Document:

AFFIRMATIVE INSURANCE HOLDINGS, INC. 1998 OMNIBUS INCENTIVE PLAN, AS AMENDED

  
 Exhibit 10.1

  
 AFFIRMATIVE INSURANCE
HOLDINGS, INC. 
 1998 OMNIBUS INCENTIVE PLAN 
 (as amended as of March 9, 2004) 
  
 Section 1. General Purpose of the Plan: Definitions 
  
 The name of the plan is the Affirmative Insurance Holdings, Inc. 1998 Omnibus Incentive Plan (the “Plan”). The purpose of the Plan is to encourage and enable the officers, employees, Directors, advisors,
consultants and key persons of Affirmative Insurance Holdings, Inc. (the “Company”) and its Subsidiaries (as defined herein) upon whose judgment, initiative and efforts the Company largely depends for the successful conduct of its business
to acquire a proprietary interest in the Company. It is anticipated that providing such persons with a direct stake in the Company’s welfare will assure a closer identification of their interests with those of the Company, thereby stimulating
their efforts on the Company’s behalf and strengthening their desire to remain with the Company. 
  
 The following terms shall be defined as set forth below: 
  
 “Act” means the Securities Exchange Act of 1934, as amended. 
  
 “Award” or “Awards,” except where referring to a particular category of grant under the Plan,
shall include Incentive Stock Options, Non-Qualified Stock Options, Restricted Stock Awards, Unrestricted Stock Awards, Performance Stock Awards and Dividend Equivalent Rights. 
  
 “Board” means the Board of Directors of the Company. 
  
 “Code” means the Internal Revenue Code of 1986, as amended,
and any successor Code, and related rules, regulations and interpretations. 
  
 “Committee” means the Committee of the Board referred to in Section 2.  
  
 “Dividend Equivalent Right” means Awards granted pursuant to Section 9. 
  
 “Effective Date” means the date on which the Plan is approved by stockholders as set forth in Section 15.

  
 “Fair Market Value” of the Stock on any given
date means the fair market value of the Stock determined in good faith by the Committee; provided, however, that (i) if the Stock is admitted to quotation on the National Association of Securities Dealers Automated Quotation System
(“NASDAQ”), the Fair Market Value on any given date shall not be less than the average of the highest bid and lowest asked prices of the Stock reported for such date or, if no bid and asked prices were reported for such date, for the last
day preceding such date for which such prices were 

  

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reported, or (ii) if the Stock is admitted to trading on a national securities exchange or the NASDAQ National Market System, the Fair Market Value on any
date shall not be less than the closing price reported for the Stock on such exchange or system for such date or, if no sales were reported for such date, for the last date preceding the date for such a sale was reported. 
  
 “Incentive Stock Option” means any Stock Option designated
and qualified as an “incentive stock option” as defined in Section 422 of the Code. 
  
 “Independent Director” means a member of the Board who is not also an employee or officer of the Company or any Subsidiary. 
  
 “Non-Qualified Stock Option” means any Stock Option that is not an Incentive Stock Option. 
  
 “Option” or “Stock Option” means any option to
purchase shares of Stock granted pursuant to Section 5. 
  
 “Performance Stock Award” means Awards granted pursuant to Section 8.  
  
 “Restricted Stock Award” means Awards granted pursuant to Section 6. 
  
 “Stock” means the Common Stock, par value $.01 per share, of the Company subject to adjustments pursuant to
Section 3. 
  
 “Subsidiary” means any corporation
or other entity (other than the Company) in any unbroken chain of corporations or other entities, beginning with the Company if each of the corporations or entities (other than the last corporation or entity in the unbroken chain) owns stock or
other interests possessing 50% or more of the economic interest or the total combined voting power of all classes of stock or other interests in one of the other corporations or entities in the chain. 
  
 “Unrestricted Stock Award” means any Award granted pursuant
to Section 7. 
  
 Section 2. Administration of Plan: Committee Authority to
Select Participants and Determine Awards 
  
 (a)
Committee. The Plan shall be administered by the Compensation Committee of the Board, or any other committee performing similar functions as appointed by the Board from time to time. On and after the date the Company becomes subject to
Section 162(m) of the Code, each member of the Committee shall be an “outside director” within the meaning of Section 162(m) of the Code and the regulations promulgated thereunder. On and after the date the Company becomes subject to
Section 16 of the Act and the rules and regulations promulgated pursuant 

  

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thereto, each member of the Committee shall be a “non-employee director” as defined in Rule 16b-3 or any successor provision. 
  
 (b) Powers of Committee. The Committee shall have the power and
authority to grant Awards consistent with the terms of the Plan, including the power and authority: 
  
 (i) to select the officers, employees, Independent Directors, consultants, advisors and key persons of the Company and its Subsidiaries to
whom Awards may from time to time be granted; 
  
 (ii) to determine the time or times of grant, and the extent, if any, of Incentive Stock Options, Non-Qualified Stock Options, Restricted Stock Awards, Unrestricted Stock Awards, Performance Stock Awards and Dividend Equivalent Rights, or
any combination of the foregoing, granted to any one or more participants; 
  
 (iii) to determine the number of shares of Stock to be covered by any Award; 
  
 (iv) to determine and modify from time to time the terms and conditions, including restrictions, not inconsistent with the terms of the
Plan, of any Award, which terms and conditions may differ among individual Awards and participants, and to approve the form of written instruments evidencing the Awards; 
  
 (v) to accelerate at any time the exercisability or vesting of all or any portion of any Award and/or to
include provisions in Awards providing for such acceleration; 
  
