Document:

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Exhibit 10.3

Description of Non-Employee Director Compensation

      Pursuant to the Company’s pre-existing policies, non-employee directors receive $25,000 per
year for serving on the Company’s Board (their “Annual Retainer”). Committee Chairmen receive an
additional $5,000 per year. Non-employee directors receive $2,000 for each regular director meeting
attended and $1,000 for each special meeting or committee meeting attended. On May 25, 2004, the
Company adopted the Affirmative Insurance Holdings, Inc. 2004 Stock Incentive Plan (the “Stock
Incentive Plan”). Under the Stock Incentive Plan, each non-employee director will receive annually,
on January 31, an option to purchase 5,000 shares of the Company’s common stock at a price equal to
the closing price on the last day of trading in January of that year with a vesting period of one
year from the date of grant.

      On February 22, 2005, the Compensation Committee recommended and on February 23, 2005, the
Board approved, that in addition to the forgoing, the non-employee directors would receive an
annual grant of 1,000 shares of restricted stock and that members of the audit committee would
receive an annual grant of an additional 500 shares of restricted stock. This restricted stock will
vest on the first anniversary of the grant date, provided however, that the non-employee director
must fulfill his or her term for which the restricted shares were granted in order for the
restrictions to be lifted.exv10w4

 

Exhibit 10.4

Quota Share Reinsurance Agreement

Number A-AFFORD-05- 001

Table of Contents

	 	 	 
	Article 1

	 	Recitals
	Article 2

	 	Definitions
	Article 3

	 	Business Reinsured
	Article 4

	 	Obligatory Agreement
	Article 5

	 	Term and Cancellation
	Article 6

	 	Consideration
	Article 7

	 	Loss and Loss Adjustment Expense
	Article 8

	 	Reports and Remittances
	Article 9

	 	Fronting Fees, Premium Taxes and Provisional Ceding Commission,
	Article 10

	 	Errors and Omissions
	Article 11

	 	Inspection of Records
	Article 12

	 	Offset Clause
	Article 13

	 	Arbitration
	Article 14

	 	Honorable Undertaking
	Article 15

	 	Assessments and Assignments
	Article 16

	 	Conservation, Liquidation or Insolvency
	Article 17

	 	Hold Harmless
	Article 18

	 	Regulatory Matters
	Article 19

	 	Loss in Excess of Policy Limits/Extra Contractual Obligations
	Article 20

	 	Savings Clause
	Article 21

	 	Unauthorized (Non-Admitted) Reinsurance
	Article 22

	 	Program Review
	Article 23

	 	Service of Suit
	Article 24

	 	Intermediary
	Article 25

	 	Miscellaneous

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QUOTA SHARE REINSURANCE AGREEMENT

NUMBER A-AFFORD-05- 001

This Agreement is made and entered into by and between OLD AMERICAN COUNTY MUTUAL FIRE
INSURANCE COMPANY (hereinafter referred to as the “Company”) and AFFIRMATIVE INSURANCE COMPANY
(hereinafter referred to as the “Reinsurer”).

THE COMPANY AND REINSURER HEREBY AGREE AS FOLLOWS:

ARTICLE 1 – RECITALS

1.1 The Company and Reinsurer hereby wish to enter into a reinsurance arrangement through which the
Company is to bear no business, credit or insurance risk whatsoever (save the risk of the
Reinsurer’s insolvency). The Reinsurer shall hold the Company fully harmless and indemnify it for
these and all risks arising pursuant to this Agreement.

1.2 The Company and Reinsurer hereby agree that the full consideration provided by the Company in
exchange for the fees set forth herein, is to permit the Policies as defined herein to be issued in
the name of the Company and reinsured one hundred percent (100%) under this Agreement.

1.3 It is understood and agreed that neither the Company nor the Reinsurer is obligated by any
representations or warranties made by any of the parties involved in this transaction unless such
representations and warranties are formally included in writing, in this Agreement.

1.4 All business reinsured hereunder shall be produced by A-AFFORDABLE MANAGING GENERAL AGENCY,
INC. (Managing General Agent), in accordance with the terms and conditions of the Managing General
Agency Agreement effective April 1, 2002, (Managing General Agency Agreement) between the Managing
General Agent and the Company, a copy of said Agreement is attached hereto and fully incorporated
herein.

1.5 This Agreement sets forth all of the duties and obligations between the Company and the
Reinsurer and supersedes any and all prior or contemporaneous or written agreements with respect to
matters referred to in this Agreement. This Agreement may not be modified, amended or changed
except by an agreement in writing signed by both parties.

ARTICLE 2 – DEFINITIONS

2.1 “Policies” is defined as all policies, endorsements, certificates, contracts, agreements and
binders of insurance issued or renewed by Managing General Agent or its designated representatives
on or after the effective date of this Agreement on behalf of the Company.

2.2 “Net Written Premium” is defined as the gross premium on all original and renewal Policies
written by the Company, less return premium and cancellations.

2.3 “Net Collected Premium” is defined as the total of all collected premiums, including down
payments received, on policies written by the Managing General Agent between the Company and the
Managing General Agent less return premium and cancellations.

