sales of available-for-sale securities                          |  |                             | 13,903  |   |      |   | 35,111  |  
|Proceeds from maturities of available-for-sale securities                     |  |                             | 11,572  |   |      |   | 24,140  |  
|Proceeds from sales of trading securities                                     |  |                             |        |   |      |   | 7,375   |  
|Purchases of available-for-sale securities                                    |  |                             | (8,671  | ) |      |   | (25,814 | )
|Premium finance receivable, net (related to third-party insurance premiums)   |  |                             | (2,936  | ) |      |   | (903    | )
|Purchases of property and equipment                                           |  |                             | (889    | ) |      |   | (1,279  | )
|Investment in real property                                                   |  |                             | (453    | ) |      |   | (230    | )
|                                                                              |  |                             |         |   |      |   |         |  
|Net cash provided by investing activities                                     |  |                             | 12,526  |   |      |   | 38,400  |  
|                                                                              |  |                             |         |   |      |   |         |  
|                                                                              |  |                            
|Cash flows from financing activities                                          |  |                             |         |   |      |   |         |  
|Principal payments under capital lease obligations                            |  |                             | (1,221  | ) |      |   |        |  
|Principal payments on senior secured credit facility                          |  |                             | (1,338  | ) |      |   | (5,335  | )
|Debt issuance costs paid                                                      |  |                             | (769    | ) |      |   |        |  
|                                                                              |  |                             |         |   |      |   |         |  
|Net cash used in financing activities                                         |  |                             | (3,328  | ) |      |   | (5,335  | )
|                                                                              |  |                             |         |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                          |  |                             | (3,071  | ) |      |   | 31,032  |  
|Cash and cash equivalents at beginning of year                                |  |                             | 46,364  |   |      |   | 60,928  |  
|                                                                              |  |                             |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                    |  | $                           | 43,293  |   |      | $ | 91,960  |  
|                                                                              |  |                             |         |   |      |   |         |  
|                                                                              |  |                            
|Supplemental disclosure of cash flow information:                             |  |                             |         |   |      |   |         |  
|Cash paid for interest                                                        |  | $                           | 3,156   |   |      | $ | 4,461   |  
|Cash paid for income taxes                                                    |  |                             |        |   |      |   | 10      |  

See accompanying Notes
to Consolidated Financial Statements



6



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##### Table of Contents

AFFIRMATIVE INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)





|1. | General
|-- | -------

Affirmative
Insurance Holdings, Inc. (the Company), formerly known as Instant Insurance Holdings, Inc., was incorporated in Delaware in June 1998. The Company is a distributor and producer of non-standard personal automobile insurance policies and related
products and services for individual consumers in targeted geographic areas. The Company currently offers insurance directly to individual consumers through retail stores in 9 states (Louisiana, Texas, Illinois, Alabama, Missouri, Indiana, South
Carolina, Kansas and Wisconsin) as well as through 5,300 independent agents or brokers in 9 states (Louisiana, Texas, Illinois, Alabama, California, Michigan, Missouri, Indiana and South Carolina).



|2. | Summary of Significant Accounting Policies
|-- | ------------------------------------------

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements of the Company. In the opinion of management, all adjustments necessary
for a fair presentation have been included and are of a normal recurring nature. Interim results are not necessarily indicative of the results that may be expected for the year. The consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto for the year ended December 31, 2010 included in the Companys Annual Report on Form 10-K.

The consolidated balance sheet at December 31, 2010 was derived from the audited financial statements at that date but does not include all of the information and notes required by GAAP. All material
intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ materially from those estimates. These estimates and assumptions are particularly important in determining reserves for losses and loss adjustment expenses, deferred policy acquisition costs, reinsurance receivables, valuation
of assets, and deferred income taxes.

Recently Issued Accounting Standards

ASU 2010-26, Financial Services-Insurance, modifies the types of costs incurred by insurance entities that can be capitalized in
the acquisition of new and renewal insurance contracts. The Task Force reached a final Consensus that requires costs to be incremental or directly related to the successful acquisition of new or renewal contracts to be capitalized as a deferred
acquisition cost. This standard is effective for interim and annual periods beginning after December 15, 2011 and may be early adopted as of the beginning of an annual reporting period using either the prospective or retrospective method.
Adoption of the new standard could have a material impact on the Companys consolidated financial position or results of operations. Management is evaluating the impact.

ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses,an amended guidance for disclosures about the credit quality of financing receivables
and the allowance for credit losses was issued in July 2010 by the FASB. This update amends existing guidance by requiring more robust and disaggregated disclosures by an entity about the credit quality of its financing receivables and its allowance
for credit losses. These disclosures will provide additional information about the nature of credit risks inherent in a companys financing receivables, how a company analyzes and assesses credit risk in determining its allowance for credit
losses, and the reasons for any changes a company may make in its allowance for credit losses. This update is generally effective for interim and annual reporting periods ending on or after December 15, 2010; however, certain aspects of the
update pertaining to activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The adoption of the new guidance had no significant effect on the Companys
financial statements.

ASU 2010-06, Fair Value Measurements and Disclosures, requires additional disclosures about fair
value measurements, including transfers in and out of Levels 1 and 2 and activity in Level 3 on a gross basis, and clarifies certain



7



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##### Table of Contents

other existing disclosure requirements including level of disaggregation and disclosures around inputs and valuation techniques. The provisions of the new standards are effective for interim or
annual reporting periods beginning after December 15, 2009, except for the additional Level 3 disclosures which will become effective for fiscal years beginning after December 15, 2010. These standards are disclosure only in nature and do
not change accounting requirements. Accordingly, adoption of the new standard had no impact on the Companys consolidated financial position, results of operations or cash flows.



|3. | Available-for-sale Investment Securities
|-- | ----------------------------------------

The Companys available-for-sale investment securities are carried at fair value with unrealized gains and losses, net of income taxes, reported in accumulated other comprehensive income, a separate
component of stockholders equity. Gains and losses realized on the disposition of investment securities are determined on the specific-identification basis and credited or charged to income.

The amortized cost, gross unrealized gains (losses), and estimated fair value of the Companys available-for-sale securities at
March 31, 2011, and December 31, 2010, were as follows (in thousands):



|                                      |  |               |         |  |                      |   |       |                       |  |   |            |   |  |   |         | 
|------------------------------------- |  | ------------- | ------- |  | -------------------- | - | ----- | --------------------- |  | - | ---------- | - |  | - | ------- | 
|                                      |  | AmortizedCost |         |  | GrossUnrealizedGains |   |       | GrossUnrealizedLosses |  |   | Fair Value |  
|March 31, 2011                        |  |               |         |  |                      |   |       |                       |  |   |            |   |  |   |         | 
|U.S. Treasury and government agencies |  | $             | 30,081  |  |                      | $ | 95    |                       |  | $ | (141       | ) |  | $ | 30,035  | 
|Mortgage-backed securities            |  |               | 11,786  |  |                      |   | 283   |                       |  |   | (62        | ) |  |   | 12,007  | 
|States and political subdivisions     |  |               | 21,658  |  |                      |   | 257   |                       |  |   | (119       | ) |  |   | 21,796  | 
|Corporate debt securities             |  |               | 101,731 |  |                      |   | 1,182 |                       |  |   | (75        | ) |  |   | 102,838 | 
|FDIC-insured certificates of deposit  |  |               | 25,950  |  |                      |   | 146   |                       |  |   | (5         | ) |  |   | 26,091  | 
|                                      |  |               |         |  |                      |   |       |                       |  |   |            |   |  |   |         | 
|Total                                 |  | $             | 191,206 |  |                      | $ | 1,963 |                       |  | $ | (402       | ) |  | $ | 192,767 | 
|                                      |  |               |         |  |                      |   |       |                       |  |   |            |   |  |   |         | 
|December 31, 2010                     |  |               |         |  |                      |   |       |                       |  |   |            |   |  |   |         | 
|U.S. Treasury and government agencies |  | $             | 25,611  |  |                      | $ | 142   |                       |  | $ | (73        | ) |  | $ | 25,680  | 
|Mortgage-backed securities            |  |               | 10,554  |  |                      |   | 295   |                       |  |   | (19        | ) |  |   | 10,830  | 
|States and political subdivisions     |  |               | 22,245  |  |                      |   | 280   |                       |  |   | (137       | ) |  |   | 22,388  | 
|Corporate debt securities             |  |               | 123,182 |  |                      |   | 1,505 |                       |  |   | (132       | ) |  |   | 124,555 | 
|FDIC-insured certificates of deposit  |  |               | 26,687  |  |                      |   | 126   |                       |  |   | (3         | ) |  |   | 26,810  | 
|                                      |  |               |         |  |                      |   |       |                       |  |   |            |   |  |   |         | 
|Total                                 |  | $             | 208,279 |  |                      | $ | 2,348 |                       |  | $ | (364       | ) |  | $ | 210,263 | 
|                                      |  |               |         |  |                      |   |       |                       |  |   |            |   |  |   |         | 

Expected maturities may differ from contractual maturities because certain borrowers may have the right to
call or prepay obligations with or without penalties. The Companys amortized cost and estimated fair values of fixed-income securities at March 31, 2011 by contractual maturity were as follows (in thousands):



|                                       |  |               |         |  |            |   |         | 
|-------------------------------------- |  | ------------- | ------- |  | ---------- | - | ------- | 
|                                       |  | AmortizedCost |         |  | Fair Value |  
|Due in one year or less                |  | $             | 53,935  |  |            | $ | 54,265  | 
|Due after one year through five years  |  |               | 118,763 |  |            |   | 119,809 | 
|Due after five years through ten years |  |               | 6,722   |  |            |   | 6,686   | 
|Mortgage-backed securities             |  |               | 11,786  |  |            |   | 12,007  | 
|                                       |  |               |         |  |            |   |         | 
|Total                                  |  | $             | 191,206 |  |            | $ | 192,767 | 
|                                       |  |               |         |  |            |   |         | 

Gross realized gains and losses on available-for-sale investments for the three months ended March 31
were as follows (in thousands):



|             |  |      |      |   |      |   |       |  
|------------ |  | ---- | ---- | - | ---- | - | ----- | -
|             |  | 2011 |      |   | 2010 |  
|Gross gains  |  | $    | 509  |   |      | $ | 1,205 |  
|Gross losses |  |      | (357 | ) |      |   | (12   | )
|             |  |      |      |   |      |   |       |  
|Total        |  | $    | 152  |   |      | $ | 1,193 |  
|             |  |      |      |   |      |   |       |  



