8-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of report (Date of earliest event reported): November 9, 2006

AFFIRMATIVE INSURANCE HOLDINGS, INC.

(Exact Name of Registrant as Specified in Charter)

Delaware	000-50795	75-2770432
(State or other jurisdiction	(Commission File Number)	(I.R.S. Employer
of incorporation		Identification Number)
4450 Sojourn Drive, Suite 500
Addison, Texas		75001
(Address of principal		(Zip code)
executive offices)

(972) 728-6300
(Registrant’s telephone number, including area code)

Not Applicable
(Former name or former address, if changed since last report)

     Check the appropriate box below if the Form 8-K is intended to simultaneously satisfy the filing obligation of the Registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under the Securities Act

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act

Item 2.02 Results of Operations and Financial Condition.

On November 9, 2006, we issued a press release announcing our results of operations for the quarter ended September 30, 2006. The press release is attached hereto as Exhibit 99.1 to this Current Report on Form 8-K and incorporated by reference into this Item 2.02.

On November 10, 2006, we held a conference call at 11:00 a.m. Eastern time (10:00 a.m. Central time) on our results of operations for the quarter ended September 30, 2006. The transcript of the conference call is attached hereto as Exhibit 99.2 to this Current Report on Form 8-K and incorporated by reference into this Item 2.02.

Item 7.01. Regulation FD Disclosure.

On November 9, 2006, we issued a press release announcing our results of operations for the quarter ended September 30, 2006. A copy of the press release is attached hereto as Exhibit 99.1 to this Current Report on Form 8-K.

On November 10, 2006, we held a conference call at 11:00 a.m. Eastern time (10:00 a.m. Central time) on our results of operations for the quarter ended September 30, 2006. The transcript of the conference call is attached hereto as Exhibit 99.2 to this Current Report on Form 8-K.

On November 10, 2006, we issued a press release regarding our declaration of a quarterly dividend. A copy of the press release is attached hereto as Exhibit 99.3 to this Current Report on Form 8-K.

Item 9.01. Financial Statements and Exhibits.

     (d) Exhibits.

Number	Exhibit
99.1*	Press release announcing our results of operations for the quarter ended September 30, 2006 dated November 9, 2006.
99.2*	Transcript of the conference call held on November 10, 2006.
99.3*	Press release announcing quarterly dividend dated November 10, 2006.

* Filed herewith.

The information furnished pursuant to this Current Report on Form 8-K, including the exhibits, shall not be deemed to be incorporated by reference into any of our filings with the SEC under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in any such filing, and shall not be deemed to be “filed” with the SEC under the Securities Exchange Act of 1934, as amended.

SIGNATURE

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

AFFIRMATIVE INSURANCE HOLDINGS, INC.
By:	/s/ MARK E. PAPE
	Mark E. Pape
	Executive Vice President and Chief Financial Officer

Date: November 14, 2006

Number	Exhibit
99.1*	Press release announcing our results of operations for the quarter ended September 30, 2006 dated November 9, 2006.
99.2*	Transcript of the conference call held on November 10, 2006.
99.3*	Press release announcing quarterly dividend dated November 10, 2006.

* Filed herewith

EX-99.1

Exhibit 99.1

News Release

Contact: Mark Pape
Chief Financial Officer
Affirmative Insurance Holdings, Inc.
(972) 728-6481

AFFIRMATIVE INSURANCE ANNOUNCES 2006 THIRD QUARTER RESULTS

ADDISON, Texas (November 9, 2006) — Affirmative Insurance Holdings, Inc. (Nasdaq: AFFM), a producer and provider of personal non-standard automobile insurance, today announced financial results for the quarter and the nine months ended September 30, 2006.

Key Financial Results for the Three and Nine Month Periods Ended September 30, 2006

	Three months ended September 30,							Nine months ended September 30,
	2006		2005		% Change			2006		2005		% Change
	Restated							Restated
	(dollars in millions, except per share data)
Gross premiums written	$	68.5	$	74.8		-8.5	%	$	223.0	$	254.1		-12.3	%
Net premiums written	$	68.4	$	72.8		-6.1	%	$	223.5	$	249.6		-10.4	%
Net premiums earned	$	71.9	$	77.5		-7.3	%	$	218.7	$	222.9		-1.9	%
Total revenues	$	88.5	$	98.7		-10.4	%	$	271.1	$	289.4		-6.3	%
Net income	$	5.0	$	5.7		-13.4	%	$	16.1	$	19.4		-17.0	%
Net income per share — diluted	$	0.33	$	0.38		-13.2	%	$	1.05	$	1.19		-11.8	%

Third Quarter Financial Results

In the third quarter of 2006, we had net income of $5.0 million or $0.33 per diluted share, as compared to net income of $5.7 million or $0.38 income per diluted share for the same period in 2005. Weighted average diluted shares outstanding for the third quarter were 15,186,777 shares, up slightly from 15,165,677 shares for the year-ago period.

