10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2012

OR

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

For the transition period from              to             

Commission file number 000-50795

(Exact name of registrant as specified in its charter)

Delaware	75-2770432
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
4450 Sojourn Drive, Suite 500 Addison, Texas	75001
(Address of principal executive offices)	(Zip Code)

(972) 728-6300

(Registrant’s telephone number, including area code)

Not Applicable

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

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

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

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

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

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

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

The number of shares outstanding of the registrant’s common stock, $.01 par value, as of August 10, 2012: 15,408,358

AFFIRMATIVE INSURANCE HOLDINGS, INC.

SIX MONTHS ENDED JUNE 30, 2012

INDEX TO FORM 10-Q

PART I – FINANCIAL INFORMATION		3
	Item 1. Financial Statements	3
	Consolidated Balance Sheets – June 30, 2012 and December 31, 2011	3
	Consolidated Statements of Operations – Three and Six Months Ended June  30, 2012 and 2011	4
	Consolidated Statements of Comprehensive Income (Loss) – Three and Six Months Ended June 30, 2012 and 2011	5
	Consolidated Statements of Stockholders’ Equity (Deficit) – Six Months Ended June  30, 2012 and 2011	5
	Consolidated Statements of Cash Flows – Six Months Ended June 30, 2012 and 2011	6
	Notes to Consolidated Financial Statements	7
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	29
	Item 4. Controls and Procedures	31
PART II – OTHER INFORMATION		31
	Item 1. Legal Proceedings	31
	Item 1A. Risk Factors	31
	Item 1B. Unresolved Staff Comments	31
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	31
	Item 3. Defaults Upon Senior Securities	32
	Item 4. Mine Safety Disclosures	32
	Item 5. Other Information	32
	Item 6. Exhibits	32
SIGNATURES		33

2

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

AFFIRMATIVE INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share data)

	June 30, 2012			December 31, 2011
				(As Adjusted See Note 1)
Assets
Available-for-sale securities, at fair value	$	82,340		$	122,922
Other invested assets		3,098			2,898
Cash and cash equivalents		29,248			28,559
Fiduciary and restricted cash		779			2,478
Accrued investment income		646			1,058
Premiums and fees receivable, net		23,607			22,579
Premium finance receivable, net		40,351			38,082
Commissions receivable		1,525			1,786
Receivable from reinsurers		116,264			131,447
Income taxes receivable		48			739
Investment in real property, net		11,355			11,776
Property and equipment (net of accumulated depreciation of $55,622 for 2012 and $51,204 for 2011)		28,423			32,130
Goodwill		23,448			23,448
Other intangible assets (net of accumulated amortization of $7,665 for 2012 and 2011)		14,509			14,609
Prepaid expenses		4,496			5,147
Other assets (net of allowance for doubtful accounts of $7,213 for 2012 and 2011)		1,936			1,944
Total assets	$	382,073		$	441,602
Liabilities and Stockholders’ Deficit
Liabilities:
Reserves for losses and loss adjustment expenses	$	155,378		$	183,836
Unearned premium		62,838			58,242
Amounts due to reinsurers		29,102			38,224
Deferred revenue		5,402			4,816
Capital lease obligation		17,651			20,301
Senior secured credit facility		91,266			91,683
Notes payable		76,849			76,857
Deferred tax liability		3,096			2,928
Deferred acquisition costs, net		1,437			6,464
Other liabilities		34,456			39,228
Total liabilities		477,475			522,579
Stockholders’ deficit:
Common stock, $0.01 par value; 75,000,000 shares authorized, 18,202,221 shares issued and 15,408,358 shares outstanding at June 30, 2012 and at December 31, 2011		182			182
Additional paid-in capital		166,515			166,342
Treasury stock, at cost (2,793,863 shares at June 30, 2012 and December 31, 2011)		(32,910	)		(32,910	)
Accumulated other comprehensive loss		(650	)		(227	)
Retained deficit		(228,539	)		(214,364	)
Total stockholders’ deficit		(95,402	)		(80,977	)
Total liabilities and stockholders’ deficit	$	382,073		$	441,602

See accompanying Notes to Consolidated Financial Statements

3

AFFIRMATIVE INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
				(As Adjusted See Note 1)						(As Adjusted See Note 1)
Revenues
Net premiums earned	$	34,935		$	46,671		$	69,116		$	97,222
Commission income and fees		14,929			17,298			31,112			37,328
Net investment income		693			1,290			1,753			2,813
Net realized gains (losses)		702			(36	)		729			116
Other income		500			221			500			249
Total revenues		51,759			65,444			103,210			137,728
Expenses
Net losses and loss adjustment expenses		26,719			29,409			52,389			69,814
Selling, general and administrative expenses		23,611			27,441			50,432			61,304
Depreciation and amortization		2,252			2,430			4,630			4,807
Total expenses		52,582			59,280			107,451			135,925
Operating income (loss)		(823	)		6,164			(4,241	)		1,803
Loss on interest rate swaps		—			—			—			(2	)
Interest expense		4,850			5,727			9,766			10,730
Income (loss) before income tax expense		(5,673	)		437			(14,007	)		(8,929	)
Income tax expense		22			418			168			862
Net income (loss)	$	(5,695	)	$	19		$	(14,175	)	$	(9,791	)
Basic loss per common share:
Net loss	$	(0.37	)	$	—		$	(0.92	)	$	(0.64	)
Diluted loss per common share:
Net loss	$	(0.37	)	$	—		$	(0.92	)	$	(0.64	)
Weighted average common shares outstanding:
Basic		15,408			15,408			15,408			15,408
Diluted		15,408			15,408			15,408			15,408

See accompanying Notes to Consolidated Financial Statements

4

AFFIRMATIVE INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)

	Three Months Ended June 30,					Six Months Ended June 30,
	2012			2011		2012			2011
				(As Adjusted See Note 1)					(As Adjusted See Note 1)
Net income (loss)	$	(5,695	)	$	19	$	(14,175	)	$	(9,791	)
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale investment securities arising during period		(48	)		384		187			112
Reclassification adjustment for realized (gains) losses included in net income (loss)		(601	)		36		(610	)		(116	)
Other comprehensive income (loss), net		(649	)		420		(423	)		(4	)
Total comprehensive income (loss)	$	(6,344	)	$	439	$	(14,598	)	$	(9,795	)

AFFIRMATIVE INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

(in thousands, except share data)

	Six Months Ended June 30,
	2012					2011
	Shares		Amounts			Shares		Amounts
								(As Adjusted See Note 1)
Common stock
Balance at beginning of year		18,202,221	$	182			17,768,721	$	178
Issuance of restricted stock awards		—		—			433,500		4
Balance at end of period		18,202,221		182			18,202,221		182
Additional paid-in capital
Balance at beginning of year				166,342					165,776
Stock-based compensation				173					214
Balance at end of period				166,515					165,990
Treasury stock
Balance at beginning of year and end of period		2,793,863		(32,910	)		2,360,363		(32,906	)
Accumulated other comprehensive income (loss)
Balance at beginning of year				(227	)				445
Unrealized loss on available-for-sale investment securities				(423	)				(4	)
Balance at end of period				(650	)				441
Retained Deficit
Balance at beginning of year				(214,364	)				(51,767	)
Net loss				(14,175	)				(9,791	)
Balance at end of period				(228,539	)				(61,558	)
Total stockholders’ equity (deficit)			$	(95,402	)			$	72,149

See accompanying Notes to Consolidated Financial Statements

5

AFFIRMATIVE INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

	Six Months Ended June 30,
	2012			2011
				(As Adjusted See Note 1)
Cash flows from operating activities
Net loss	$	(14,175	)	$	(9,791	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		5,050			4,807
Stock-based compensation expense		156			194
Amortization of debt modification costs		188			206
Amortization of debt discount		1,978			2,342
Net realized gains from sales of available-for-sale securities		(610	)		(116	)
Fair value gain on investment in hedge fund		(200	)		(276	)
Gain on disposal of assets		(119	)		—
Amortization of premiums on investments, net		983			1,631
Provision for doubtful premiums receivable		360			(181	)
Loss on interest rate swaps		—			2
Proceeds from insurance recoveries		—			212
Paid-in-kind interest		1,777			—
Change in operating assets and liabilities:
Fiduciary and restricted cash		1,699			3,692
Premiums, fees and commissions receivable, net		(1,127	)		14,584
Reserves for losses and loss adjustment expenses		(28,458	)		(22,193	)
Amounts due from reinsurers		6,061			(13,928	)
Premium finance receivable, net (related to our insurance premiums)		(1,870	)		3,389
Deferred revenue		586			(1,771	)
Unearned premium		4,596			(20,437	)
Deferred acquisition costs, net		(5,027	)		685
Deferred taxes		168			637
Income taxes receivable		691			1,019
Other		(4,866	)		(4,880	)
Net cash used in operating activities		(32,159	)		(40,173	)
Cash flows from investing activities
Proceeds from sales of available-for-sale securities		21,173			39,798
Proceeds from maturities of available-for-sale securities		21,375			19,363
Purchases of available-for-sale securities		(2,762	)		(13,458	)
Premium finance receivable, net (related to third-party insurance premiums)		(399	)		(1,710	)
Purchases of property and equipment		(896	)		(1,457	)
Proceeds from insurance recoveries		30			—
Investment in real property, net		—			(550	)
Net cash provided by investing activities		38,521			41,986
Cash flows from financing activities
Principal payments under capital lease obligations		(2,650	)		(2,460	)
Principal payments on senior secured credit facility		(3,023	)		(5,118	)
Debt modification costs paid		—			(769	)
Net cash used in financing activities		(5,673	)		(8,347	)
Net increase (decrease) in cash and cash equivalents		689			(6,534	)
Cash and cash equivalents at beginning of year		28,559			46,364
Cash and cash equivalents at end of period	$	29,248		$	39,830
Supplemental disclosure of cash flow information:
Cash paid for interest	$	5,135		$	7,492
Cash paid for income taxes		239			310

See accompanying Notes to Consolidated Financial Statements

6

AFFIRMATIVE INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements of the Company. In the opinion of management, all adjustments necessary for a fair presentation have been included and are of a normal recurring nature. Interim results are not necessarily indicative of the results that may be expected for the year. The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2011 included in the Company’s Annual Report on Form 10-K. The results of operations for interim periods should not be considered indicative of results to be expected for the full year.

Adopted Accounting Standards

In October 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. ASU 2010-26 modified the definitions of the type of costs that can be capitalized in the successful acquisition of new and renewal insurance contracts. ASU 2010-26 requires incremental direct costs of successful contract acquisition as well as certain costs related to underwriting, policy issuance and processing, medical and inspection and sales force contract selling for successful contract acquisition to be capitalized. These incremental direct costs and other costs are those that are essential to the contract transaction and would not have been incurred had the contract transaction not occurred. The Company retrospectively adopted ASU 2010-26 on January 1, 2012. The cumulative effect of the adoption was a decrease of shareholders’ equity by $11.3 million, net of tax, as of January 1, 2011.

The following table illustrates the effect of adopting ASU 2010-26 in the consolidated balance sheets (in thousands):

	December 31, 2011
	Previously Reported			As Adjusted
Deferred acquisition costs, net	$	3,206		$	(6,464	)
Stockholders’ deficit		(71,307	)		(80,977	)

The following table illustrates the effect of adopting ASU 2010-26 in the consolidated statements of operations (in thousands, except per share amounts):

	Three Months Ended June 30, 2011					Six Months Ended June 30, 2011
	Previously Reported			As Adjusted		Previously Reported			As Adjusted
Selling, general and administrative expenses	$	28,274		$	27,441	$	61,975		$	61,304
Net income (loss)		(814	)		19		(10,462	)		(9,791	)
Net loss per share:
Basic		(0.05	)		—		(0.68	)		(0.64	)
Diluted		(0.05	)		—		(0.68	)		(0.64	)

ASU 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment, permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. Additionally, if the carrying amount of a reporting unit is zero or negative, the second step of the impairment test shall be performed to measure the amount of the impairment loss, if any, when it is more likely than not that a goodwill impairment exists. In considering whether it is more likely than not that a goodwill impairment exists, a qualitative assessment will be performed. If an entity concludes it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it need not perform the two-step impairment test. This standard is effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this standard did not have an impact on the Company’s consolidated financial position, results of operations or cash flows.

ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, requires companies to present the components of net income and comprehensive income in either one or two consecutive financial statements. Companies will no

7

longer be permitted to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. This standard is effective for interim and annual periods beginning after December 15, 2011, and should be applied retrospectively. The adoption of this standard did not impact the Company’s consolidated financial position, results of operations or cash flows.

ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, provides identical guidance with concurrently issued International Financial Reporting Standard (IFRS) 13, Fair Value Measurements. Most of the changes in the new standard are clarifications of existing guidance, but it expands the disclosures about fair value measurements, and requires the categorization by level of the fair value hierarchy for items that are not measured at fair value in the statement of financial position, but for which the fair value is required to be disclosed, which would consist of the Company’s debt, cash and cash equivalents, and fiduciary and restricted cash. In addition, for fair value measurements categorized as Level 3 within the fair value hierarchy, the valuation processes and sensitivity of the fair value measurements to changes in unobservable inputs shall be disclosed. This standard is effective for interim and annual periods beginning after December 15, 2011, and should be applied prospectively. The adoption of this standard did not impact the Company’s consolidated financial position, results of operations or cash flows.

Recently Issued Accounting Standards

In July 2012, the FASB issued ASU 2012-02, Intangibles — Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. This ASU gives entities testing indefinite-lived intangible assets for impairment the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, the entity is not required to take further action. However, if an entity concludes otherwise, a quantitative impairment test is required. This guidance is effective for annual and interim impairment tests beginning January 1, 2013, with early adoption permitted. Management does not believe the adoption of this update will have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

2. Available-for-Sale Investment Securities

The Company’s available-for-sale investment securities are carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income (loss), a separate component of stockholders’ equity (deficit). No income tax effect of unrealized gains and losses is reflected in other comprehensive income (loss) due to the Company carrying a full deferred tax valuation allowance. Gains and losses realized on the disposition of investment securities are determined on the specific-identification basis and credited or charged to income.

The amortized cost, gross unrealized gains (losses), and estimated fair value of the Company’s available-for-sale securities at June 30, 2012 and December 31, 2011, were as follows (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2012
U.S. Treasury and government agencies	$	11,367	$	140	$	(3	)	$	11,504
Mortgage-backed securities		3,947		28		(53	)		3,922
States and political subdivisions		11,581		244		(2	)		11,823
Corporate debt securities		37,690		466		(14	)		38,142
FDIC-insured certificates of deposit		16,866		86		(3	)		16,949
Total	$	81,451	$	964	$	(75	)	$	82,340
December 31, 2011
U.S. Treasury and government agencies	$	11,804	$	172	$	(1	)	$	11,975
Mortgage-backed securities		10,803		283		(135	)		10,951
States and political subdivisions		16,841		338		(1	)		17,178
Corporate debt securities		61,031		764		(158	)		61,637
FDIC-insured certificates of deposit		21,131		53		(3	)		21,181
Total	$	121,610	$	1,610	$	(298	)	$	122,922

8

Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without penalties. The Company’s amortized cost and estimated fair values of fixed-income securities at June 30, 2012 by contractual maturity were as follows (in thousands):

	Amortized Cost		Fair Value
Due in one year or less	$	44,934	$	45,242
Due after one year through five years		30,618		31,186
Due after five years through ten years		1,952		1,990
Mortgage-backed securities		3,947		3,922
Total	$	81,451	$	82,340

Gross realized gains and losses on available-for-sale investments for the six months ended June 30 were as follows (in thousands):

	2012			2011
Gross gains	$	728		$	212
Gross losses		(118	)		(96	)
Total	$	610		$	116

The following table summarizes the Company’s available-for-sale securities in an unrealized loss position at June 30, 2012 and December 31, 2011, the fair value and amount of gross unrealized losses, aggregated by investment category and length of time those securities have been continuously in an unrealized loss position (in thousands):

	June 30, 2012
	Less Than Twelve Months					Twelve Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
U.S. Treasury and government agencies	$	1,578	$	(3	)	$	—	$	—		$	1,578	$	(3	)
Mortgage-backed securities		1,701		(26	)		851		(27	)		2,552		(53	)
States and political subdivisions		—		—			73		(2	)		73		(2	)
Corporate debt securities		1,942		(13	)		180		(1	)		2,122		(14	)
FDIC-insured certificates of deposit		1,272		(3	)		—		—			1,272		(3	)
Total	$	6,493	$	(45	)	$	1,104	$	(30	)	$	7,597	$	(75	)
	December 31, 2011
	Less Than Twelve Months					Twelve Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
U.S. Treasury and government agencies	$	505	$	(1	)	$	—	$	—		$	505	$	(1	)
Mortgage-backed securities		2,688		(36	)		3,312		(99	)		6,000		(135	)
States and political subdivisions		—		—			74		(1	)		74		(1	)
Corporate debt securities		13,982		(137	)		1,344		(21	)		15,326		(158	)
FDIC-insured certificates of deposit		958		(1	)		348		(2	)		1,306		(3	)
Total	$	18,133	$	(175	)	$	5,078	$	(123	)	$	23,211	$	(298	)

The Company’s portfolio contained approximately 24 and 34 individual investment securities that were in an unrealized loss position as of June 30, 2012 and December 31, 2011, respectively.