 (vi) to impose any limitations on Awards granted under the Plan, including limitations on transfers, repurchase provisions and the like; 
  
 (vii) subject to the provisions of Section 5(a)(ii), to extend at any time the period in which Stock Options
may be exercised; 
  
 (viii) to determine at any
time whether, to what extent, and under what circumstances Stock and other amounts payable with respect to an Award shall be deferred either automatically or at the election of the participant and whether and to what extent the Company shall pay or
credit amounts constituting interest (at rates determined by the Committee) or dividends or deemed dividends on such deferrals; and 
  
 (ix) at any time to adopt, alter and repeal such rules, guidelines and practices for administration of the Plan and for its own acts and
proceedings 

  

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as it shall deem advisable; to interpret the terms and provisions of the Plan and any Award (including related written instruments); to make all
determinations it deems advisable for the administration of the Plan; to decide all disputes arising in connection with the Plan; and to otherwise supervise the administration of the Plan. 
  
 All decisions and interpretations of the Committee shall be binding on all
persons, including the Company and Plan participants. 
  
 Section 3. Stock
Issuable under the Plan; Mergers; Substitution 
  
 (a)
Stock Issuable. The maximum number of shares of Stock reserved and available for issuance under the Plan shall be 60,896 shares of Common Stock. For purposes of this limitation, the shares of Stock underlying any Awards which are forfeited,
canceled, reacquired by the Company, satisfied without the issuance of Stock or otherwise terminated (other than by exercise) shall be added back to the shares of Stock available for issuance under the Plan. The shares available for issuance under
the Plan may be authorized but unissued shares of Stock or shares of Stock reacquired by the Company. 
  
 (b) Recapitalizations. If, through or as a result of any merger, consolidation, sale of all or substantially all of the assets of the Company,
reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, the outstanding shares of Stock are increased or decreased or are exchanged for a different number or kind of shares
or other securities of the Company, or additional shares or new or different shares or other securities of the Company or other non-cash assets are distributed with respect to such shares of Stock or other securities, the Committee, in its sole
discretion, shall make an appropriate or proportionate adjustment in (i) the maximum number of shares reserved for issuance under the Plan, (ii) the number of Stock Options that can be granted to any one individual participant, (iii) the number and
kind of shares or other securities subject to any then outstanding Awards under the Plan, and (iv) the price for each share subject to any then outstanding Stock Options under the Plan, without changing the aggregate exercise price (i.e., the
exercise price multiplied by the number of Stock Options) as to which such Stock Options remain exercisable. The adjustment by the Committee shall be final, binding and conclusive. No fractional shares of Stock shall be issued under the Plan
resulting from any such adjustment, but the Committee, in its sole discretion, may make a cash payment in lieu of fractional shares. 
  
 (c) Mergers and Other Transactions. In the case of (i) the dissolution or liquidation of the Company, (ii) a merger, reorganization or
consolidation in which the Company is acquired by another person or entity (other than a holding company formed by the Company), (iii) the sale of all or substantially all of the assets of the Company to an unrelated person or entity, or (iv) the
sale of all of the Stock of the 

  

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Company to an unrelated person or entity, the outstanding Awards shall become fully vested. Upon the effectiveness of any such transaction or event, the Plan
and all Awards granted hereunder shall terminate, unless provision is made in connection with such transaction for the assumption of Awards heretofore granted, or the substitution of such Awards of new Awards of the successor entity or parent
thereof, with appropriate adjustment as to the number and kind of shares and, if appropriate, the per share exercise prices, as provided in Section 3(b) above. In the event of such termination, all Awards, other than Options, shall be fully settled
in shares of Stock or cash, and each Optionee shall be permitted to exercise for a period of at least 15 days prior to the termination all outstanding Options then held by the Optionee. 
  
 (d) Substitute Awards. The Committee may grant Awards under the Plan in substitution for stock and stock based awards
held by employees of another corporation who become employees of the Company or a Subsidiary as the result of a merger or consolidation of the employing corporation with the Company or a Subsidiary or the acquisition by the Company or a Subsidiary
of property or stock of the employing corporation. The Committee may direct that the substitute awards be granted on such terms and conditions as the Committee considers appropriate in the circumstances. 
  
 Section 4. Eligibility 
  
 Participants in the Plan will be such officers, and other employees, advisors, consultants and key persons of the Company
and its Subsidiaries who are responsible for or contribute to the management, growth or profitability of the Company and its Subsidiaries as are selected from time to time by the Committee, in its sole discretion. Independent Directors are also
eligible to participate in the Plan. 
  
 Section 5. Stock Options

  
 Any Stock Option granted under the Plan shall be pursuant
to a stock option agreement which shall be in such form as the Committee may from time to time approve. Option agreements need not be identical. 
  
 Stock Options granted under the Plan may be either Incentive Stock Options or Non-Qualified Stock Options. Incentive Stock Options may be granted only to
employees of the Company or any Subsidiary that is a “subsidiary corporation” within the meaning of Section 424(f) of the Code. Non-Qualified Stock Options may be granted to officers, employees, Independent Directors, advisors, consultants
and key persons of the Company and its Subsidiaries. To the extent that any Option does not qualify as an Incentive Stock Option, it shall be deemed a Non-Qualified Stock Option. 
  
 No Incentive Stock Option shall be granted under the Plan after June 30, 2008. 
  