Net premiums earned for the three months ended September 30, 2006 were $71.9 million, a decrease of $5.6 million or 7.3% compared to net premiums earned of $77.5 million for the three months ended September 30, 2005. The decrease was primarily due to our reduced levels of gross premiums written in both the current and previous periods. In the third quarter of 2006, our gross premiums written were down 8.5% as compared to the third quarter of 2005.

Net premiums written decreased 6.1% to $68.4 million due to the decline in our gross premiums written.

For the quarter ended September 30, 2006, our loss and loss adjustment expense ratio was 64.1% as compared to 61.1% in the third quarter of the prior year. This increase in the loss ratio reflects the favorable loss development on previously written business that was recognized in the previous year’s third quarter relative to the lesser amount of favorable development recognized in the third quarter of 2006.

Our selling, general and administrative expenses decreased 17.8% to $33.0 million for the third quarter of 2006 from $40.1 million in the comparable period in 2005 and our expense ratio decreased to 27.3% from 27.5% in the prior year. The relatively small decrease in our expense ratio reflects the effect of the widely used industry calculation method that offsets our operating expenses (selling, general and administrative expenses and depreciation and amortization) with our other revenues (commission income and fees) in the dividend, with the divisor consisting of only net premiums earned. The revenue from commission income and fees decreased to $14.4 million in the third quarter of 2006 from $19.7 million in the comparable period in 2005 in part as a result of our increased retention of business that we produced. In the previous year, we reinsured more of our business with other insurers and earned fees for servicing the policies. In addition, revenue from commission income and fees has been adversely affected by both the overall decline in gross premiums written and the change in our sales strategy during the third quarter that involved the reduction or elimination of the agency fee charged to a customer when a policy is written. This change allows us to offer the prospective customer a more affordable down payment, with the objective of gaining new customers, increasing premiums earned on policies written by our three affiliated insurance carriers and commission income on policies written on third party carriers, thereby enhancing the longer-term economic value of the company.

Our combined ratio (the sum of the loss and loss adjustment expense ratio and the expense ratio) for the third quarter of 2006 was 91.4% as compared to 88.5% for the comparable quarter in 2005.

Year-to-date Financial Results

In the first nine months of 2006, we had net income of $16.1 million or $1.05 per diluted share, as compared to the net income of $19.4 million or $1.19 income per diluted share for the same period in 2005. Weighted average diluted shares outstanding for the first nine months were 15,327,137 shares as compared to 16,231,333 shares for the year-ago period, largely as a result of our acquisition of 2.0 million shares of treasury stock in June 2005 and 302,400 shares in the second quarter of 2006.

Net premiums earned for the nine months ended September 30, 2006 were $218.7 million, a decrease of $4.2 million or 1.9% compared to net premiums earned of $222.9 million for the nine months ended September 30, 2005. The decrease was primarily due to the reduction in gross premiums written in current and previous periods. In the first nine months of 2006, our gross premiums written were down 12.3% as compared to the first nine months of 2005.

Net premiums written decreased 10.4% to $223.5 million due to the decline in our gross premiums written.

For the nine months ended September 30, 2006, our loss and loss adjustment expense ratio remained stable at 64.4% as compared to 64.2% in the first nine months of the prior year.

For the nine months ended September 30, 2006, our expense ratio was 25.8% as compared to 22.6% in the prior year. This increase in our expense ratio reflects the effect of the widely used industry calculation method that offsets our operating expenses (selling, general and administrative expenses and depreciation and amortization) with our other revenues (commission income and fees) in the dividend, with the divisor consisting of only net premiums earned. The revenue from commission income and fees included in our consolidated financial statements decreased to $46.5 million in the first nine months of 2006 from $62.4 million in the comparable period in 2005 in part as a result of our increased retention of business produced in the current year as compared to our greater use of reinsurance in prior years. In addition, revenue from commission income and fees has been adversely affected by both the decline in gross premiums written and the change in our sales strategy during the third quarter as described above.

Our combined ratio (the sum of the loss and loss adjustment expense ratio and the expense ratio) for the first nine months of 2006 was 90.2% as compared to 86.8% for the comparable quarter in 2005.