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##### Table of Contents

The following table summarizes the Companys available-for-sale securities in an
unrealized loss position at March 31, 2011, and December 31, 2010, the fair value and amount of gross unrealized losses, aggregated by investment category and length of time those securities have been continuously in an unrealized loss
position (in thousands):



|                                      |  |                        |        |  |                         |   |      |           |  |   |                       |  |  |           |    |   |                       |   |        |  |  |   |      |  
|------------------------------------- |  | ---------------------- | ------ |  | ----------------------- | - | ---- | --------- |  | - | --------------------- |  |  | --------- | -- | - | --------------------- | - | ------ |  |  | - | ---- | -
|                                      |  | March 31, 2011         |       
|                                      |  | Less Than TwelveMonths |        |  | Twelve Months orGreater |   |      | Total     | 
|                                      |  | FairValue              |        |  | GrossUnrealizedLosses   |   |      | FairValue |  |   | GrossUnrealizedLosses |  |  | FairValue |    |   | GrossUnrealizedLosses |  
|U.S. Treasury and government agencies |  | $                      | 19,831 |  |                         | $ | (141 | )         |  | $ |                      |  |  | $         |   |   |                       | $ | 19,831 |  |  | $ | (141 | )
|States and political subdivisions     |  |                        | 6,872  |  |                         |   | (119 | )         |  |   |                      |  |  |           |   |   |                       |   | 6,872  |  |  |   | (119 | )
|Corporate debt securities             |  |                        | 23,807 |  |                         |   | (73  | )         |  |   | 475                   |  |  |           | (2 | ) |                       |   | 24,282 |  |  |   | (75  | )
|Mortgage-backed securities            |  |                        | 7,046  |  |                         |   | (62  | )         |  |   |                      |  |  |           |   |   |                       |   | 7,046  |  |  |   | (62  | )
|FDIC-insured certificates of deposit  |  |                        | 1,442  |  |                         |   | (5   | )         |  |   |                      |  |  |           |   |   |                       |   | 1,442  |  |  |   | (5   | )
|                                      |  |                        |        |  |                         |   |      |           |  |   |                       |  |  |           |    |   |                       |   |        |  |  |   |      |  
|Total                                 |  | $                      | 58,998 |  |                         | $ | (400 | )         |  | $ | 475                   |  |  | $         | (2 | ) |                       | $ | 59,473 |  |  | $ | (402 | )
|                                      |  |                        |        |  |                         |   |      |           |  |   |                       |  |  |           |    |   |                       |   |        |  |  |   |      |  
|                                      | 
|                                      |  | December 31, 2010      |       
|                                      |  | Less Than TwelveMonths |        |  | Twelve Months orGreater |   |      | Total     | 
|                                      |  | FairValue              |        |  | GrossUnrealizedLosses   |   |      | FairValue |  |   | GrossUnrealizedLosses |  |  | FairValue |    |   | GrossUnrealizedLosses |  
|U.S. Treasury and government agencies |  | $                      | 12,707 |  |                         | $ | (73  | )         |  | $ |                      |  |  | $         |   |   |                       | $ | 12,707 |  |  | $ | (73  | )
|States and political subdivisions     |  |                        | 8,619  |  |                         |   | (137 | )         |  |   |                      |  |  |           |   |   |                       |   | 8,619  |  |  |   | (137 | )
|Corporate debt securities             |  |                        | 23,801 |  |                         |   | (132 | )         |  |   |                      |  |  |           |   |   |                       |   | 23,801 |  |  |   | (132 | )
|Mortgage-backed securities            |  |                        | 3,770  |  |                         |   | (19  | )         |  |   |                      |  |  |           |   |   |                       |   | 3,770  |  |  |   | (19  | )
|FDIC-insured certificates of deposit  |  |                        | 2,183  |  |                         |   | (3   | )         |  |   |                      |  |  |           |   |   |                       |   | 2,183  |  |  |   | (3   | )
|                                      |  |                        |        |  |                         |   |      |           |  |   |                       |  |  |           |    |   |                       |   |        |  |  |   |      |  
|Total                                 |  | $                      | 51,080 |  |                         | $ | (364 | )         |  | $ |                      |  |  | $         |   |   |                       | $ | 51,080 |  |  | $ | (364 | )
|                                      |  |                        |        |  |                         |   |      |           |  |   |                       |  |  |           |    |   |                       |   |        |  |  |   |      |  

The Companys portfolio contains approximately 106 and 64 individual investment securities that were in
an unrealized loss position as of March 31, 2011 and December 31, 2010, respectively.

The unrealized losses at
March 31, 2011 were attributable to changes in market interest rates since the securities were purchased. Management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly
basis. This analysis requires management to consider various factors, which include (1) duration and magnitude of the decline in value, (2) the financial condition of the issuer or issuers, (3) structure of the security and
(4) the Companys intent to sell the security or whether its more likely than not that the Company would be required to sell the security before its anticipated recovery in market value. At March 31, 2011, management performed
its quarterly analysis of all securities with an unrealized loss and concluded no individual securities were other-than-temporarily impaired.



|4. | Reinsurance
|-- | -----------

In the
ordinary course of business, the Company places reinsurance with other insurance companies in order to provide greater diversification of its business and limit the potential for losses arising from large risks. In addition, the Company assumes
reinsurance from other insurance companies.

Effective October 1, 2010, the Company entered into a quota-share
reinsurance agreement with a third-party reinsurance company ceding 40% of premiums and losses on policies in-force in certain states on October 1, 2010 and policies written through December 31, 2010. The Company receives provisional
ceding commission which may be adjusted based on the fully-developed loss ratio of the reinsured policies. Premiums ceded under this agreement totalled $65.0 million during the fourth quarter of 2010.

A separate quota-share reinsurance agreement was put in place effective January 1, 2011. Under the terms of the 2011 agreement, the
Company cedes 28% of gross written premium in all states other than Michigan through December 31, 2011. Written premiums ceded under this agreement totalled $20.5 million during the first quarter of 2011.



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The Companys quota-share ceding commission rate structure varies based on loss experience for both agreements. The estimates of loss experience are continually reviewed and adjusted, and
the resulting adjustments to ceding commissions are reflected in current operations.

On August 1, 2010, the Company
entered into an excess of loss reinsurance contract with third-party reinsurers which provides coverage for individual losses in excess of $100,000 up to $1 million.

On June 1, 2010, the Company entered into a reinsurance agreement with third-party reinsurers which provides coverage for catastrophic events that may involve multiple insured losses.

The effect of reinsurance on premiums written and earned was as follows (in thousands):



|                    |  |                              |         |   |               |   |         |                                |  |   |                |   |  |               |         |   |                                |   |        |   |  |   |        |  
|------------------- |  | ---------------------------- | ------- | - | ------------- | - | ------- | ------------------------------ |  | - | -------------- | - |  | ------------- | ------- | - | ------------------------------ | - | ------ | - |  | - | ------ | -
|                    |  | Three Months Ended March 31, |        
|                    |  | 2011                         |         |   | 2010          |  
|                    |  | WrittenPremium               |         |   | EarnedPremium |   |         | Loss andLossAdjustmentExpenses |  |   | WrittenPremium |   |  | EarnedPremium |         |   | Loss andLossAdjustmentExpenses |  
|Direct              |  | $                            | 65,876  |   |               | $ | 65,239  |                                |  | $ | 49,764         |   |  | $             | 97,741  |   |                                | $ | 75,124 |   |  | $ | 56,940 |  
|Reinsurance assumed |  |                              | 11,903  |   |               |   | 13,417  |                                |  |   | 10,161         |   |  |               | 19,341  |   |                                |   | 18,925 |   |  |   | 16,472 |  
|Reinsurance ceded   |  |                              | (21,542 | ) |               |   | (28,105 | )                              |  |   | (19,520        | ) |  |               | (2,210  | ) |                                |   | (1,327 | ) |  |   | (2,387 | )
|                    |  |                              |         |   |               |   |         |                                |  |   |                |   |  |               |         |   |                                |   |        |   |  |   |        |  
|Total               |  | $                            | 56,237  |   |               | $ | 50,551  |                                |  | $ | 40,405         |   |  | $             | 114,872 |   |                                | $ | 92,722 |   |  | $ | 71,025 |  
|                    |  |                              |         |   |               |   |         |                                |  |   |                |   |  |               |         |   |                                |   |        |   |  |   |        |  

Under certain of the Companys reinsurance transactions, the Company has received ceding commissions.
The ceding commission rate structure varies based on loss experience. The estimates of loss experience are continually reviewed and adjusted, and the resulting adjustments to ceding commissions are reflected in current operations. Ceding commissions
recognized were reflected as a (reduction) increase of selling, general and administrative expenses follows (in thousands):



|                                             |  |                             |        |   |      |   |    |  
|-------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | -- | -
|                                             |  | Three MonthsEnded March 31, |       
|                                             |  | 2011                        |        |   | 2010 |  
|Selling, general and administrative expenses |  | $                           | (5,448 | ) |      | $ | (9 | )
|                                             |  |                             |        |   |      |   |    |  

The amount of loss reserves and unearned premium the Company would remain liable for in the event its
reinsurers are unable to meet their obligations were as follows (in thousands):



|                                            |  |               |         |  |                  |   |         | 
|------------------------------------------- |  | ------------- | ------- |  | ---------------- | - | ------- | 
|                                            |  | March 31,2011 |         |  | December 31,2010 |  
|Losses and loss adjustment expense reserves |  | $             | 99,921  |  |                  | $ | 93,084  | 
|Unearned premium reserve                    |  |               | 27,585  |  |                  |   | 34,149  | 
|                                            |  |               |         |  |                  |   |         | 
|Total                                       |  | $             | 127,506 |  |                  | $ | 127,233 | 
|                                            |  |               |         |  |                  |   |         | 

The Michigan Catastrophic Claims Association (MCCA) is the mandatory reinsurance facility that covers
no-fault medical losses above a specific retention amount in Michigan. For policies effective in 2011 the required retention is $0.5 million. As a writer of personal automobile policies in the state of Michigan, the Company cedes premiums
and claims to the MCCA. Funding for MCCA comes from assessments against automobile insurers based upon their proportionate market share of the states automobile liability insurance market. Insurers are allowed to pass along this cost to
Michigan automobile policyholders. Due to the planned decrease in Michigan business, ceded premiums written to the MCCA were negligible for the three months ended March 31, 2011. The Companys ceded premiums written to the MCCA were $2.0
million for the three months ended March 31, 2010. The Companys ceded losses to the MCCA were $0.7 million and $2.2 million for the three months ended March 31, 2011 and 2010, respectively.



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The table below presents the total amount of receivables due from reinsurers as of
March 31, 2011 and December 31, 2010 (in thousands):



|                                                                                     |  |               |         |  |                  |   |         | 
|------------------------------------------------------------------------------------ |  | ------------- | ------- |  | ---------------- | - | ------- | 
|                                                                                     |  | March 31,2011 |         |  | December 31,2010 |  
|Michigan Catastrophic Claims Association                                             |  | $             | 65,224  |  |                  | $ | 65,727  | 
|Quota-share reinsurer for agreements effective in fourth quarter of 2010 and in 2011 |  |               | 55,073  |  |                  |   | 53,743  | 
|Vesta Insurance Group                                                                |  |               | 13,089  |  |                  |   | 13,161  | 
|Excess of loss reinsurer                                                             |  |               | 1,913   |  |                  |   | 1,429   | 
|Excess of loss reinsurer                                                             |  |               | 1,913   |  |                  |   | 1,429   | 
|Other                                                                                |  |               | 4,396   |  |                  |   | 4,722   | 
|                                                                                     |  |               |         |  |                  |   |         | 
|Total reinsurance receivable                                                         |  | $             | 141,608 |  |                  | $ | 140,211 | 
|                                                                                     |  |               |         |  |                  |   |         | 

The quota-share reinsurer for the agreements effective in the fourth quarter of 2010 and in 2011, and the
excess of loss reinsurers all have A ratings from A.M. Best. Accordingly, the Company believes there is minimal credit risk related to these reinsurance receivables. Under the reinsurance agreement with Vesta Insurance Group (VIG), including
primarily Vesta Fire Insurance Corporation (VFIC), the Companys wholly-owned subsidiaries, Affirmative Insurance Company (AIC) and Insura Property and Casualty Insurance Company (Insura), had the right, under certain circumstances, to require
VFIC to provide a letter of credit or establish a trust account to collateralize gross amounts due from VFIC under the reinsurance agreement. Accordingly, AIC, Insura and VFIC entered into a Security Fund Agreement effective September 2004. In
August 2005, AIC received a letter from VFICs President that irrevocably confirmed VFICs duty and obligation under the Security Fund Agreement to provide security sufficient to satisfy VFICs gross obligations under the
reinsurance agreement (the VFIC Trust). At March 31, 2011, the VFIC Trust held $16.7 million (after cumulative withdrawals of $8.7 million through March 31, 2011), consisting of $12.9 million of a U.S. Treasury money market account and
$3.8 million of corporate bonds rated BBB+ or higher, to collateralize the $13.1 million net recoverable (net of $3.0 million payable) from VFIC.

The Company assumes reinsurance from a Texas county mutual insurance company (the county mutual) whereby the Company has assumed 100% of the policies issued by the county mutual for business produced by
the Companys owned MGAs. The county mutual does not retain any of this business and there are no loss limits other than the underlying policy limits. AIC has established a trust to secure the Companys obligation under this reinsurance
contract with a balance of $54.0 million and $52.0 million as of March 31, 2011 and December 31, 2010, respectively.