The unrealized losses at June 30, 2012 were primarily attributable to changes in market interest rates since the securities were purchased. Management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. On a quarterly basis, the Company considers available quantitative and qualitative evidence in evaluating potential impairment of its investments. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, duration and extent to which the fair value is less than cost. If the fair value of a debt security is less than its amortized cost basis, an other-than-

9

temporary impairment may be triggered in circumstances where (1) an entity has an intent to sell the security, (2) it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis, or (3) the entity does not expect to recover the entire amortized cost basis of the security (that is, a credit loss exists). Other-than-temporary impairments are separated into amounts representing credit losses which are recognized in earnings and amounts related to all other factors which are recognized in other comprehensive income. The Company also considers potential adverse conditions related to the financial health of the issuer based on rating agency actions. At June 30, 2012, management performed its quarterly analysis of all securities with an unrealized loss and concluded no individual securities were other-than-temporarily impaired.

3. Reinsurance

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

A quota-share reinsurance agreement was put in place effective January 1, 2011 ceding 28% of gross written premium in all states other than Michigan through December 31, 2011. This contract terminated on January 1, 2012 on a cut-off basis and resulted in the return of $11.8 million of ceded unearned premium, net of $4.3 million of deferred ceding commissions. Written premiums ceded under this agreement totaled $50.6 million.

In 2011, the Company entered into an additional quota-share agreement with a third-party reinsurance company under which the Company ceded 10% of business produced in Louisiana, Alabama, Texas and Illinois from September 1, 2011 through December 31, 2011. At December 31, 2011, this contract converted to a 40% quota-share reinsurance contract on the in-force business for the applicable states throughout 2012. Written premiums ceded under this agreement totaled $16.5 million and $40.1 million during the three and six months ended June 30, 2012, respectively. Written premiums ceded under this agreement totaled $63.0 million since inception.

In June 2012, the Company entered into a reinsurance agreement with third-party reinsurers which provides $5.0 million in excess of the first $3.0 million of losses coverage for catastrophic events that may involve multiple insured losses.

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

	Three Months Ended June 30,
	2012									2011
	Written Premium			Earned Premium			Loss and Loss Adjustment Expenses			Written Premium			Earned Premium			Loss and Loss Adjustment Expenses
Direct	$	37,352		$	45,551		$	33,854		$	42,191		$	58,072		$	45,810
Reinsurance assumed		9,746			9,041			8,527			7,409			10,641			(891	)
Reinsurance ceded		(16,807	)		(19,657	)		(15,662	)		(14,624	)		(22,042	)		(15,510	)
Total	$	30,291		$	34,935		$	26,719		$	34,976		$	46,671		$	29,409
	Six Months Ended June 30,
	2012									2011
	Written Premium			Earned Premium			Loss and Loss Adjustment Expenses			Written Premium			Earned Premium			Loss and Loss Adjustment Expenses
Direct	$	92,646		$	91,023		$	64,397		$	108,067		$	123,311		$	95,574
Reinsurance assumed		20,020			16,928			14,021			19,312			24,058			9,270
Reinsurance ceded		(24,637	)		(38,835	)		(26,029	)		(36,166	)		(50,147	)		(35,030	)
Total	$	88,029		$	69,116		$	52,389		$	91,213		$	97,222		$	69,814

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Selling, general and administrative expenses	$	(5,876	)	$	(6,313	)	$	(12,371	)	$	(13,485	)

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

	June 30, 2012		December 31, 2011
Losses and loss adjustment expense reserves	$	75,615	$	78,510
Unearned premium reserve		22,475		36,674
Total	$	98,090	$	115,184

The table below presents the total amount of receivables due from reinsurers as of June 30, 2012 and December 31, 2011 (in thousands):

	June 30, 2012		December 31, 2011
Michigan Catastrophic Claims Association	$	43,044	$	44,049
Quota-share reinsurer for agreement effective September 1, 2011		42,231		22,102
Quota-share reinsurer for agreements effective in fourth quarter of 2010 and January 2011		12,077		46,103
Vesta Insurance Group		10,071		10,068
Excess of loss reinsurers		5,624		5,458
Other		3,217		3,667
Total reinsurance receivable	$	116,264	$	131,447

The quota-share reinsurers and the excess of loss reinsurers all have A ratings from A.M. Best. Accordingly, the Company believes there is minimal credit risk related to these reinsurance receivables. Under the reinsurance agreement with Vesta Insurance Group (VIG), including primarily Vesta Fire Insurance Corporation (VFIC), the Company’s wholly-owned subsidiaries, Affirmative Insurance Company (AIC) and Insura Property and Casualty Insurance Company (Insura), had the right, under certain circumstances, to require VFIC to provide a letter of credit or establish a trust account to collateralize gross amounts due from VFIC under the reinsurance agreement. Accordingly, AIC, Insura and VFIC entered into a Security Fund Agreement effective September 2004. In August 2005, AIC received a letter from VFIC’s President that irrevocably confirmed VFIC’s duty and obligation under the Security Fund Agreement to provide security sufficient to satisfy VFIC’s gross obligations under the reinsurance agreement (the VFIC Trust). At June 30, 2012, the VFIC Trust held $16.8 million (after cumulative withdrawals of $8.7 million through June 30, 2012), consisting of $14.7 million of a U.S. Treasury money market account and $2.1 million of corporate bonds rated BBB+ or higher, to collateralize the $10.1 million net recoverable (net of $2.9 million payable) from VFIC.

The Company assumes reinsurance from a Texas county mutual insurance company (the county mutual) whereby the Company has assumed 100% of the policies issued by the county mutual for business produced by the Company’s owned general agents. The county mutual does not retain any of this business and there are no loss limits other than the underlying policy limits. AIC has established a trust to secure the Company’s obligation under this reinsurance contract with a balance of $29.9 million and $34.4 million as of June 30, 2012 and December 31, 2011, respectively.

At June 30, 2012, $2.5 million was included in reserves for losses and loss adjustment expenses that represented the amounts owed by AIC and Insura under reinsurance agreements with the VIG affiliated companies. Affirmative established a trust account to collateralize this payable, which currently holds $20.7 million in securities (the AIC Trust). The Special Deputy Receiver in Texas had cumulative withdrawals from the AIC Trust of $0.4 million through June 2012, and the Special Deputy Receiver in Hawaii had cumulative withdrawals from the AIC Trust of $1.7 million through June 2012.

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4. Premium Finance Receivables, Net

Premium finance receivables (related to policies of both the Company and third-party carriers) were as follows at June 30, 2012 and December 31, 2011 (in thousands):

	June 30, 2012			December 31, 2011
Premium finance contracts	$	42,987		$	40,472
Unearned finance charges		(2,136	)		(1,911	)
Allowance for credit losses		(500	)		(479	)
Total	$	40,351		$	38,082

Premium finance receivables are secured by the underlying unearned policy premiums for which the Company obtains assignment from the policyholder in the event of non-payment. When a payment becomes past due, the Company cancels the underlying policy with the insurance carrier and receives the unearned premium to clear unpaid principal and interest. The loan is closed by writing off any uncollected amounts or refunding any overpayment to the customer. An insignificant amount of finance receivables are past due in excess of thirty days. Losses due to non-realization of premium finance receivables were $0.1 million, or 0.3% of total premiums financed, for the three months ended June 30, 2012, and $0.3 million, or 0.7% of total premiums financed, for the three months ended June 30, 2011. Losses due to non-realization of premium finance receivables were $0.3 million, or 0.4% of total premiums financed, for the six months ended June 30, 2012, and $0.7 million, or 0.8% of total premiums financed, for the six months ended June 30, 2011.

5. Deferred Policy Acquisition Costs

Policy acquisition costs, consisting of primarily commissions and premium taxes, net of ceding commission income, are deferred and charged against income ratably over the terms of the related policies. The components of deferred policy acquisition costs and the related amortization expense were as follows for the three months ended June 30, 2012 and 2011 (in thousands):

	Gross			Ceded			Net
Balance at April 1, 2012	$	4,963		$	(7,222	)	$	(2,259	)
Additions		3,923			(4,698	)		(775	)
Amortization		(3,925	)		5,522			1,597
Ending balance at June 30, 2012	$	4,961		$	(6,398	)	$	(1,437	)
Balance at April 1, 2011, as adjusted	$	7,348		$	(7,251	)	$	97
Additions		3,451			(3,550	)		(99	)
Amortization		(5,695	)		5,471			(224	)
Ending balance at June 30, 2011, as adjusted	$	5,104		$	(5,330	)	$	(226	)

The components of deferred policy acquisition costs and the related amortization expense were as follows for the six months ended June 30, 2012 and 2011 (in thousands):

	Gross			Ceded			Net
Balance at January 1, 2012	$	3,668		$	(10,132	)	$	(6,464	)
Additions		8,690			(7,162	)		1,528
Amortization		(7,397	)		10,896			3,499
Ending balance at June 30, 2012	$	4,961		$	(6,398	)	$	(1,437	)
Balance at January 1, 2011, as adjusted	$	9,432		$	(8,972	)	$	460
Additions		9,255			(8,978	)		277
Amortization		(13,583	)		12,620			(963	)
Ending balance at June 30, 2011, as adjusted	$	5,104		$	(5,330	)	$	(226	)

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6. Debt

The Company’s long-term debt instruments and balances outstanding at June 30, 2012 and December 31, 2011 were as follows (in thousands):

	June 30, 2012		December 31, 2011
Notes payable due 2035	$	30,928	$	30,928
Notes payable due 2035		25,774		25,774
Notes payable due 2035		20,147		20,155
Total notes payable		76,849		76,857
Senior secured credit facility, net of discount		91,266		91,683
Total long-term debt	$	168,115	$	168,540

The $30.9 million notes payable due 2035 are redeemable in whole or in part by the Company. The notes adjust quarterly to the three-month LIBOR rate plus 3.60%. The interest rate as of June 30, 2012 was 4.07%.

The $25.8 million notes payable due 2035 are redeemable in whole or in part by the Company. The notes adjust quarterly to the three-month LIBOR rate plus 3.55%. The interest rate as of June 30, 2012 was 4.02%.

On February 28, 2012, the Company exercised its right to defer interest payments on the two Notes Payable mentioned above beginning with the scheduled interest payment due in March 2012 and continuing for a period of up to five years. The affected notes are associated with obligations to the Company’s unconsolidated trusts. The outstanding balance of the affected notes was $56.7 million as of June 30, 2012. The Company will continue to accrue interest on the principal during the extension period and the unpaid deferred interest will also accrue interest. Deferred interest will be due and payable at the expiration of the extension period and totaled $1.1 million as of June 30, 2012.

The $20.1 million notes payable due 2035 are redeemable in whole or in part by the Company. The notes adjust to the three-month LIBOR rate plus 3.95%. The interest rate as of June 30, 2012 was 4.42%.

The pricing under the senior secured credit facility is currently subject to a LIBOR floor of 3.00% plus 6.25%, and is tiered based on the Company’s leverage ratio. The interest rate as of June 30, 2012 was 10.5%. As of June 30, 2012, the principal balance of the senior secured credit facility was $97.2 million.

7. Capital Lease Obligation

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

Property under capital lease consisted of the following as of June 30, 2012 and December 31, 2011 (in thousands):

	June 30, 2012			December 31, 2011
Computer software, software licenses and hardware	$	28,189		$	28,189
Accumulated depreciation		(11,154	)		(8,821	)
Computer software, software licenses and hardware, net	$	17,035		$	19,368

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

2012	$	3,368
2013		6,736
2014		6,736
2015		2,807
Total estimated future lease payments		19,647
Less: Amount representing interest		1,996
Present value of future lease payments	$	17,651

8. Income Taxes

The provision for income taxes for the three and six months ended June 30, 2012 and 2011 consisted of the following (in thousands):

	Three Months Ended June 30,					Six Months Ended June 30,
	2012			2011		2012		2011
Current tax expense (benefit)	$	(62	)	$	100	$	—	$	225
Deferred tax expense		84			318		168		637
Net income tax expense	$	22		$	418	$	168	$	862

The Company’s effective tax rate differed from the statutory rate of 35% for the three and six months ended June 30 as follows (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Income (loss) before income taxes	$	(5,673	)	$	437		$	(14,007	)	$	(8,929	)
Tax provision computed at the federal statutory income tax rate		(1,985	)		153			(4,902	)		(3,125	)
Increases (reductions) in tax resulting from:
Tax-exempt interest		(23	)		(35	)		(51	)		(74	)
State income taxes		(28	)		104			295			(30	)
IRS audit settlement		(118	)		—			(118	)		—
Valuation allowance		2,185			162			4,961			4,018
Other		(9	)		34			(17	)		73
Income tax expense	$	22		$	418		$	168		$	862
Effective tax rate		(0.4	)%		95.7	%		(1.2	)%		(9.7	)%

Our gross deferred tax assets prior to recognition of valuation allowance were $97.0 million and $92.7 million at June 30, 2012 and December 31, 2011, respectively. In assessing the realizability of our deferred tax assets, we considered whether it was more likely than not that our deferred tax assets will be realized based upon all available evidence, including scheduled reversal of deferred tax liabilities, historical operating results, projected future operating results, tax carry-back availability, and limitations pursuant to Section 382 of the Internal Revenue Code, among others. Based on this assessment, we have recorded a valuation allowance of $94.0 million and $88.9 million at June 30, 2012 and December 31, 2011, respectively.

9. Legal and Regulatory Proceedings

The Company and its subsidiaries are named from time to time as parties in various legal actions arising in the ordinary course of the Company’s business and arising out of or related to claims made in connection with the Company’s insurance policies and claims handling. There are no material changes with respect to legal and regulatory proceedings previously disclosed in Note 15 to the consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 2011. The Company believes that the resolution of these legal actions will not have a material adverse effect on the Company’s consolidated financial position or results of operations. However, the ultimate outcome of these matters is uncertain.

On February 3, 2012, the Chapter 7 Trustee for the Estate of Inga Nikokhosyan filed suit against Affirmative Insurance Company (AIC) and Platinum Claims Services, Inc. (Platinum) in the Superior Court for the State of California, County of Los Angeles. Platinum is a third-party claims administrator contracted by AIC to handle claims written through an unaffiliated program

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managed by Carnegie General Insurance Agency. The lawsuit alleges claims for breach of contract, breach of the implied covenant of good faith and fair dealing, intentional infliction of emotional distress, and punitive damages arising out of Platinum’s handling of a claim. The parties are proceeding to discovery. The Company believes that these claims lack merit and intends to defend itself vigorously. No estimate of the range of potential loss can be made at this time.