Restatement

As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2005, we restated certain of our previously issued financial statements to correct consolidating elimination entries made in prior periods

Page 2

that were not in conformity with generally accepted accounting principles and to correct the allocation of commission income and fees among the first three quarters of 2005. The erroneous elimination entries had no effect on reported net income, earnings per share, cash, invested assets or stockholders’ equity, but did have the effect of materially understating gross revenues and expenses and misstating certain assets and liabilities. The restatement of the misallocation of commission income and fees among the first three quarters of 2005 increased commission and fee income by $482,000 ($311,000 after income taxes) for the third quarter of 2005, but had no impact for the nine months ending September 30, 2005. The previously issued unaudited interim consolidated financial statements for the quarter ended September 30, 2005 have been restated. All financial information in this announcement gives effect to the restatement.

Page 3

Affirmative Insurance Holdings, Inc.
Consolidated Statements of Operations — Unaudited
(dollars in thousands, except per share data)

	Three months ended September 30,									Nine months ended September 30,
	2006			2005			% Change			2006			2005			% Change
	Restated									Restated
Revenues
Net premiums earned	$	71,877		$	77,544			-7.3	%	$	218,668		$	222,921			-1.9	%
Commission income and fees		14,420			19,721			-26.9	%		46,471			62,423			-25.6	%
Net investment income		2,233			1,447			54.3	%		6,447			4,057			58.9	%
Realized gains (losses)		(78	)		5			NM			(444	)		11			NM
Total revenues		88,452			98,717			-10.4	%		271,142			289,412			-6.3	%
Expenses
Losses and loss adjustment expenses		46,044			47,350			-2.8	%		140,777			143,134			-1.6	%
Selling, general and administrative expenses		32,979			40,097			-17.8	%		99,774			109,919			-9.2	%
Depreciation and amortization		1,094			912			20.0	%		3,213			2,934			9.5	%
Interest expense		1,085			1,124			-3.5	%		3,256			2,499			30.3	%
Total expenses		81,202			89,483			-9.3	%		247,020			258,486			-4.4	%
Net income before income taxes, minority interest and equity interest in unconsolidated subsidiaries		7,250			9,234			-21.5	%		24,122			30,926			-22.0	%
Income tax expense		2,278			3,274			-30.4	%		7,954			10,961			-27.4	%
Minority interest, net of income taxes		—			217			NM			81			576			-85.9	%
Net income (loss)	$	4,972		$	5,743			-13.4	%	$	16,087		$	19,389			-17.0	%
Net income (loss) per common share — Basic	$	0.33		$	0.39			-15.4	%	$	1.05		$	1.21			-13.2	%
Net income (loss) per common share — Diluted	$	0.33		$	0.38			-13.2	%	$	1.05		$	1.19			-11.8	%
Weighted average shares outstanding — Basic		15,139,571			14,893,310			1.7	%		15,296,893			15,978,852			-4.3	%
Weighted average shares outstanding — Diluted		5,186,777			15,165,677			0.1	%		15,327,137			16,231,333			-5.6	%
Operational Information
Gross premiums written	$	68,483		$	74,821			-8.5	%	$	222,963		$	254,121			-12.3	%
Net premiums written	$	68,357		$	72,777			-6.1	%	$	223,535		$	249,576			-10.4	%
Percentage retained		99.8	%		97.3	%					100.3	%		98.2	%
Loss Ratio		64.1	%		61.1	%					64.4	%		64.2	%
Expense Ratio		27.3	%		27.5	%					25.8	%		22.6	%
Combined Ratio		91.4	%		88.5	%					90.2	%		86.8	%

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Affirmative Insurance Holdings, Inc.
Condensed Consolidated Balance Sheets
(dollars in thousands, except share and per share data)

	September 30,			December 31,
	2006			2005
	(Unaudited)
Assets
Fixed maturities — available for sale	$	226,414		$	210,273
Short-term investments		251			477
Total invested assets		226,665			210,750
Cash and cash equivalents		57,267			48,037
Fiduciary and restricted cash		32,138			29,689
Premiums and fees receivable		85,611			81,680
Commissions receivable		5,154			2,144
Receivable from reinsurers		23,152			28,137
Deferred acquisition costs		26,005			24,453
Deferred tax asset, net		9,918			14,866
Goodwill and other intangible assets, net		83,467			80,616
Other assets		23,260			23,753
Total assets	$	572,637		$	544,125
Liabilities and Stockholders’ Equity
Liabilities
Reserves for losses and loss adjustment expenses		139,859			126,940
Unearned premium		99,221			97,344
Amounts due reinsurers		8,081			8,715
Deferred revenue		25,893			27,101
Notes payable		56,702			56,702
Other liabilities		31,271			27,361
Total liabilities		361,027			344,163
Stockholders’ equity
Common stock		175			175
Additional paid-in capital		159,416			158,904
Treasury stock, at cost		(32,880	)		(28,746	)
Accumulated other comprehensive income (loss)		(431	)		(529	)
Retained earnings		85,330			70,158
Total stockholders’ equity		211,610			199,962
Total liabilities and stockholders’ equity	$	572,637		$	544,125
Notes payable as % of capitalization		21.1	%		22.1	%
Actual shares outstanding		15,140,486			15,432,557
Book value per share	$	13.98		$	12.96