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 (a) Terms of Stock Options. Stock Options granted under the Plan shall be subject to the following
terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable: 
  
 (i) Exercise Price. The exercise price per share for the Stock covered by a Stock Option shall be
determined by the Committee at the time of grant but shall not be less than 100% of the Fair Market Value on the date of grant in the case of Incentive Stock Options. If an employee owns or is deemed to own (by reason of the attribution rules
applicable under Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or any parent or subsidiary corporation and an Incentive Stock Option is granted to such employee, the option price of
such Incentive Stock Option shall be not less than 110% of the Fair Market Value on the grant date. 
  
 (ii) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Incentive Stock Option shall be exercisable
more than ten years after the date the option is granted. If an employee owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or
any Subsidiary or parent corporation and an Incentive Stock Option is granted to such employee, the term of such option shall be no more than five years from the date of grant. 
  
 (iii) Exercisability: Rights of a Stockholder. Stock Options shall become vested and exercisable at
such time or times, whether or not in installments, as shall be determined by the Committee at or after the grant date; provided, however, that Stock Options granted in lieu of cash compensation shall be exercisable in full as of the grant date. The
Committee may at any time accelerate the exercisability of all or any portion of any Stock Option. An optionee shall have the rights of a stockholder only as to shares acquired upon the exercise of a Stock Option and not as to unexercised Stock
Options. 
  
 (iv) Method of Exercise.
Stock Options may be exercised in whole or in part, by giving written notice of exercise to the Company, specifying the number of shares to be purchased. Payment of the purchase price may be made by one or more of the following methods; provided,
however, that the methods set forth in subsections (B) and (C) below shall become available only after the closing of the first underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as
amended, covering the offer and sale of Stock to the public: 
  
 (A) In cash, by certified or bank check or other instrument acceptable to the Committee; 
  

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 (B) In the form of shares of Stock that are not then subject to restrictions under any
Company plan and that have been held by the optionee for at least six months, if permitted by the Committee in its discretion. Such surrendered shares shall be valued at Fair Market Value on the exercise date; or 
  
 (C) By the optionee delivering to the Company a properly
executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company cash or a check payable and acceptable to the Company to pay the purchase price; provided that in the event the optionee chooses to pay
the purchase price as so provided, the optionee and the broker shall comply with such procedures and enter into such agreements of indemnity and other agreements as the Committee shall prescribe as a condition of such payment procedure. 

 
 Payment instruments will be received subject to collection. The delivery of certificates
representing the shares of Stock to be purchased pursuant to the exercise of a Stock Option will be contingent upon receipt from the optionee (or a purchaser acting in his stead in accordance with the provisions of the Stock Option) by the Company
of the full purchase price for such shares and the fulfillment of any other requirements contained in the Stock Option or applicable provisions of laws. 
  
 (v) Termination. Unless otherwise provided in the option agreement or determined by the Committee, upon the optionee’s
termination of employment (or other business relationship) with the Company and its Subsidiaries, the optionee’s rights in his Stock Options shall automatically terminate. 
  
 (vi) Annual Limit on Incentive Stock Options. To the extent required for “incentive stock
option” treatment under Section 422 of the Code, the aggregate Fair Market Value (determined as of the time of grant) of the shares of Stock with respect to which Incentive Stock Options granted under this Plan and any other plan of the Company
or its parent and subsidiary corporations become exercisable for the first time by an optionee during any calendar year shall not exceed $100,000. To the extent that any Stock Option exceeds this limit, it shall constitute a Non-Qualified Stock
Option. 
  
 (b) Reload Options. At the discretion of the
Committee, Options granted under Section 5(a) may include a “reload” feature pursuant to which an optionee exercising an option by the delivery of a number of shares of Stock in accordance with Section 5(a)(v)(B) hereof would automatically
be granted an additional Option (with an exercise price equal to the Fair Market Value of the Stock on the date the additional Option is granted and with the same expiration date as the original Option being exercised, and with such other terms as
the Committee may provide) to 

  

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purchase that number of shares of Stock equal to the number delivered to exercise the original Option. 
  
 (c) Non-transferability of Options. No Stock Option shall be
transferable by the optionee otherwise than by will or by the laws of descent and distribution and all Stock Options shall be exercisable, during the optionee’s lifetime, only by the optionee. Notwithstanding the foregoing, the Committee may
provide in an option agreement that the optionee may transfer, without consideration for the transfer, his Stock Options to members of his immediate family, to trusts for the benefit of such family members and to partnerships in which such family
members are the only partners. 
  
 Section 6. Restricted Stock Awards

  
 (a) Nature of Restricted Stock Awards. The
Committee may grant Restricted Stock Awards to any officer, employee, Independent Director, advisor, consultant or key person of the Company and its Subsidiaries. A Restricted Stock Award is an Award entitling the recipient to acquire, at par value
or such other purchase price determined by the Committee, shares of Stock subject to such restrictions and conditions as the Committee may determine at the time of grant (“Restricted Stock”). Conditions may be based on continuing
employment (or other business relationship) and/or achievement of pre-established performance goals and objectives. 
  
 (b) Rights as a Stockholder. Upon execution of a written instrument setting forth the Restricted Stock Award and paying any applicable purchase
price, a participant shall have the rights of a stockholder with respect to the voting of the Restricted Stock, subject to such conditions contained in the written instrument evidencing the Restricted Stock Award. Unless the Committee shall
otherwise determine, certificates evidencing the Restricted Stock shall remain in the possession of the Company until such Restricted Stock is vested as provided in Section 6(e) below. 
  