On May 27, 2011, PropertyOne, Inc. filed suit against USAgencies, LLC and Affirmative Insurance Holdings, Inc. in the 19^th Judicial District Court, Parish of East Baton Rouge, Louisiana. PropertyOne’s petition asserts equitable claims for payment of broker commissions arising out of the December 2009 execution of a lease with a federal agency for the Company’s building located in Baton Rouge, Louisiana. The Company removed the lawsuit to the U.S. District Court for the Middle District of Louisiana. The parties are now proceeding to discovery. The Company believes that these claims lack merit and intends to defend itself vigorously. No estimate of the range of potential loss can be made at this time.

The Illinois Insurance Code includes a reserve requirement that an insurer maintain an amount of qualifying investments, as defined, at least equal to the lesser of $250.0 million or 100% of its adjusted loss reserves and loss adjustment expenses reserves, as defined. As of December 31, 2011, Affirmative Insurance Company was deficient in meeting the qualifying investments requirement by $18.9 million. Management submitted a plan to cure the deficiency and the Illinois Department of Insurance approved management’s plan to cure the deficiency by September 30, 2012. Management is working on a number of actions to cure the deficiency. If AIC is not compliant as of September 30, 2012, AIC could be deemed to be in hazardous financial condition and the Director of the Illinois Department of Insurance could take one or more of the actions authorized by law for insurers in hazardous financial condition.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. This assumes continuing operations and the realization of assets and liabilities in the normal course of business. If AIC was not in compliance with the requirement by September 30, 2012, it could have a material adverse effect on the Company’s operations and the interests of its creditors and stockholders and could raise significant uncertainty about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or liabilities related to the going concern uncertainty.

10. Net Loss Per Common Share

Net loss per common share is based on the weighted average number of shares outstanding. Diluted weighted average shares is calculated by adjusting basic weighted average shares outstanding by all potentially dilutive stock options and restricted stock. Stock options outstanding of 502,000 for the three and six months ended June 30, 2012 and stock options outstanding of 558,900 for the three and six months ended 2011 were not included in the computation of diluted earnings per share because there is a loss from operations in the respective periods and thus the inclusion would have been anti-dilutive.

The following table sets forth the reconciliation of numerators and denominators for the basic and diluted earnings per share computation for the three and six months ended June 30, 2012 and 2011 (in thousands, except per share amounts):

	Three Months Ended June 30,					Six Months Ended June 30,
	2012			2011		2012			2011
Numerator:
Income (loss) from continuing operations	$	(5,695	)	$	19	$	(14,175	)	$	(9,791	)
Denominator:
Weighted average common shares outstanding		15,408			15,408		15,408			15,408
Weighted average diluted shares outstanding		15,408			15,408		15,408			15,408
Basic loss per common share from continuing operations:	$	(0.37	)	$	—	$	(0.92	)	$	(0.64	)
Diluted loss per common share from continuing operations:	$	(0.37	)	$	—	$	(0.92	)	$	(0.64	)

11. Related Party Transactions

The Company has entered into certain transactions with a partnership that is affiliated with J. Christopher Flowers. Mr. Flowers is affiliated with New Affirmative LLC, the majority shareholder of the Company.

In the fourth quarter of 2010, the Company committed to invest $2.5 million in Varadero, a hedge fund, and $10.0 million in a related liquidity-focused product. The investment manager of Varadero is Varadero Capital, L.P., of which Varadero GP, LLC is the general partner. Both the investment manager and general partner are partially-owned by an entity affiliated with Mr. Flowers. As of

15

June 30, 2012, the Company had funded $2.5 million in the hedge fund and approximately $3.9 million in the related liquidity-focused product. At June 30, 2012, the fair value of the hedge fund was approximately $3.1 million, based on net asset value and recorded as other invested assets, and the fair value of the liquidity-focused product was approximately $3.9 million, included in available-for-sale securities in the consolidated balance sheets.

12. Fair Value of Financial Instruments

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

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

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

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

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

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

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Financial assets measured at fair value on a recurring basis

The following table provides information as of June 30, 2012 about the Company’s financial assets measured at fair value on a recurring basis (in thousands):

	Total		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
U.S. Treasury and government agencies	$	11,504	$	11,504	$	—	$	—
Mortgage-backed securities		3,922		—		3,922		—
States and political subdivisions		11,823		—		11,823		—
Corporate debt securities		38,142		—		38,142		—
FDIC-insured certificates of deposit		16,949		—		16,949		—
Total investment securities		82,340		11,504		70,836		—
Other invested assets		3,098		—		—		3,098
Total assets	$	85,438	$	11,504	$	70,836	$	3,098

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

	Total		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
U.S. Treasury and government agencies	$	11,975	$	11,975	$	—	$	—
Mortgage-backed securities		10,951		—		10,951		—
States and political subdivisions		17,178		—		17,178		—
Corporate debt securities		61,637		—		61,637		—
FDIC-insured certificates of deposit		21,181		—		21,181		—
Total investment securities		122,922		11,975		110,947		—
Other invested assets		2,898		—		—		2,898
Total assets	$	125,820	$	11,975	$	110,947	$	2,898

Level 1 Financial assets

Financial assets classified as Level 1 in the fair value hierarchy include U.S. Treasury and government agencies securities and cash and cash equivalents. These securities are actively traded and the Company estimates the fair value of these securities using unadjusted quoted market prices.

Level 2 Financial assets

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

Level 3 Financial assets

At June 30, 2012, the Company’s Level 3 financial assets include an investment in a hedge fund, which is presented as other invested assets in the consolidated balance sheets. The Company measured the fair value of the hedge fund on the basis of the net asset value of the fund as reported by the fund manager. The hedge fund is primarily invested in residential mortgage-backed securities

17

and other asset-backed securities which are recorded at fair value as determined by the fund manager. Such fair value determination is based on quoted marked prices, bid prices, or the fund manager’s proprietary valuation models where quoted prices are unavailable or deemed to be inadequately representative of fair value. Significant decreases in the fair value of the underlying securities in the hedge fund would result in a significantly lower fair value measurement of other invested assets as reported in the consolidated balance sheets.

Fair value measurements for assets in Level 3 for the three months ended June 30, 2012 were as follows (in thousands):

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Other Invested Assets
Balance at April 1, 2012	$	3,016
Transfers into Level 3		—
Total gains included in earnings as net investment income		82
Settlements		—
Balance at June 30, 2012	$	3,098

Fair value measurements for assets in Level 3 for the three months ended June 30, 2011 were as follows (in thousands):

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Other Invested Assets
Balance at April 1, 2011	$	2,735
Transfers into Level 3		—
Total gains included in earnings as net investment income		105
Settlements		—
Balance at June 30, 2011	$	2,840

Fair value measurements for assets in Level 3 for the six months ended June 30, 2012 were as follows (in thousands):

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Other Invested Assets
Balance at January 1, 2012	$	2,898
Transfers into Level 3		—
Total gains included in earnings as net investment income		200
Settlements		—
Balance at June 30, 2012	$	3,098

Fair value measurements for assets in Level 3 for the six months ended June 30, 2011 were as follows (in thousands):

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Other Invested Assets
Balance at January 1, 2011	$	2,564
Transfers into Level 3		—
Total gains included in earnings as net investment income		276
Settlements		—
Balance at June 30, 2011	$	2,840

The Company did not have any transfers between Levels 1 and 2 during the period ended June 30, 2012.

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Financial Instruments Disclosed, But Not Carried, At Fair Value

Fair values represent the Company’s best estimates and may not be substantiated by comparisons to independent markets and, in many cases, could not be realized in immediate settlement of the instruments.

The following table presents the carrying value and fair value of the Company’s financial assets and liabilities disclosed, but not carried, at fair value at June 30, 2012 and the level within the fair value hierarchy at which such assets and liabilities are measured on a recurring basis (in thousands):

	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	29,248	$	29,248	$	29,248	$	—	$	—
Fiduciary and restricted cash		779		779		779		—		—
Total	$	30,027	$	30,027	$	30,027	$	—	$	—
Liabilities:
Notes payable	$	76,849	$	12,997	$	—	$	—	$	12,997
Senior secured credit facility		91,266		73,701		—		—		73,701
Total	$	168,115	$	86,698	$	—	$	—	$	86,698

The following table presents the carrying value and fair value of the Company’s financial assets and liabilities disclosed, but not carried, at fair value at December 31, 2011 and the level within the fair value hierarchy at which such assets and liabilities are measured on a recurring basis (in thousands):

	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	28,559	$	28,559	$	28,559	$	—	$	—
Fiduciary and restricted cash		2,478		2,478		2,478		—		—
Total	$	31,037	$	31,037	$	31,037	$	—	$	—
Liabilities:
Notes payable	$	76,857	$	17,433	$	—	$	—	$	17,433
Senior secured credit facility		91,683		79,554		—		—		79,554
Total	$	168,540	$	96,987	$	—	$	—	$	96,987

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

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

As of June 30, 2012, our subsidiaries included insurance companies licensed to write insurance policies in 39 states, underwriting agencies, retail agencies with 200 owned stores and a relationship with two unaffiliated underwriting agencies. We are currently active in offering insurance directly to individual consumers through retail stores in 9 states (Louisiana, Texas, Illinois, Alabama, Missouri, Indiana, South Carolina, Kansas and Wisconsin) and distributing our own insurance policies through our owned retail stores and approximately 4,800 independent agents or brokers in 8 states (Louisiana, Texas, Illinois, Alabama, California, Missouri, Indiana and South Carolina). In March 2011, we discontinued writing new business in the state of Michigan, and in June 2011 we discontinued writing renewals.

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

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

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

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

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

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

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

ADOPTED ACCOUNTING STANDARDS

In October 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. ASU 2010-26 modified the definitions of the type of costs that can be capitalized in the successful acquisition of new and renewal insurance contracts. ASU 2010-26 requires incremental direct costs of successful contract acquisition as well as certain costs related to underwriting, policy issuance and processing, medical and inspection and sales force contract selling for successful contract acquisition to be capitalized. These incremental direct costs and other costs are those that are essential to the contract transaction and would not have been incurred had the contract transaction not occurred. The Company retrospectively adopted ASU 2010-26 on January 1, 2012. The cumulative effect of the adoption was a decrease of shareholders’ equity by $11.3 million, net of tax, as of January 1, 2011.

The following table illustrates the effect of adopting ASU 2010-26 in the consolidated balance sheets (in thousands):

	December 31, 2011
	Previously Reported			As Adjusted
Deferred acquisition costs, net	$	3,206		$	(6,464	)
Stockholders’ deficit		(71,307	)		(80,977	)

20

The following table illustrates the effect of adopting ASU 2010-26 in the consolidated statements of operations (in thousands, except per share amounts):

	Three Months Ended June 30, 2011					Six Months Ended June 30, 2011
	Previously Reported			As Adjusted		Previously Reported			As Adjusted
Selling, general and administrative expenses	$	28,274		$	27,441	$	61,975		$	61,304
Net income (loss)		(814	)		19		(10,462	)		(9,791	)
Net loss per share:
Basic		(0.05	)		—		(0.68	)		(0.64	)
Diluted		(0.05	)		—		(0.68	)		(0.64	)

ASU 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment, permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. Additionally, if the carrying amount of a reporting unit is zero or negative, the second step of the impairment test shall be performed to measure the amount of the impairment loss, if any, when it is more likely than not that a goodwill impairment exists. In considering whether it is more likely than not that a goodwill impairment exists, a qualitative assessment will be performed. If an entity concludes it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it need not perform the two-step impairment test. This standard is effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Our qualitative assessment consisted of consideration of current and projected earnings, premium volume, and projected loss and expense ratios over the next five years, as well as business trends and market conditions. Based on this assessment, we do not believe it is more likely than not that goodwill impairment exists as of June 30, 2012. As a result, the two-step impairment test was not performed. The adoption of this standard did not have an impact on the Company’s consolidated financial position, results of operations or cash flows.

In addition to the above, refer to Note 1 to the unaudited Consolidated Financial Statements for a discussion of other accounting standards that have been adopted during 2012.

MEASUREMENT OF PERFORMANCE

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

As part of our corporate strategy, we treat our retail stores as independent agents, encouraging them to sell to their individual customers whatever products are most appropriate for and affordable to those customers. We believe that this offers our retail customers the best combination of service and value, developing stronger customer loyalty and improving customer retention. In practice, this means that in our retail stores, the relative proportion of the sales of our own insurance products as compared to the sales of the third-party policies will vary depending upon the competitiveness of our insurance products in the marketplace during the period. This reflects our intention of maintaining the margins in our insurance company subsidiaries, even at the cost of business lost to third-party carriers.

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

21

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Our underwriting agencies:
Retail agencies	$	31,913	$	34,031	$	78,666	$	86,219
Independent agencies		12,254		11,808		27,924		32,939
Subtotal		44,167		45,839		106,590		119,158
Unaffiliated underwriting agencies		2,931		3,761		6,076		8,221
Total	$	47,098	$	49,600	$	112,666	$	127,379

Total gross premiums written for the three months ended June 30, 2012 decreased $2.5 million, or 5.0%, compared with the prior year quarter. Total gross premiums written for the six months ended June 30, 2012 decreased $14.7 million, or 11.6%, compared with the prior year period. This decrease was due to a decline in renewal policies because of a number of actions taken during 2010 and 2011 to increase prices and strengthen underwriting standards to improve the profitability of the gross premiums written. New business policies increased 27.0% for the three months ended June 30, 2012 compared to the prior year quarter, which was comprised of an 8.5% increase from our retail stores and an 85.5% increase from independent agents. New business policies increased 11.8% for the six months ended June 30, 2012 compared to the prior year period, which was comprised of a 4.9% increase from our retail stores and a 32.2% increase from independent agents. Based on new business and renewal trends, we anticipate that gross premiums written during the second half of 2012 will exceed the level written in the second half of 2011 if such trends continue.

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Our policies	$	31,913	$	34,031	$	78,666	$	86,219
Third-party carrier policies		10,403		12,122		26,769		27,555
Total	$	42,316	$	46,153	$	105,435	$	113,774

Gross premiums written of our policies in our retail distribution channel for the three and six months ended June 30, 2012 decreased $2.1 million and $7.6 million, or 6.2% and 8.8%, respectively, compared with the prior year. This decrease is a result of the decline in renewal policies. Third-party policies for the three and six months ended June 30, 2012 decreased $1.7 million and $0.8 million, or 14.2% and 2.9%, respectively, compared with the prior year.

In our independent agency distribution channel, gross premiums written for the three months ended June 30, 2012 increased $0.4 million, or 3.8%, compared with the prior year quarter. Gross premiums written for the six months ended June 30, 2012 decreased $5.0 million, or 15.2%, compared with the prior year period. We stopped writing new policies in Michigan in March 2011 and renewing policies in June 2011. Michigan represented $1.1 million of the decline.

Gross premiums written by our unaffiliated underwriting agencies for the three and six months ended June 30, 2012 decreased $0.8 million and $2.1 million, or 22.1% and 26.1%, respectively, compared with the prior year.