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Forward-Looking Statements Disclosure

Certain information in this news release and other statements or materials are not historical facts but are forward-looking statements relating to such matters as future results of our business, financial condition, liquidity, results of operations, plans, and objectives. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we provide the following cautionary remarks regarding important factors that, among others, could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. The risks and uncertainties that may affect the operations, performance, results of our business, and the other matters referred to above include, but are not limited to: general volatility of the non-standard personal automobile and reinsurance markets; the market price of our common stock; changes in business strategy; severe weather conditions; availability, terms and deployment of capital; the degree and nature of competitor product and pricing activity; changes in the non-standard personal automobile insurance industry, interest rates or the general economy; identification and integration of potential acquisitions; claims experience; and availability of qualified personnel.

About Affirmative Insurance Holdings, Inc.

Headquartered in Addison, Texas, Affirmative Insurance Holdings, Inc. is a producer and provider of personal non-standard automobile insurance policies to individual consumers in highly targeted geographic markets. We currently offer products and services in 12 states, including Texas, Illinois, California and Florida.

# # #

Page 6

EX-99.2

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Final Transcript

Nov. 10. 2006 / 11:00AM ET, AFFM — Q3 2006 Affirmative Insurance Holdings Inc. Earnings Conference Call

CORPORATE PARTICIPANTS

Mark Pape
Affirmative Insurance — CFO & EVP

Kevin Callahan
Affirmative Insurance — CEO & Chairman

Sean McPadden
Affirmative Insurance — EVP & President of Underwriting Div.

CONFERENCE CALL PARTICIPANTS

Jonathon Graffey
Piper Jaffray — Analyst

Ron Bobman
Capital Returns — Analyst

PRESENTATION

Operator

      Good day, ladies and gentlemen, and welcome to the Third Quarter 2006 Affirmative Insurance Holdings Earnings Conference Call. My name is Jean and I’ll be your conference coordinator today. (Operator Instructions.) At this time, I will turn the call over to your host, Mr. Mark Pape, Chief Financial Officer. Sir, please proceed.

Mark Pape — Affirmative Insurance — CFO & EVP

      Thank you, Jean. Good morning, and welcome to the 2006 Third Quarter Earnings Conference Call for Affirmative Insurance Holdings. I’m Mark Pape, Chief Financial Officer and Executive Vice President. On the call today with me are Kevin Callahan, CEO and Chairman, and Sean McPadden, Executive Vice President and President of our insurance companies. In the next few minutes, we’ll give you an overview of our 2006 third quarter results. Following our remarks, we’ll have time to answer your questions.

First, some housekeeping before we begin. Please be aware that this conference call is being recorded, and all participants on the audio bridge are in a listen-only mode. During this conference call, we may make forward-looking statements regarding assumed future results of Affirmative’s business, financial condition, and the results of operation. These statements may refer to a future period or include such terms as anticipate, estimate, expect, believe, may, or should.

In connection with Safe Harbor provisions, the Company cautions you that forward-looking statements are subject to risks, uncertainties and assumptions, and actual results could differ materially from those that are indicated in our forward-looking statements. For a discussion of the factors, please refer to our periodic reports and documents filed with the Securities and Exchange Commission.

We have filed our quarterly report on the Form 10-Q for the third quarter of 2006 with the SEC, and issued a news release announcing the quarter’s results. If you have not yet received a copy of the news release or reviewed the Form 10-Q, you may find both versions on the Investor Relations portion of our website, www.affirmativeholdings.com, or on the web in the SEC’s EDGAR database. I’ll keep my comments concerning the quarter’s results fairly brief, since the complete Management Discussion is already included in the previously disclosed Form 10-Q.

We continue to experience the effects of a soft market for non-standard auto insurance. Sean and Kevin will have some comments about those in a few minutes. As compared to the third quarter of 2005, total revenues for the third quarter of 2006 were down 10.4%, net premiums earned were down 7.3%, and net income per share was down 13.2%. The consolidated loss and loss adjustment expense ratio increased to 64.1% from 63.8% in the second quarter of this year last quarter, and from 61.1% in the prior year’s third quarter.

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Final Transcript

Nov. 10. 2006 / 11:00AM ET, AFFM — Q3 2006 Affirmative Insurance Holdings Inc. Earnings Conference Call

Although this aggregate loss ratio is worse than the prior year’s comparable quarter, you need to consider the effect of development on prior period reserves when evaluating the current period’s loss ratio. Specifically, our third quarter loss ratio includes the impact of favorable development this year that was significantly less than we reported in last year’s third quarter. Specifically, we had only 2.9 million in favorable loss development in the third quarter of 2006, as compared to 6.7 million in the third quarter of 2005. The larger favorable development in 2005 was related in part to the innovation we completed in that quarter, as disclosed in our previous SEC filing.