At March 31, 2011, $2.8 million was included in reserves for losses and loss adjustment expenses that represented the amounts owed
by AIC and Insura under reinsurance agreements with the VIG affiliated companies, including Hawaiian Insurance and Guaranty Company, Ltd (Hawaiian). Affirmative established a trust account to collateralize this payable, which currently holds $20.7
million in securities (the AIC Trust). The Special Deputy Receiver in Texas had cumulative withdrawals from the AIC Trust of $0.4 million through March 2011, and the Special Deputy Receiver in Hawaii had cumulative withdrawals from the AIC Trust of
$1.7 million through March 2011.



|5. | Premium Finance Receivables, Net
|-- | --------------------------------

Premium finance receivables (related to policies of both the Company and third-party carriers) are secured by unearned premiums from the underlying insurance policies and consisted of the following at
March 31, 2011 and December 31, 2010 (in thousands):



|                            |  |               |        |   |                  |   |        |  
|--------------------------- |  | ------------- | ------ | - | ---------------- | - | ------ | -
|                            |  | March 31,2011 |        |   | December 31,2010 |  
|Premium finance contracts   |  | $             | 54,965 |   |                  | $ | 45,866 |  
|Unearned finance charges    |  |               | (2,745 | ) |                  |   | (2,286 | )
|Allowance for credit losses |  |               | (387   | ) |                  |   | (437   | )
|                            |  |               |        |   |                  |   |        |  
|Total                       |  | $             | 51,833 |   |                  | $ | 43,143 |  
|                            |  |               |        |   |                  |   |        |  

Premium finance receivables are secured by the underlying unearned insurance premiums for which the Company
obtains assignment from the policyholder in the event of non-payment. When a payment becomes past due, the Company cancels the underlying policy with the insurance carrier and receives the unearned premium to clear unpaid principal



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and interest. The loan is closed by writing off any uncollected amounts or refunding any overpayment to the customer. Therefore, no finance receivables are considered past due in excess of thirty
days. Losses due to non-realization of premium finance receivables were $0.5 million and 0.9% of total premiums financed for the three months ended March 31, 2011, and $0.3 million and 0.5% of total premiums financed for the three months ended
March 31, 2010.



|6. | Deferred Policy Acquisition Costs
|-- | ---------------------------------

Policy acquisition costs, consisting of primarily commissions, advertising, premium taxes, underwriting and agency expenses, are deferred and charged against income ratably over the terms of the related
policies. The components of deferred policy acquisition costs and the related amortization expense were as follows (in thousands):



|                  |  |               |         |   |               |   |         |  
|----------------- |  | ------------- | ------- | - | ------------- | - | ------- | -
|                  |  | March 31,2011 |         |   | March 31,2010 |  
|Beginning balance |  | $             | 11,742  |   |               | $ | 24,230  |  
|Additions         |  |               | 10,142  |   |               |   | 24,994  |  
|Amortization      |  |               | (10,341 | ) |               |   | (20,279 | )
|                  |  |               |         |   |               |   |         |  
|Ending balance    |  | $             | 11,543  |   |               | $ | 28,945  |  
|                  |  |               |         |   |               |   |         |  



|7. | Debt
|-- | ----

The Companys
long-term debt instruments and balances outstanding at March 31, 2011 and December 31, 2010 were as follows (in thousands):



|                               |  |               |         |  |                  |   |         | 
|------------------------------ |  | ------------- | ------- |  | ---------------- | - | ------- | 
|                               |  | March 31,2011 |         |  | December 31,2010 |  
|Notes payable due 2035         |  | $             | 30,928  |  |                  | $ | 30,928  | 
|Notes payable due 2035         |  |               | 25,774  |  |                  |   | 25,774  | 
|Notes payable due 2035         |  |               | 20,167  |  |                  |   | 20,171  | 
|                               |  |               |         |  |                  |   |         | 
|Total notes payable            |  |               | 76,869  |  |                  |   | 76,873  | 
|Senior secured credit facility |  |               | 95,823  |  |                  |   | 95,974  | 
|                               |  |               |         |  |                  |   |         | 
|Total long-term debt           |  | $             | 172,692 |  |                  | $ | 172,847 | 
|                               |  |               |         |  |                  |   |         | 

The $30.9 million notes payable due 2035 are redeemable in whole or in part by the issuer after five years.
The notes were issued in December 2004 and bore an initial interest rate of 7.545% until March 15, 2010. Since March 15, 2010, the securities adjust quarterly to the three-month LIBOR rate plus 3.60%. The interest rate as of March 31,
2011 was 3.91%.

The $25.8 million notes payable due 2035 are redeemable in whole or in part by the issuer after five years.
The notes were issued in June 2005 and bore an initial interest rate of 7.792% until June 15, 2010. Since June 15, 2010, the securities adjust quarterly to the three-month LIBOR rate plus 3.55%. The interest rate as of March 31, 2011
was 3.86%.

The $20.2 million notes payable due 2035 are redeemable by the issuer in whole or in part anytime after
March 15, 2010. The notes were issued in March 2005 and bore an initial interest rate of the three-month LIBOR rate plus 3.95% not exceeding 12.50% through March 2010 with no limit thereafter. The interest rate as of March 31, 2011 was
4.26%.

The pricing under the senior secured credit facility is currently subject to a LIBOR floor of 3.00% plus 6.25%, and is
tiered based on the Companys leverage ratio. The interest rate as of March 31, 2011 was 9.25%.

During the first
quarter of 2011, the Company made a prepayment of $1.3 million on the senior secured credit facility. As of March 31, 2011, the principal balance of the senior secured credit facility was $107.0 million.

In March 2011, the Company entered into an amendment to the facility. The amendment included the following significant items:



| |  |  | A waiver of any defaults or events of default for the period prior to the effective date of the amendment related to the risk-based capital ratio and
loss ratio covenants under the prior terms of the agreement.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The permitted dividend leverage ratio was changed from 1.5 to 1.0.
| | - |  | ------------------------------------------------------------------



| |  |  | Indebtedness under the baskets for qualified additional subordinated debt and Affirmative Premium Finance Company was eliminated. The Company did not
have any such debt.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



12



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##### Table of Contents

| |  |  | A provision was added allowing for the acquisition of $30 million of subordinated debt if the proceeds are used as a capital contribution to the
regulated insurance entities.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The assets and stock of Affirmative Premium Finance Company will be pledged and this entity will become a guarantor of the debt.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | The quarterly requirements for the leverage ratio covenant calculation were changed for the first three quarters of 2011.
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | The quarterly requirements for the interest coverage ratio covenant calculation were changed for the first two quarters of 2011.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | The quarterly requirements for the loss ratio covenant calculation were changed from December 31, 2010 through March 31, 2012.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | The annual requirements for the risk-based capital covenant calculation were changed for December 31, 2010 and December 31, 2011.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | At every quarter end, the Company will make a payment to the lenders equal to the excess of cash at the non-regulated entities of $12 million at
December 31 and March 31 and $10 million at June 30 and September 30.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Effective April 1, 2011, the pricing under the agreement is changing to if the leverage ratio is greater than 2.3, the pricing is LIBOR plus
9.00%. If the leverage ratio is greater than 2.0 and less than or equal to 2.3, the pricing is LIBOR plus 7.50%. If the leverage ratio is greater than 1.8 and less than or equal to 2.0, the pricing is LIBOR plus 6.25%. The pricing for leverage
ratios less than or equal to 1.8 was unchanged.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company has the option to capitalize interest that is in excess of the prior payment terms to the loan balance.
| | - |  | -------------------------------------------------------------------------------------------------------------------

In addition, the Company paid a 0.25% fee to all lenders that approved the amendment.

In accordance with ASC 470-50 Debt Modifications and Extinguishments, the Company evaluated the present value of the cash flows
under the terms of the amended credit agreement to determine if they were at least 10 percent different from the present value of the remaining cash flows under the terms of the existing credit agreement. It was determined that the terms were not
substantially different and therefore should not be accounted for as a debt extinguishment. Accordingly, lender consent fees of approximately $0.3 million were capitalized and will be amortized, along with remaining unamortized debt issuance costs
from the March 2009 debt modification, over the remaining term of the senior secured credit facility. Fees paid to other parties of approximately $0.7 million were expensed as incurred in the first quarter of 2011.



|8. | Capital Lease Obligation
|-- | ------------------------

In May 2010, the Company entered into a capital lease obligation related to certain computer software, software licenses, and hardware
used in the Companys insurance operations. The Company received cash proceeds from the financing in the amount of $28.2 million. As required by the lease agreements, the Company purchased $28.2 million of FDIC-insured certificates of deposit
held in brokerage accounts and pledged as collateral against all of the Companys obligations under the lease. The dollar amount of collateral pledged is set to decline over the term of the lease as the Company makes the scheduled lease
payments. The lease term is 60 months with monthly rental payments totaling approximately $0.6 million. At the end of the initial term, the Company will have the right to purchase the software for a nominal fee, after which all rights, title and
interest would transfer to the Company.

Property under capital lease at March 31, 2011 was as follows (in thousands):



|                                                  |  |      |        |  |                         |   |       |     |  |   |        | 
|------------------------------------------------- |  | ---- | ------ |  | ----------------------- | - | ----- | --- |  | - | ------ | 
|                                                  |  | Cost |        |  | AccumulatedDepreciation |   |       | Net | 
|Computer software, software licenses and hardware |  | $    | 28,189 |  |                         | $ | 5,308 |     |  | $ | 22,881 | 
|                                                  |  |      |        |  |                         |   |       |     |  |   |        | 



13



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##### Table of Contents

Estimated future lease payments for the years ending December 31 (in thousands):



|                                       |  |   |        | 
|-------------------------------------- |  | - | ------ | 
|2011                                   |  | $ | 5,052  | 
|2012                                   |  |   | 6,736  | 
|2013                                   |  |   | 6,736  | 
|2014                                   |  |   | 6,736  | 
|2015                                   |  |   | 2,807  | 
|                                       |  |   |        | 
|Total estimated future lease payments  |  |   | 28,067 | 
|Less: Amount representing interest     |  |   | 3,986  | 
|                                       |  |   |        | 
|Present value of future lease payments |  | $ | 24,081 | 
|                                       |  |   |        | 



|9. | Income Taxes
|-- | ------------

The
provision for income taxes for the three months ended March 31, 2011 and 2010 consisted of the following (in thousands):



|                       |  |                             |     |  |      |   |     | 
|---------------------- |  | --------------------------- | --- |  | ---- | - | --- | 
|                       |  | Three Months EndedMarch 31, |    
|                       |  | 2011                        |     |  | 2010 |  
|Current tax expense    |  | $                           | 125 |  |      | $ | 121 | 
|Deferred tax expense   |  |                             | 319 |  |      |   | 324 | 
|                       |  |                             |     |  |      |   |     | 
|Net income tax expense |  | $                           | 444 |  |      | $ | 445 | 
|                       |  |                             |     |  |      |   |     | 

The Companys effective tax rate differed from the statutory rate of 35% for the three months ended
March 31 as follows (in thousands):



|                                                                |  |                             |        |    |      |   |        |   
|--------------------------------------------------------------- |  | --------------------------- | ------ | -- | ---- | - | ------ | --
|                                                                |  | Three Months EndedMarch 31, |       
|                                                                |  | 2011                        |        |    | 2010 |  
|Loss before income taxes                                        |  | $                           | (9,204 | )  |      | $ | (3,019 | ) 
|Tax provision computed at the federal statutory income tax rate |  |                             | (3,221 | )  |      |   | (1,056 | ) 
|Increases (reductions) in tax resulting from:                   |  |                             |        |    |      |   |        |   
|Tax-exempt interest                                             |  |                             | (39    | )  |      |   | (216   | ) 
|State income taxes                                              |  |                             | (134   | )  |      |   | (16    | ) 
|Valuation allowance                                             |  |                             | 3,799  |    |      |   | 1,689  |   
|Other                                                           |  |                             | 39     |    |      |   | 44     |   
|                                                                |  |                             |        |    |      |   |        |   
|Income tax expense                                              |  | $                           | 444    |    |      | $ | 445    |   
|                                                                |  |                             |        |    |      |   |        |   
|Effective tax rate                                              |  |                             | (4.8   | )% |      |   | (14.7  | )%
|                                                                |  |                             |        |    |      |   |        |   

Net deferred tax assets prior to recognition of the valuation allowance were $56.9 million and
$53.4 million at March 31, 2011 and December 31, 2010, respectively. In assessing the realizability of our deferred tax assets, we considered whether it was more likely than not that our deferred tax assets will be realized based upon
all available evidence, including scheduled reversal of deferred tax liabilities, historical operating results, projected future operating results, tax carry-back availability, and limitations pursuant to Section 382 of the Internal Revenue
Code, among others. Based on this assessment, the Company began recording a valuation allowance against deferred taxes in December 2009.



|10. | Legal and Regulatory Proceedings
|--- | --------------------------------

The Company and its subsidiaries are named from time to time as parties in various legal actions arising in the ordinary course of the Companys business and arising out of or related to claims made
in connection with the Companys insurance policies and claims handling. There are no material changes with respect to legal and regulatory proceedings previously disclosed in Note 16 to the consolidated financial statements included in
the Companys Form 10-K for the year ended December 31, 2010. The Company believes that the resolution of these legal actions will not have a material adverse effect on the Companys consolidated financial position or results of
operations. However, the ultimate outcome of these matters is uncertain.