22

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

	Three Months Ended June 30,					Six Months Ended June 30,
	2012			2011		2012			2011
Louisiana	$	22,810		$	25,235	$	56,485		$	64,609
Texas		9,816			7,546		20,175			19,657
Illinois		5,099			5,782		12,367			13,836
Alabama		3,863			4,733		11,726			13,713
California		2,910			3,732		6,040			8,164
Indiana		1,538			1,340		3,782			3,486
South Carolina		566			700		1,198			1,747
Missouri		502			459		925			1,128
Michigan		—			55		—			1,015
Other		(6	)		18		(32	)		24
Total	$	47,098		$	49,600	$	112,666		$	127,379

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Our underwriting agencies:
Retail agencies — gross premiums written	$	31,913		$	34,031		$	78,666		$	86,219
Ceded reinsurance		(12,186	)		(9,269	)		(19,303	)		(23,218	)
Subtotal retail agencies net premiums written		19,727			24,762			59,363			63,001
Independent agencies — gross premiums written		12,254			11,808			27,924			32,939
Ceded reinsurance		(4,347	)		(2,440	)		(5,396	)		(8,964	)
Subtotal independent agencies net premiums written		7,907			9,368			22,528			23,975
Unaffiliated underwriting agencies — gross premiums written		2,931			3,761			6,076			8,221
Ceded reinsurance		(17	)		(2,267	)		624			(2,284	)
Subtotal unaffiliated underwriting agencies net premiums written		2,914			1,494			6,700			5,937
Excess of loss coverages with various reinsurers		(126	)		(407	)		(270	)		(1,375	)
Catastrophe coverages with various reinsurers		(131	)		(241	)		(292	)		(325	)
Total net premiums written	$	30,291		$	34,976		$	88,029		$	91,213

Total net premiums written for the three months ended June 30, 2012 decreased $4.7 million, or 13.4%, compared with the prior year quarter. Total net premiums written for the six months ended June 30, 2012 decreased $3.2 million, or 3.5%, compared with the prior year period. The decreases were primarily due to the decline in gross written premium and a higher level of ceded written premium, which was partially offset during the first six months of the year by the termination of a quota-share reinsurance agreement on January 1, 2012. This contract, put in place effective January 1, 2011, terminated on a cut-off basis and resulted in the return of $11.8 million of ceded unearned premium, net of $4.3 million of deferred ceding commissions during the six months ended June 30, 2012.

In 2011, we entered into an additional quota-share agreement with a third-party reinsurance company under which we ceded 10% of business produced in Louisiana, Alabama, Texas and Illinois from September 1, 2011 through December 31, 2011. At December 31, 2011, this contract converted to a 40% quota-share reinsurance contract on the in-force business for the applicable states throughout 2012. Written premiums ceded under this agreement totaled $16.5 million and $40.1 million during the three and six months ended June 30, 2012, respectively. Written premiums ceded under this agreement totaled $63.0 million since inception.

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RESULTS OF OPERATIONS

We had a net loss of $5.7 million for the three months ended June 30, 2012 and net income of $0.02 million for the three months ended June 30, 2011. We had a net loss of $14.2 million and $9.8 million for the six months ended June 30, 2012 and 2011, respectively.

Comparison of the Three Months Ended June 30, 2012 to the Three Months Ended June 30, 2011

Total revenues for the three months ended June 30, 2012 decreased $13.7 million, or 20.9%, compared with the three months ended June 30, 2011. The decrease was due to decreases in net premiums earned, commission income and fees, and net investment income, partially offset by increases in net realized gains and other income.

The largest component of revenue is net premiums earned on insurance policies. Due to the decline in net written premiums, net premiums earned for the current quarter decreased $11.7 million, or 25.1%, to $34.9 million compared with the prior year quarter of $46.7 million. Since insurance premiums are earned over the service period of the policies, the revenue in the current quarter includes premiums earned on insurance products written through our three distribution channels in both current and previous periods.

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

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

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

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

	Three Months Ended June 30,
	2012		2011
Policyholder fees	$	4,944	$	6,109
Premium finance revenue		5,538		6,175
Commissions and fees		3,640		3,956
Agency fees		807		1,058
Total commission income and fees	$	14,929	$	17,298

Total commission income and fees decreased $2.4 million, or 13.7%, compared with the prior year quarter. Policyholder fees decreased $1.2 million, or 19.1%, due to the lower overall volume of premiums written and a change in mix of states. Premium finance revenue decreased $0.6 million, or 10.3%, due to decreases in the number of policies financed and revenue per policy. Commissions and fees decreased $0.3 million, or 8.0%, primarily due to decreases of third-party sales and ancillary product sales.

Net Investment Income. Net investment income includes income on our portfolio of debt securities and net rental income from our investment in real property. Net investment income for the current quarter decreased $0.6 million, or 46.3%, compared with the prior year quarter. The decrease was primarily due to a 48.0% decrease in total average invested assets to $89.0 million during the current quarter from $171.2 million in the prior year quarter, which was partially offset by a $0.1 million increase in income from our investment in real estate. The average investment yield was 2.2% (2.4% on a taxable equivalent basis) for both the current quarter and the prior year quarter.

24

Losses and Loss Adjustment Expenses. Since the largest expenses of an insurance company are the losses and loss adjustment expenses, another measurement of our insurance carriers’ performance is the level of such expenses, specifically as a ratio to earned premiums. Our losses and loss adjustment expenses are a blend of the specific estimated and actual costs of providing the coverage contracted by the purchasers of our insurance policies. We maintain reserves to cover our estimated ultimate liability for losses and related loss adjustment expenses for both reported and unreported claims on the insurance policies issued by our insurance companies. The establishment of appropriate reserves is an inherently uncertain process, involving actuarial and statistical projections of what we expect to be the cost of the ultimate settlement and administration of claims based on historical claims information, estimates of future trends in claims severity and other variable factors such as inflation. The change in claims practices that began in the third quarter of 2009 and throughout 2010 added additional uncertainty to the reserving process. Due to the inherent uncertainty of estimating reserves, reserve estimates can be expected to vary from period to period. To the extent that our reserves prove to be inadequate in the future, we would be required to increase our reserves for losses and loss adjustment expenses and incur a charge to earnings in the period during which such reserves are increased. The historic development of our reserves for losses and loss adjustment expenses is not necessarily indicative of future trends in the development of these amounts.

Net losses and loss adjustment expenses for the current quarter decreased $2.7 million, or 9.1%, compared with the prior year quarter. The percentage of net losses and loss adjustment expense to net premiums earned (the net loss ratio) was 76.5% in the current quarter, compared with 63.0% in the prior year quarter. The prior year quarter included $5.0 million of favorable prior period development. On an accident year basis, the net loss ratio was 75.8% in the current quarter, compared with 73.6% in the prior year quarter. The current quarter’s loss ratio was significantly impacted by the quota-share treaty. Loss adjustment expenses include all of the business subject to the quota-share treaties with ceding commission income booked as an offset to selling, general and administrative expenses. As such, the quota-share treaties’ impact on the loss ratio was to increase it by 4.0 points for the three months ended June 30, 2012 and 1.7 points for the prior year quarter. Excluding the impact of the quota-share, the net loss ratio for the current accident year was comparable to the prior year quarter.

Selling, General and Administrative Expenses. Another measurement of our performance that addresses our overall efficiency is the level of selling, general and administrative expenses. We recognize that our customers are primarily motivated by low prices. As a result, we strive to keep our costs as low as possible to be able to keep our prices affordable and thus to maximize our sales while still maintaining profitability. Our selling, general and administrative expenses include not only the cost of acquiring the insurance policies through our insurance carriers (the amortization of the deferred acquisition costs) and managing our insurance carriers and the retail stores, but also the costs of the holding company. The largest component of selling, general and administrative expenses is personnel costs, including compensation and benefits. Selling, general and administrative expenses decreased $3.8 million, or 14.0%, compared with the prior year quarter, primarily due to a $2.1 million decline in employee compensation and benefits due to management actions to reduce expenses and a $1.8 million decline in deferred acquisition cost amortization expense due to a decrease in premiums.

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

25

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

	Three Months Ended June 30,
	2012			2011, As Adjusted
Amortization of deferred acquisition costs, net	$	(1,597	)	$	224
Other selling, general and administrative expenses		25,208			27,217
Total selling, general and administrative expenses	$	23,611		$	27,441
Total as a percentage of net premiums earned		67.6	%		58.8	%
Beginning deferred acquisition costs, net	$	(2,259	)	$	97
Additions, net of ceding commission		(775	)		(99	)
Amortization, net of ceding commissions		1,597			(224	)
Ending deferred acquisition costs	$	(1,437	)	$	(226	)
Amortization of deferred acquisition costs, net, as a percentage of net premiums earned		(4.6	)%		0.5	%

Interest Expense. Interest expense for the current quarter decreased $0.9 million, or 15.3%, compared with the prior year quarter. This decrease was due to decreases in the average debt outstanding, in the amortization of debt discount and in interest expense on the lease obligation entered into in May 2010. Amortization of debt discount was $1.0 million in the current quarter as compared with $1.2 million for the prior year quarter.

Income Taxes. Income tax expense for the current quarter was $0.1 million as compared with income tax expense of $0.4 million for the prior year quarter. Income tax expense for both periods represents increasing deferred tax liabilities arising from timing differences on goodwill and other intangible assets.

Comparison of the Six Months Ended June 30, 2012 to the Six Months Ended June 30, 2011

Total revenues for the six months ended June 30, 2012 decreased $34.5 million, or 25.1%, compared with the six months ended June 30, 2011. The decrease was due to decreases in net premiums earned, commission income and fees, and net investment income, partially offset by increases in net realized gains and other income.

The largest component of revenue is net premiums earned on insurance policies. Due to the decline in net written premiums, net premiums earned for the current period decreased $28.1 million, or 28.9%, to $69.1 million compared with the prior year period of $97.2 million. Since insurance premiums are earned over the service period of the policies, the revenue in the current quarter includes premiums earned on insurance products written through our three distribution channels in both current and previous periods.

Commission Income and Fees.

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

	Six Months Ended June 30,
	2012		2011
Policyholder fees	$	9,718	$	13,959
Premium finance revenue		11,079		12,288
Commissions and fees		8,399		8,663
Agency fees		1,916		2,418
Total commission income and fees	$	31,112	$	37,328

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Total commission income and fees decreased $6.2 million, or 16.7%, compared with the prior year period. Policyholder fees decreased $4.2 million, or 30.4%, due to the lower overall volume of premiums written and a change in mix of states. Premium finance revenue decreased $1.2 million, or 9.8%, due to decreases in the number of policies financed and revenue per policy. Commissions and fees decreased $0.3 million, or 3.0%, due to a decrease in ancillary product sales.

Net Investment Income. Net investment income includes income on our portfolio of debt securities and net rental income from our investment in real property. Net investment income for the current period decreased $1.1 million, or 37.7%, compared with the prior year period. The decrease was primarily due to a 46.6% decrease in total average invested assets to $97.7 million during the current period from $183.1 million in the prior year period, which was partially offset by a $0.2 million increase in income from our investment in real estate. The average investment yield was 2.2% (2.4% on a taxable equivalent basis) in both the current period and comparable prior year period.

Losses and Loss Adjustment Expenses. Net losses and loss adjustment expenses for the current period decreased $17.4 million, or 25.0%, compared with the prior year period. The percentage of net losses and loss adjustment expense to net premiums earned (the net loss ratio) was 75.8% in the current period, compared with 71.8% in the prior year period. The prior year period included $5.0 million of favorable prior period development. On an accident year basis, the net loss ratio was 75.8% in the current period, compared with 77.0% in the prior year period. Loss adjustment expenses include all of the business subject to the quota-share treaties with ceding commission income booked as an offset to selling, general and administrative expenses. As such, the quota-share treaties’ impact on the loss ratio was to increase it by 4.7 points for the current period and 3.3 points for the prior year period. Excluding the impact of the quota-share, the net loss ratio for the current accident year was 71.0% for the six months ended June 30, 2012 and 73.6% for the comparable prior year period. This decrease reflects the pricing and underwriting actions that commenced in the second half of 2010.

Selling, General and Administrative Expenses. The largest component of selling, general and administrative expenses is personnel costs, including compensation and benefits. Selling, general and administrative expenses decreased $10.9 million, or 17.7%, compared with the prior year period, primarily due to a $5.5 million decline in employee compensation and benefits due to management actions to reduce expenses and a $4.5 million decline in deferred acquisition cost amortization expense due to a decrease in premiums.

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

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

	Six Months Ended June 30,
	2012			2011, As Adjusted
Amortization of deferred acquisition costs, net	$	(3,499	)	$	963
Other selling, general and administrative expenses		53,931			60,341
Total selling, general and administrative expenses	$	50,432		$	61,304
Total as a percentage of net premiums earned		73.0	%		63.1	%
Beginning deferred acquisition costs, net	$	(6,464	)	$	460
Additions, net of ceding commission		1,528			277
Amortization, net of ceding commissions		3,499			(963	)
Ending deferred acquisition costs	$	(1,437	)	$	(226	)
Amortization of deferred acquisition costs, net, as a percentage of net premiums earned		(5.1	)%		1.0	%

Interest Expense. Interest expense for the current period decreased $1.0 million, or 9.0%, compared with the prior year period. This decrease was due to decreases in the average debt outstanding, in the amortization of debt discount and in interest expense on the lease obligation entered into in May 2010. Amortization of debt discount was $2.0 million in the current period as compared with $2.3 million for the prior year period.

27

Income Taxes. Income tax expense for the current period was $0.2 million as compared with income tax expense of $0.9 million for the prior year period. Income tax expense for both periods represents increasing deferred tax liabilities arising from timing differences on goodwill and other intangible assets.

Our gross deferred tax assets prior to recognition of valuation allowance were $97.0 million and $92.7 million at June 30, 2012 and December 31, 2011, respectively. In assessing the realizability of our deferred tax assets, we considered whether it was more likely than not that our deferred tax assets will be realized based upon all available evidence, including scheduled reversal of deferred tax liabilities, historical operating results, projected future operating results, tax carry-back availability, and limitations pursuant to Section 382 of the Internal Revenue Code, among others. Based on this assessment, we began recording a valuation allowance against deferred taxes in December 2009. The valuation allowance was $94.0 million and $88.9 million at June 30, 2012 and December 31, 2011, respectively.

LIQUIDITY AND CAPITAL RESOURCES

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

There are no restrictions on the payment of dividends by our non-insurance company subsidiaries other than state corporate laws regarding solvency. As a result, our non-insurance company subsidiaries generate revenues, profits and net cash flows that are generally unrestricted as to their availability for the payment of dividends and we have and expect to continue to use those revenues to service our corporate financial obligations, such as debt service and stockholder dividends. As of June 30, 2012, we had $4.6 million of cash and cash equivalents at our holding company and non-insurance company subsidiaries.

State insurance laws restrict the ability of our insurance company subsidiaries to declare stockholder dividends. These subsidiaries may not make an “extraordinary dividend” until 30 days after the applicable commissioner of insurance has received notice of the intended dividend and has not objected in such time or until the commissioner has approved the payment of the extraordinary dividend within the 30-day period. In most states, an extraordinary dividend is defined as any dividend or distribution of cash or other property whose fair market value, together with that of other dividends and distributions made within the preceding 12 months, exceeds the greater of 10.0% of the insurance company’s surplus as of the preceding year-end or the insurance company’s net income for the preceding year, in each case determined in accordance with statutory accounting practices. In addition, dividends may only be paid from unassigned earnings and an insurance company’s remaining surplus must be both reasonable in relation to its outstanding liabilities and adequate to its financial needs. As of June 30, 2012, our insurance companies could not pay ordinary dividends to us without prior regulatory approval due to a negative unassigned surplus position of Affirmative Insurance Company. However, as mentioned previously, our non-insurance company subsidiaries provide adequate cash flow to fund their own operations.

The Illinois Insurance Code includes a reserve requirement that an insurer maintain an amount of qualifying investments, as defined, at least equal to the lesser of $250.0 million or 100% of its adjusted loss reserves and loss adjustment expenses reserves, as defined. As of December 31, 2011, Affirmative Insurance Company was deficient in meeting the qualifying investments requirement by $18.9 million. Management submitted a plan to cure the deficiency and the Illinois Department of Insurance approved management’s plan to cure the deficiency by September 30, 2012. Management is working on a number of actions to cure the deficiency. If AIC is not compliant as of September 30, 2012, AIC could be deemed to be in hazardous financial condition and the Director of the Illinois Department of Insurance could take one or more of the actions authorized by law for insurers in hazardous financial condition.

The accompanying consolidated financial statements have been prepared assuming we will continue as a going concern. This assumes continuing operations and the realization of assets and liabilities in the normal course of business. If AIC is not in compliance with the requirement by September 30, 2012, it could have a material adverse effect on our operations and the interests of our creditors and stockholders and could raise significant uncertainty about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or liabilities related to the going concern uncertainty.