 (c) Restrictions. Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered or
disposed of except as specifically provided herein or in the written instrument evidencing the Restricted Stock Award. If a participant’s employment (or other business relationship) with the Company and its Subsidiaries terminates for any
reason, the Company or its assigns shall have the right or shall agree, as may be specified in the relevant restricted stock agreement, to repurchase Restricted Stock with respect to which conditions have not lapsed at their purchase price from the
participant or the participant’s legal representative. 
  
 (d) Vesting of Restricted Stock. The Committee at the time of grant shall specify the date or dates and/or the attainment of pre-established performance goals, objectives and other conditions on which Restricted Stock shall become
vested, subject 

  

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to such further rights of the Company or its assigns as may be specified in the instrument evidencing the Restricted Stock Award. Except as may otherwise be
provided by the Committee at any time, a participant’s rights in any shares of Restricted Stock that have not vested shall automatically terminate upon the participant’s termination of employment (or other business relationship) with the
Company and its Subsidiaries and such shares shall be subject to the Company’s right of or agreement to repurchase as provided in Section 6(c) above. 
  
 (e) Waiver, Deferral and Reinvestment of Dividends. The written instrument evidencing the Restricted Stock Award may require or permit the
immediate payment, waiver, deferral or investment of dividends paid on the Restricted Stock. 
  
 Section 7. Unrestricted Stock Awards 
  
 (a) Grant or Sale of Unrestricted Stock. The Committee may, in its sole discretion, grant (or sell at a purchase price determined by the Committee) an Unrestricted Stock Award to any officer, employee,
Independent Director, advisor, consultant or key person of the Company or its Subsidiaries, pursuant to which such individual may receive shares of Stock free of any vesting restrictions (“Unrestricted Stock”) under the Plan. Unrestricted
Stock Awards may be granted or sold as described in the preceding sentence in respect of past services or other valid consideration, or in lieu of any cash compensation due to such individual. 
  
 (b) Deferral of Awards. Each participant who has made an election to
receive shares of Unrestricted Stock under this Section 7 will have the right to defer receipt of up to 100% of such shares of Unrestricted Stock payable to such participant in accordance with such rules and procedures as may from time to time be
established by the Company for that purpose, and such election shall be effective on the later of the date six months and one day from the date of such election or the beginning of the next calendar year. The deferred Unrestricted Stock shall be
entitled to receive Dividend Equivalent Rights settled in shares of Stock. 
  
 (c) Restrictions on Transfers. The right to receive Unrestricted Stock on a deferred basis may not be sold, assigned, transferred, pledged or otherwise encumbered, other than by will or the laws of descent and
distribution. 
  
 Section 8. Performance Stock Awards 
  
 (a) Nature of Performance Stock Awards. A Performance Stock Award is
an Award entitling the recipient to acquire shares of Stock upon the attainment of specified performance goals. The Committee may make Performance Stock Awards independent of or in connection with the granting of any other Award under the Plan.
Performance Stock Awards may be granted under the Plan to any officer, employee, Independent Director, advisor, consultant or key person of the Company or its 

  

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Subsidiaries, including those who qualify for awards under other performance plans of the Company. The Committee in its sole discretion shall determine
whether and to whom Performance Stock Awards shall be made, the performance goals applicable under each such Award, the periods during which performance is to be measured, and all other limitations and conditions applicable to the awarded shares;
provided, however, that the Committee may rely on the performance goals and other standards applicable to other performance unit plans of the Company in setting the standards for Performance Stock Awards under the Plan. 
  
 (b) Restrictions on Transfer. Performance Stock Awards and all rights
with respect to such Awards may not be sold, assigned, transferred, pledged or otherwise encumbered. 
  
 (c) Rights as a Stockholder. A participant receiving a Performance Stock Award shall have the rights of a stockholder only as to shares actually
received by the participant under the Plan and not with respect to shares subject to the Award but not actually received by the participant. A participant shall be entitled to receive a stock certificate evidencing the acquisition of shares of Stock
under a Performance Stock Award only upon satisfaction of all conditions specified in the written instrument evidencing the Performance Stock Award (or in a performance plan adopted by the Committee). 
  
 (d) Termination. Except as may otherwise be provided by the Committee
at any time, a participant’s rights in all Performance Stock Awards shall automatically terminate upon the participant’s termination of employment (or business relationship) with the Company and its Subsidiaries for any reason. 

 
 (e) Acceleration, Waiver, Etc. At any time prior to the
participant’s termination of employment (or other business relationship) by the Company and its Subsidiaries, the Committee may in its sole discretion accelerate, waive or, subject to Section 12, amend any or all of the goals, restrictions or
conditions imposed under any Performance Stock Award. 
  
 Section 9. Dividend
Equivalent Rights 
  
 (a) Dividend Equivalent Rights.
A Dividend Equivalent Right is an Award entitling the recipient to receive credits based on cash dividends that would be paid on the shares of Stock specified in the Dividend Equivalent Right (or other award to which it relates) if such shares were
held by the recipient. A Dividend Equivalent Right may be granted hereunder to any officer, employee, Independent Director, advisor, consultant or key person, as a component of another Award or as a freestanding award. The terms and conditions of
Dividend Equivalent Rights shall be specified in the grant. Dividend equivalents credited to the holder of a Dividend Equivalent Right may be paid currently or may be deemed to be reinvested in additional shares of Stock, which may thereafter accrue
additional equivalents. Any 

  

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such reinvestment shall be at Fair Market Value on the date of reinvestment or such other price as may then apply under a dividend reinvestment plan
sponsored by the Company, if any. Dividend Equivalent Rights may be settled in cash or shares of Stock or a combination thereof, in a single installment or installments. A Dividend Equivalent Right granted as a component of another Award may provide
that such Dividend Equivalent Right shall be settled upon exercise, settlement, or payment of, or lapse of restrictions on, such other award, and that such Dividend Equivalent Right shall expire or be forfeited or annulled under the same conditions
as such other award. A Dividend Equivalent Right granted as a component of another Award may also contain terms and conditions different from such other award. 
  