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2.4 “Loss in Excess of Policy Limits” (XPL) is defined as any amount which the Company pays or
would have been contractually held liable to pay had it not been for the limit of the original
Policy.

2.5 “Extra Contractual Obligation” (ECO) is defined as those liabilities not covered under any
other provision of this Agreement which arise from the handling of any claim on business covered
hereunder, because of, but not limited to, failure by the Company to settle within the policy
limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of
settlement or in the preparation of the defense or in the trial of any action against its insured
or reinsured or in the preparation or prosecution of an appeal consequent upon such action. The
date on which any ECO is incurred by the Company shall be deemed, in all circumstances, to be the
date of the original disaster and/or casualty.

2.6 “Loss Adjustment Expense” shall mean expenditures by the Company that are not part of the
indemnity under the original policy (i.e. which do not contribute to exhaustion of the original
policy limit), made in connection with the disposition of a claim, loss or legal proceeding
(including investigation, negotiation, cost of bonds, court costs, statutory penalties, prejudgment
interest or delayed damages, and interest on any judgment or award and legal expenses of
litigation) and the Company’s defense costs and legal expenses incurred in direct connection with
legal actions (including, but not limited to, Declaratory Judgment actions) brought to determine
the Company’s defense and/or indemnification obligations that are allocable only to Policies and
claims under Policies subject to this Contract. Any Declaratory Judgment action expenses shall be
deemed to have been fully incurred on the same date as the original loss (if any) giving rise to
the action.

2.7 “Prejudgment Interest” or “Delayed Damages” shall mean interest or damages added to a
settlement, verdict, award or judgment based on the amount of time prior to the settlement,
verdict, award or judgment whether or not made part of the settlement, verdict, award or judgment.

ARTICLE 3 – BUSINESS REINSURED

3.1 The Reinsurer hereby reinsures the Company for a one hundred percent (100%) quota share in
respect of all liability, including, but not limited to, losses and Loss Adjustment Expenses, under
Policies as classified by the Company in the attached Schedule of Business.

3.2 It is understood that the classes of business reinsured under this Agreement are deemed to
include coverages required for non-resident drivers under the motor vehicle financial
responsibility law or the motor vehicle compulsory insurance law or any similar law of any state or
province, following the provisions of the Company’s policies when they include or are deemed to
include so-called “Out of State Insurance” provisions.

3.3 All insurance under this Agreement shall be subject to the same rates, terms, conditions and
waivers, and to the same modifications and alterations as the respective Policies of the Company.

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ARTICLE 4 – OBLIGATORY AGREEMENT

4.1 The Company agrees to cede to the Reinsurer, and the Reinsurer agrees to accept from the
Company, a one hundred percent (100%) quota share reinsurance participation under all Policies
effective on or after the effective date hereof by the Company covering risks situated in Texas.
The liability of the Reinsurer shall commence obligatorily and simultaneously with that of the
Company subject to the terms, conditions and limitations set forth in this Agreement.

4.2 Business ceded hereunder shall include every original policy, rewrite, renewal or extension
(whether before or after the termination of this Agreement) required by statute or by rule or
regulation of the Texas Department of Insurance, or other authority having competent jurisdiction,
of any policy of insurance originally ceded hereunder by the Company to the Reinsurer.

4.3 The parties understand and intend that the Managing General Agent and the Reinsurer will agree
on the rates to be charged under this program. Rate changes proposed by the Reinsurer shall be
incorporated into the rate filing by the Managing General Agent.

ARTICLE 5 – TERM AND CANCELLATION

5.1 This Agreement shall become effective 12:00:01 a.m. (Central Standard Time) on the first day of
January 2005, as respects losses arising under Policies effective on or after such date, and shall
remain continuously in force unless terminated by either party.

5.2 This Agreement may be terminated by either party at any annual anniversary, giving the other
party written notice at least ninety (90) days prior to such date.

5.3 In addition to the provisions set forth in Article 5.2 herein, this Agreement may be terminated
at any time in accordance with the following terms and conditions:

a. After thirty (30) days written notice by the Reinsurer or the Company in the event the Reinsurer
or Company:

     (i) Is acquired and/or merged by or in any manner becomes under the control of any other
company or corporation;

     (ii) Change a majority of its officers or board of directors; or

     (iii) Are the subject of a filing or petition or initiation of any proceeding for supervision,
rehabilitation, conservation or liquidation, or any other proceedings for the protection of the
Company’s or the Reinsurer’s creditor.

b. By the Company, immediately and automatically, without prior written notice should the Texas
Department of Insurance require cancellation or disallow credit for this reinsurance.

c. After fifteen (15) days written notice by the Reinsurer or the Company, in the event of breach
of conditions, fraud or default by either party under the terms and conditions of the Agreement.

d. On the effective date of any termination of the Managing General Agency Agreement.

5.4 When the Agreement terminates for any reason, reinsurance hereunder shall continue to apply to
the business in force at the time and date of termination until expiration or cancellation of such
business. The parties understand and agree that any Policies with effective dates prior to the
termination date, but issued after the termination date, are covered under this Agreement.