Our insurance company subsidiaries are subject to risk-based capital standards and other minimum capital and surplus requirements imposed under applicable state laws, including the laws of their state of domicile. The risk-based capital standards, based upon the Risk-Based Capital Model Act, adopted by the National Association of Insurance Commissioners (NAIC), require our insurance company subsidiaries to report their results of risk-based capital calculations to state departments of insurance and the

28

NAIC. Failure to meet applicable risk-based capital requirements or minimum statutory capital requirements could subject us to further examination or corrective action imposed by state regulators, including limitations on our writing of additional business, state supervision or liquidation. Any changes in existing risk-based capital requirements or minimum statutory capital requirements may require us to increase our statutory capital levels. At June 30, 2012, each of our insurance subsidiaries maintained a risk-based capital level that was in excess of an amount that would require any corrective actions. At December 31, 2011, each of our insurance subsidiaries maintained a risk-based capital level that was in excess of an amount that would require any corrective actions. Effective January 1, 2012, the NAIC revised the Risk-Based Capital Model Act to include a risk-based capital trend test as another manner under which the company action level could be triggered and will be applied as of December 31, 2012. The test is applicable when an insurance company has a risk-based capital ratio between 200% and 300% and a combined ratio of more than 120%. If the risk-based capital trend test was in place during 2011, Affirmative Insurance Company would not have met the thresholds of the test as the combined ratio was 126%. However, we believe that AIC will pass the test in 2012 based on the actions that we have taken including the exit of the Michigan business, the underwriting and pricing actions that we began in the second half of 2010 and expense reductions.

On February 28, 2012, the Company exercised its right to defer interest payments on selected Notes Payable beginning with the scheduled interest payment due in March 2012 and continuing for a period of up to five years. The affected notes are associated with obligations to the Company’s unconsolidated trusts. The outstanding balance of the affected notes was $56.7 million as of June 30, 2012. The Company will continue to accrue interest on the principal during the extension period and the unpaid deferred interest will also accrue interest. Deferred interest will be due and payable at the expiration of the extension period.

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

We believe that existing cash and investment balances, as well as cash flows generated from operations, and other actions taken by the Company will be adequate to meet our liquidity needs, planned capital expenditures and the debt service requirements of the senior secured credit facility and notes payable, during the 12-month period following the date of this report at both the holding company and insurance company levels. For the six months ended June 30, 2012, our net cash used in operations was $32.2 million. We believe that this amount will be significantly reduced for the year ending December 31, 2012 due to our exit from the Michigan business, premium production stabilizing and quota-share reinsurance already being in place in 2011. These items had a substantial impact on the net cash used in operations during 2011. However, if premium production levels were to continue to decline, this could have a material negative impact on operating results, financial position, cash flow and debt covenant compliance. We do not currently know of any events that could cause a material increase or decrease in our long-term liquidity needs other than the 2014 expiration of our senior secured credit facility.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Interest rate risk. Our investment portfolio consists of investment-grade, fixed-income securities classified as available-for-sale investment securities. Accordingly, the primary market risk exposure to our debt securities is interest rate risk. In general, the fair market value of a portfolio of fixed-income securities increases or decreases inversely with changes in market interest rates, while net investment income realized from future investments in fixed-income securities increases or decreases along with interest rates. In addition, some of our fixed-income securities have call or prepayment options. This could subject us to reinvestment risk should interest rates fall and issuers call their securities and we reinvest at lower interest rates. We attempt to mitigate this interest rate risk by investing in securities with varied maturity dates and by managing the duration of our investment portfolio to the duration of our reserves. The fair value of our fixed-income securities as of June 30, 2012 was $82.3 million. The effective average duration of the portfolio as of June 30, 2012 was 1.5 years. If market interest rates increase 1.0%, our fixed-income investment portfolio would be expected to decline in market value by 1.5%, or $1.2 million, representing the effective average duration multiplied by the change in market interest rates. Conversely, a 1.0% decline in interest rates would result in a 1.5%, or $1.2 million, increase in the market value of our fixed-income investment portfolio.

Our senior secured credit facility is also subject to interest rate risk. In March 2011, we entered into an amendment that changed the pricing to be tiered based on the leverage ratio and includes a LIBOR floor of 3.0%. The interest rate is floating based on LIBOR plus increments tied to our leverage ratio. Effective April 1, 2011, the pricing under the agreement changed to if the leverage ratio is greater than 2.3, the pricing is LIBOR plus 9.00%. If the leverage ratio is greater than 2.0 and less than or equal to 2.3, the pricing is LIBOR plus 7.50%. If the leverage ratio is greater than 1.8 and less than or equal to 2.0, the pricing is LIBOR plus 6.25%. The pricing for leverage ratios less than or equal to 1.8 was unchanged. The interest rate at June 30, 2012 was 10.5%.

Our notes payable are also subject to interest rate risk. The $30.9 million notes adjust quarterly to the three-month LIBOR rate plus 3.60%. The interest rate as of June 30, 2012 was 4.07%. The $25.8 million notes adjust quarterly to the three-month LIBOR rate

29

plus 3.55%. The interest rate as of June 30, 2012 was 4.02%. The $20.2 million notes payable bear an interest rate of the three-month LIBOR rate plus 3.95%. The interest rate as of June 30, 2012 was 4.42%.

Credit risk. An additional exposure to our investment portfolio is credit risk. We attempt to manage our credit risk by investing only in investment-grade securities and limiting our exposure to a single issuer. At June 30, 2012 and December 31, 2011, respectively, our investments were in the following:

	June 30, 2012			December 31, 2011
Corporate debt securities		46.3	%		50.1	%
FDIC-insured certificates of deposit		20.6			17.2
States and political subdivisions		14.3			14.0
U.S. Treasury and government agencies		14.0			9.8
Mortgage-backed securities		4.8			8.9
Total		100.0	%		100.0	%

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

	June 30, 2012			December 31, 2011
Total invested assets	$	82,340		$	122,922
Tax-equivalent book yield		2.37	%		2.44	%
Average duration in years		1.50			1.82
Average S&P rating		AA-			A+

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

Our hedge fund investment of $3.1 million at June 30, 2012 is also subject to credit and counterparty risk, in the event that issuers of any of the underlying commercial and residential mortgage-backed securities should default. However, this investment is not material to our overall investment portfolio or consolidated assets and we have established investment policy guidelines to limit the amount of investments other than high quality fixed-income securities.

The table below presents the total amount of receivables due from reinsurance as of June 30, 2012 and December 31, 2011, respectively (in thousands):

	June 30, 2012		December 31, 2011
Michigan Catastrophic Claims Association	$	43,044	$	44,049
Quota-share reinsurer for agreement effective September 1, 2011		42,231		22,102
Quota-share reinsurer for agreements effective in fourth quarter of 2010 and January 2011		12,077		46,103
Vesta Insurance Group		10,071		10,068
Excess of loss reinsurers		5,624		5,458
Other		3,217		3,667
Total reinsurance receivable	$	116,264	$	131,447

The quota-share reinsurers and excess of loss reinsurers all have A ratings from A.M. Best. Accordingly, we believe there is minimal risk related to these reinsurance receivables.

The Michigan Catastrophic Claims Association (MCCA) is the mandatory reinsurance facility that covers no-fault medical losses above a specific retention amount in Michigan. For policies effective in 2012 and 2011 the retention amount was $0.5 million. As a writer of personal automobile policies in the state of Michigan, we cede premiums and claims to the MCCA. Funding for MCCA comes from assessments against active automobile insurers based upon their proportionate market share of the state’s automobile liability insurance market. Insurers are allowed to pass along this cost to Michigan automobile policyholders.

Under the reinsurance agreement with Vesta Insurance Group (VIG), including primarily Vesta Fire Insurance Corporation (VFIC), our wholly-owned subsidiaries Affirmative Insurance Company (AIC) and Insura Property and Casualty Insurance Company (Insura) had the right, under certain circumstances, to require VFIC to provide a letter of credit or establish a trust account to

30

collateralize the gross amount due AIC and Insura from VFIC under the reinsurance agreement. Accordingly, AIC, Insura and VFIC entered into a Security Fund Agreement in September 2004. In August 2005, AIC received a letter from VFIC’s President that irrevocably confirmed VFIC’s duty and obligation under the Security Fund Agreement to provide security sufficient to satisfy VFIC’s gross obligations under the reinsurance agreement (the VFIC Trust). At June 30, 2012, the VFIC Trust held $16.8 million (after cumulative withdrawals of $8.7 million through June 30, 2012), consisting of a $14.7 million U.S. Treasury money market account and $2.1 million of corporate bonds rated BBB+ or higher, to collateralize the $10.1 million net recoverable (net of $2.9 million payable) from VFIC.

At June 30, 2012, $2.5 million was included in reserves for losses and loss adjustment expenses that represented the amounts owed by AIC and Insura under reinsurance agreements with the VIG affiliated companies, including Hawaiian Insurance and Guaranty Company, Ltd (Hawaiian). Affirmative established a trust account to collateralize this payable, which currently holds $20.7 million in securities (the AIC Trust). The Special Deputy Receiver (SDR) in Texas drew down the AIC Trust $0.4 million through June 2012, and the Special Deputy Receiver in Hawaii had cumulative withdrawals from the AIC Trust of $1.7 million through June 2012.

As part of the terms of the acquisition of AIC and Insura, VIG has indemnified us for any losses due to uncollectible reinsurance related to reinsurance agreements entered into with unaffiliated reinsurers prior to December 31, 2003. As of June 30, 2012, all such unaffiliated reinsurers had A.M. Best ratings of “A-” or better.

Item 4. Controls and Procedures

The Company’s management performed an evaluation under the supervision and with the participation of the Company’s principal executive officer and the principal financial officer, and completed an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e), as adopted by the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934, as amended (the Exchange Act) as of June 30, 2012. Disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.

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

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

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

The Company and its subsidiaries are named from time to time as parties in various legal actions arising in the ordinary course of the Company’s business and arising out of or related to claims made in connection with the Company’s insurance policies and claims handling. There are no material changes with respect to legal and regulatory proceedings previously disclosed in Note 15 to the consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 2011.

Item 1A. Risk Factors

There are no material changes with respect to those risk factors previously disclosed in Item 1A to Part I of our Form 10-K for the year ended December 31, 2011, except as noted below.

Our failure to maintain financial strength requirements as set forth by various state departments of insurance could adversely affect our business and overall liquidity.

Various individual state departments of insurance in jurisdictions where our insurance company subsidiaries conduct business maintain specific requirements in connection with the financial strength of property and casualty insurance companies. Failure on the part of our insurance company subsidiaries to comply with these requirements could subject us to an examination or corrective action imposed by state regulators, including limitations on our writing of additional business, state supervision or liquidation. The Illinois Insurance Code includes a reserve requirement that an insurer maintain an amount of qualifying investments, as defined, at least equal to the lesser of $250.0 million or 100% of its adjusted loss reserves and loss adjustment expenses reserves, as defined. As of December 31, 2011, Affirmative Insurance Company was deficient in meeting the qualifying investments requirement by $18.9 million.

Management submitted a plan to cure the deficiency and the Illinois Department of Insurance approved management’s plan to cure the deficiency by September 30, 2012. Management is working on a number of actions to cure the deficiency. If AIC is not compliant as of September 30, 2012, AIC could be deemed to be in hazardous financial condition and the Director of the Illinois Department of Insurance could take one or more of the actions authorized by law for insurers in hazardous financial condition.

The accompanying consolidated financial statements have been prepared assuming we will continue as a going concern. This assumes continuing operations and the realization of assets and liabilities in the normal course of business. If AIC is not in compliance with the requirement by September 30, 2012, it could have a material adverse effect on our operations and the interests of our creditors and stockholders and could raise uncertainty about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or liabilities related to the going concern uncertainty.

In addition, our common stock was delisted from the NASDAQ Global Select Market effective at the opening of the trading session on June 25, 2012. Accordingly, two risk factors that were disclosed in our 2011 10-K related to NASDAQ listing standards and NASDAQ Global Select Market’s corporate governance standards are no longer applicable.

Item 1B. Unresolved Staff Comments

Since October 2011, we have had ongoing discussions with the staff of the U.S. Securities and Exchange Commission via the comment letter process concerning our evaluation of goodwill impairment as of December 31, 2010. We cannot make a determination of what the outcome of these discussions will be at this point in time.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable.

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Item 3. Defaults Upon Senior Securities

Not Applicable.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

Not Applicable.

Item 6. Exhibits

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

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

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

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

101 The following materials from Affirmative Insurance Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (Extensible Business Reporting Language): (1) the Consolidated Balance Sheets, (2) the Consolidated Statements of Operations, (3) the Consolidated Statements of Comprehensive Income (Loss), (4) the Consolidated Statements of Stockholders’ Equity (Deficit), (5) the Consolidated Statements of Cash Flows, and (6) Notes to Consolidated Financial Statements, including detailed tagging of footnotes and schedules.

32

SIGNATURES

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

	Affirmative Insurance Holdings, Inc.
Date: August 14, 2012	By:	/s/ Michael J. McClure
		Michael J. McClure
		Executive Vice President and Chief Financial Officer (and in his capacity as Principal Financial Officer)

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EX-31.1

Exhibit 31.1

CERTIFICATION

I, Gary Y. Kusumi, Chief Executive Officer of Affirmative Insurance Holdings, Inc., certify that:

1. I have reviewed this report on Form 10-Q of Affirmative Insurance Holdings, Inc.:

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting that are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 14, 2012

/s/ Gary Y. Kusumi

Gary Y. Kusumi

Chief Executive Officer

34

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Michael J. McClure, Executive Vice President and Chief Financial Officer of Affirmative Insurance Holdings, Inc., certify that:

1. I have reviewed this report on Form 10-Q of Affirmative Insurance Holdings, Inc.:

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting that are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 14, 2012

/s/ Michael J. McClure

Michael J. McClure

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

35

EX-32.1

Exhibit 32.1

CERTIFICATION

I, Gary Y. Kusumi, Chairman of the Board and Chief Executive Officer of Affirmative Insurance Holdings, Inc. (the Company), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 to the best of my knowledge, that:

(1) the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2012 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

This certificate is being furnished solely for purposes of Section 906.

Date: August 14, 2012

/s/ Gary Y. Kusumi

Gary Y. Kusumi

Chairman of the Board and Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the U.S. Securities and Exchange Commission or its staff upon request.

36

EX-32.2

Exhibit 32.2

CERTIFICATION

I, Michael J. McClure, Executive Vice President and Chief Financial Officer of Affirmative Insurance Holdings, Inc. (the Company), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 to the best of my knowledge, that:

(1) the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2012 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

This certificate is being furnished solely for purposes of Section 906.

Date: August 14, 2012

/s/ Michael J. McClure

Michael J. McClure

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the U.S. Securities and Exchange Commission or its staff upon request.