(b) Interest Equivalents. Any Award under this Plan that is settled in whole or in part in cash on a deferred basis may provide in the grant for
interest equivalents to be credited with respect to such cash payment. Interest equivalents may be compounded and shall be paid upon such terms and conditions as may be specified by the grant. 
  
 Section 10. Tax Withholding 
  
 Each participant shall, no later than the date as of which the value of an
Award or of any Stock or other amounts received thereunder first becomes includable in the gross income of the participant for Federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Committee regarding payment of,
any Federal, state, or local taxes of any kind required by law to be withheld with respect to such income. The Company and its Subsidiaries shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind
otherwise due to the participant. 
  
 Section 11. Transfer, Leave of Absence,
Etc. 
  
 For purposes of the Plan, the following events shall
not be deemed a termination of employment: 
  
 (a) a transfer to
the employment of the Company from a Subsidiary or from the Company to a Subsidiary, or from one Subsidiary to another; or 
  
 (b) an approved leave of absence for military service or sickness, or for any other purpose approved by the Company, if the employee’s right to
re-employment is guaranteed either by a statute or by contract or under the policy pursuant to which the leave of absence was granted or if the Committee otherwise so provides in writing. 
  

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 Section 12. Amendments and Termination 
  
 The Board may, at any time, amend or discontinue the Plan and the Committee may, at any time, amend or cancel any
outstanding Award (or provide substitute Awards at the same or reduced exercise or purchase price or with no exercise or purchase price in a manner not inconsistent with the terms of the Plan), but such price, if any, must satisfy the requirements
which would apply to the substitute or amended Award if it were then initially granted under this Plan) for the purpose of satisfying changes in law or for any other lawful purpose, but no such action shall adversely affect rights under any
outstanding Award without the holder’s consent. If and to the extent determined by the Committee to be required by the Act to ensure that Awards granted under the Plan are exempt under Section 16 of the Act and the rules and regulations
promulgated pursuant thereto, or that Incentive Stock Options granted under the Plan are qualified under Section 422 of the Code, Plan amendments shall be subject to approval by the Company stockholders who are eligible to vote at a meeting of
stockholders. 
  
 Section 13. Status of Plan 
  
 With respect to the portion of any Award which has not been exercised and
any payments in cash, Stock or other consideration not received by a participant, a participant shall have no rights greater than those of a general creditor of the Company unless the Committee shall otherwise expressly determine in connection with
any Award or Awards. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the Company’s obligations to deliver Stock or make payments with respect to Awards hereunder, provided that the
existence of such trusts or other arrangements is consistent with the foregoing sentence. 
  
 Section 14. General Provisions 
  
 (a) No Distribution: Compliance with Legal Requirements. The Committee may require each person acquiring Stock pursuant to an Award to represent to and agree with the Company in writing that such person is acquiring the shares
without a view to distribution thereof. 
  
 No shares of Stock
shall be issued pursuant to an Award until all applicable securities law and other legal and stock exchange or similar requirements have been satisfied. The Committee may require the placing of such stop-orders and restrictive legends on
certificates for Stock and Awards as it deems appropriate. 
  
 (b)
Other Compensation Arrangements: No Employment Rights. Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, including trusts, and such arrangements may be either generally
applicable or applicable only in specific cases. The adoption of this Plan 

  

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and the grant of Awards do not confer upon any employee any right to continued employment with the Company or any Subsidiary. 
  
 Section 15. Effective Date of Plan 
  
 This Plan shall become effective upon approval by the holders of a majority
of the shares of Stock of the Company present or represented and entitled to vote at a meeting of stockholders. Subject to such approval by the stockholders and to the requirement that no Stock may be issued hereunder prior to such approval, Stock
Options and other Awards may be granted hereunder on and after adoption of this Plan by the Board. 
  
 Section 16. Governing Law 
  
 This Plan shall be governed by Delaware law except to the extent such law is preempted by federal law. 
  
  

 - 13 -AMENDED AND RESTATED 100% QUOTA SHARE REINSURANCE CONTRACT

 Exhibit 10.7 
  
 AMENDED AND RESTATED 
 100% QUOTA SHARE REINSURANCE CONTRACT 
  
 between 
  
 THE SHELBY INSURANCE COMPANY 
 AFFIRMATIVE INSURANCE COMPANY and 
 INSURA PROPERTY AND CASUALTY INSURANCE COMPANY 
 Chicago, Illinois 
  
 (Hereinafter referred to as the “Company”) 
  
 and 
  
 VESTA FIRE INSURANCE CORPORATION 
 Chicago, Illinois 
  
 (Hereinafter referred to as the “Reinsurer”)

  
 ARTICLE I — BUSINESS
COVERED 
  
 The Company obligates itself to cede to the
Reinsurer, and the Reinsurer obligates itself to accept as reinsurance from the Company 100% quota share of the ultimate net liability of the Company as hereinafter defined under all binders, policies, contracts or other evidences of insurance or
reinsurance, whether oral or written (hereinafter called “policy” or “policies”) inforce, new, and renewal. 
  
 ARTICLE II — TERRITORY 
  
 This contract applies to business located in the United States of America, Puerto Rico and Canada, and elsewhere when coverage extends thereto under
extraterritorial provisions of the Company’s policies. 
  