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Additionally, the reinsurance hereunder shall continue to apply as to Policies that must be issued
or renewed, as a matter of state law or regulation or because an agent (appointed by the Company at
the request of the Reinsurer) has not been timely canceled, or non-renewed, until the expiration
dates on said Policies.

5.5 Upon termination of this Agreement for any reason, the Reinsurer and the Company shall not be
relieved or released from any obligation that relate to outstanding insurance business created by
or under this Agreement. The parties hereto expressly covenant and agree that they will cooperate
with each other in the handling of all such run-off insurance business until all Policies have
expired and all outstanding losses and Loss Adjustment Expenses have been settled.

While by law and regulations, the Company recognizes its primary obligations to its Policyholders,
the Reinsurer recognizes that there shall be no cost or involvement by the Company, unless
specifically agreed, in servicing this run-off. The Reinsurer shall bear all costs and expenses
associated with handling of such run-off business following the cancellation or termination of this
Agreement. If for any reason any managing general agent or agent fails to service any such run-off
business (or any business while the Agreement is still in effect), including the payment of claims,
then consistent with this Agreement, the Reinsurer’s obligation with respect to such run-off
business shall continue and the Reinsurer shall either service such run-off business directly or
appoint, at the Reinsurer’s expense, a successor to such managing general agent and/or agent,
subject to the approval of the Company, which approval shall not be unreasonably withheld. Such
successor shall perform all of the duties and obligations of the managing general agent and/or
agent with respect to servicing such run-off business.

5.6 Notices hereunder shall be provided in accordance with Article 23.2, hereof.

ARTICLE 6 – CONSIDERATION

6.1 In consideration of the acceptance by the Reinsurer of one hundred percent (100%) of the
Company’s liability on insurance business reinsured hereunder, the Reinsurer is entitled to one
hundred percent (100%) of the Net Premium produced by the Managing General Agent and/or agent or
the Reinsurer on Policies reinsured less the Provisional Ceding Commission allowed to the Company,
which includes premium taxes and fronting fees on Policies subject to reinsurance hereunder.

ARTICLE 7 – LOSS AND LOSS ADJUSTMENT EXPENSE

7.1 All loss settlements, judgments and all interest on said judgments, including losses in excess
of policy limits (XPL) and extra contractual obligations (ECO) made by the Company or the Company’s
designee under the terms of this Agreement, whether under strict policy conditions or by way of
compromise, shall be unconditionally binding upon the Reinsurer. The Reinsurer shall also be
liable for one hundred percent (100%) of and pay, or cause to be paid, on behalf of the Company all
Loss Adjustment Expenses as defined in Article 2.6. The Reinsurer shall be credited with all
salvage or recoveries by the Company on business reinsured hereunder.

7.2 The Reinsurer shall provide a loss adjustment expense allowance equal to 9.0% of net earned
premium, inclusive of direct loss adjustment expense charged to specific claim files. Such
allowance shall be passed to the Managing General Agency .

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7.3 Claims handling shall be accomplished by the Managing General Agent or its designated
representative (“Claims Agent”) pursuant to the Managing General Agency Agreement and whose
designation is subject to the Company’s continuing approval and shall not be inconsistent with the
terms and conditions of this Agreement.

7.4 The Reinsurer’s share of losses, Loss Adjustment Expenses and loss recoveries shall be carried
into the monthly account for which provision is hereinafter made; however, when the amount of loss
paid by the Company under insurance subject to this Agreement exceeds the balance due the Reinsurer
pursuant to Article 8, the Reinsurer will, at the option and the demand of the Company, immediately
reimburse the Company by special remittance. The Reinsurer shall retain the right to deduct from
any such special remittance any overdue balance due the Reinsurer by the Company.

ARTICLE 8 – REPORTS AND REMITTANCES

8.1 Within thirty-five (35) days after the end of each calendar month, the Company shall provide
the Reinsurer a net monthly account of the following:

a. Ceded net written premium;

b. Ceded collected premium for the month;

c. Provisional Ceding Commission on such premium as provided in Article 9.1;

d. Ceded losses and Loss Adjustment Expenses paid during the month;

e. Ceded earned and unearned premium at the end of the month;

f. Ceded outstanding losses and Loss Adjustment Expenses at the end of the month; and

g. Inception to date ceded uncollected premium.

8.2 The Company will immediately settle with the Reinsurer upon receipt of funds from the Managing
General Agency, any and all sums due to the Reinsurer, on a Net Collected Premium basis, pursuant
to this Agreement (b-c-d).

8.3 The Reinsurer shall remit balances due directly to the Company via wire transfer within
forty-eight (48) hours, or as soon as commercially feasible if the net monthly account results in
an amount due to the Company, or if during the month, there are no funds to pay losses, and the
Company submits additional reports reflecting an amount due to the Company.

ARTICLE 9 – FRONTING FEES, PREMIUM TAXES AND PROVISIONAL CEDING COMMISSION,

9.1 The Reinsurer will allow the Company a Provisional Ceding Commission of twenty-seven percent
(27%), which shall be calculated on the basis of all Net Written Premium reinsured hereunder and
shall be settled on a Net Collected Premium basis. The Provisional Ceding Commission paid to the
Company by the Reinsurer shall be adjusted periodically in accordance with the provisions of
Sections 9.4 below.