37

XML

Reinsurance (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Effect of reinsurance on premiums written and earned
Written Premium, Direct	$ 37,352	$ 42,191	$ 92,646	$ 108,067
Written Premium, Reinsurance assumed	9,746	7,409	20,020	19,312
Written Premium, Reinsurance ceded	(16,807)	(14,624)	(24,637)	(36,166)
Written Premium, Total	30,291	34,976	88,029	91,213
Earned Premium, Direct	45,551	58,072	91,023	123,311
Earned Premium, Reinsurance assumed	9,041	10,641	16,928	24,058
Earned Premium, Reinsurance ceded	(19,657)	(22,042)	(38,835)	(50,147)
Earned Premium, Total	34,935	46,671	69,116	97,222
Loss and Loss Adjustment Expenses, Direct	33,854	45,810	64,397	95,574
Loss and Loss Adjustment Expenses, Reinsurance assumed	8,527	(891)	14,021	9,270
Loss and Loss Adjustment Expenses, Reinsurance ceded	(15,662)	(15,510)	(26,029)	(35,030)
Loss and Loss Adjustment Expenses, Total	$ 26,719	$ 29,409	$ 52,389	$ 69,814

XML

Income Taxes (Details Textual) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Dec. 31, 2011
Income Taxes (Textual) [Abstract]
Effective tax rate from statutory rate	35.00%	35.00%	35.00%	35.00%
Gross deferred tax assets, valuation allowance of prior to recognition	$ 97.0		$ 97.0		$ 92.7
Valuation allowance of prior to recognition	$ 94.0		$ 94.0		$ 88.9

XML

Debt (Details Textual) (USD $)	6 Months Ended
	Jun. 30, 2012	Dec. 31, 2011
Debt Instrument [Line Items]
Notes payable	$ 76,849,000	$ 76,857,000
Interest rate	10.50%
Interest rate adjusted	6.25%
Outstanding balance of notes	76,849,000	76,857,000
Debt (Textual) [Abstract]
Principal balance of the senior secured credit facility	97,200,000
Period of interest payments on selected notes payable	5 years
Total deferred interest payable at the expiration of extension period	1,100,000
Leverage ratio under condition one	3.00%
3.60% Notes payable due 2035 [Member]
Debt Instrument [Line Items]
Notes payable	30,928,000	30,928,000
Interest rate	4.07%
Interest rate adjusted	3.60%
Securities adjusted	Three-month LIBOR
Outstanding balance of notes	30,928,000	30,928,000
3.55% Notes payable due 2035 [Member]
Debt Instrument [Line Items]
Notes payable	25,774,000,000	25,774,000
Interest rate	4.02%
Interest rate adjusted	3.55%
Securities adjusted	Three-month LIBOR
Outstanding balance of notes	25,774,000,000	25,774,000
3.95% Notes payable due 2035 [Member]
Debt Instrument [Line Items]
Notes payable	20,147,000	20,155,000
Interest rate	4.42%
Interest rate adjusted	3.95%
Securities adjusted	Three-month LIBOR
Outstanding balance of notes	20,147,000	20,155,000
Notes Payable With Deferred Interest Right [Member]
Debt Instrument [Line Items]
Notes payable	56,700,000
Outstanding balance of notes	$ 56,700,000

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Legal and Regulatory Proceedings (Details) (USD $)	6 Months Ended
	Jun. 30, 2012	Dec. 31, 2011
Legal and Regulatory Proceedings (Textual) [Abstract]
Estimated range of potential loss	$ 0
Qualifying investments required	250,000,000
Adjusted loss reserves percentage	100.00%
Qualifying Investment Reserve Deficiency		$ 18,900,000

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Deferred Policy Acquisition Costs (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Deferred policy acquisition costs gross [Member]
Summary of policy acquisition costs
Beginning balance	$ 4,963	$ 7,348	$ 3,668	$ 9,432
Additions	3,923	3,451	8,690	9,255
Amortization	(3,925)	(5,695)	(7,397)	(13,583)
Ending balance	4,961	5,104	4,961	5,104
Deferred policy acquisition costs ceded [Member]
Summary of policy acquisition costs
Beginning balance	(7,222)	(7,251)	(10,132)	(8,972)
Additions	(4,698)	(3,550)	(7,162)	(8,978)
Amortization	5,522	5,471	(10,896)	12,620
Ending balance	(6,398)	(5,330)	(6,398)	(5,330)
Deferred policy acquisition costs net [Member]
Summary of policy acquisition costs
Beginning balance	(2,259)	97	(6,464)	460
Additions	(775)	(99)	1,528	277
Amortization	1,597	(224)	3,499	(963)
Ending balance	$ (1,437)	$ (226)	$ (1,437)	$ (226)

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Summary of Significant Accounting Policies (Details Textual) (USD $) In Millions, unless otherwise specified	1 Months Ended
	Jan. 31, 2011
Summary of Significant Accounting Policies (Textual) [Abstract]
Decrease of shareholders' equity	$ 11.3

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Net Loss Per Common Share (Details Textual)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Net Loss Per Common Share (Textual) [Abstract]
Stock options outstanding	502,000	558,900	502,000	558,900

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Deferred Policy Acquisition Costs (Tables)

6 Months Ended

Jun. 30, 2012

Deferred Policy Acquisition Costs [Abstract]

Summary of deferred policy acquisition costs

The components of deferred policy acquisition costs and the related amortization expense were as follows for the three months ended June 30, 2012 and 2011 (in thousands):

	Gross			Ceded			Net
Balance at April 1, 2012	$	4,963		$	(7,222	)	$	(2,259	)
Additions		3,923			(4,698	)		(775	)
Amortization		(3,925	)		5,522			1,597
Ending balance at June 30, 2012	$	4,961		$	(6,398	)	$	(1,437	)
Balance at April 1, 2011, as adjusted	$	7,348		$	(7,251	)	$	97
Additions		3,451			(3,550	)		(99	)
Amortization		(5,695	)		5,471			(224	)
Ending balance at June 30, 2011, as adjusted	$	5,104		$	(5,330	)	$	(226	)

The components of deferred policy acquisition costs and the related amortization expense were as follows for the six months ended June 30, 2012 and 2011 (in thousands):

	Gross			Ceded			Net
Balance at January 1, 2012	$	3,668		$	(10,132	)	$	(6,464	)
Additions		8,690			(7,162	)		1,528
Amortization		(7,397	)		10,896			3,499
Ending balance at June 30, 2012	$	4,961		$	(6,398	)	$	(1,437	)
Balance at January 1, 2011, as adjusted	$	9,432		$	(8,972	)	$	460
Additions		9,255			(8,978	)		277
Amortization		(13,583	)		12,620			(963	)
Ending balance at June 30, 2011, as adjusted	$	5,104		$	(5,330	)	$	(226	)

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Capital Lease Obligation (Details 1) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2011
Estimated future lease payments
2012	$ 3,368
2013	6,736
2014	6,736
2015	2,807
Total estimated future lease payments	19,647
Less: Amount representing interest	1,996
Present value of future lease payments	$ 17,651

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Reinsurance (Details 3) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Amount of receivables due from reinsurers
Total reinsurance receivable	$ 116,264	$ 131,447
Michigan Catastrophic Claims Association [Member]
Amount of receivables due from reinsurers
Total reinsurance receivable	43,044	44,049
Quota-share reinsurer one [Member]
Amount of receivables due from reinsurers
Total reinsurance receivable	42,231	22,102
Quota-share reinsurer [Member]
Amount of receivables due from reinsurers
Total reinsurance receivable	12,077	46,103
Vesta Insurance Group [Member]
Amount of receivables due from reinsurers
Total reinsurance receivable	10,071	10,068
Excess of loss reinsurers [Member]
Amount of receivables due from reinsurers
Total reinsurance receivable	5,624	5,458
Other [Member]
Amount of receivables due from reinsurers
Total reinsurance receivable	$ 3,217	$ 3,667

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Available-for-Sale Investment Securities (Details 3) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value [Abstract]
Less Than Twelve Months Fair Value	$ 6,493	$ 18,133
Twelve Months or Greater Fair Value	1,104	5,078
Total Fair Value	7,597	23,211
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses [Abstract]
Less Than Twelve Months Gross Unrealized Losses	(45)	(175)
Twelve Months or Greater Gross Unrealized Losses	(30)	(123)
Gross Unrealized Losses	(75)	(298)
U.S. Treasury and government agencies [Member]
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value [Abstract]
Less Than Twelve Months Fair Value	1,578	505
Total Fair Value	1,578	505
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses [Abstract]
Less Than Twelve Months Gross Unrealized Losses	(3)	(1)
Gross Unrealized Losses	(3)	(1)
Mortgage-backed securities [Member]
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value [Abstract]
Less Than Twelve Months Fair Value	1,701	2,688
Twelve Months or Greater Fair Value	851	3,312
Total Fair Value	2,552	6,000
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses [Abstract]
Less Than Twelve Months Gross Unrealized Losses	(26)	(36)
Twelve Months or Greater Gross Unrealized Losses	(27)	(99)
Gross Unrealized Losses	(53)	(135)
States and political subdivisions [Member]
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value [Abstract]
Twelve Months or Greater Fair Value	73	74
Total Fair Value	73	74
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses [Abstract]
Twelve Months or Greater Gross Unrealized Losses	(2)	(1)
Gross Unrealized Losses	(2)	(1)
Corporate debt securities [Member]
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value [Abstract]
Less Than Twelve Months Fair Value	1,942	13,982
Twelve Months or Greater Fair Value	180	1,344
Total Fair Value	2,122	15,326
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses [Abstract]
Less Than Twelve Months Gross Unrealized Losses	(13)	(137)
Twelve Months or Greater Gross Unrealized Losses	(1)	(21)
Gross Unrealized Losses	(14)	(158)
FDIC-insured certificates of deposit [Member]
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value [Abstract]
Less Than Twelve Months Fair Value	1,272	958
Twelve Months or Greater Fair Value		348
Total Fair Value	1,272	1,306
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses [Abstract]
Less Than Twelve Months Gross Unrealized Losses	(3)	(1)
Twelve Months or Greater Gross Unrealized Losses		(2)
Gross Unrealized Losses	$ (3)	$ (3)

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Income Taxes (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Provision for income taxes
Current tax expense (benefit)	$ (62)	$ 100		$ 225
Deferred tax expense	84	318	168	637
Net income tax expense	$ 22	$ 418	$ 168	$ 862

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Fair Value of Financial Instruments (Details 2) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Level 1 [Member]
Assets:
Cash and cash equivalents	$ 29,248	$ 28,559
Fiduciary and restricted cash	779	2,478
Total assets	30,027	31,037
Liabilities:
Notes payable
Senior secured credit facility
Total liabilities
Level 2 [Member]
Assets:
Cash and cash equivalents
Fiduciary and restricted cash
Total assets
Liabilities:
Notes payable
Senior secured credit facility
Total liabilities
Level 3 [Member]
Assets:
Cash and cash equivalents
Fiduciary and restricted cash
Total assets
Liabilities:
Notes payable	12,997	17,433
Senior secured credit facility	73,701	79,554
Total liabilities	86,698	96,987
Carrying Value [Member]
Assets:
Cash and cash equivalents	29,248	28,559
Fiduciary and restricted cash	779	2,478
Total assets	30,027	31,037
Liabilities:
Notes payable	76,849	76,857
Senior secured credit facility	91,266	91,683
Total liabilities	168,115	168,540
Fair Value [Member]
Assets:
Cash and cash equivalents	29,248	28,559
Fiduciary and restricted cash	779	2,478
Total assets	85,438	125,820
Liabilities:
Notes payable	12,997	17,433
Senior secured credit facility	73,701	79,554
Total liabilities	86,698	96,987
Fair Value [Member] | Level 1 [Member]
Assets:
Total assets	11,504	11,975
Fair Value [Member] | Level 2 [Member]
Assets:
Total assets	70,836	110,947
Fair Value [Member] | Level 3 [Member]
Assets:
Total assets	$ 3,098	$ 2,898

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Debt (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Summary of company's long-term debt instruments and balances outstanding
Notes payable	$ 76,849	$ 76,857
Senior secured credit facility, net of discount	91,266	91,683
Total long-term debt	168,115	168,540
Notes payable due 2035 [Member]
Summary of company's long-term debt instruments and balances outstanding
Notes payable	30,928	30,928
Notes payable due 2035 [Member]
Summary of company's long-term debt instruments and balances outstanding
Notes payable	25,774,000	25,774
Notes payable due 2035 [Member]
Summary of company's long-term debt instruments and balances outstanding
Notes payable	$ 20,147	$ 20,155

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Available-for-Sale Investment Securities

6 Months Ended

Jun. 30, 2012

Available-for-Sale Investment Securities [Abstract]

Available-for-Sale Investment Securities

2. Available-for-Sale Investment Securities

The Company’s available-for-sale investment securities are carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income (loss), a separate component of stockholders’ equity (deficit). No income tax effect of unrealized gains and losses is reflected in other comprehensive income (loss) due to the Company carrying a full deferred tax valuation allowance. Gains and losses realized on the disposition of investment securities are determined on the specific-identification basis and credited or charged to income.

The amortized cost, gross unrealized gains (losses), and estimated fair value of the Company’s available-for-sale securities at June 30, 2012 and December 31, 2011, were as follows (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2012
U.S. Treasury and government agencies	$	11,367	$	140	$	(3	)	$	11,504
Mortgage-backed securities		3,947		28		(53	)		3,922
States and political subdivisions		11,581		244		(2	)		11,823
Corporate debt securities		37,690		466		(14	)		38,142
FDIC-insured certificates of deposit		16,866		86		(3	)		16,949
Total	$	81,451	$	964	$	(75	)	$	82,340
December 31, 2011
U.S. Treasury and government agencies	$	11,804	$	172	$	(1	)	$	11,975
Mortgage-backed securities		10,803		283		(135	)		10,951
States and political subdivisions		16,841		338		(1	)		17,178
Corporate debt securities		61,031		764		(158	)		61,637
FDIC-insured certificates of deposit		21,131		53		(3	)		21,181
Total	$	121,610	$	1,610	$	(298	)	$	122,922

Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without penalties. The Company’s amortized cost and estimated fair values of fixed-income securities at June 30, 2012 by contractual maturity were as follows (in thousands):

	Amortized Cost		Fair Value
Due in one year or less	$	44,934	$	45,242
Due after one year through five years		30,618		31,186
Due after five years through ten years		1,952		1,990
Mortgage-backed securities		3,947		3,922
Total	$	81,451	$	82,340

Gross realized gains and losses on available-for-sale investments for the six months ended June 30 were as follows (in thousands):

	2012			2011
Gross gains	$	728		$	212
Gross losses		(118	)		(96	)
Total	$	610		$	116

The following table summarizes the Company’s available-for-sale securities in an unrealized loss position at June 30, 2012 and December 31, 2011, the fair value and amount of gross unrealized losses, aggregated by investment category and length of time those securities have been continuously in an unrealized loss position (in thousands):

	June 30, 2012
	Less Than Twelve Months					Twelve Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
U.S. Treasury and government agencies	$	1,578	$	(3	)	$	—	$	—		$	1,578	$	(3	)
Mortgage-backed securities		1,701		(26	)		851		(27	)		2,552		(53	)
States and political subdivisions		—		—			73		(2	)		73		(2	)
Corporate debt securities		1,942		(13	)		180		(1	)		2,122		(14	)
FDIC-insured certificates of deposit		1,272		(3	)		—		—			1,272		(3	)
Total	$	6,493	$	(45	)	$	1,104	$	(30	)	$	7,597	$	(75	)
	December 31, 2011
	Less Than Twelve Months					Twelve Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
U.S. Treasury and government agencies	$	505	$	(1	)	$	—	$	—		$	505	$	(1	)
Mortgage-backed securities		2,688		(36	)		3,312		(99	)		6,000		(135	)
States and political subdivisions		—		—			74		(1	)		74		(1	)
Corporate debt securities		13,982		(137	)		1,344		(21	)		15,326		(158	)
FDIC-insured certificates of deposit		958		(1	)		348		(2	)		1,306		(3	)
Total	$	18,133	$	(175	)	$	5,078	$	(123	)	$	23,211	$	(298	)

The Company’s portfolio contained approximately 24 and 34 individual investment securities that were in an unrealized loss position as of June 30, 2012 and December 31, 2011, respectively.

The unrealized losses at June 30, 2012 were primarily attributable to changes in market interest rates since the securities were purchased. Management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. On a quarterly basis, the Company considers available quantitative and qualitative evidence in evaluating potential impairment of its investments. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, duration and extent to which the fair value is less than cost. If the fair value of a debt security is less than its amortized cost basis, an other-than-temporary impairment may be triggered in circumstances where (1) an entity has an intent to sell the security, (2) it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis, or (3) the entity does not expect to recover the entire amortized cost basis of the security (that is, a credit loss exists). Other-than-temporary impairments are separated into amounts representing credit losses which are recognized in earnings and amounts related to all other factors which are recognized in other comprehensive income. The Company also considers potential adverse conditions related to the financial health of the issuer based on rating agency actions. At June 30, 2012, management performed its quarterly analysis of all securities with an unrealized loss and concluded no individual securities were other-than-temporarily impaired.