Excluding the effect of that prior period unfavorable—that prior period favorable development, our loss and loss adjustment expense ratio was much more consistent on a year-over-year basis at 68.2% this quarter, as compared to 69.6% last year. This is actually a modest improvement.

Our SG&A costs decreased 17.8% from the prior year’s third quarter, largely due to the cost reduction measures that we announced and began implementing back in the first quarter of this year. Our selling, general, and administrative expenses represented only 45.9% of earned premiums in the third quarter, down from 51.7% last year. We anticipate continued benefits from this cost reduction program in the fourth quarter.

Our expense ratio remained basically stable at 27.3%, as compared to 27.5% last year, despite the significant decrease in the commission income and fees. As you know, in computing the expense ratio, commission income and fees are treated as an offset to the operating costs. At 94.1%, our combined ratio is relatively unchanged from the 91.9% we reported last quarter, and up slightly, as compared to the 88.5% in last year’s third quarter.

Overall, commission income and fees dropped 27% to 14.4 million from 19.7 million, a decline of 5.3 million. There are several reasons for this. First, the decline in income on non-retained business represented 4.3 million of the overall 5.3 million decline. This is a result of the increased retention of our business by our insurance companies. This type of fee income will not return until we begin to [cede] more of our premiums to reinsurers. In the meantime, this reduced fee income has been traded off for earned premiums and the resulting insurance margin from the business now being retained.

Secondly, commission income and fees are correlated with the overall level of earned premiums or business written, so the recent decline in our production in new business in both current and previous quarters negatively impacts the level of commission income and fees. This affects virtually every type of commission and fee income that we recognize.

And thirdly, agency fees that we have historically earned on both affiliated and non-affiliated business dropped about 1.1 million in the third quarter, largely as a result of our renewed retail strategy that included reducing or eliminating such fees. We will continue to evaluate the effect of this policy on our level of sales and we anticipate reproducing—or reintroducing fees in some markets on some products. Kevin and Sean will have some additional comments about the third quarter operating results in just a few minutes, as well as some thoughts about our future expectations.

Turning from the third quarter results to information about the future, we have recently made several announcements that will have an impact on results for our fourth quarter and for future periods. On October 20, we announced we had entered into a master services agreement with Accenture, LLP, whereby we would outsource substantially all of our IT operations to Accenture, including our data center, field support, and application management. We believe that over time this arrangement will create a stronger technology platform to support our business by consolidating our data centers into one professionally managed location, and thereby improving our overall IT infrastructure.

The fees for Accenture’s services included a fixed component and a smaller variable component. The fixed component is expected at its maximum amount to reach approximately $12 million per year, and ultimately decrease to 4.5 million per year by 2016.

The variable component will be charged on an hourly basis, depending on skill level and location of the resource. Fees are subject to adjustment for discounts based on usage in periods, the cost of living increases, currency fluctuations for offshore resources, and for service level [failures-audio glitch] or improvements that are customary in the IT outsourcing industry.

Currently, the entire cost of our IT operations are borne by Affirmative through our internal staffing and contractors. We are looking forward to the full implementation of this arrangement [indiscernible-audio glitch] greater stability for our systems, significantly reduce risk related to maintaining data centers, and greatly enhance user experience for our customers and employees. Moreover, within a few quarters it will be less expensive than managing our own IT department would have been.

However, the initial costs of implementing this arrangement are significantly higher than our cost of IT would normally be, particularly here in the fourth quarter when we will have both our usual cost, as well as the cost associated with the implementation of the arrangement. It is early yet in this quarter, but currently we believe that this extra cost will be about $0.16 to $0.20 per share in the fourth quarter.

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Final Transcript

Nov. 10. 2006 / 11:00AM ET, AFFM — Q3 2006 Affirmative Insurance Holdings Inc. Earnings Conference Call

On October 10, we announced we have strengthened our Management Team. We are very enthusiastic about the value these individuals bring to us and the strength they will add to the Management Team. But as you would expect, the new officers receive stock option grants and/or restricted stock grants as part of their compensation packages to entice them to join us. This will have the effect of increasing our expense for stock-based compensation under SFAS-123R.

As you know, this is a complicated accounting rule, and while we have not yet completed our analysis of the incremental expense, we believe that it could be in the range of $0.01 or so per share per quarter. Moreover, we will have a one-time cost of approximately $0.03 per share in the fourth quarter related to the severance costs incurred in connection with the departure of a former officer.