14



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##### Table of Contents

|11. | Net Loss per Common Share
|--- | -------------------------

Net loss per common share is based on the weighted average number of shares outstanding. Diluted weighted average shares is calculated by
adjusting basic weighted average shares outstanding by all potentially dilutive stock options and restricted stock. Stock options outstanding of 565,900 and 1,262,100 for the three months ended March 31, 2011 and 2010, respectively, were not
included in the computation of diluted earnings per share because the exercise price of the options was greater than the average market price of the common stock and thus the inclusion would have been anti-dilutive.

The following table sets forth the reconciliation of numerators and denominators for the basic and diluted earnings per share computation
for the three months ended March 31, 2011 and 2010 (in thousands, except per share amounts):



|                                                          |  |                             |        |   |      |   |        |  
|--------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                          |  | Three Months EndedMarch 31, |       
|                                                          |  | 2011                        |        |   | 2010 |  
|Numerator:                                                |  |                             |        |   |      |   |        |  
|Loss from continuing operations                           |  | $                           | (9,648 | ) |      | $ | (3,464 | )
|                                                          |  |                             |        |   |      |   |        |  
|Denominator:                                              |  |                             |        |   |      |   |        |  
|Weighted average common shares outstanding                |  |                             | 15,483 |   |      |   | 15,415 |  
|                                                          |  |                             |        |   |      |   |        |  
|Weighted average diluted shares outstanding               |  |                             | 15,483 |   |      |   | 15,415 |  
|                                                          |  |                             |        |   |      |   |        |  
|Basic loss per common share from continuing operations:   |  | $                           | (0.62  | ) |      | $ | (0.22  | )
|                                                          |  |                             |        |   |      |   |        |  
|Diluted loss per common share from continuing operations: |  | $                           | (0.62  | ) |      | $ | (0.22  | )
|                                                          |  |                             |        |   |      |   |        |  

On March 18, 2011, 433,500 shares of Affirmatives common stock were issued on a restricted basis,
and the voting rights for all of the shares was assigned to New Affirmative, LLC via a written irrevocable proxy at the time the stock awards were made.



|12. | Related Party Transactions
|--- | --------------------------

The Company has entered into certain transactions with a partnership that is affiliated with J. Christopher Flowers. Mr. Flowers is
affiliated with New Affirmative LLC, the majority shareholder of the Company. In the fourth quarter of 2010, the Company committed to invest $2.5 million in Varadero, a hedge fund, and $10.0 million in a related liquidity focused product. The
investment manager of Varadero is Varadero Capital, L.P., of which Varadero GP, LLC is the general partner. Both the investment manager and general partner are partially-owned by an entity affiliated with Mr. Flowers. As of March 31, 2011, the
Company had funded $2.5 million in the hedge fund and approximately $9.0 million in the related liquidity focused product.



|13. | Fair Value of Financial Instrument
|--- | ----------------------------------

The Company utilizes a hierarchy of valuation techniques for the disclosure of fair value estimates based on whether the significant inputs into the valuation are observable. In determining the level of
hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect the Companys significant market assumptions. The Company
measures certain assets and liabilities at fair value on a recurring basis, including investment securities classified as available-for-sale or trading, cash equivalents, other invested assets, other receivables and interest rate swaps. Following is
a brief description of the type of valuation information that qualifies a financial asset for each level:

Level 1  Unadjusted quoted market prices for identical assets or liabilities in active markets which are accessible
by the Company.

Level 2  Observable prices in active markets for similar assets or liabilities. Prices
for identical or similar assets or liabilities in markets that are not active. Directly observable market inputs for substantially the full term of the asset or liability, e.g., interest rates and yield curves at commonly quoted intervals,
volatilities, prepayment speeds, default rates, and credit spreads. Market inputs that are not directly observable but are derived from or corroborated by observable market data.

Level 3  Unobservable inputs based on the Companys own judgment as to assumptions a market participant would
use, including inputs derived from extrapolation and interpolation that are not corroborated by observable market data.



15



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##### Table of Contents

The Company evaluates the various types of financial assets and liabilities to determine the
appropriate fair value hierarchy based upon trading activity and the observability of market inputs. The Company employs control processes to validate the reasonableness of the fair value estimates of its assets and liabilities, including those
estimates based on prices and quotes obtained from independent third-party sources. The Companys procedures generally include, but are not limited to, initial and ongoing evaluation of methodologies used by independent third-parties and
monthly analytical reviews of the prices against current pricing trends and statistics.

Where possible, the Company utilizes
quoted market prices to measure fair value. For assets and liabilities that have quoted market prices in active markets, the Company uses the quoted market prices as fair value and includes these prices in the amounts disclosed in Level 1 of the
hierarchy. When quoted market prices in active markets are unavailable, the Company determines fair values based on independent external valuation information, which utilizes various models and valuation techniques based on a range of inputs
including pricing models, quoted market prices of publicly traded securities with similar duration and yield, time value, yield curve, prepayment speeds, default rates and discounted cash flow. In most cases, these estimates are determined based on
independent third-party valuation information, and the amounts are disclosed as Level 2 or Level 3 of the fair value hierarchy depending on the level of observable market inputs.

Financial assets and financial liabilities measured at fair value on a recurring basis

The following table provides information as of March 31, 2011 about the Companys financial assets and liabilities measured at fair value on a recurring basis (in thousands):



|                                        |  |               |         |  |                                       |   |        |                                           |  |   |                                        |  |  |   |       | 
|--------------------------------------- |  | ------------- | ------- |  | ------------------------------------- | - | ------ | ----------------------------------------- |  | - | -------------------------------------- |  |  | - | ----- | 
|                                        |  | March 31,2011 |         |  | QuotedPrices inActiveMarkets(Level 1) |   |        | SignificantOtherObservableInputs(Level 2) |  |   | SignificantUnobservableInputs(Level 3) | 
|Assets:                                 |  |               |         |  |                                       |   |        |                                           |  |   |                                        |  |  |   |       | 
|U.S. Treasury and government agencies   |  | $             | 30,035  |  |                                       | $ | 30,035 |                                           |  | $ |                                       |  |  | $ |      | 
|Mortgage-backed securities              |  |               | 12,007  |  |                                       |   |       |                                           |  |   | 12,007                                 |  |  |   |      | 
|States and political subdivisions       |  |               | 21,796  |  |                                       |   |       |                                           |  |   | 21,796                                 |  |  |   |      | 
|Corporate debt securities               |  |               | 102,838 |  |                                       |   |       |                                           |  |   | 102,838                                |  |  |   |      | 
|FDIC-insured certificates of deposit    |  |               | 26,091  |  |                                       |   |       |                                           |  |   | 26,091                                 |  |  |   |      | 
|                                        |  |               |         |  |                                       |   |        |                                           |  |   |                                        |  |  |   |       | 
|Total investment securities             |  |               | 192,767 |  |                                       |   | 30,035 |                                           |  |   | 162,732                                |  |  |   |      | 
|Cash and cash equivalents               |  |               | 43,293  |  |                                       |   | 43,293 |                                           |  |   |                                       |  |  |   |      | 
|Fiduciary and restricted cash           |  |               | 2,808   |  |                                       |   | 2,808  |                                           |  |   |                                       |  |  |   |      | 
|Other invested assets                   |  |               | 2,735   |  |                                       |   |       |                                           |  |   |                                       |  |  |   | 2,735 | 
|                                        |  |               |         |  |                                       |   |        |                                           |  |   |                                        |  |  |   |       | 
|Total assets                            |  | $             | 241,603 |  |                                       | $ | 76,136 |                                           |  | $ | 162,732                                |  |  | $ | 2,735 | 
|                                        |  |               |         |  |                                       |   |        |                                           |  |   |                                        |  |  |   |       | 
|Liabilities:                            |  |               |         |  |                                       |   |        |                                           |  |   |                                        |  |  |   |       | 
|Interest rate swaps (other liabilities) |  | $             | 567     |  |                                       | $ |       |                                           |  | $ |                                       |  |  | $ | 567   | 
|                                        |  |               |         |  |                                       |   |        |                                           |  |   |                                        |  |  |   |       | 
|Total liabilities                       |  | $             | 567     |  |                                       | $ |       |                                           |  | $ |                                       |  |  | $ | 567   | 
|                                        |  |               |         |  |                                       |   |        |                                           |  |   |                                        |  |  |   |       | 



16



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##### Table of Contents

The following table provides information as of December 31, 2010 about the
Companys financial assets and liabilities measured at fair value on a recurring basis (in thousands):



|                                        |  |                  |         |  |                                       |   |        |                                           |  |   |                                        |  |  |   |       | 
|--------------------------------------- |  | ---------------- | ------- |  | ------------------------------------- | - | ------ | ----------------------------------------- |  | - | -------------------------------------- |  |  | - | ----- | 
|                                        |  | December 31,2010 |         |  | QuotedPrices inActiveMarkets(Level 1) |   |        | SignificantOtherObservableInputs(Level 2) |  |   | SignificantUnobservableInputs(Level 3) | 
|Assets:                                 |  |                  |         |  |                                       |   |        |                                           |  |   |                                        |  |  |   |       | 
|U.S. Treasury and government agencies   |  | $                | 25,680  |  |                                       | $ | 25,680 |                                           |  | $ |                                       |  |  | $ |      | 
|Mortgage-backed securities              |  |                  | 10,830  |  |                                       |   |       |                                           |  |   | 10,830                                 |  |  |   |      | 
|States and political subdivisions       |  |                  | 22,388  |  |                                       |   |       |                                           |  |   | 22,388                                 |  |  |   |      | 
|Corporate debt securities               |  |                  | 124,555 |  |                                       |   |       |                                           |  |   | 124,555                                |  |  |   |      | 
|FDIC-insured certificates of deposit    |  |                  | 26,810  |  |                                       |   |       |                                           |  |   | 26,810                                 |  |  |   |      | 
|                                        |  |                  |         |  |                                       |   |        |                                           |  |   |                                        |  |  |   |       | 
|Total investment securities             |  |                  | 210,263 |  |                                       |   | 25,680 |                                           |  |   | 184,583                                |  |  |   |      | 
|Cash and cash equivalents               |  |                  | 46,364  |  |                                       |   | 46,364 |                                           |  |   |                                       |  |  |   |      | 
|Fiduciary and restricted cash           |  |                  | 3,866   |  |                                       |   | 3,866  |                                           |  |   |                                       |  |  |   |      | 
|Other invested assets                   |  |                  | 2,564   |  |                                       |   |       |                                           |  |   |                                       |  |  |   | 2,564 | 
|                                        |  |                  |         |  |                                       |   |        |                                           |  |   |                                        |  |  |   |       | 
|Total assets                            |  | $                | 263,057 |  |                                       | $ | 75,910 |                                           |  | $ | 184,583                                |  |  | $ | 2,564 | 
|                                        |  |                  |         |  |                                       |   |        |                                           |  |   |                                        |  |  |   |       | 
|Liabilities:                            |  |                  |         |  |                                       |   |        |                                           |  |   |                                        |  |  |   |       | 
|Interest rate swaps (other liabilities) |  | $                | 1,453   |  |                                       | $ |       |                                           |  | $ |                                       |  |  | $ | 1,453 | 
|                                        |  |                  |         |  |                                       |   |        |                                           |  |   |                                        |  |  |   |       | 
|Total liabilities                       |  | $                | 1,453   |  |                                       | $ |       |                                           |  | $ |                                       |  |  | $ | 1,453 | 
|                                        |  |                  |         |  |                                       |   |        |                                           |  |   |                                        |  |  |   |       | 

Level 1 Financial assets

Financial assets classified as Level 1 in the fair value hierarchy include U.S. Government bonds and certain government agencies securities and cash or cash equivalents. These securities are actively
traded and the Company estimates the fair value of these securities using unadjusted quoted market prices. Cash and cash equivalents primarily consist of highly liquid money market funds, which are reflected within Level 1 of the fair value
hierarchy.