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Reinsurance (Details Textual) (USD $)	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2012	Dec. 31, 2011	Jun. 30, 2012	Jun. 30, 2011	Dec. 21, 2011
Reinsurance Related Transaction [Line Items]
Receivable from reinsurers	$ 116,264,000	$ 131,447,000	$ 116,264,000
Amount payable	29,102,000	38,224,000	29,102,000
Reserves for losses and loss adjustment expenses	155,378,000	183,836,000	155,378,000
Reinsurance (Textual) [Abstract]
Ceded gross written premium					28.00%
Ceded unearned premium			4,596,000	(20,437,000)	11,800,000
Net deferred ceding commissions			4,300,000
Written Premiums Ceded	40,100,000		50,600,000		63,000,000
Ceded percentage of business produced		10.00%
Conversion rate of quota share reinsurance contract				40.00%
Duration of loss reinsurance contract			1 year
Maximum coverage for individual losses	5,000,000		5,000,000
Minimum coverage for individual losses	3,000,000		3,000,000
Affirmative Insurance Company [Member]
Reinsurance Related Transaction [Line Items]
Company obligation under reinsurance contract	29,900,000	34,400,000	29,900,000
Funds in securities	20,700,000		20,700,000
Cumulative withdrawal by first party	400,000		400,000
Cumulative withdrawal by second party	1,700,000		1,700,000
Subsidiaries [Member]
Reinsurance Related Transaction [Line Items]
Reserves for losses and loss adjustment expenses	2,500,000		2,500,000
County Mutual Insurance Company [Member]
Reinsurance Related Transaction [Line Items]
Percentage of policies issued	100.00%		100.00%
Quota-share reinsurer [Member]
Reinsurance Related Transaction [Line Items]
Receivable from reinsurers	12,077,000	46,103,000	12,077,000
Vesta Insurance Group [Member]
Reinsurance Related Transaction [Line Items]
Total Deposit	16,800,000		16,800,000
Deposit after cumulative withdrawals	8,700,000		8,700,000
Treasury money market account	14,700,000		14,700,000
Corporate bond deposits	2,100,000		2,100,000
Receivable from reinsurers	10,071,000	10,068,000	10,071,000
Amount payable	$ 2,900,000		$ 2,900,000

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Net Loss Per Common Share (Tables)

6 Months Ended

Jun. 30, 2012

Net Loss Per Common Share [Abstract]

Summary of reconciliation of numerators and denominators for the basic and diluted earnings per share

The following table sets forth the reconciliation of numerators and denominators for the basic and diluted earnings per share computation for the three and six months ended June 30, 2012 and 2011 (in thousands, except per share amounts):

	Three Months Ended June 30,					Six Months Ended June 30,
	2012			2011		2012			2011
Numerator:
Income (loss) from continuing operations	$	(5,695	)	$	19	$	(14,175	)	$	(9,791	)
Denominator:
Weighted average common shares outstanding		15,408			15,408		15,408			15,408
Weighted average diluted shares outstanding		15,408			15,408		15,408			15,408
Basic loss per common share from continuing operations:	$	(0.37	)	$	—	$	(0.92	)	$	(0.64	)
Diluted loss per common share from continuing operations:	$	(0.37	)	$	—	$	(0.92	)	$	(0.64	)

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Income Taxes (Tables)

6 Months Ended

Jun. 30, 2012

Income Taxes [Abstract]

Provision for income taxes

The provision for income taxes for the three and six months ended June 30, 2012 and 2011 consisted of the following (in thousands):

	Three Months Ended June 30,					Six Months Ended June 30,
	2012			2011		2012		2011
Current tax expense (benefit)	$	(62	)	$	100	$	—	$	225
Deferred tax expense		84			318		168		637
Net income tax expense	$	22		$	418	$	168	$	862

Summary of effective tax rate differed from the statutory rate

The Company’s effective tax rate differed from the statutory rate of 35% for the three and six months ended June 30 as follows (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Income (loss) before income taxes	$	(5,673	)	$	437		$	(14,007	)	$	(8,929	)
Tax provision computed at the federal statutory income tax rate		(1,985	)		153			(4,902	)		(3,125	)
Increases (reductions) in tax resulting from:
Tax-exempt interest		(23	)		(35	)		(51	)		(74	)
State income taxes		(28	)		104			295			(30	)
IRS audit settlement		(118	)		—			(118	)		—
Valuation allowance		2,185			162			4,961			4,018
Other		(9	)		34			(17	)		73
Income tax expense	$	22		$	418		$	168		$	862
Effective tax rate		(0.4	)%		95.7	%		(1.2	)%		(9.7	)%

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Net Loss Per Common Share (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Numerator
Income (loss) from continuing operations	$ (5,695)	$ 19	$ (14,175)	$ (9,791)
Denominator:
Weighted average common shares outstanding	15,408	15,408	15,408	15,408
Weighted average diluted shares outstanding	15,408	15,408	15,408	15,408
Basic loss per common share from continuing operations:	$ (0.37)		$ (0.92)	$ (0.64)
Diluted loss per common share from continuing operations:	$ (0.37)		$ (0.92)	$ (0.64)

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Premium Finance Receivables, Net (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Summary of premium finance receivables
Premium finance contracts	$ 42,987	$ 40,472
Unearned finance charges	(2,136)	(1,911)
Allowance for credit losses	(500)	(479)
Total	$ 40,351	$ 38,082

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Fair Value of Financial Instruments (Tables)

6 Months Ended

Jun. 30, 2012

Fair Value of Financial Instruments [Abstract]

Financial assets measured at fair value on a recurring basis

The following table provides information as of June 30, 2012 about the Company’s financial assets measured at fair value on a recurring basis (in thousands):

	Total		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
U.S. Treasury and government agencies	$	11,504	$	11,504	$	—	$	—
Mortgage-backed securities		3,922		—		3,922		—
States and political subdivisions		11,823		—		11,823		—
Corporate debt securities		38,142		—		38,142		—
FDIC-insured certificates of deposit		16,949		—		16,949		—
Total investment securities		82,340		11,504		70,836		—
Other invested assets		3,098		—		—		3,098
Total assets	$	85,438	$	11,504	$	70,836	$	3,098

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

	Total		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
U.S. Treasury and government agencies	$	11,975	$	11,975	$	—	$	—
Mortgage-backed securities		10,951		—		10,951		—
States and political subdivisions		17,178		—		17,178		—
Corporate debt securities		61,637		—		61,637		—
FDIC-insured certificates of deposit		21,181		—		21,181		—
Total investment securities		122,922		11,975		110,947		—
Other invested assets		2,898		—		—		2,898
Total assets	$	125,820	$	11,975	$	110,947	$	2,898

Fair value measurements for assets

Fair value measurements for assets in Level 3 for the three months ended June 30, 2012 were as follows (in thousands):

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Other Invested Assets
Balance at April 1, 2012	$	3,016
Transfers into Level 3		—
Total gains included in earnings as net investment income		82
Settlements		—
Balance at June 30, 2012	$	3,098

Fair value measurements for assets in Level 3 for the three months ended June 30, 2011 were as follows (in thousands):

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Other Invested Assets
Balance at April 1, 2011	$	2,735
Transfers into Level 3		—
Total gains included in earnings as net investment income		105
Settlements		—
Balance at June 30, 2011	$	2,840

Fair value measurements for assets in Level 3 for the six months ended June 30, 2012 were as follows (in thousands):

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Other Invested Assets
Balance at January 1, 2012	$	2,898
Transfers into Level 3		—
Total gains included in earnings as net investment income		200
Settlements		—
Balance at June 30, 2012	$	3,098

Fair value measurements for assets in Level 3 for the six months ended June 30, 2011 were as follows (in thousands):

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Other Invested Assets
Balance at January 1, 2011	$	2,564
Transfers into Level 3		—
Total gains included in earnings as net investment income		276
Settlements		—
Balance at June 30, 2011	$	2,840

Fair value measurements for assets and liabilities

The following table presents the carrying value and fair value of the Company’s financial assets and liabilities disclosed, but not carried, at fair value at June 30, 2012 and the level within the fair value hierarchy at which such assets and liabilities are measured on a recurring basis (in thousands):

	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	29,248	$	29,248	$	29,248	$	—	$	—
Fiduciary and restricted cash		779		779		779		—		—
Total	$	30,027	$	30,027	$	30,027	$	—	$	—
Liabilities:
Notes payable	$	76,849	$	12,997	$	—	$	—	$	12,997
Senior secured credit facility		91,266		73,701		—		—		73,701
Total	$	168,115	$	86,698	$	—	$	—	$	86,698

The following table presents the carrying value and fair value of the Company’s financial assets and liabilities disclosed, but not carried, at fair value at December 31, 2011 and the level within the fair value hierarchy at which such assets and liabilities are measured on a recurring basis (in thousands):

	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	28,559	$	28,559	$	28,559	$	—	$	—
Fiduciary and restricted cash		2,478		2,478		2,478		—		—
Total	$	31,037	$	31,037	$	31,037	$	—	$	—
Liabilities:
Notes payable	$	76,857	$	17,433	$	—	$	—	$	17,433
Senior secured credit facility		91,683		79,554		—		—		79,554
Total	$	168,540	$	96,987	$	—	$	—	$	96,987

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Summary of Significant Accounting Policies (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011	Jun. 30, 2011
Consolidated Balance Sheets
Stockholders' deficit	$ (95,402)	$ (80,977)	$ 72,149
Previously Reported [Member]
Consolidated Balance Sheets
Deferred acquisition costs, net		3,206
Stockholders' deficit		(71,307)
As Adjusted [Member]
Consolidated Balance Sheets
Deferred acquisition costs, net		(6,464)
Stockholders' deficit		$ (80,977)

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Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2012

Summary of Significant Accounting Policies [Abstract]

Summary of Significant Accounting Policies

1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements of the Company. In the opinion of management, all adjustments necessary for a fair presentation have been included and are of a normal recurring nature. Interim results are not necessarily indicative of the results that may be expected for the year. The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2011 included in the Company’s Annual Report on Form 10-K. The results of operations for interim periods should not be considered indicative of results to be expected for the full year.

Adopted Accounting Standards

In October 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. ASU 2010-26 modified the definitions of the type of costs that can be capitalized in the successful acquisition of new and renewal insurance contracts. ASU 2010-26 requires incremental direct costs of successful contract acquisition as well as certain costs related to underwriting, policy issuance and processing, medical and inspection and sales force contract selling for successful contract acquisition to be capitalized. These incremental direct costs and other costs are those that are essential to the contract transaction and would not have been incurred had the contract transaction not occurred. The Company retrospectively adopted ASU 2010-26 on January 1, 2012. The cumulative effect of the adoption was a decrease of shareholders’ equity by $11.3 million, net of tax, as of January 1, 2011.

The following table illustrates the effect of adopting ASU 2010-26 in the consolidated balance sheets (in thousands):

	December 31, 2011
	Previously Reported			As Adjusted
Deferred acquisition costs, net	$	3,206		$	(6,464	)
Stockholders’ deficit		(71,307	)		(80,977	)

The following table illustrates the effect of adopting ASU 2010-26 in the consolidated statements of operations (in thousands, except per share amounts):

	Three Months Ended June 30, 2011					Six Months Ended June 30, 2011
	Previously Reported			As Adjusted		Previously Reported			As Adjusted
Selling, general and administrative expenses	$	28,274		$	27,441	$	61,975		$	61,304
Net income (loss)		(814	)		19		(10,462	)		(9,791	)
Net loss per share:
Basic		(0.05	)		—		(0.68	)		(0.64	)
Diluted		(0.05	)		—		(0.68	)		(0.64	)

ASU 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment, permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. Additionally, if the carrying amount of a reporting unit is zero or negative, the second step of the impairment test shall be performed to measure the amount of the impairment loss, if any, when it is more likely than not that a goodwill impairment exists. In considering whether it is more likely than not that a goodwill impairment exists, a qualitative assessment will be performed. If an entity concludes it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it need not perform the two-step impairment test. This standard is effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this standard did not have an impact on the Company’s consolidated financial position, results of operations or cash flows.

ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, requires companies to present the components of net income and comprehensive income in either one or two consecutive financial statements. Companies will no longer be permitted to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. This standard is effective for interim and annual periods beginning after December 15, 2011, and should be applied retrospectively. The adoption of this standard did not impact the Company’s consolidated financial position, results of operations or cash flows.

ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, provides identical guidance with concurrently issued International Financial Reporting Standard (IFRS) 13, Fair Value Measurements. Most of the changes in the new standard are clarifications of existing guidance, but it expands the disclosures about fair value measurements, and requires the categorization by level of the fair value hierarchy for items that are not measured at fair value in the statement of financial position, but for which the fair value is required to be disclosed, which would consist of the Company’s debt, cash and cash equivalents, and fiduciary and restricted cash. In addition, for fair value measurements categorized as Level 3 within the fair value hierarchy, the valuation processes and sensitivity of the fair value measurements to changes in unobservable inputs shall be disclosed. This standard is effective for interim and annual periods beginning after December 15, 2011, and should be applied prospectively. The adoption of this standard did not impact the Company’s consolidated financial position, results of operations or cash flows.

Recently Issued Accounting Standards

In July 2012, the FASB issued ASU 2012-02, Intangibles — Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. This ASU gives entities testing indefinite-lived intangible assets for impairment the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, the entity is not required to take further action. However, if an entity concludes otherwise, a quantitative impairment test is required. This guidance is effective for annual and interim impairment tests beginning January 1, 2013, with early adoption permitted. Management does not believe the adoption of this update will have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

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Summary of Significant Accounting Policies (Details 1) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Consolidated statements of operations
Selling, general and administrative expenses	$ 23,611	$ 27,441	$ 50,432	$ 61,304
Net income (loss)	(5,695)	19	(14,175)	(9,791)
Net loss per share:
Basic loss per common share from continuing operations:	$ (0.37)		$ (0.92)	$ (0.64)
Diluted loss per common share from continuing operations:	$ (0.37)		$ (0.92)	$ (0.64)
Previously Reported [Member]
Consolidated statements of operations
Selling, general and administrative expenses		28,274		61,975
Net income (loss)		(814)		(10,462)
Net loss per share:
Basic loss per common share from continuing operations:		$ (0.05)		$ (0.68)
Diluted loss per common share from continuing operations:		$ (0.05)		$ (0.68)
As Adjusted [Member]
Consolidated statements of operations
Selling, general and administrative expenses		27,441		61,304
Net income (loss)		$ 19		$ (9,791)
Net loss per share:
Basic loss per common share from continuing operations:				$ (0.64)
Diluted loss per common share from continuing operations:				$ (0.64)

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Reinsurance (Details 1) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Selling, general and administrative expenses
Selling, general and administrative expenses	$ (5,876)	$ (6,313)	$ (12,371)	$ (13,485)

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Income Taxes (Details 1) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Summary of effective tax rate differed from the statutory rate
Income (loss) before income tax	$ (5,673)	$ 437	$ (14,007)	$ (8,929)
Tax provision computed at the federal statutory income tax rate	(1,985)	153	(4,902)	(3,126)
Increases (reductions) in tax resulting from:
Tax-exempt interest	(23)	(35)	(51)	(74)
State income taxes	(28)	104	295	(30)
IRS audit settlement	(118)		(118)
Valuation allowance	2,185	162	4,961	4,018
Other	(9)	34	(17)	73
Income tax expense	$ 22	$ 418	$ 168	$ 862
Effective tax rate	(0.40%)	95.70%	(1.20%)	(9.70%)