9.2 The Company will be liable for remitting state premium taxes based on net written premium and
net policy fees charged. If service fees charged on any policy covered by this Agreement are
deemed taxable for premium tax purposes, then such service fees should be added to the net written
premium and net policy fees charged to determine the amount subject to Fronting Fees. Since premium
taxes are required to be paid semiannually on March 1st and

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August 1st, the Company may bill the Reinsurers for their proportionate share of the prepayment and
shall allow credit for premium taxes on the monthly accounts.

9.3 The Reinsurer acknowledges that the Company is not responsible for any contingent commission
adjustment, and any such adjustment shall be settled directly between the Managing General Agent
and the Reinsurer. The Reinsurer shall seek any recovery for any contingent commission adjustment
directly from the Managing General Agent.

9.4 The Adjusted Ceding Commission Rate shall be calculated as follows and be applied to net earned
premium for the underwriting year under consideration as follows:

a. If the ratio of losses incurred to net earned premium is 70.0% or greater, then the Adjusted
Ceding Commission for the underwriting year under consideration shall be 24%;

b. If the ratio of losses incurred to net earned premium is less than 70.0%, but not less than
58.0%, then the Adjusted Ceding Commission for the underwriting year under consideration shall be
24.0%, plus 100% of the difference in percentage points between 70.0% and the actual ratio of
losses incurred to net earned premium;

c. If the ratio of losses incurred to net earned premium is 58.0% or less, then the Adjusted Ceding
Commission for the underwriting year under consideration shall be 36.0%.

Within 45 days of the end of the First Underwriting Year, and for each subsequent quarter
thereafter until all losses for the Policies in the First Underwriting Year have been finally
settled, the Managing General Agent shall calculate and report the Adjusted Ceding Commission on
net earned premium for the First Underwriting Year, subject to the following:

a. With respect to the first and second calculation, if the Adjusted Ceding Commission on net
earned premium is greater than the Provisional Ceding Commission previously allowed by the
Reinsurer on net earned premium for the underwriting year, the Reinsurer shall remit 75.0% of the
difference to the Managing General Agent as promptly as possible after receipt and verification of
the Managing General Agent’s report.

b. With respect to the third and each subsequent calculation, if the Adjusted Ceding Commission on
net earned premium is less than the Provisional Ceding Commission previously allowed by the
Reinsurer on net earned premium for the underwriting year, the Managing General Agent shall remit
the difference to the Reinsurer with its report as promptly as possible after receipt and
verification of the Managing General Agent’s report. If the Adjusted Ceding Commission on net
earned premium is greater than the Provisional Ceding Commission previously allowed by the
Reinsurer on net earned premium for the underwriting year, the Reinsurer shall remit the difference
to the Managing General Agent as promptly as possible after receipt and verification of the
Managing General Agent’s report, but in any event no more than 30 days following receipt and
acceptance of the report.

c. Each underwriting year subsequent to the First Underwriting Year shall undergo the adjustment
described above.

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ARTICLE 10 – ERRORS AND OMISSIONS

10.1 Inadvertent delays, errors or omissions made in connection with this Agreement or any
transaction hereunder shall not relieve either party from any liability which would have attached
had such delay, error or omission not occurred, provided always that such error or omission is
rectified as soon as possible after discovery.

ARTICLE 11 – INSPECTION OF RECORDS

11.1 All records pertaining to Policies issued on behalf of the Company through or by the Reinsurer
or its designated representative subject to this Agreement, shall be deemed to be jointly owned
records of the Company and the Reinsurer, and shall be made immediately available to the Company or
the Reinsurer or their representative or any duly appointed examiner for any State within the
United States; and these records shall be kept in the State of Texas. Notwithstanding the
foregoing, the Reinsurer is authorized to maintain duplicate working files of all such records
outside the State of Texas. The Company and the Reinsurer agree that neither will destroy any such
records in their possession without the prior written approval of the other, except that the
Company and Reinsurer shall not be required to retain files longer than required by the guidelines
set by the Texas Department of Insurance.

ARTICLE 12 – OFFSET CLAUSE

12.1 The Company or the Reinsurer shall have the right to offset any balance or amounts due from
one party to the other under the terms of this Agreement. The party asserting the right of offset
may exercise such right at any time whether the balances due are on account of premiums or losses
or otherwise.

12.2 The Reinsurer and the Company shall not offset obligations arising under this Agreement with
obligations arising under any other agreement except to the extent permitted under state law and/or
regulations.

ARTICLE 13 – ARBITRATION

13.1 Unless both parties mutually agree to waive arbitration with respect to a particular dispute,
the parties to this Contract hereby agree that binding arbitration shall be the sole remedy for any
and all dispute(s) arising between them with reference to any transactions, terms, or conditions
under this Contract including its formation and validity. Arbitration proceedings brought
hereunder shall be referred for final determination to the majority decision of a Panel of three
disinterested arbitrators. Notice of demand for arbitration shall be made in writing and shall be
served via certified or registered mail, return receipt requested, on the Respondent to the
Arbitration at the Respondent’s current address. The notice requesting arbitration shall identify
the contract(s) involved in the dispute, the issues to be resolved in the view of the Petitioner,
and the arbitrator selected by the Petitioner. The term “days” as used herein shall mean calendar
days.