Level 2 Financial assets

Financial assets classified as Level 2 in the fair value hierarchy include mortgage-backed securities, tax-exempt securities, corporate bonds and FDIC-insured certificates of deposit. The fair value of
these securities is determined based on observable market inputs provided by independent third-party pricing services and the Company discloses the fair values of these investments in Level 2 of the fair value hierarchy. The Company determined that
its corporate debt securities are more appropriately classified as Level 2 in the fair value hierarchy. To date, the Company has not experienced a circumstance where it has determined that an adjustment is required to a quote or price received from
independent third-party pricing sources. To the extent the Company determines that a price or quote is inconsistent with actual trading activity observed in that investment or similar investments, the Company would determine a fair value using this
observable market information and disclose the occurrence of this circumstance. All of the fair values of securities disclosed in Level 2 are estimated based on independent third-party pricing services.

Level 3 Financial assets and liabilities

At March 31, 2011, the Companys Level 3 financial assets include other invested assets related to an investment in a hedge fund and is presented as a separate line item in the consolidated
balance sheet. The Company measured the fair value of other invested assets on the basis of the net asset value of the fund as reported by the fund manager.

The Companys Level 3 financial liabilities are interest rate swaps. The fair value of these swaps are determined by quotes from brokers that are not considered binding.



17



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##### Table of Contents

Fair value measurements for assets in category Level 3 for the period ended March 31,
2011 were as follows (in thousands):



|                                 |  |                                                                                           |       | 
|-------------------------------- |  | ----------------------------------------------------------------------------------------- | ----- | 
|                                 |  | Fair Value MeasurementsUsing SignificantUnobservable Inputs(Level 3)Other Invested
Assets |      
|Balance at January 1, 2011       |  | $                                                                                         | 2,564 | 
|Transfers into Level 3           |  |                                                                                           |      | 
|Total gains included in earnings |  |                                                                                           | 171   | 
|Settlements                      |  |                                                                                           |      | 
|                                 |  |                                                                                           |       | 
|Balance at March 31, 2011        |  | $                                                                                         | 2,735 | 
|                                 |  |                                                                                           |       | 

Fair value measurements for liabilities in category Level 3 for the period ended March 31, 2011 were as
follows (in thousands):



|                                  |  |                                                                                         |       |  
|--------------------------------- |  | --------------------------------------------------------------------------------------- | ----- | -
|                                  |  | Fair Value MeasurementsUsing SignificantUnobservable Inputs(Level 3)Interest Rate
Swaps |      
|Balance at January 1, 2011        |  | $                                                                                       | 1,453 |  
|Transfers into Level 3            |  |                                                                                         |      |  
|Total losses included in earnings |  |                                                                                         | 2     |  
|Settlements                       |  |                                                                                         | (888  | )
|                                  |  |                                                                                         |       |  
|Balance at March 31, 2011         |  | $                                                                                       | 567   |  
|                                  |  |                                                                                         |       |  

The Company did not have any significant transfers between Levels 1 and 2 during the period ended
March 31, 2011.

Fair value measurements for assets in category Level 3 for the year ended December 31, 2010 were as
follows (in thousands):



|                                 |  |                                                                                           |       | 
|-------------------------------- |  | ----------------------------------------------------------------------------------------- | ----- | 
|                                 |  | Fair Value MeasurementsUsing SignificantUnobservable Inputs(Level 3)Other Invested
Assets |      
|Balance at January 1, 2010       |  | $                                                                                         |      | 
|Transfers into Level 3           |  |                                                                                           |      | 
|Total gains included in earnings |  |                                                                                           | 64    | 
|Purchases                        |  |                                                                                           | 2,500 | 
|Settlements                      |  |                                                                                           |      | 
|                                 |  |                                                                                           |       | 
|Balance at December 31, 2010     |  | $                                                                                         | 2,564 | 
|                                 |  |                                                                                           |       | 

Fair value measurements for liabilities in category Level 3 for the year ended December 31, 2010 were
as follows (in thousands):



|                                  |  |                                                                                         |        |  
|--------------------------------- |  | --------------------------------------------------------------------------------------- | ------ | -
|                                  |  | Fair Value MeasurementsUsing SignificantUnobservable Inputs(Level 3)Interest Rate
Swaps |       
|Balance at January 1, 2010        |  | $                                                                                       | 4,108  |  
|Transfers into Level 3            |  |                                                                                         |       |  
|Total losses included in earnings |  |                                                                                         | 961    |  
|Settlements                       |  |                                                                                         | (3,616 | )
|                                  |  |                                                                                         |        |  
|Balance at December 31, 2010      |  | $                                                                                       | 1,453  |  
|                                  |  |                                                                                         |        |  



18



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Derivative financial instruments are reported at fair value on the consolidated balance
sheet. The Companys current derivative instruments consist of an interest rate swap with an aggregate notional amount of $50 million outstanding at March 31, 2011. The interest rate swap liability is recorded in other liabilities on the
consolidated balance sheet. The credit risk associated with this swap agreement is limited to the uncollected interest payments due from counterparties. As of March 31, 2011, counterparty credit risk was minimal.

Gains and losses (realized and unrealized) for Level 3 assets and liabilities included in earnings for the period ended March 31,
2011, are reported in net investment income and loss on interest rate swaps as follows (in thousands):



|                                          |  |                     |     |  |                          |   |    |  
|----------------------------------------- |  | ------------------- | --- |  | ------------------------ | - | -- | -
|                                          |  | NetInvestmentIncome |     |  | Loss onInterestRateSwaps |  
|Assets                                    |  |                     |     |  |                          |   |    |  
|Total gains realized in earnings          |  | $                   | 171 |  |                          | $ |   |  
|Liabilities                               |  |                     |     |  |                          |   |    |  
|Total losses realized in earnings         |  |                     |    |  |                          |   | (2 | )
|                                          |  |                     |     |  |                          |   |    |  
|Total for the period ended March 31, 2011 |  | $                   | 171 |  |                          | $ | (2 | )
|                                          |  |                     |     |  |                          |   |    |  

Fair values represent the Companys best estimates and may not be substantiated by comparisons to
independent markets and, in many cases, could not be realized in immediate settlement of the instruments. The following financial liabilities are not required to be recorded at fair value, but their fair value is disclosed.

Notes payable  The fair values of the notes payable were determined using a third-party valuation source and were estimated
to be $26.6 million in the aggregate with a total carrying value of $76.9 million at March 31, 2011.

Senior secured
credit facility  The fair value of the senior secured credit facility was determined using a third-party valuation source and was estimated to be $89.7 million with a carrying value of $95.8 million at March 31, 2011.



19



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##### Table of Contents

|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

OVERVIEW

We are a distributor and producer of non-standard personal
automobile insurance policies for individual consumers in targeted geographic markets. Non-standard personal automobile insurance policies provide coverage to drivers who find it difficult to obtain insurance from standard automobile insurance
companies due to their lack of prior insurance, age, driving record, limited financial resources or other factors. Non-standard personal automobile insurance policies generally require higher premiums than standard automobile insurance policies for
comparable coverage.

As of March 31, 2011, our subsidiaries included insurance companies licensed to write insurance
policies in 40 states, underwriting agencies, and retail agencies with 201 owned stores and relationships with two unaffiliated underwriting agencies. We are currently active in offering insurance directly to individual consumers through retail
stores in 9 states (Louisiana, Texas, Illinois, Alabama, Missouri, Indiana, South Carolina, Kansas and Wisconsin) and distributing our own insurance policies through our owned retail stores and 5,300 independent agents or brokers in 9 states
(Louisiana, Texas, Illinois, Alabama, California, Michigan, Missouri, Indiana and South Carolina). In March 2011, we discontinued writing new business in the state of Michigan. In May 2010, we discontinued writing new and renewal policies in the
state of Florida. In July 2010, we discontinued writing new and renewal insurance policies in New Mexico.

We believe that the
delivery of non-standard personal automobile insurance policies to individual consumers requires the interaction of four basic operations, each with a specialized function:



| |  |  | Insurance companies, which possess the regulatory authority and capital necessary to issue insurance policies;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | Underwriting agencies, which supply centralized infrastructure and personnel required to design and service insurance policies that are
distributed through retail agencies;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Retail agencies,which provide multiple points of sale under established local brands with personnel licensed and trained to sell insurance
policies and ancillary products to individual consumers; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Premium finance companies, which provide payment alternatives to individual customers of our retail agencies.
| | - |  | -------------------------------------------------------------------------------------------------------------

Our four operating components often function as a vertically integrated unit, capturing the premium and associated risk and commission
income and fees generated from the sale of an insurance policy. There are other instances, however, when each of our operations functions with unaffiliated entities on an unbundled basis, either independently or with one or two of the other
operations. For example, our retail stores earn commission income and fees from sales of non-standard automobile insurance policies issued by third-party insurance carriers.

We believe that our ability to enter into a variety of business relationships with third parties allows us to maximize sales penetration and profitability through industry cycles better than if we
employed a single, vertically integrated operating structure.

CRITICAL ACCOUNTING POLICIES

There have been no changes of critical accounting policies since December 31, 2010.

RECENTLY ISSUED ACCOUNTING STANDARDS

Refer to Note 2 to the unaudited Consolidated Financial Statements for a discussion of certain accounting standards that have been adopted during 2011 and certain accounting standards that we have not yet
been required to adopt and may be applicable to the Companys future Consolidated Financial Statements.

MEASUREMENT OF PERFORMANCE

We are an insurance holding company engaged in the underwriting, servicing and distributing of non-standard personal
automobile insurance policies and related products and services. We distribute our products through three distinct distribution channels: our retail stores, independent agents and unaffiliated underwriting agencies. We generate earned premiums and
fees from policyholders through the sale of our insurance products. In addition, through our retail stores, we sell insurance policies of third-party insurers and other products or services of unaffiliated third-party providers and thereby earn
commission income from those third-party providers and insurers and fees from the customers.

As part of our corporate
strategy, we treat our retail stores as independent agents, encouraging them to sell to their individual customers whatever products are most appropriate for and affordable to those customers. We believe that this offers our retail customers the
best combination of service and value, developing stronger customer loyalty and improving



20



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##### Table of Contents

customer retention. In practice, this means that in our retail stores, the relative proportion of the sales of our own insurance products as compared to the sales of the third-party policies will
vary depending upon the competitiveness of our insurance products in the marketplace during the period. This reflects our intention of maintaining the margins in our insurance company subsidiaries, even at the cost of business lost to third-party
carriers.

In the independent agency distribution channel and the unaffiliated underwriting agency distribution channel, the
effect of competitive conditions is the same as in our retail store distribution channel. As in our retail stores, independent agents (either working directly with us or through unaffiliated underwriting agencies) not only offer our products but
also offer their customers a selection of products by third-party carriers. Therefore, our insurance products must be competitive in pricing, features, commission rates and ease of sale or the independent agents will sell the products of those third
parties instead of our products. We believe that we are generally competitive in the markets we serve, and we constantly evaluate our products relative to those of other carriers.

Premiums.One measurement of our performance is the level of gross premiums written and a second measurement is the relative
proportion of premiums written through our three distribution channels. The following table displays our gross premiums written and assumed by distribution channel (in thousands):



|                                   |  |                             |        |  |      |   |         | 
|---------------------------------- |  | --------------------------- | ------ |  | ---- | - | ------- | 
|                                   |  | Three Months EndedMarch 31, |       
|                                   |  | 2011                        |        |  | 2010 |  
|Our underwriting agencies:         |  |                             |        |  |      |   |         | 
|Retail agencies                    |  | $                           | 52,188 |  |      | $ | 57,953  | 
|Independent agencies               |  |                             | 21,131 |  |      |   | 53,007  | 
|                                   |  |                             |        |  |      |   |         | 
|Subtotal                           |  |                             | 73,319 |  |      |   | 110,960 | 
|Unaffiliated underwriting agencies |  |                             | 4,460  |  |      |   | 6,122   | 
|                                   |  |                             |        |  |      |   |         | 
|Total                              |  | $                           | 77,779 |  |      | $ | 117,082 | 
|                                   |  |                             |        |  |      |   |         | 

Total gross premiums written for the three months ended March 31, 2011 decreased $39.3 million, or
33.6%, compared with the prior year quarter. This decrease was due to a number of actions taken during 2010 and into 2011 to increase prices and strengthen underwriting standards to improve the profitability of the gross premiums written. As a
result, base rates on an overall basis increased by 15% from September 30, 2010 to the first quarter of 2011. Improved processes and monitoring of pricing activity have been put in place. We suspended or constrained new business production for
unprofitable independent agent relationships. We expect that these actions will continue to have a negative effect on premium production levels in 2011, but should improve the profitability of the business.