Clearly, this is not intended to be a complete list of the items to consider in thinking about our prospective fourth quarter results, but just some additional information to help you evaluate the announcements we have made, the impact of the announcements we’ve made, since the end of the third quarter.

On a more exciting note, although it does note affect the fourth quarter, we want to remind you that on October 17 we announced the acquisition of USAgencies, the leading non-standard personal auto insurance distributor in Louisiana. Kevin will have some updated information for you on the status of that acquisition.

We appreciate your interest in Affirmative. I look forward to your questions after we conclude our remarks. And I will now turn this over to Kevin for the CEO’s comments.

      Kevin Callahan — Affirmative Insurance — CEO & Chairman

      Thank you, Mark. We’ve had a busy period over the past several months and have begun to see the positive impact of actions that we took back in the second quarter. About 65 to 70% of the expense reduction actions that were enacted have actually flowed through to our earnings during the quarter. I expect that they will be virtually 100% in our run rate earnings during the fourth quarter.

In addition, our major retail brands have seen unit sales increase from 25% to more than 50%. And we believe this is a result of a combination of factors, including lower agency fees, a strategy of selling more third party products when appropriate, and increased and more effective advertising. As we have discussed in the past, although this sales growth is economically valuable for the organization, it takes a full year for the economic benefit to appear in our financial results.

As most of you know, the Board has asked me to become the permanent CEO, and I was delighted and enthusiastic about accepting the position. We have gathered an Executive Team that the Board and I feel confident will deliver significant value to our shareholders over time. I will be happy to discuss our team during the question period if appropriate, but did want to announce that we have added an additional new executive, called [Bob Bondy], in a newly created position called Chief Operations Officer. Bob will be joining us from AON, where he has run their client service centers for the past seven years.

We also announced the strategic partnership with Accenture with regard to our IT operations. The integration and stability of these systems is critical to our future success. Given our historic struggles with IT, this partnership provides our business with significant certainty surrounding the improvement of our existing platforms.

And finally, as Mark mentioned, we announced the definitive agreement to acquire USAgencies, a non-standard auto insurer headquartered in Baton Rouge, Louisiana. USAgencies is a strong company that sells it auto policies through owned retail stores in Louisiana, Alabama, and Illinois. In 2005, approximately 90% of the USAgencies business was written in Louisiana. Louisiana is the 12th largest market for non-standard auto insurance in the U.S. We believe that the company has a market share that exceeds 20% in the non-standard auto sector, and that they are the fifth largest auto insurance of any kind in Louisiana.

In 2005, a year that was significantly negatively impacted by Hurricane Katrina, USAgencies reported pre-tax income of almost $26 million. They are well capitalized, and currently reinsure 70% of their written premium.

Some of their business in Illinois overlaps in the Chicago region with our business, and we will be targeting synergies between the 30 USAgencies retail stores and the 82 InsureOne stores owned by Affirmative in that market. In any case, expanding our market position in Illinois

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Final Transcript

Nov. 10. 2006 / 11:00AM ET, AFFM — Q3 2006 Affirmative Insurance Holdings Inc. Earnings Conference Call

is a strategically favorable result. A hearing has been scheduled in Louisiana in mid-December to seek regulatory approval. We expect that to go well, and are hoping to be in a position to close this transaction in January 2007.

We appreciate your interest in Affirmative. And I’ll now turn it over to Sean McPadden to talk about our insurance operation.

      Sean McPadden — Affirmative Insurance — EVP & President of Underwriting Div.

      Thank you, Kevin, and good morning. I’ll begin with some general comments surrounding the underwriting performance of our various programs. We continue once again to be satisfied with the loss ratio results that we have experienced thus far in 2006. The loss trends we are experiencing remain below the normal historical levels on a seasonality adjusted basis, driven by both moderating frequency and severity.

The margins on the underlying business as being produced—being produced remain at acceptable levels. And as Mark commented, our reported calendar year loss ratio benefited in the quarter as a result of 4.1 points of favorable loss reserve release from prior periods. All of this favorable development was related to business managed within our affiliated underwriting agency group.

Our current period, i.e., accident year loss ratio, improved by 1.4 points in the quarter compared to prior year. This resulted from changes in the mix of business by state, and is not an indication that we are projecting our overall loss ratios and results are improving in the aggregate.

As mentioned in earlier calls, we normalized our expense structure and worked to significantly improve operating efficiencies in our underwriting and claims operations during the first half of 2006. This consolidation of responsibility should enable us to maintain tight controls on quality and service levels while reducing the cost of our operations. These changes have allowed us to align our expense structure with our revenues during the latter half of 2006.