 ARTICLE III — ULTIMATE NET LIABILITY 
  
 The term “ultimate net liability” shall mean the net liability of the Company after the deduction of all other reinsurance (including facultative), whether specific or general, effected by the Company or its agents.

  
 ARTICLE IV — LIABILITY OF THE
REINSURER 
  

	A.	The liability of the Reinsurer hereunder shall commence obligatorily and simultaneously with that of the Company. 

	B.	The Reinsurer binds itself unconditionally to follow the Company in the acceptance or rejection of business, its settlement or rejection of claims, its premium rates
and its terms of insurance to its insureds and in all policies whether originally adopted or subsequently changed by the Company and in every lawful act of the Company performed under the development, preservation, conduct or liquidation of business
which is the subject matter of this Contract. 

  
 ARTICLE V — COMMENCEMENT AND TERMINATION 
  

	A.	This Contract shall take effect as of 12:01 a.m., local standard time, June 30, 2001, and shall remain continuously in force but may be terminated at the end of any
calendar quarter by either party upon giving not less than 60 days notice in writing to the other party. 

  

	B.	Unless otherwise agreed by the parties hereto, the Reinsurer shall remain liable for its share of losses under policies in force at the termination of this Contract
until the natural expiration, cancellation or the next anniversary of such policies. The Reinsurer shall not be liable for loss or losses occurring subsequent to the first anniversary of the effective date of termination. 

 

	C.	In the event of termination of this Contract, the Company retains the right to reassume the liability reinsured hereunder as of the effective date of such
termination. Should the Company choose to exercise this right, the Reinsurer shall remit to the Company the unearned premiums hereunder, less original commissions previously allowed on such premiums. 

  

	D.	Should any law or regulation of any jurisdiction in which the Company is doing business render illegal the provisions of this Contract, this Contract shall be
terminated immediately, insofar as it applies to such jurisdiction, by either party giving written notice to the other to such effect. Nonetheless, the Reinsurer shall remain liable for its pro-rata share of the affected policies so long as the
Company remains at risk under such policies. 

  

	E.	Should this Contract terminate while a loss covered hereunder is in progress, it is agreed that, subject to the other conditions of this Contract, the Reinsurer
shall indemnify the Company as if the entire loss had occurred during the term of this Contract. 

  
 ARTICLE VI — PREMIUMS AND COMMISSIONS 
  
 The premiums payable to the Reinsurer shall be calculated at the original gross rates charged by the Company. The Company will cede to the Reinsurer and
the Reinsurer will accept 100% of the unearned premium as of June 30, 2001. The Reinsurer shall allow the Company a commission on the net premiums ceded (being gross written premiums less cancellations and return premiums) equal to all expenses
associated with the production and maintenance of the business, plus one half (1/2) of one (1) percent of the gross written premium of business covered under the Agreement. 
  

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 ARTICLE VII — REPORTS AND REMITTANCES 
  

	A.	Within 30 days after the close of each calendar month, the Company shall forward to the Reinsurer an account current which shall provide the following information:

  

	 	1.	Gross premiums, net of return premiums, ceded to this Contract during the accounted month; 

  

	 	2.	Reinsurance premiums ceded; 

  

	 	3.	Original acquisition costs; 

  

	 	4.	Overriding commissions, if any; 

  

	 	5.	Losses and loss adjustment expenses, net of salvage and/or subrogation, paid during the accounted month and recoverable hereunder. 

  

	    	Net balances due either party shall be remitted by the other within 60 days after the close of the accounted month. 

  

	B.	The monthly account current shall also indicate: 

  

	 	1.	Reserves for unearned premiums in respect of premiums ceded hereunder as of the close of the accounted month; 

  

	 	2.	Reserves for outstanding losses recoverable hereunder as of the close of the accounted month; 

  

	 	3.	Loss Adjustment Expenses—reserves for outstanding losses recoverable hereunder as of the close of the accounted month. 

  
 ARTICLE VIII — LOSS AND LOSS ADJUSTMENT
EXPENSES 
  

	A.	All loss settlements made by the Company shall be unconditionally binding upon the Reinsurer in proportion to its participation, and the Reinsurer shall benefit
proportionately in all salvages and recoveries. 

  

	B.	The Reinsurer shall bear its proportionate share of all expenses incurred by the Company in investigation, adjustment, appraisal or defense of all claims under
policies reinsured hereunder (excluding office expenses and salaries of officials and regular employees, other than staff field adjusters of the Company), and shall receive its proportionate share of any recoveries of any such expenses.

  

 3 

	C.	The Reinsurer’s share of losses, loss adjustment expense and loss recoveries shall be carried into the monthly account current provided for in the Reports and
Remittances Article forming a part of this Contract. 

  
 ARTICLE IX — ERRORS AND OMISSIONS 
  

	A.	The Reinsurer shall not be relieved of liability by reason of an error or accidental omission by the Company in reporting any claim or loss or any business reinsured
under this Contract, provided that such error or omission is rectified promptly after discovery. 

  

	B.	The Reinsurer shall be obligated only for the return of the premium paid to the Reinsurer with respect to business reported but not reinsured under this Contract.

  
 ARTICLE
X — CURRENCY 
  
 All amounts expressed herein
are in United States Dollars and all premiums and loss payments shall be made in United States Currency. 
  
 ARTICLE XI — ACCESS TO RECORDS 
  
 The Reinsurer or its duly authorized representative shall have free access at all reasonable times to the books and records of the Company for the purpose
of obtaining information concerning this Contract or the subject matter hereof. 
  