In our retail distribution channel, gross premiums written consist of premiums written for our affiliated insurance carriers
products only and do not include premiums written for third-party insurance carriers in our retail stores. We earn commission income and fees in our retail distribution channel for sales of third-party insurance policies. The following represents
gross premiums written produced by our retail agencies (in thousands):



|                             |  |                              |        |  |      |   |        | 
|---------------------------- |  | ---------------------------- | ------ |  | ---- | - | ------ | 
|                             |  | Three Months Ended March 31, |       
|                             |  | 2011                         |        |  | 2010 |  
|Our policies                 |  | $                            | 52,188 |  |      | $ | 57,953 | 
|Third-party carrier policies |  |                              | 15,433 |  |      |   | 13,167 | 
|                             |  |                              |        |  |      |   |        | 
|Total                        |  | $                            | 67,621 |  |      | $ | 71,120 | 
|                             |  |                              |        |  |      |   |        | 

Gross premiums written of our policies in our retail distribution channel for the three months ended
March 31, 2011 decreased $5.8 million, or 9.9%, compared with the same period in the prior year. This decrease is a result of the pricing and underwriting actions on our policies. However, third-party policies increased $2.2 million, or 17.2%,
for the three months ended March 31, 2011.

In our independent agency distribution channel, gross premiums written for the
three months ended March 31, 2011 decreased $31.9 million, or 60.1%, compared with the same period in the prior year.

Gross premiums written by our unaffiliated underwriting agencies for the three months ended March 31, 2011 decreased $1.7 million,
or 27.1%, compared with the same period in the prior year.





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##### Table of Contents

We introduced a multivariate pricing product in May 2011 for new business in Louisiana. The
multivariate pricing product is also expected to be put in place for new business in Alabama, Texas and Illinois as well during 2011. The new product is expected to result in an improvement in profitability through better segment pricing.

The following table displays our gross premiums written and assumed by state (in thousands):



|               |  |                             |        |  |      |   |         | 
|-------------- |  | --------------------------- | ------ |  | ---- | - | ------- | 
|               |  | Three Months EndedMarch 31, |       
|               |  | 2011                        |        |  | 2010 |  
|Louisiana      |  | $                           | 39,375 |  |      | $ | 44,557  | 
|Texas          |  |                             | 12,111 |  |      |   | 19,894  | 
|Alabama        |  |                             | 8,980  |  |      |   | 9,928   | 
|Illinois       |  |                             | 8,054  |  |      |   | 11,868  | 
|California     |  |                             | 4,432  |  |      |   | 6,067   | 
|Indiana        |  |                             | 2,145  |  |      |   | 3,062   | 
|South Carolina |  |                             | 1,047  |  |      |   | 1,551   | 
|Michigan       |  |                             | 960    |  |      |   | 16,934  | 
|Missouri       |  |                             | 669    |  |      |   | 1,868   | 
|Other          |  |                             | 6      |  |      |   | 1,353   | 
|               |  |                             |        |  |      |   |         | 
|Total          |  | $                           | 77,779 |  |      | $ | 117,082 | 
|               |  |                             |        |  |      |   |         | 

The following table displays our net premiums written by distribution channel (in thousands):



|                                                                |  |                             |         |   |      |   |         |  
|--------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                |  | Three Months EndedMarch 31, |        
|                                                                |  | 2011                        |         |   | 2010 |  
|Our underwriting agencies:                                      |  |                             |         |   |      |   |         |  
|Retail agencies  gross premiums written                        |  | $                           | 52,188  |   |      | $ | 57,953  |  
|Ceded reinsurance                                               |  |                             | (13,949 | ) |      |   |        |  
|                                                                |  |                             |         |   |      |   |         |  
|Subtotal retail agencies net premiums written                   |  |                             | 38,239  |   |      |   | 57,953  |  
|                                                                |  |                             |         |   |      |   |         |  
|Independent agencies  gross premiums written                   |  |                             | 21,131  |   |      |   | 53,007  |  
|Ceded reinsurance                                               |  |                             | (6,524  | ) |      |   | (2,003  | )
|                                                                |  |                             |         |   |      |   |         |  
|Subtotal independent agencies net premiums written              |  |                             | 14,607  |   |      |   | 51,004  |  
|                                                                |  |                             |         |   |      |   |         |  
|Unaffiliated underwriting agencies  gross premiums written     |  |                             | 4,460   |   |      |   | 6,122   |  
|Ceded reinsurance                                               |  |                             | (17     | ) |      |   | (32     | )
|                                                                |  |                             |         |   |      |   |         |  
|Subtotal unaffiliated underwriting agencies net premium written |  |                             | 4,443   |   |      |   | 6,090   |  
|                                                                |  |                             |         |   |      |   |         |  
|Excess of loss coverages with various reinsurers                |  |                             | (968    | ) |      |   |        |  
|Catastrophe coverages with various reinsurers                   |  |                             | (84     | ) |      |   | (175    | )
|                                                                |  |                             |         |   |      |   |         |  
|Total net premiums written                                      |  | $                           | 56,237  |   |      | $ | 114,872 |  
|                                                                |  |                             |         |   |      |   |         |  

Total net premiums written for the three months ended March 31, 2011 decreased $58.6 million, or 51.0%,
compared with the same period in the prior year primarily due to the quota-share reinsurance agreements put in place for 2010 and 2011 and the decline in gross written premium production.

Effective October 1, 2010, the Company entered into a quota-share reinsurance agreement with a third-party reinsurance company
ceding 40% of premiums and losses on policies in-force in certain states on October 1, 2010 and policies written through December 31, 2010.

A separate quota-share reinsurance agreement was put in place effective January 1, 2011. Under the terms of the 2011 agreement, the Company cedes 28% of gross written premium in all states other than
Michigan through December 31, 2011. The Companys quota-share ceding commission rate structure varies based on loss experience for both agreements.

Ceded premiums for the three months ended March 31 were $21.5 million in 2011 and $2.2 million in 2010.



22



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RESULTS OF OPERATIONS

We had a net loss from continuing operations of $9.6 million and $3.5 million for the three months ended March 31, 2011 and 2010, respectively.

Comparison of the Three Months Ended March 31, 2011 to the Three Months Ended March 31, 2010

Total revenues for the three months ended March 31, 2011 decreased $47.3 million, or 39.6%, compared with the three months ended
March 31, 2010. The decrease was due to decreases in net premiums earned, commission income and fees, and net realized gains, partially offset by an increase in net investment income.

The largest component of revenue is net premiums earned on insurance policies. Net premiums earned for the current quarter decreased
$42.2 million, or 45.5%, compared with the prior year quarter. Since insurance premiums are earned over the service period of the policies, the revenue in the current quarter includes premiums earned on insurance products written through our three
distribution channels in both current and previous periods.

The following table sets forth net premiums earned by
distribution channel (in thousands):



|                                   |  |                             |        |  |      |   |        | 
|---------------------------------- |  | --------------------------- | ------ |  | ---- | - | ------ | 
|                                   |  | Three Months EndedMarch 31, |       
|                                   |  | 2011                        |        |  | 2010 |  
|Our underwriting agencies          |  | $                           | 47,478 |  |      | $ | 86,807 | 
|Unaffiliated underwriting agencies |  |                             | 3,073  |  |      |   | 5,915  | 
|                                   |  |                             |        |  |      |   |        | 
|Total net premiums earned          |  | $                           | 50,551 |  |      | $ | 92,722 | 
|                                   |  |                             |        |  |      |   |        | 

Commission Income and Fees. Another measurement of our performance is the relative level of
production of commission income and fees. Commission income and fees consist of (a) policy, installment, premium finance and agency fees earned for business written or assumed by our insurance companies both through independent agents and our
retail agencies and (b) the commission, premium finance and agency fee income earned on sales of unaffiliated, third-party companies insurance policies or other products sold by our retail agencies. These various types of commission
income and fees are impacted in different ways by the decisions we make in pursuing our corporate strategy.

Policy,
installment, premium finance and agency fees are earned for business written or assumed by our insurance companies both through independent agents and our retail agencies. Generally, we can increase or decrease agency fees, installment fees, and
interest rates subject to limited regulatory restrictions, but policy fees must be approved by the applicable states department of insurance. Premium finance fees are financing fees earned by our premium finance subsidiaries, and consist of
origination and servicing fees as well as interest on premiums that customers choose to finance.

Commissions, premium finance
and agency fees are earned on sales of third-party companies products sold by our retail agencies. As described above, in our owned stores, there can be a shift in the relative proportion of the sales of third-party insurance products as
compared to sales of our own carriers products due to the relative competitiveness of our insurance products that could result in an increase in our commission income and fees from non-affiliated third-party insurers. We negotiate commission
rates with the various third-party carriers whose products we agree to sell in our retail stores. As a result, the level of third-party commission income will also vary depending upon the mix by carrier of third-party products that are sold. In
addition, we earn fees from the sales of other products and services such as auto club memberships and bond cards offered by unaffiliated companies.

The following sets forth the components of consolidated commission income and fees earned for the current quarter and the prior year quarter (in thousands):



|                                 |  |                             |        |  |      |   |        | 
|-------------------------------- |  | --------------------------- | ------ |  | ---- | - | ------ | 
|                                 |  | Three Months EndedMarch 31, |       
|                                 |  | 2011                        |        |  | 2010 |  
|Policyholder fees                |  | $                           | 7,850  |  |      | $ | 12,153 | 
|Premium finance revenue          |  |                             | 6,113  |  |      |   | 5,771  | 
|Commissions and fees             |  |                             | 4,707  |  |      |   | 4,289  | 
|Agency fees                      |  |                             | 1,360  |  |      |   | 1,382  | 
|                                 |  |                             |        |  |      |   |        | 
|Total commission income and fees |  | $                           | 20,030 |  |      | $ | 23,595 | 
|                                 |  |                             |        |  |      |   |        | 



23



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Total commission income and fees decreased $3.6 million, or 15.1%, compared with the same
period in the prior year. Policyholder fees decreased $4.3 million, or 35.4%, due to the lower overall volume of premiums written and a change in mix in states where these fees are realized. Premium finance revenue increased $0.3 million, or 5.9%,
due to increases in the number of policies financed and revenue per policy. We experienced a steady increase in premium finance revenue since December 2007 when we began financing third-party premiums. Commissions and fees increased $0.4 million, or
9.7%, due to more of our retail customers choosing third-party products due to pricing and underwriting actions and an expansion of our ancillary product sales.

Net Investment Income and Other Income.Net investment income for the three months ended March 31, 2011 increased $0.1 million, or 4.4%, compared with the same period in the prior year.
The increase was primarily due to an increase in income from our investment in real estate and from our investment in a hedge fund, partially offset by a reduction in yields and a 15.5% decrease in total average invested assets to $194.9 million
during the current quarter from $230.6 million in the prior year. The average investment yield was 2.6% (2.7% on a taxable equivalent basis) in the current quarter, compared with 2.7% (3.4% on a taxable equivalent basis) in the prior year. The
increase in income from our investment in real estate is due to a new long-term lease which commenced in the fourth quarter of 2010. We entered into an investment in a hedge fund in the fourth quarter of 2010 which increased in market value during
the three months ended March 31, 2011.

In the first quarter of 2010, we began to reposition our investment portfolio by
decreasing our exposure to tax-exempt investments. The repositioning was completed in the second quarter of 2010. We sold $35.1 million of available-for-sale securities for the three months ended March 31, 2010 for a net realized gain of $1.2
million.

At March 31, 2011, our fixed-income investments were invested in the following: corporate debt securities
53.4%; U.S. Treasury and government agencies securities 15.6%; FDIC-insured certificates of deposit 13.5%; states and political subdivisions securities 11.3%; and mortgage-backed securities 6.2%. The average quality of our portfolio was A+ at
March 31, 2011. We attempt to mitigate interest rate risk by managing the duration of our fixed-income portfolio to a target range of three years or less. As of March 31, 2011, the effective duration of our fixed-income investment
portfolio was 2.0 years.