While we are pleased with our progress, we are focused on achieving additional savings and improvements related to both technology consolidation and technology enhancements, which would serve to further improve the efficiencies of our operations while also improving our ability to distribute our product to all our independent agencies.

The market we operate in continues to be marked by varying levels of competition, which presents a challenge as we develop and manage our products in each state. We continue to make progress with our independent agencies as we focus on expanding our products through additional segmentation or new product offerings for this distribution channel. There was a clear urgency within the organization to broaden and improve our product offerings distributed through our retail stores as we compete for their business with unaffiliated insurers and MGAs.

While the profitability of this business remains attractive, we have seen a decrease in business produced through this distribution channel with our insurance company during the second half of 2006. We work—we are continuing to work on streamlining and standardizing our product offerings that we offer through this distribution network.

This concludes our formal remarks. And at this time, we’d like to open up the call for questions.

      QUESTION AND ANSWER

Operator

      (Operator Instructions.) We have a question from [Jonathon Graffey] of Piper Jaffray. Please proceed. And, sir, your line may be on mute.

      Jonathon Graffey — Piper Jaffray — Analyst

      Good morning.

      Kevin Callahan — Affirmative Insurance — CEO & Chairman

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Final Transcript

Nov. 10. 2006 / 11:00AM ET, AFFM — Q3 2006 Affirmative Insurance Holdings Inc. Earnings Conference Call

      Hi, Jonathon.

      Jonathon Graffey — Piper Jaffray — Analyst

      A question regarding the Accenture deal. You said the initial startup costs are going to be greater, obviously. But over the long run, you’re going to experience some cost savings. Do you know when you might—when you’ll start experiencing these and to what degree?

      Mark Pape — Affirmative Insurance — CFO & EVP

      This is Mark. I think that the fourth quarter, obviously, is kind of a double-up is what I was trying to convey. Beginning next year, it will be kind of down to a single-up, which will be higher than our normal run rate. After several quarters — I think we’re talking towards the end of next year — it will actually begin to decline to where it’s a lesser run rate than we would have otherwise experienced had we managed our own business. So the timeframe for seeing savings is within the foreseeable future, but it’s not right around the corner.

      Jonathon Graffey — Piper Jaffray — Analyst

      It will be more in 2008?

      Mark Pape — Affirmative Insurance — CFO & EVP

      Yes. Beginning in 2008, you should begin to see some significant benefits.

      Jonathon Graffey — Piper Jaffray — Analyst

      Okay. Thank you. And can you guys break out the premium production between owned and non-owned?

      Mark Pape — Affirmative Insurance — CFO & EVP

      Yes. Actually, we have that in the 10-Q. We’ve got that on page—let me just flip to it there. The—for the three months, we had about 60 million in production through our affiliated entities, and about 8.6 million through the unaffiliated. So that’s—again, the unaffiliated is a shrinking portion of our overall.

      Jonathon Graffey — Piper Jaffray — Analyst

      Okay. Are you guys not putting out a financial supplement this quarter?

      Mark Pape — Affirmative Insurance — CFO & EVP

      Yes. It’s on the website.

      Jonathon Graffey — Piper Jaffray — Analyst

      And it’s—okay. I haven’t seen it yet. Okay. That’s all I have. Thank you.

Operator

      At this time, I’m showing no questions. I’ll turn the call back over to—I’m sorry. We do have a question from Ron Bobman of Capital Returns.

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Final Transcript

Nov. 10. 2006 / 11:00AM ET, AFFM — Q3 2006 Affirmative Insurance Holdings Inc. Earnings Conference Call

      Ron Bobman — Capital Returns — Analyst

      Hi. I’ve got a quick question. I was wondering—good morning, by the way. I was wondering—the relevant size of the IT budget that the Accenture contract sort of speaks to. What is your spend for that expense bucket presently?

      Mark Pape — Affirmative Insurance — CFO & EVP

      Are you talking like an overall annual IT budget?

      Ron Bobman — Capital Returns — Analyst

      yes.

      Mark Pape — Affirmative Insurance — CFO & EVP

      I think we’re looking—generally speaking, historically, we’re looking on the order of about 12 to 14 a million all in.

      Ron Bobman — Capital Returns — Analyst

      Okay.

      Mark Pape — Affirmative Insurance — CFO & EVP

      And now, again, that doesn’t all necessarily flow through to earnings. That’s a kind of cash budget. Obviously, some of that—.

      Ron Bobman — Capital Returns — Analyst

      —CapEx or something?

      Mark Pape — Affirmative Insurance — CFO & EVP

      Yes, right.

      Ron Bobman — Capital Returns — Analyst

      Okay.

      Mark Pape — Affirmative Insurance — CFO & EVP

      But in terms of just out of pocket, it’s about 12 to 14.