 ARTICLE XII — TAX CLAUSE — REINSURANCE 
  
 The Company agrees not to claim any deduction with respect to the premiums ceded hereunder when making tax returns, other than income or profits tax
returns to the appropriate tax authorities. 
  
 ARTICLE XIII — RESERVES AND TAXES 
  

	A.	The Reinsurer shall maintain such reserves as may be required with respect to the Reinsurer’s proportion of unearned premium, outstanding losses, and loss
adjustment expense. The Reserves for Outstanding Losses and Loss Adjustment Expense Reserves shall have included a separate item for Incurred But Not Reported amounts for each caption. 

  

	B.	The Company shall be liable for all taxes on premiums ceded to the Reinsurer under this Contract. 

  
 ARTICLE XIV — RESERVES FUNDING CLAUSE

  

	A.	 In the event that the Reinsurer is not admitted to transact insurance business in any state, and if required by the Company to avoid a penalty to
its surplus, the Reinsurer agrees to have funds withheld on account, advance funds or furnish clean, evergreen irrevocable letters of credit to the Company, for the purpose of guaranteeing payment of obligations of the Reinsurer for its share of
unearned premium, outstanding loss and attendant expense reserves, 

  

 4 

	 	 
and reserves for Incurred But Not Reported losses. Such funds or letters of credit to be in a form acceptable to the insurance regulatory
authority involved. 

  

	B.	Should the Reinsurer be required to apply for and secure delivery to the Company of a letter of credit, it is understood that such letter of credit shall be clean,
evergreen and irrevocable and issued by a bank which is acceptable to the insurance regulatory authority of the jurisdiction involved. Such letter of credit shall be effective not later than December 31 of the year in which such letter of credit
shall have been requested and shall be unlimited term subject only to cancellation on any subsequent December 31 upon 90 days written notice given by the Company to the Reinsurer. 

  

	C.	The Company agrees that any amounts which it may draw against any such letters of credit shall be for the following purposes only: 

  

	 	1.	To pay the Reinsurer’s share under this Contract for any losses sustained under policies which are the subject of this Contract if not otherwise paid by the
Reinsurer. 

  

	 	2.	To refund to the Reinsurer any amount drawn against the letter of credit which is in excess of the actual amount required by paragraph (1) herein.

  
 ARTICLE
XV — OFFSET CLAUSE 
  
 The Company and each
Reinsurer hereunder may offset any balance or amount due from one party to the other under this agreement or any other agreement entered into between them. 
  
 ARTICLE XVI — INSOLVENCY FUNDS EXCLUSION CLAUSE 
  
 This Contract excludes all liablity of the Company arising, by contract, operation of law or otherwise, from its
participation or membership, whether voluntary or involuntary, in any insolvency fund. “Insolvency Fund” includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, howsoever denominated, established or
governed, which provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee, or other obligation of an insurer, or its successors or assigns, which has been declared by any competent
authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part. 
  
 ARTICLE XVII — INSOLVENCY 
  

	A.	The reinsurance under this Contract shall be payable by the Reinsurer on the basis of the liability of the Company under any policy or policies reinsured hereunder
without diminution because of the insolvency of the Company. 

  

	B.	In the event of the insolvency of the Company, the liquidator, receiver or statutory successor of the Company shall give written notice to the Reinsurer of the
pendency of a claim against the Company on the policy or policies reinsured hereunder within a reasonable time after such claim is filed in the insolvency proceedings. During the pendency of such claim the 

  

 5 

 Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding
where such claim is to be adjudicated, any defense or defenses which it may deem available to the Company or its liquidator, receiver or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to court approval,
against the Company as part of the expense of liquidation to the extent of a pro-rata share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. 
  

	C.	Where two or more Reinsurers are involved in the same claim and a majority in interest elects to interpose a defense to such claim, the expense so incurred shall be
apportioned in accordance with the terms of this agreement as though such expense had been incurred by the Company. 

  

	D.	In the event of the insolvency of the Company, the reinsurance under this Contract shall be payable by the Reinsurer directly to the Company or to its liquidator,
receiver, or statutory successor. 

  
 ARTICLE XVIII — ARBITRATION 
  

	A.	In the event of differences arising between the contracting parties with reference to the interpretation of this Contract or their rights with respect to any
transaction involved, whether arising before or after termination of this Contract, such differences shall be submitted to arbitration upon the written request of one of the contracting parties. 

  

	B.	Each party shall appoint an arbitrator within 30 days of being requested to do so, and the two named shall select an Umpire before entering upon the arbitration. If
either party refuses or neglects to appoint an arbitrator within the time specified, the other party may appoint the second arbitrator. If the two arbitrators fail to agree on an Umpire within 30 days of their appointment each of them shall name
three individuals, of whom the other shall decline two, and the choice shall then be made by drawing lots. The arbitrators and the Umpire shall be active or retired disinterested officers of insurance or reinsurance companies authorized to transact
business in one or more states of the United States of America and having knowledge of the kind of insurance about which the difference has arisen. 

  

	C.	Each party shall submit its case to the arbitrators within 30 days of the appointment of the Umpire or within such period as may be agreed by the arbitrators. All
arbitrators shall interpret this Contract as an honorable engagement rather than as merely a legal obligation; they are relieved of all judicial formalities and may abstain from following the strict rules of law. Their decision shall be made as soon
as practicable but within sixty days following termination of the hearings unless the parties consent to an extension. 

  

	D.	Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the expense of the third arbitrator and of the
arbitration. The arbitration shall be held at the times and places agreed upon by the arbitrators and Umpire. 