For the three-month period ended March 31, 2010, other income includes $0.5 million related to
a settlement received from legal proceedings.

Losses and Loss Adjustment Expenses. Since the largest expenses of an
insurance company are the losses and loss adjustment expenses, another measurement of our insurance carriers performance is the level of such expenses, specifically as a ratio to earned premiums. Our losses and loss adjustment expenses are a
blend of the specific estimated and actual costs of providing the coverage contracted by the purchasers of our insurance policies. We maintain reserves to cover our estimated ultimate liability for losses and related loss adjustment expenses for
both reported and unreported claims on the insurance policies issued by our insurance companies. The establishment of appropriate reserves is an inherently uncertain process, involving actuarial and statistical projections of what we expect to be
the cost of the ultimate settlement and administration of claims based on historical claims information, estimates of future trends in claims severity, changes in the mix of business/limits and other variable factors such as inflation. Due to the
inherent uncertainty of estimating reserves, reserve estimates can be expected to vary from period to period. The claim initiatives that we started in the second half of 2009 shortened the claims payment cycle and reduced the number of claims
outstanding. The acceleration of payment patterns has necessitated increased use of judgment by management to account for the deviation in trends. To the extent that our reserves prove to be inadequate in the future, we would be required to increase
our reserves for losses and loss adjustment expenses and incur a charge to earnings in the period during which such reserves are increased. The historic development of our reserves for losses and loss adjustment expenses is not necessarily
indicative of future trends in the development of these amounts.

Losses and loss adjustment expenses for the current quarter
decreased $30.6 million, or 43.1%, compared with the prior year quarter. The percentage of losses and loss adjustment expense to net premiums earned (the loss ratio) was 79.9% in the current quarter, compared with 76.6% in the prior year quarter. A
better comparison is to compare the 79.9% loss ratio for the current quarter to the 85.4% ratio for the 2010 accident year. The decline in the loss ratio for the first quarter of 2011 compared with the 2010 accident year was due to the pricing and
underwriting actions that were taken as well as additional process changes implemented in the handling of claims to mitigate the significant increases in severity that occurred due to the claims initiatives.



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Selling, General and Administrative Expenses. Another measurement of our performance
that addresses our overall efficiency is the level of selling, general and administrative expenses. We recognize that our customers are primarily motivated by low prices. As a result, we strive to keep our costs as low as possible to be able to keep
our prices affordable and thus to maximize our sales while still maintaining profitability. Our selling, general and administrative expenses include not only the cost of acquiring the insurance policies through our insurance carriers (the
amortization of the deferred acquisition costs) and managing our insurance carriers and the retail stores, but also the costs of the holding company. The largest component of selling, general and administrative expenses is personnel costs, including
payroll, benefits and accrued bonus expenses. Selling, general and administrative expenses decreased $8.8 million, or 20.8%, compared with the prior year quarter, primarily due to a decrease in premium production and policy acquisition expenses due
to ceding commission from the quota-share reinsurance agreements. The primary drivers of the decrease were a drop in independent agent expense with lower premium volume and ceding commission income in the first quarter of 2011 from the quota-share
reinsurance agreements. There was no ceding commission income in the first quarter of 2010.

Deferred policy acquisition costs
represent the deferral of expenses that we incur in acquiring new business or renewing existing business. Policy acquisition costs, consisting of primarily commission, advertising, premium taxes, underwriting and retail agency expenses, are
initially deferred and then charged against income ratably over the terms of the related policies through amortization of the deferred policy acquisition costs. Thus, the amortization of deferred acquisition costs is correlated with earned premium
and the ratio of amortization of deferred acquisition costs to earned premium in an accounting period is another measurement of performance.

Amortization of deferred policy acquisition costs is a major component of SG&A expenses. The following table sets forth the impact that amortization of deferred acquisition costs had on SG&A
expenses and the change in deferred acquisition costs (in thousands):



|                                                                                  |  |                             |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                  |  | Three Months EndedMarch 31, |        
|                                                                                  |  | 2011                        |         |   | 2010 |  
|Amortization of deferred acquisition costs                                        |  | $                           | 10,341  |   |      | $ | 20,279  |  
|Other selling, general and administrative expenses                                |  |                             | 23,360  |   |      |   | 22,260  |  
|                                                                                  |  |                             |         |   |      |   |         |  
|Total selling, general and administrative expenses                                |  | $                           | 33,701  |   |      | $ | 42,539  |  
|                                                                                  |  |                             |         |   |      |   |         |  
|Total as a percentage of net premiums earned                                      |  |                             | 66.7    | % |      |   | 45.9    | %
|                                                                                  |  |                             |         |   |      |   |         |  
|Beginning deferred acquisition costs                                              |  | $                           | 11,742  |   |      | $ | 24,230  |  
|Additions                                                                         |  |                             | 10,142  |   |      |   | 24,994  |  
|Amortization                                                                      |  |                             | (10,341 | ) |      |   | (20,279 | )
|                                                                                  |  |                             |         |   |      |   |         |  
|Ending deferred acquisition costs                                                 |  | $                           | 11,543  |   |      | $ | 28,945  |  
|                                                                                  |  |                             |         |   |      |   |         |  
|Amortization of deferred acquisition costs as a percentage of net premiums earned |  |                             | 20.5    | % |      |   | 21.9    | %
|                                                                                  |  |                             |         |   |      |   |         |  

Loss on Interest Rate Swaps.Loss on interest rate swaps for the three months ended March 31,
2011 decreased $0.5 million from the same period in the prior year. The loss relates to the impact on the determination of fair value associated with the decline in short-term interest rates implied in the forward yield curve. One swap instrument
expired in February 2011 and the remaining swap instrument expired in April 2011.

Interest Expense.Interest expense
for the three months ended March 31, 2011 decreased $1.1 million, or 18.3%, compared with the same period in the prior year. This decrease was due to a decrease in the average debt outstanding and lower interest rates on the notes payable,
partially offset by interest expense on the lease obligation entered into in May 2010. Amortization of debt discount was $1.2 million in the current quarter as compared with $1.7 million for the same period in the prior year.

Income Taxes.Income tax expense for the current quarter was $0.4 million as compared with income tax expense of $0.4
million for the same period in the prior year. The income tax expense for both periods was primarily due to an increase in the deferred tax liability related to goodwill and state tax expense.

Our net deferred tax assets prior to recognition of valuation allowance were $56.9 million and $53.4 million at March 31,
2011 and December 31, 2010, respectively. In assessing the realizability of our deferred tax assets, we considered whether it was more likely than not that our deferred tax assets will be realized based upon all available evidence, including
scheduled reversal of deferred tax liabilities, historical operating results, projected future operating results, tax carry-back



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availability, and limitations pursuant to Section 382 of the Internal Revenue Code, among others. Based on this assessment, we began recording a valuation allowance against deferred taxes in
December 2009.

LIQUIDITY AND CAPITAL RESOURCES

Sources and uses of funds. We are a holding company with no business operations of our own. Consequently, our ability to pay dividends to stockholders, meet our debt payment obligations and pay our
taxes and administrative expenses is largely dependent on dividends or other distributions from our subsidiaries.

There are
no restrictions on the payment of dividends by our non-insurance company subsidiaries other than state corporate laws regarding solvency. As a result, our non-insurance company subsidiaries generate revenues, profits and net cash flows that are
generally unrestricted as to their availability for the payment of dividends and we have and expect to continue to use those revenues to service our corporate financial obligations, such as debt service and stockholder dividends. As of
March 31, 2011, we had $0.3 million of cash and cash equivalents at the holding company level and $11.5 million of cash and cash equivalents at our non-insurance company subsidiaries.

State insurance laws restrict the ability of our insurance company subsidiaries to declare stockholder dividends. These subsidiaries may
not make an extraordinary dividend until 30 days after the applicable commissioner of insurance has received notice of the intended dividend and has not objected in such time or until the commissioner has approved the payment of the
extraordinary dividend within the 30-day period. In most states, an extraordinary dividend is defined as any dividend or distribution of cash or other property whose fair market value, together with that of other dividends and distributions made
within the preceding 12 months, exceeds the greater of 10.0% of the insurance companys surplus as of the preceding year-end or the insurance companys net income for the preceding year, in each case determined in accordance with statutory
accounting practices. In addition, dividends may only be paid from unassigned earnings and an insurance companys remaining surplus must be both reasonable in relation to its outstanding liabilities and adequate to its financial needs. As of
March 31, 2011, our insurance companies could not pay ordinary dividends to us without prior regulatory approval due to a negative unassigned surplus position of Affirmative Insurance Company. However, as mentioned previously, our non-insurance
company subsidiaries provide adequate cash flow to fund their own operations.

The National Association of Insurance
Commissioners model law for risk-based capital provides formulas to determine the amount of capital that an insurance company needs to ensure that it has an acceptable expectation of not becoming financially impaired. At March 31, 2011,
each of our insurance subsidiaries maintained a risk-based capital level that was in excess of an amount that would require any corrective actions.

The Illinois Insurance Code includes a reserve requirement that requires an insurer to maintain an amount of qualifying investments as defined at least equal to the lesser of $250.0 million or 100% of
adjusted loss reserves and loss adjustment reserve expenses. As of December 31, 2010, Affirmative Insurance Company was deficient in qualifying assets by $32.1 million. The Illinois Department of Insurance has approved our plan to cure the
deficiency by June 30, 2011. The plan included a $3.8 million ordinary dividend and a $21.0 million extraordinary distribution from two of AICs insurance company subsidiaries, which were completed in March 2011 and an extraordinary dividend
from one of AICs insurance company subsidiaries, which is subject to its state insurance department approval. If the state insurance department does not approve the extraordinary dividend, we have other means available to us to cure the
deficiency.

In May 2010, we entered into a capital lease obligation related to certain computer software, software licenses,
and hardware currently used by and on the books of Affirmative Insurance Company and received cash from the financing in the amount of $28.2 million. As required by the lease agreements, we purchased $28.2 million of FDIC-insured certificates of
deposit with the lease financing proceeds. These investments are pledged as collateral against our lease obligation and are scheduled to decrease as we make the scheduled lease payments. The lease term is 60 months with monthly rental payments
totaling approximately $0.6 million.

Our operating subsidiaries primary sources of funds are premiums received,
commission and fee income, investment income and the proceeds from the sale and maturity of investments. Funds are used to pay claims and operating expenses, to purchase investments and to pay dividends to our holding company.

We believe that existing cash and investment balances, as well as cash flows generated from operations, will be adequate to meet our
liquidity needs, planned capital expenditures and the debt service requirements of the senior secured credit facility and notes payable, during the 12-month period following the date of this report at both the holding company and insurance company
levels. We do not currently know of any events that could cause a material increase or decrease in our long-term liquidity needs.



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Senior secured credit facility. In March 2011, we entered into an amendment to the
facility. The amendment included the following significant items:



| |  |  | A waiver of any defaults or events of default for the period prior to the effective date of the amendment related to the risk-based capital ratio and
loss ratio covenants under the prior terms of the agreement.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The permitted dividend leverage ratio was changed from 1.5 to 1.0.
| | - |  | ------------------------------------------------------------------



| |  |  | Indebtedness under the baskets for qualified additional subordinated debt and Affirmative Premium Finance Company was eliminated. We did not have any
such debt.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A provision was added allowing for the acquisition of $30 million of subordinated debt if the proceeds are used as a capital contribution to the
regulated insurance entities.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The assets and stock of Affirmative Premium Finance Company will be pledged and this entity will become a guarantor of the debt.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | The quarterly requirements for the leverage ratio covenant calculation were changed for the first three quarters of 2011.
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | The quarterly requirements for the interest coverage ratio covenant calculation were changed for the first two quarters of 2011.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | The quarterly requirements for the loss ratio covenant calculation were changed from December 31, 2010 through March 31, 2012.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | The annual requirements for the risk-based capital covenant calculation were changed for December 31, 2010 and December 31, 2011.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | At every quarter end, we will make a payment to the lenders equal to the excess of cash at the non-regulated entities of $12 million at
December 31 and March 31 and $10 million at June 30 and September 30.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Effective April 1, 2011, the pricing under the agreement is changing to if the leverage ratio is greater than 2.3, the pricing is LIBOR plus
9.00%. If the leverage ratio is greater than 2.0 and less than or equal to 2.3, the pricing is LIBOR plus 7.50%. If the leverage ratio is greater than 1.8 and less than or equal to 2.0, the pricing is LIBOR plus 6.25%. The pricing for leverage
ratios less than or equal to 1.8 was unchanged.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have the option to capitalize interest that is in excess of the prior payment terms to the loan balance.
| | - |  | -----------------------------------------------------------------------------------------------------------

In addition, we paid a 0.25% fee to all lenders that approved the amendment. The amendment is expected to increase our interest costs in
2011.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

We are principally exposed to two types of market risk: interest rate risk and credit risk.