      Ron Bobman — Capital Returns — Analyst

      Okay. So longer term, in some respects, that’s sort of what we measure against the performance of the—sort of the Accenture switch.

      Mark Pape — Affirmative Insurance — CFO & EVP

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Final Transcript

Nov. 10. 2006 / 11:00AM ET, AFFM — Q3 2006 Affirmative Insurance Holdings Inc. Earnings Conference Call

      I think another way to look at this though is, yes, you’ve got to focus on the expense. But it’s harder to get your arms around the value added by doing this.

      Ron Bobman — Capital Returns — Analyst

      Right.

      Mark Pape — Affirmative Insurance — CFO & EVP

      This is a significant enhancement to our ability to keep our systems up on a more consistent basis. It provides disaster recovery, data recovery, in the event of problems. It provides a much more solid confidence level that business will be up and running 24/7. So what happens on that is it provides much efficient actions by our employees. They don’t have to wait for delays in getting on the Internet or delays getting into our systems. It works—it makes for much better customer interface, so that independent agents and our own retail stores, again, don’t have to wait for downtime. And their processing speed is faster.

So there are a huge amount of intangible benefits that we’re not trying to quantify here for you, but I think you need to start thinking about that, too. This isn’t just a cost savings thing. This is actually a major quality improvement in our service levels.

      Ron Bobman — Capital Returns — Analyst

      No, no. I understand that it obviously should help sort of bind the quote rates and retention, hopefully, and all those things.

      Kevin Callahan — Affirmative Insurance — CEO & Chairman

      In fact, I would just say—this is Kevin. It’s important to note that it’s in fact being done for all of those reasons. It turns out that it will create cost advantage for us as well.

      Ron Bobman — Capital Returns — Analyst

      Got you. Okay. And would you talk a little bit about two other topics? Just sort of rate actions you may be taking in certain markets, if at all, rate actions that you’re seeing from competitors, if at all, in certain markets, and then, thirdly, any pick up from this California electronic enforcement yet, as far as call volume, retention, request for quotes, et cetera. Thanks.

      Sean McPadden — Affirmative Insurance — EVP & President of Underwriting Div.

      Sure. This is Sean. I’ll respond to your last question first. We have seen within our unaffiliated distribution channel—we have programs in California—and we’ve seen an increase in production in October of roughly 20 to 30% over prior periods on a premium basis, application counts being up more significant than that. So, we have seen the beginnings of some benefit in our California portfolio.

From our perspective, from a rate change for—during 2006, we continue to look for opportunities to better segment our product. In general, our product changes have resulted in a net decrease from a rate level perspective. But on an overall aggregate basis, we’re talking about a couple percent overall. Not anything of major significance for our portfolio in all the different states we do business in.

From a market perspective and a competitive environment perspective, the marketplace continues to be very competitive. We are not seeing any trends that would suggest major competitors taking significant rate decreases. We do see activity in some markets that would suggest that it is stabilized. And in fact, we see some increases offsetting some decreases. But in general, we believe that the competitiveness in the marketplace will be around for a while.

      Ron Bobman — Capital Returns — Analyst

      Thanks a lot.

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Final Transcript

Nov. 10. 2006 / 11:00AM ET, AFFM — Q3 2006 Affirmative Insurance Holdings Inc. Earnings Conference Call

Operator

      (Operator Instructions.) And I’m showing no questions. I’ll turn the call back over to the presenters for closing remarks.

      Mark Pape — Affirmative Insurance — CFO & EVP

      Well, thank you, Jean. Thank you all for listening in. We appreciate your interest and we look forward to talking to you on future conference calls. Hope you have a great weekend.

Operator

      Ladies and gentlemen, thank you for joining us on the call. You may now disconnect.

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EX-99.3

EXHIBIT 99.3

News Release

Contact:	Mark Pape
	Chief Financial Officer
	Affirmative Insurance Holdings, Inc.
	(972) 728-6481

AFFIRMATIVE INSURANCE HOLDINGS, INC. ANNOUNCES QUARTERLY
CASH DIVIDEND OF TWO CENTS PER SHARE

ADDISON, Texas (November 10, 2006) – Affirmative Insurance Holdings, Inc. (Nasdaq: AFFM), a producer and provider of personal non-standard automobile insurance, today announced that its board of directors has declared a quarterly cash dividend on its common stock of two cents per share, payable on December 29, 2006 to shareholders of record at the close of business December 15, 2006.

ABOUT AFFIRMATIVE INSURANCE HOLDINGS

Affirmative Insurance Holdings, Inc. is a producer and provider of personal non-standard automobile insurance policies to individual consumers in highly targeted geographic markets. Affirmative currently offers products and services in 12 states, including Texas, Illinois, California and Florida.

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