  

 6 

 ARTICLE XIX — ENTIRE AGREEMENT CLAUSE 
  
 This Agreement will constitute the entire agreement between the parties
hereto with respect to the business reinsured hereunder and no understanding exist between the parties other than those expressed in the Agreement. 
  
 ARTICLE XX — PARTICIPATION 
  

This Contract obligates the Reinsurer for 100% of the interest and liabilities set forth under this Contract. 
  
 ARTICLE XXI — AMENDMENT AND RESTATEMENT

 OF EXISTING 100% QUOTA SHARE REINSURANCE CONTRACT 
  
 The 100% Quota Share Reinsurance Contract, effective July 1, 1997, between the Company and the Reinsurer (the “Existing
Contract”) is amended and restated effective on the effective date of this Contract. This Contract shall govern the relationship of the Company and the Reinsurer beginning on the effective date of this Contract. Provided, however, the
effectiveness of this Amended and Restated Contract is subject to approval of all appropriate regulatory authorities in all states where approval is required. If this Amended and Restated Contract is not approved by all required regulatory
authorities, this Amended and Restated Contract shall be void and of no force and the relationship of the Company and the Reinsurer shall continue to be governed by the Existing Contract. 
  
 IN WITNESS WHEREOF, the parties hereto, by their authorized representatives, have executed this Contract as of the following
dates: 
  
 Birmingham, Alabama, this
                 day of
                                     
   , 2001. 
  

	
	  

	 THE SHELBY INSURANCE COMPANY

	 AFFIRMATIVE INSURANCE COMPANY and

	 INSURA PROPERTY AND CASUALTY INSURANCE COMPANY

  
 Birmingham, Alabama,
this                  day of
                                     
   , 2001. 
  

	
	  

	 VESTA FIRE INSURANCE CORPORATION

  

 7 

 Addendum to Exhibit 10.7 
  
 ADDENDUM NO. 1 TO THE 
  
 AMENDED & RESTATED 
  
 100% QUOTA SHARE REINSURANCE CONTRACT 
  
 BETWEEN 
  
 THE SHELBY INSURANCE COMPANY 
 AFFIRMATIVE INSURANCE COMPANY and 
 INSURA PROPERTY AND CASUALTY INSURANCE COMPANY 
  
 AND 
  
 VESTA FIRE INSURANCE CORPORATION 
  
 It is hereby agreed to by the parties that EFFECTIVE DECEMBER 31, 2003, the following amendments are made to the above-noted agreement: 
  
 1) The captioned definition of “Company”, and all provisions related thereto, continues to include all three
individual companies EXCEPT in those instances where any one or more of the companies are specified individually; 
  
 2) That “ARTICLE I — BUSINESS COVERED” is deleted in its entirety and replaced by amendment as follows: 
  
 “The Company obligates itself to cede to the Reinsurer, and the
Reinsurer obligates itself to accept as reinsurance from the Company 100% of the premium and the associated ultimate net liability of the Company, on all binders, policies, contracts or other evidences of insurance, in-force, new and renewal for
Residential Home Owners, Standard Automobile and Commercial lines of business; and it is EXPRESSLY noted that under this Agreement, Affirmative Insurance Company (“Affirmative”) and Insura Property and Casualty Insurance Company
(“Insura”) will no longer cede but instead will each retain their respective premiums and the ultimate net liability for their non-standard automobile line of business; and each will retain any other premiums, and associated ultimate net
liability, regardless of which line of business such premiums and liabilities are derived from, if such premium and liability is generated by American Agencies Holdings, Inc. Losses and Allocated Loss Adjusted Expenses occurring prior to the
EFFECTIVE DATE of these amendments, DECEMBER 31, 2003, continue to remain the responsibility of the Reinsurer. 
  
 Further, as of the EFFECTIVE DATE, the Reinsurer shall return to Affirmative and Insura any and all of their respective unearned non-standard automobile premium.” 
  
 3) That “ARTICLE VI — PREMIUMS AND COMMISSIONS” is
amended as follows: 
  
 The word “Company” in the third
sentence is replaced with “The Shelby Insurance Company” and the following paragraph is added: 
  
 “The Reinsurer shall allow Affirmative Insurance Company (“Affirmative”) and Insura Property and Casualty Insurance Company (“Insura”) a commission that includes the equal of
actual agencies 
  

 1 

 commissions, taxes, assessments, boards, bureau and agents licensing fees, but excluding Unallocated Loss
Adjustment Expenses, on the business the that Affirmative and Insura cede to the Reinsurer as defined above in “ARTICLE I — BUSINESS COVERED”, plus one half (1/2) of one (1) percent of the gross written premium of the
business covered under this Agreement.” 
  
 4) That
“ARTICLE XV — OFFSET CLAUSE” is deleted in its entirety and replaced by amendment as follows: 
  
 “The Company and each Reinsurer hereunder may offset balances or amounts due from one party to the other under this agreement.” 
  
 IN WITNESS WHEREOF, EACH of the parties hereto has caused this Addendum to be
executed by its duly authorized representative as of the dates below: 
  
 Birmingham, Alabama, this 5th day of January, 2003. 
  

	
	 /s/ Russell Crouch

	 THE SHELBY INSURANCE COMPANY

	 AFFIRMATIVE INSURANCE COMPANY and

	 INSURA PROPERTY AND CASUALTY INSURANCE COMPANY

  
 Birmingham, Alabama,
this 5th day of January, 2003. 
  

	
	 /s/ Arthur J. Gonzales

	 VESTA FIRE INSURANCE CORPORATION

  

 2

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