Interest rate risk.Our investment portfolio consists of investment-grade, fixed-income securities classified as available-for-sale investment securities and auction-rate tax-exempt
securities classified as trading. Accordingly, the primary market risk exposure to our debt securities is interest rate risk. In general, the fair market value of a portfolio of fixed-income securities increases or decreases inversely with changes
in market interest rates, while net investment income realized from future investments in fixed-income securities increases or decreases along with interest rates. In addition, some of our fixed-income securities have call or prepayment options.
This could subject us to reinvestment risk should interest rates fall and issuers call their securities and we reinvest at lower interest rates. We attempt to mitigate this interest rate risk by investing in securities with varied maturity dates and
by managing the duration of our investment portfolio to a defined range of less than three years. The fair value of our fixed-income securities as of March 31, 2011 was $192.8 million. The effective average duration of the portfolio as of
March 31, 2011 was 2.0 years. If market interest rates increase 1.0%, our fixed-income investment portfolio would be expected to decline in market value by 2.0%, or $3.8 million, representing the effective average duration multiplied by the
change in market interest rates. Conversely, a 1.0% decline in interest rates would result in a 2.0%, or $3.8 million, increase in the market value of our fixed-income investment portfolio.

Our senior secured credit facility is also subject to interest rate risk. During the first quarter of 2010, we entered into an amendment
that changed the pricing to be tiered based on the leverage ratio and includes a LIBOR floor of 3.0%. The interest rate is floating based on LIBOR plus increments tied to the Companys leverage ratio. Effective April 1, 2011, the pricing
under the agreement is changing to if the leverage ratio is greater than 2.3, the pricing is LIBOR plus 9.00%. If the leverage ratio is greater than 2.0 and less than or equal to 2.3, the pricing is LIBOR plus 7.50%. If the leverage ratio is greater
than 1.8 and less than or equal to 2.0, the pricing is LIBOR plus 6.25%. The pricing for leverage ratios less than or equal to 1.8 was unchanged.



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Derivative financial instruments are reported at fair value on the consolidated balance
sheet. Our current derivative instrument consists of an interest rate swap with an aggregate notional amount of $50.0 million outstanding at March 31, 2011. This swap instrument requires quarterly settlements whereby we pay a fixed rate of
4.993% and receive a three-month LIBOR rate. The interest rate swap was previously designated as a hedge against the variability of cash flows associated with that portion of the senior secured credit facility. This swap expired in April 2011.

Our notes payable are also subject to interest rate risk. The $30.9 million notes adjust quarterly to the three-month LIBOR
rate plus 3.60%. The interest rate as of March 31, 2011 was 3.91%. The $25.8 million notes adjust quarterly to the three-month LIBOR rate plus 3.55%. The interest rate as of March 31, 2011 was 3.86%. The $20.2 million notes payable bear an
interest rate of the three-month LIBOR rate plus 3.95%. The interest rate as of March 31, 2011 was 4.26%.

Credit
risk.An additional exposure to our fixed-income securities portfolio is credit risk. We attempt to manage our credit risk by investing only in investment-grade securities and limiting our exposure to a single issuer. At March 31, 2011,
and December 31, 2010, respectively, our fixed-income investments were invested in the following:



|                                      |  |               |       |   |                  |  |       |  
|------------------------------------- |  | ------------- | ----- | - | ---------------- |  | ----- | -
|                                      |  | March 31,2011 |       |   | December 31,2010 | 
|Corporate debt securities             |  |               | 53.4  | % |                  |  | 59.2  | %
|U.S. Treasury and government agencies |  |               | 15.6  |   |                  |  | 12.2  |  
|FDIC-insured certificates of deposit  |  |               | 13.5  |   |                  |  | 12.8  |  
|States and political subdivisions     |  |               | 11.3  |   |                  |  | 10.7  |  
|Mortgage-backed securities            |  |               | 6.2   |   |                  |  | 5.1   |  
|                                      |  |               |       |   |                  |  |       |  
|Total                                 |  |               | 100.0 | % |                  |  | 100.0 | %
|                                      |  |               |       |   |                  |  |       |  

We invest our insurance portfolio funds in highly-rated, fixed-income securities. Information about our
investment portfolio is as follows ($ in thousands):



|                          |  |               |         |   |                  |   |         |  
|------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                          |  | March 31,2011 |         |   | December 31,2010 |  
|Total invested assets     |  | $             | 192,767 |   |                  | $ | 210,263 |  
|Tax-equivalent book yield |  |               | 2.72    | % |                  |   | 2.61    | %
|Average duration in years |  |               | 1.97    |   |                  |   | 2.07    |  
|Average S&P rating        |  |               | A+      |   |                  |   | A+      |  

We are subject to
credit risks with respect to our reinsurers. Although a reinsurer is liable for losses to the extent of the coverage which it assumes, our reinsurance contracts do not discharge our insurance companies from primary liability to each policyholder for
the full amount of the applicable policy, and consequently our insurance companies remain obligated to pay claims in accordance with the terms of the policies regardless of whether a reinsurer fulfills or defaults on its obligations under the
related reinsurance agreement. In order to mitigate credit risk to reinsurance companies, we attempt to select financially strong reinsurers with an A.M. Best rating of A- or better and continue to evaluate their financial condition.

The table below presents the total amount of receivables due from reinsurance as of March 31, 2011 and December 31,
2010, respectively (in thousands):



|                                                                                     |  |               |         |  |                  |   |         | 
|------------------------------------------------------------------------------------ |  | ------------- | ------- |  | ---------------- | - | ------- | 
|                                                                                     |  | March 31,2011 |         |  | December 31,2010 |  
|Michigan Catastrophic Claims Association                                             |  | $             | 65,224  |  |                  | $ | 65,727  | 
|Quota-share reinsurer for agreements effective in fourth quarter of 2010 and in 2011 |  |               | 55,073  |  |                  |   | 53,743  | 
|Vesta Insurance Group                                                                |  |               | 13,089  |  |                  |   | 13,161  | 
|Excess of loss reinsurer                                                             |  |               | 1,913   |  |                  |   | 1,429   | 
|Excess of loss reinsurer                                                             |  |               | 1,913   |  |                  |   | 1,429   | 
|Other                                                                                |  |               | 4,396   |  |                  |   | 4,722   | 
|                                                                                     |  |               |         |  |                  |   |         | 
|Total reinsurance receivable                                                         |  | $             | 141,608 |  |                  | $ | 140,211 | 
|                                                                                     |  |               |         |  |                  |   |         | 

The quota-share reinsurer for the agreement effective in fourth quarter of 2010, and excess of loss
reinsurers all have A ratings from A.M. Best. Accordingly, the Company believes there is minimal risk related to these reinsurance receivables.



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The Michigan Catastrophic Claims Association (MCCA) is the mandatory reinsurance facility
that covers no-fault medical losses above a specific retention amount in Michigan. For policies effective in 2011 the required retention is $0.5 million. As a writer of personal automobile policies in the state of Michigan, we cede
premiums and claims to the MCCA. Funding for MCCA comes from assessments against automobile insurers based upon their proportionate market share of the states automobile liability insurance market. Insurers are allowed to pass along this
cost to Michigan automobile policyholders.

Effective October 1, 2010, we entered into a quota-share reinsurance
agreement with a third-party reinsurance company ceding 40% of certain premiums and losses on policies in-force in certain states on October 1, 2010 and policies written through December 31, 2010. We receive provisional ceding commission which
may be adjusted based on the fully-developed loss ratio of the reinsured policies. Written premiums ceded under this agreement totalled $65.0 million during 2010. A separate quota-share reinsurance agreement was put in place effective
January 1, 2011. Under the terms of the 2011 agreement, we cede 28% of gross written premium in all states other than Michigan through December 31, 2011. Written premiums ceded under this agreement totalled $20.5 million during the
first quarter of 2011.

Under the reinsurance agreement with Vesta Insurance Group (VIG), including primarily Vesta Fire
Insurance Corporation (VFIC), the Companys wholly-owned subsidiaries Affirmative Insurance Company (AIC) and Insura Property and Casualty Insurance Company (Insura) had the right, under certain circumstances, to require VFIC to provide a
letter of credit or establish a trust account to collateralize the gross amount due AIC and Insura from VFIC under the reinsurance agreement. Accordingly, AIC, Insura and VFIC entered into a Security Fund Agreement in September 2004. In
August 2005, AIC received a letter from VFICs President that irrevocably confirmed VFICs duty and obligation under the Security Fund Agreement to provide security sufficient to satisfy VFICs gross obligations under the
reinsurance agreement (the VFIC Trust). At March 31, 2011, the VFIC Trust held $16.7 million (after cumulative withdrawals of $8.7 million through March 31, 2011), consisting of $12.9 million of a U.S. Treasury money market account and
$3.8 million of corporate bonds rated BBB+ or higher, to collateralize the $13.1 million net recoverable from VFIC.

At
March 31, 2011, $2.8 million was included in reserves for losses and loss adjustment expenses that represented the amounts owed by AIC and Insura under reinsurance agreements with the VIG affiliated companies, including Hawaiian Insurance and
Guaranty Company, Ltd (Hawaiian). Affirmative established a trust account to collateralize this payable, which currently holds $20.7 million in securities (the AIC Trust). The Special Deputy Receiver (SDR) in Texas drew down the AIC Trust $0.4
million through March 2011, and the Special Deputy Receiver in Hawaii had cumulative withdrawals from the AIC Trust of $1.7 million through March 2011.

As part of the terms of the acquisition of AIC and Insura, VIG has indemnified us for any losses due to uncollectible reinsurance related to reinsurance agreements entered into with unaffiliated
reinsurers prior to December 31, 2003. As of March 31, 2011, all such unaffiliated reinsurers had A.M. Best ratings of A- or better.



|Item 4. | Controls and Procedures
|------- | -----------------------

The Companys management performed an evaluation under the supervision and with the participation of the Companys principal
executive officer and the principal financial officer, and completed an evaluation of the effectiveness of the design and operation of the Companys disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e),
as adopted by the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934, as amended (the Exchange Act) as of March 31, 2011. Disclosure controls and procedures are the controls and other procedures that are designed
to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to management,
including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.

Based on that evaluation, the Companys principal executive officer and principal financial officer concluded that the Companys disclosure controls and procedures were effective.

During the Companys last fiscal quarter there were no changes in internal control over financial reporting that materially
affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.

PART II  OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

See
Note 10 of Notes to Consolidated Financial Statements, Legal and Regulatory Proceedings.



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|Item 1A. | Risk Factors
|-------- | ------------

There are
no material changes with respect to those risk factors previously disclosed in Item 1A to Part I of our Form 10-K for the year ended December 31, 2010.



|Item 6. | Exhibits
|------- | --------

31.1 Certification of Gary Y. Kusumi, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 Certification of Michael J. McClure, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002

32.1 Certification of Gary Y. Kusumi, Chairman of the Board and Chief Executive Officer, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

32.2 Certification of Michael J. McClure, Chief Financial Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



|                   |  |  |  |                                      |  |                                                                                                          
|------------------ |  |  |  | ------------------------------------ |  | ---------------------------------------------------------------------------------------------------------
|                   |  |  |  | Affirmative Insurance Holdings, Inc.
|                   |  |  | 
|Date: May 16, 2011 |  |  |  | By:                                  |  | /s/ Michael J. McClure                                                                                   
|                   |  |  |  |                                      |  | Michael J. McClure                                                                                       
|                   |  |  |  |                                      |  | Executive Vice President and Chief Financial Officer (and in his capacity as Principal Financial Officer)



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