13.2 The Respondent shall appoint an arbitrator within 30 days of receiving a request by the
Petitioner in writing and served via certified or registered mail, return receipt requested, to do
so. At the same time as the appointment, the Respondent shall identify in writing any issues which
in its view must be resolved in the arbitration proceeding and which were not identified by the
Petitioner. If the Respondent fails to appoint its arbitrator within 30 days of being requested

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to do so, in writing, by the Petitioner, the Petitioner shall have the right to appoint the second
arbitrator. Within 30 days after their appointment, the two arbitrators so chosen shall select a
third arbitrator to act as umpire. If the two arbitrators do not agree as to the selection of a
third arbitrator within 60 days after their appointment, the third arbitrator shall be selected
from a list of six individuals (three named by each arbitrator) by a judge of the federal district
court in Dallas County, Texas.

13.3 Each arbitrator shall be a disinterested, active, or retired official or officer of an
insurance or reinsurance company, not under the control or management of either party to this
Contract, and shall have experience in the class and type of business subject to this dispute.

13.4 Within 30 days after notice of appointment of all arbitrators, the Petitioner and the
Respondent shall each submit a statement of position to the Panel.

13.5 Within 60 days after notice of appointment of all arbitrators, each party shall provide the
other with its relevant books, records, and/or other papers not protected from disclosure by either
the work-product or attorney client privilege. Other than the exchange of relevant documents, both
parties shall refrain from engaging in any type of discovery including, but not limited to,
depositions and interrogatories.

13.6 Within 30 days following the exchange of documents, the Petitioner and the Respondent shall
submit re-hearing briefs to the Panel.

13.7 Unless some other location is mutually agreeable to the parties, arbitration proceedings shall
take place within the municipality wherein the Home Office of the Company is located. Arbitration
shall commence as soon as practicable but in no event longer than 120 days after selection of the
third arbitrator with notice thereof to the parties. The specific time and site of arbitration
shall be promptly agreed to by the parties, or if no Contract is reached, then determined by the
Panel.

13.8 The Panel shall be relieved from applying the strict rules of evidence and/or procedure and
shall make its decision based on the custom and practice of the insurance and reinsurance business
with a view toward affecting this Contract in a reasonable manner. Should either party fail to
appear at an arbitration and/or fail to furnish the Panel with any subpoenaed papers or
information, the Panel is empowered to proceed ex parte. The Panel shall make its award within 60
days following the close of the hearing. The majority decision of the Panel shall be final and
binding upon the parties and shall be reduced to a written award, which may include factual
findings, and shall be signed by any two of the three arbitrators, dated and delivered overnight to
the parties. The Panel may award pre-judgment and post-judgment interest, but in no case shall the
authority of the Panel extend to awarding punitive or exemplary damages. Judgment may be entered
upon the award by any court having jurisdiction.

13.9 The expense of its own arbitrator, but shall equally share with the other the expense of the
third arbitrator. In the event that the two arbitrators are chosen by one party, as above
provided, the expense of the two arbitrators, the third arbitrator and the arbitration shall be
equally divided between the Petitioner and the Respondent. Unless mutually agreed other wise, a
court reporter transcript shall be taken of the hearing with costs to be divided equally between
the parties. The remaining costs of arbitration shall be allocated by the Panel.

13.10 The Arbitration proceeding brought hereunder, any or all provisions contained herein, and
arbitration awards entered pursuant to this Article are specifically governed by, subject to

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and enforceable under the Federal Arbitration Act (Title 9, United States Code, Sections 1-14, as
amended.)

13.11 Each party agrees that time is of the essence with respect to all terms and conditions
referenced in this Article. All deadlines contained in this Article may be extended by mutual
Contract of the parties, and if the Panel has been selected, the Panel’s Contract must also be
obtained.

13.12 Each party agrees that any arbitration award entered pursuant to and governed by this Article
shall not have any precedential or collateral estoppel effect on future arbitrations, proceedings,
or controversies, if any, between the parties. Any claim of res judicata or claim preclusion shall
itself be subject to arbitration.

13.13 This Article shall survive the termination of this Contract.

ARTICLE 14 – HONORABLE UNDERTAKING

14.1 The purposes of this Contract are not to be defeated by narrow or technical legal
interpretations of its provisions. This Contract shall be construed as an honorable undertaking
and should be interpreted for the purpose of giving effect to the intentions of the parties hereto.

ARTICLE 15 – ASSESSMENTS AND ASSIGNMENTS

15.1 The Reinsurer hereby assumes liability for any and all costs, assessments or assignments
imposed as a result of Policies reinsured hereunder (whether before or after the termination of
this Agreement) levied or made by a guaranty fund, insolvency fund, plan, pool, association, or
other arrangement created by statute or regulation including, but not limited to, assessments
levied by the Volunteer Fire Departments, TAIPA or the Texas Property & Casualty Insurance Guaranty
Association.

ARTICLE 16 – CONSERVATION, LIQUIDATION OR INSOLVENCY

16.1 In the event of the insolvency of the Company, the Reinsurance afforded by this Agreement
shall be payable directly by the Reinsurer to the Company or its liquidator, receiver or statutory
successor on the basis of the liability of the Company under the Policies, without diminution
because of the insolvency of the Company, in accordance with the provisions of any State Law which
may be involved except:

a. where the Agreement specifically provides another payee of such reinsurance in the event of the
insolvency of the Company; or

b. where the Reinsurer with the consent of the direct insured(s) has assumed such Policy
obligations of the Company as direct obligations of the Reinsurer to the payees under such policies
and in substitution for the obligations of the Company to the payees.

16.2 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 insolvent Company on a Policy within a reasonable time after such claim is filed in the
insolvency proceedings. During the pendency of such claim, the 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

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liquidator, receiver or statutory successor. The expense thus incurred by the Reinsurer shall be
chargeable, subject to court approval, against the insolvent Company as part of the expense of
liquidation to the extent of the proportionate share of the benefits that may accrue to the Company
solely as a result of the defense undertaken by the Reinsurer.

16.3 If two (2) or more reinsurers are involved in the same claim and a majority in interest elects
to interpose defense to such claim, the expense shall be apportioned in accordance with the terms
of this Agreement as though such expense had been incurred by the Company.

16.4 As respects subject business assumed as reinsurance under this Agreement, the parties agree
that if the Company has a conservator, liquidator, or receiver appointed for it, or becomes the
subject of any conservation, liquidation or insolvency proceeding, and the Company is permitted to
have all its liabilities under the Policies reinsured hereunder assumed by another licensed
insurer, such assuming insurer shall be substituted for the Company as payee of any reinsurance
recoverable hereunder in respect of losses under Policies subject hereto, and the Reinsurer shall
make payments thereof directly to the substituted insurer.

16.5 In the event the foregoing provisions apply, all the other provisions of this Agreement shall
apply to the substituted insurer in the same manner as if said insurer were substituted for the
Company as the reinsured party hereunder, and to the extent this Agreement reinsures such
substituted insurer, coverage hereunder shall be excluded as respects the Company.

ARTICLE 17 – HOLD HARMLESS

17.1 In consideration of these presents and the reciprocal benefits derived by the Company and the
Reinsurer, the Reinsurer assumes liability for any and all uncollected balances, unsettled finance
agreements, claims, commission adjustments, losses, loss corridors, demands, causes of action
(including, but not limited to, violations of the Texas Deceptive Trade Practices Act or insurance
laws or regulations), damages (including, but not limited to, any and all extra contractual or
liability in excess of policy limits), judgments and expenses (including, but not limited to,
attorney’s fees and costs of court) which may be made against the Company and which are incurred,
either directly or indirectly, in connection with this Agreement or contracts related to this
Agreement or any actions or failure to take action by the Managing General Agent or any agent or by
the Company in successfully asserting its rights hereunder in connection with or with respect to
this Agreement. Notwithstanding anything to the contrary, this provision shall not apply to fraud,
dishonesty, theft or collusion on the part of any Director, Officer or employee of the Company; or
policies not reinsured hereunder; or the Company’s failure to perform its duties and obligations
under this Agreement.

17.2 If, for any reason, the Managing General Agent or agent fails, or is unable, to administer the
Policies reinsured hereunder (whether the Agreement is still in effect or the business is being
run-off), the Reinsurer shall appoint, a third party, subject to the Company’s approval, to
administer the business in accordance with the terms and conditions of this Agreement and the
agreement with the Managing General Agent. The Reinsurer shall be responsible for the cost of such
administration. The Company agrees to cooperate with the Reinsurer and the third party
administrator in the run-off of the business. If return premiums or other funds need to be returned
or paid to premium finance companies, policyholders, sub-agents or any other party, the Reinsurer
shall pay these amounts if the Managing General Agent or agent does not.

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ARTICLE 18 – REGULATORY MATTERS

18.1 It is the parties’ understanding that the Texas Department of Insurance views current premium
due over ninety (90) days past due (aged by item and effective date) from insureds or their
designated representative to the Company as non-admitted assets. In confirmation of the
liabilities assumed by the Reinsurer under this Agreement, the Reinsurer hereby assumes its share
of all liability and responsibility for all premiums in the course of collection.

18.2 The Reinsurer shall agree, at no cost to the Company, to take those actions (including, but
not limited to, modifications in how funds are handled and how accounts are cleared and settled)
and agree to those arrangements necessary to ensure that the Company suffers no adverse impact
because of this reinsurance program and is in compliance with the laws of the State of Texas and
regulations promulgated by any governmental entity thereof, including the Texas Department of
Insurance, insofar as this reinsurance program is concerned, subject to the provisions of Article
16.

18.3 The parties acknowledge that the Company is subject to Article 5.144 of the Texas Insurance
Code, which allows the Commissioner of Insurance to order refunds or discounts of premiums
determined to be excessive or unfairly discriminatory. The Reinsurer and Managing General Agent
agree to be bound by any such determination by the Commissioner and to proportionately make any
refund or provide any discount ordered by the Commissioner. This provision shall survive
termination of this Agreement and the run-off of all policies under Article 5 of this Agreement.

18.4 The parties acknowledge that the Company currently qualifies for the non-standard auto
exemption under subsection 13(f) of the Article 5.13 2 of the Texas Insurance Code and the parties
agree to take all necessary action for the Company to continue to qualify for said exemption,
including the limitation of premium volume on new business and the non-renewal existing business.

ARTICLE 19 – LOSS IN EXCESS OF POLICY LIMITS/EXTRA CONTRACTUAL OBLIGATIONS

19.1 This Agreement shall protect the Company for one hundred percent (100%) of any loss in excess
of Policy limits (XPL) and/or one hundred percent (100%) of the extra contractual obligations (ECO)
which shall be deemed to be a loss under the Policy involved and shall be subject to this
Agreement.

19.2 Notwithstanding anything stated herein, this Agreement shall not apply to any extra
contractual obligation (ECO) incurred by the Company as a result of any fraudulent and/or criminal
act by any officer or director of the Company acting individually or collectively or in collusion
with any individual or corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.

ARTICLE 20 – SAVINGS CLAUSE

20.1 If any law or regulation of any Federal, State or Local Government of the United States of
America, or the ruling of officials having supervision over insurance companies, should prohibit or
render illegal this Agreement or any portion thereof, as to risks or properties located in the
jurisdiction of such authority, either the Company or the Reinsurer may, upon written notice to the
other, suspend or abrogate this Agreement insofar as it relates to risks or

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properties located within such jurisdiction to such extent as may be necessary to comply with such
law, regulation or ruling. Such illegality shall in no way affect any other portion thereof,
provided, however, that the Reinsurer or the Company may terminate or suspend this Agreement
insofar as it relates to the Business to which such law or regulation may apply.

20.2 Should any portion of this Agreement be held to be unenforceable by Arbitration or any court
of competent jurisdiction, the remainder of such Agreement shall be construed as if originally
written without the unenforceable portion thereof, giving effect to the extent possible of the
original intent of the parties hereto as expressed in such Agreement as originally written.

ARTICLE 21 – UNAUTHORIZED (NON-ADMITTED) REINSURANCE

21.1 In the event the Company is unable to take reserve credit under this Agreement or the
Reinsurer’s A.M. Best rating is below “A-“, the Reinsurer hereby agrees to secure delivery to the
Company, prior to the effective date of this Agreement, a clean, irrevocable, evergreen,
unconditional letter of credit drawn on a bank that is a member of the Federal Reserve System and
approved by the National Association of Insurance Commissioners, and in accordance with the rules
and regulations as set forth by the Texas Department of Insurance or any other regulatory authority
having jurisdiction, for an amount equal to the Reinsurer’s share of the reserves for unearned
premium and outstanding losses and loss expenses, including incurred but not reported losses. The
Company agrees to furnish the Reinsurer with necessary accounting data to establish the amount of
such letter of credit.

21.2 In the event the Reinsurer and the Company mutually agree, the Reinsurer may, instead of
complying with Article 21.1, enter into a security trust agreement and establish a trust account
for the benefit of the Company in a bank that is a member of the Federal Reserve System, approved
by the National Association of Insurance Commissioners and in accordance with the rules and
regulations as set forth by the Texas Department of Insurance or any other regulatory authority
having jurisdiction. Such amount shall be determined in accordance with Article 21.1 above.

21.3 The assets deposited in the trust account shall be valued, according to their current fair
market value, and shall consist only of cash, certificates of deposit, and/or investments of the
types permitted by the Texas Insurance Code, Article 5.75-1 (d), provided that such investments are
issued by an institution that is not the parent, subsidiary, or affiliate of either the guarantor
or the beneficiary.

21.4 The trust agreement shall further require that all settlements of account between the Company
and the Reinsurer be made in cash or its equivalent.

21.5 The Reinsurer and the Company hereby agree that the assets in the trust account established
pursuant to this Agreement may be withdrawn by the Company at any time, notwithstanding any other
provisions in this Agreement. Such withdrawals shall be utilized and applied by the Company or its
successors in interest by operation of law, including without limitation any liquidator,
rehabilitator, receiver, or conservator of such Company, without diminution because of insolvency
on the part of the Company or the Reinsurer, only for the following purposes:

a. to reimburse the Company for the Reinsurer’s share of premiums returned to the owners of
Policies reinsured under this Agreement on account of cancellations of such Policies; or

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b. to reimburse the Company for the Reinsurer’s share of surrenders and benefits or losses paid
by the Company pursuant to the provisions of the Policies reinsured under this Agreement; or

c. in the event of notice of termination of the trust, to fund an account with the Company in
an amount at least equal to the reinsurers share of reserves described in Article 21.1 above; or

d. to pay any other amounts due the Company under this Agreement.

ARTICLE 22 – PROGRAM REVIEW

22.1 The Reinsurer acknowledges that it has been afforded the opportunity to review the records of
the Managing General Agent including but not limited to rate levels, rate filings, underwriting
guidelines and claims handling. Although the Company may perform reviews as well, it is understood
that the participation of the Reinsurer on this contract is based upon its continuing due diligence
and not based upon due diligence performed by the Company.

ARTICLE 23 – SERVICE OF SUIT (BRMA 49C)

23.1 It is agreed that in the event the Reinsurer fails to pay any amount claimed to be due
hereunder, the Reinsurer, at the request of the Company, will submit to the jurisdiction of any
court of competent jurisdiction within the United States. Nothing in this Article constitutes or
should be understood to constitute a waiver of the Reinsurer’s rights to commence an action in any
court of competent jurisdiction in the United States, to remove an action to a United States
District Court, or to seek a transfer of a case to another court as permitted by the laws of the
United States or of any state in the United States.

23.2 Further, pursuant to any statute of any state, territory or district of the United States
which makes provision therefore, the Reinsurer hereby designates the party named in its Interests
and Liabilities Agreement, or if no party is named therein, the Superintendent, Commissioner or
Director of Insurance or other officer specified for that purpose in the statute, or his successor
or successors in office, as its true and lawful attorney upon whom may be served any lawful process
in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary
hereunder arising out of this Contract.

ARTICLE 24 – INTERMEDIARY

24.1 Neither party hereto has utilized the services of a Reinsurance Intermediary for any actions
taken with regard to the negotiation drafting, and/or execution of this Agreement.

ARTICLE 25 – MISCELLANEOUS

25.1 This Agreement has been made and entered into in the State of Texas.

25.2 All notices required to be given hereunder shall be deemed to have been duly given by
personally delivering such notice in writing or by mailing it, Certified Mail, return receipt
requested, with postage prepaid. Any party may change the address to which notices and other
communications hereunder are to be sent to such party by giving the other party written notice
thereof in accordance with this provision.

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25.3 This Agreement shall be binding upon the parties hereto, together with their respective
executors, administrators, personal representatives, heirs and assigns.

25.4 This Agreement may be executed in one or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same instrument.

25.5 This Agreement may be amended, modified, or supplemented only by a written instrument executed
by all parties hereto.

25.6 This Agreement is the entire Agreement between the parties and supersedes one and all previous
agreements, written or oral, and amendments thereto.

25.7 A waiver by the Company, the Reinsurer or its designated representative of any breach or
default by the other party under this Agreement shall not constitute a continuing waiver or a
waiver by the Company, the Reinsurer or its designated representative of any subsequent act in
breach or of default hereunder.

25.8 Headings used in this agreement are for reference purposes only and shall not be deemed a part
of this Agreement.

	 	 	 	 	 	 	 
	The Company:	 	The Reinsurer:
	 
	 	 	 	 	 	 
	OLD AMERICAN COUNTY MUTUAL	 	AFFIRMATIVE INSURANCE COMPANY
	FIRE INSURANCE COMPANY	 	 	 	 
	 
	 	 	 	 	 	 
	By:

	 	/s/ Thomas A. McCall
	 	By:
	 	/s/ Teresa K. Hitchcock
	

	 	 
	 	 	 	 
	Thomas A. McCall, President	 	Teresa K. Hitchcock, Assistant Vice President
	 
	 	 	 	 	 	 
	Date: 2/10/2005	 	Date: 2/15/2005

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SCHEDULE OF BUSINESS

The Company, the Reinsurer and the Managing General Agent agree that the Managing General Agent has
the authority to accept, on forms approved by the Company, any Policy, endorsement, binder,
certificate, or proposal for insurance. The Managing General Agent’s authority is limited by this
Schedule of Business.

     Overall:

	 	 	 	 	 
	

	 	Projected Treaty Year Premium
	 	$40,000,000
	

	 	Maximum Treaty Year Premium
	 	$50,000,000
	

	 	Territory
	 	Texas only
	

	 	Maximum policy term
	 	Twelve Months

     Lines of business and maximum limits of liability

	 	 	 	 	 
	 	 	                    Coverage	 	          Maximum Limits
	

	 	Bodily Injury Liability
	 	$25,023 each person
	

	 	 	 	$50,023 each accident
	

	 	Property Damage Liability
	 	$25,023 each accident
	 
	 	 	 	 
	

	 	Uninsured/Underinsured Motorists	 	 
	

	 	                    Bodily Injury
	 	$20,023 each person
	

	 	 	 	$40,023 each accident
	

	 	                    Property Damage
	 	$15,023 each accident
	 
	 	 	 	 
	

	 	Personal Injury Protection
	 	$2,500 each person
	 
	 	 	 	 
	

	 	Medical payments
	 	$500 each person
	 
	 	 	 	 
	

	 	Physical Damage
	 	$50,000 each automobile

This Agreement does not apply to and specifically excludes the following:

a. Any business not produced by A-AFFORDABLE MANAGING GENERAL AGENCY, INC. or

b. Any business not classified as private passenger automobile liability or physical damage, or

c. Exclusions specified within the Quota Share Reinsurance Agreement.

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