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Consolidated Balance Sheets (Unaudited) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Assets
Available-for-sale securities, at fair value	$ 82,340	$ 122,922
Other invested assets	3,098	2,898
Cash and cash equivalents	29,248	28,559
Fiduciary and restricted cash	779	2,478
Accrued investment income	646	1,058
Premiums and fees receivable, net	23,607	22,579
Premium finance receivable, net	40,351	38,082
Commissions receivable	1,525	1,786
Receivable from reinsurers	116,264	131,447
Income taxes receivable	48	739
Investment in real property, net	11,355	11,776
Property and equipment (net of accumulated depreciation of $55,622 for 2012 and $51,204 for 2011)	28,423	32,130
Goodwill	23,448	23,448
Other intangible assets (net of accumulated amortization of $7,665 for 2012 and 2011)	14,509	14,609
Prepaid expenses	4,496	5,147
Other assets (net of allowance for doubtful accounts of $7,213 for 2012 and 2011)	1,936	1,944
Total assets	382,073	441,602
Liabilities:
Reserves for losses and loss adjustment expenses	155,378	183,836
Unearned premium	62,838	58,242
Amounts due to reinsurers	29,102	38,224
Deferred revenue	5,402	4,816
Capital lease obligation	17,651	20,301
Senior secured credit facility	91,266	91,683
Notes payable	76,849	76,857
Deferred tax liability	3,096	2,928
Deferred acquisition costs, net	1,437	6,464
Other liabilities	34,456	39,228
Total liabilities	477,475	522,579
Stockholders' deficit:
Common stock, $0.01 par value; 75,000,000 shares authorized, 18,202,221 shares issued and 15,408,358 shares outstanding at June 30, 2012 and at December 31, 2011	182	182
Additional paid-in capital	166,515	166,342
Treasury stock, at cost (2,793,863 shares at June 30, 2012 and December 31, 2011)	(32,910)	(32,910)
Accumulated other comprehensive loss	(650)	(227)
Retained deficit	(228,539)	(214,364)
Total stockholders' deficit	(95,402)	(80,977)
Total liabilities and stockholders' deficit	$ 382,073	$ 441,602

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Premium Finance Receivables, Net (Details Textual) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Premium Finance Receivables, Net (Textual) [Abstract]
Past due amount of finance receivables	30 days		30 days
Losses due to non-realization of premium finance receivables	$ 0.1	$ 0.3	$ 0.3	$ 0.7
Percentage of premiums financed	0.30%	0.70%	0.40%	0.80%

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Statements of Stockholders' Equity (Deficit) (Unaudited) (USD $) In Thousands, except Share data	Total	Common stock	Additional paid-in capital	Treasury stock	Accumulated other comprehensive income (loss)	Retained Deficit
Beginning balance at Dec. 31, 2010		$ 178	$ 165,776	$ (32,906)	$ 445	$ (51,767)
Beginning balance, shares at Dec. 31, 2010		17,768,721		2,360,363
Issuance of restricted stock awards		4
Issuance of restricted stock awards, shares		433,500
Stock-based compensation			214
Unrealized loss on available-for-sale investment securities					(4)
Net loss	(9,791)					(9,791)
Ending balance at Jun. 30, 2011	72,149	182	165,990	(32,906)	441	(61,558)
Ending balance, shares at Jun. 30, 2011		18,202,221		2,360,363
Beginning balance at Dec. 31, 2011	(80,977)	182	166,342	(32,910)	(227)	(214,364)
Beginning balance, shares at Dec. 31, 2011	15,408,358	18,202,221		2,793,863
Stock-based compensation			173
Unrealized loss on available-for-sale investment securities					(423)
Net loss	(14,175)					(14,175)
Ending balance at Jun. 30, 2012	$ (95,402)	$ 182	$ 166,515	$ (32,910)	$ (650)	$ (228,539)
Ending balance, shares at Jun. 30, 2012	15,408,358	18,202,221		2,793,863

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Fair Value of Financial Instruments (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Financial assets measured at fair value on a recurring basis
Total investment securities	$ 82,340	$ 122,922
Other invested assets	3,098	2,898
Quoted Prices in Active Markets (Level 1) [Member]
Financial assets measured at fair value on a recurring basis
Total assets	30,027	31,037
Significant Other Observable Inputs (Level 2) [Member]
Financial assets measured at fair value on a recurring basis
Total assets
Significant Unobservable Inputs (Level 3) [Member]
Financial assets measured at fair value on a recurring basis
Total assets
Fair Value, Measurements, Recurring [Member]
Financial assets measured at fair value on a recurring basis
Total investment securities	82,340	122,922
Other invested assets	3,098	2,898
Total assets	85,438	125,820
Fair Value, Measurements, Recurring [Member] | U.S. Treasury and government agencies [Member]
Financial assets measured at fair value on a recurring basis
Total investment securities	11,504	11,975
Fair Value, Measurements, Recurring [Member] | Mortgage-backed securities [Member]
Financial assets measured at fair value on a recurring basis
Total investment securities	3,922	10,951
Fair Value, Measurements, Recurring [Member] | States and political subdivisions [Member]
Financial assets measured at fair value on a recurring basis
Total investment securities	11,823	17,178
Fair Value, Measurements, Recurring [Member] | Corporate debt securities [Member]
Financial assets measured at fair value on a recurring basis
Total investment securities	38,142	61,637
Fair Value, Measurements, Recurring [Member] | FDIC-insured certificates of deposit [Member]
Financial assets measured at fair value on a recurring basis
Total investment securities	16,949	21,181
Fair Value, Measurements, Recurring [Member] | Quoted Prices in Active Markets (Level 1) [Member]
Financial assets measured at fair value on a recurring basis
Total investment securities	11,504	11,975
Total assets	11,504	11,975
Fair Value, Measurements, Recurring [Member] | Quoted Prices in Active Markets (Level 1) [Member] | U.S. Treasury and government agencies [Member]
Financial assets measured at fair value on a recurring basis
Total investment securities	11,504	11,975
Fair Value, Measurements, Recurring [Member] | Significant Other Observable Inputs (Level 2) [Member]
Financial assets measured at fair value on a recurring basis
Total investment securities	70,836	110,947
Total assets	70,836	110,947
Fair Value, Measurements, Recurring [Member] | Significant Other Observable Inputs (Level 2) [Member] | Mortgage-backed securities [Member]
Financial assets measured at fair value on a recurring basis
Total investment securities	3,922	10,951
Fair Value, Measurements, Recurring [Member] | Significant Other Observable Inputs (Level 2) [Member] | States and political subdivisions [Member]
Financial assets measured at fair value on a recurring basis
Total investment securities	11,823	17,178
Fair Value, Measurements, Recurring [Member] | Significant Other Observable Inputs (Level 2) [Member] | Corporate debt securities [Member]
Financial assets measured at fair value on a recurring basis
Total investment securities	38,142	61,637
Fair Value, Measurements, Recurring [Member] | Significant Other Observable Inputs (Level 2) [Member] | FDIC-insured certificates of deposit [Member]
Financial assets measured at fair value on a recurring basis
Total investment securities	16,949	21,181
Fair Value, Measurements, Recurring [Member] | Significant Unobservable Inputs (Level 3) [Member]
Financial assets measured at fair value on a recurring basis
Other invested assets	3,098	2,898
Total assets	$ 3,098	$ 2,898

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Available-for Sale-Investment Securities (Details 1) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Amortized cost and estimated fair values of fixed-income securities
Mortgage-backed securities, Amortized Cost	$ 81,451	$ 121,610
Amortized Cost	81,451	121,610
Fair Value	82,340	122,922
Fixed Income Securities [Member]
Amortized cost and estimated fair values of fixed-income securities
Due in one year or less, Amortized Cost	44,934
Due after one year through five years, Amortized Cost	30,618
Due after five years through ten years, Amortized Cost	1,952
Due in one year or less, Fair Value	45,242
Due after one year through five years, Fair Value	31,186
Due after five years through ten years, Fair Value	1,990
Mortgage-backed securities [Member]
Amortized cost and estimated fair values of fixed-income securities
Mortgage-backed securities, Amortized Cost	3,947	10,803
Amortized Cost	3,947	10,803
Fair Value	$ 3,922	$ 10,951

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Available-for-Sale Investment Securities (Tables)

6 Months Ended

Jun. 30, 2012

Available-for-Sale Investment Securities [Abstract]

Summary of Available for sale securities

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2012
U.S. Treasury and government agencies	$	11,367	$	140	$	(3	)	$	11,504
Mortgage-backed securities		3,947		28		(53	)		3,922
States and political subdivisions		11,581		244		(2	)		11,823
Corporate debt securities		37,690		466		(14	)		38,142
FDIC-insured certificates of deposit		16,866		86		(3	)		16,949
Total	$	81,451	$	964	$	(75	)	$	82,340
December 31, 2011
U.S. Treasury and government agencies	$	11,804	$	172	$	(1	)	$	11,975
Mortgage-backed securities		10,803		283		(135	)		10,951
States and political subdivisions		16,841		338		(1	)		17,178
Corporate debt securities		61,031		764		(158	)		61,637
FDIC-insured certificates of deposit		21,131		53		(3	)		21,181
Total	$	121,610	$	1,610	$	(298	)	$	122,922

Amortized cost and estimated fair values of fixed-income securities

The Company’s amortized cost and estimated fair values of fixed-income securities at June 30, 2012 by contractual maturity were as follows (in thousands):

	Amortized Cost		Fair Value
Due in one year or less	$	44,934	$	45,242
Due after one year through five years		30,618		31,186
Due after five years through ten years		1,952		1,990
Mortgage-backed securities		3,947		3,922
Total	$	81,451	$	82,340

Gross realized gains and losses on available-for-sale investments

Gross realized gains and losses on available-for-sale investments for the six months ended June 30 were as follows (in thousands):

	2012			2011
Gross gains	$	728		$	212
Gross losses		(118	)		(96	)
Total	$	610		$	116

Summary of available for sale securities in an unrealized loss position

The following table summarizes the Company’s available-for-sale securities in an unrealized loss position at June 30, 2012 and December 31, 2011, the fair value and amount of gross unrealized losses, aggregated by investment category and length of time those securities have been continuously in an unrealized loss position (in thousands):

	June 30, 2012
	Less Than Twelve Months					Twelve Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
U.S. Treasury and government agencies	$	1,578	$	(3	)	$	—	$	—		$	1,578	$	(3	)
Mortgage-backed securities		1,701		(26	)		851		(27	)		2,552		(53	)
States and political subdivisions		—		—			73		(2	)		73		(2	)
Corporate debt securities		1,942		(13	)		180		(1	)		2,122		(14	)
FDIC-insured certificates of deposit		1,272		(3	)		—		—			1,272		(3	)
Total	$	6,493	$	(45	)	$	1,104	$	(30	)	$	7,597	$	(75	)
	December 31, 2011
	Less Than Twelve Months					Twelve Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
U.S. Treasury and government agencies	$	505	$	(1	)	$	—	$	—		$	505	$	(1	)
Mortgage-backed securities		2,688		(36	)		3,312		(99	)		6,000		(135	)
States and political subdivisions		—		—			74		(1	)		74		(1	)
Corporate debt securities		13,982		(137	)		1,344		(21	)		15,326		(158	)
FDIC-insured certificates of deposit		958		(1	)		348		(2	)		1,306		(3	)
Total	$	18,133	$	(175	)	$	5,078	$	(123	)	$	23,211	$	(298	)

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Available-for-Sale Investment Securities (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Available-for-sale Securities, Gross Realized Gain (Loss) [Abstract]
Gross gains	$ 728	$ 212
Gross losses	(118)	(96)
Total	$ 610	$ 116	$ 610	$ 116

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Premium Finance Receivables, Net (Tables)

6 Months Ended

Jun. 30, 2012

Premium Finance Receivables, Net [Abstract]

Summary of premium finance receivables

Premium finance receivables (related to policies of both the Company and third-party carriers) were as follows at June 30, 2012 and December 31, 2011 (in thousands):

	June 30, 2012			December 31, 2011
Premium finance contracts	$	42,987		$	40,472
Unearned finance charges		(2,136	)		(1,911	)
Allowance for credit losses		(500	)		(479	)
Total	$	40,351		$	38,082

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Consolidated Statements of Cash Flows (Unaudited) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Cash flows from operating activities
Net loss	$ (14,175)	$ (9,791)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	5,050	4,807
Stock-based compensation expense	156	194
Amortization of debt modification costs	188	206
Amortization of debt discount	1,978	2,342
Net realized gains from sales of available-for-sale securities	(610)	(116)
Fair value gain on investment in hedge fund	(200)	(276)
Gain on disposal of assets	(119)
Amortization of premiums on investments, net	983	1,631
Provision for doubtful premiums receivable	360	(181)
Loss on interest rate swaps		(2)
Proceeds from insurance recoveries		212
Paid-in-kind interest	1,777
Change in operating assets and liabilities:
Fiduciary and restricted cash	1,699	3,692
Premiums, fees and commissions receivable, net	(1,127)	14,584
Reserves for losses and loss adjustment expenses	(28,458)	(22,193)
Amounts due from reinsurers	6,061	(13,928)
Premium finance receivable, net (related to our insurance premiums)	(1,870)	3,389
Deferred revenue	586	(1,771)
Unearned premium	4,596	(20,437)
Deferred acquisition costs, net	(5,027)	685
Deferred taxes	168	637
Income taxes receivable	691	1,019
Other	(4,866)	(4,880)
Net cash used in operating activities	(32,159)	(40,173)
Cash flows from investing activities
Proceeds from sales of available-for-sale securities	21,173	39,798
Proceeds from maturities of available-for-sale securities	21,375	19,363
Purchases of available-for-sale securities	(2,762)	(13,458)
Premium finance receivable, net (related to third-party insurance premiums)	(399)	(1,710)
Purchases of property and equipment	(896)	(1,457)
Proceeds from insurance recoveries	30
Investment in real property, net		(550)
Net cash provided by investing activities	38,521	41,986
Cash flows from financing activities
Principal payments under capital lease obligations	(2,650)	(2,460)
Principal payments on senior secured credit facility	(3,023)	(5,118)
Debt modification costs paid		(769)
Net cash used in financing activities	(5,673)	(8,347)
Net increase (decrease) in cash and cash equivalents	689	(6,534)
Cash and cash equivalents at beginning of year	28,559	46,364
Cash and cash equivalents at end of period	29,248	39,830
Supplemental disclosure of cash flow information:
Cash paid for interest	5,135	7,492
Cash paid for income taxes	$ 239	$ 310

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Consolidated Balance Sheets (Unaudited) (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Consolidated Balance Sheets [Abstract]
Property and equipment, accumulated depreciation	$ 55,622	$ 51,204
Other intangible assets, accumulated amortization	7,665	7,665
Other assets, allowance for doubtful accounts	$ 7,213	$ 7,213
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	75,000,000	75,000,000
Common stock, shares issued	18,202,221	18,202,221
Common stock, shares outstanding	15,408,358	15,408,358
Treasury stock, shares	2,793,863	2,793,863

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Net Loss Per Common Share

6 Months Ended

Jun. 30, 2012

Net Loss Per Common Share [Abstract]

Net Loss Per Common Share

10. Net Loss Per Common Share

Net loss per common share is based on the weighted average number of shares outstanding. Diluted weighted average shares is calculated by adjusting basic weighted average shares outstanding by all potentially dilutive stock options and restricted stock. Stock options outstanding of 502,000 for the three and six months ended June 30, 2012 and stock options outstanding of 558,900 for the three and six months ended 2011 were not included in the computation of diluted earnings per share because there is a loss from operations in the respective periods and thus the inclusion would have been anti-dilutive.

The following table sets forth the reconciliation of numerators and denominators for the basic and diluted earnings per share computation for the three and six months ended June 30, 2012 and 2011 (in thousands, except per share amounts):

	Three Months Ended June 30,					Six Months Ended June 30,
	2012			2011		2012			2011
Numerator:
Income (loss) from continuing operations	$	(5,695	)	$	19	$	(14,175	)	$	(9,791	)
Denominator:
Weighted average common shares outstanding		15,408			15,408		15,408			15,408
Weighted average diluted shares outstanding		15,408			15,408		15,408			15,408
Basic loss per common share from continuing operations:	$	(0.37	)	$	—	$	(0.92	)	$	(0.64	)
Diluted loss per common share from continuing operations:	$	(0.37	)	$	—	$	(0.92	)	$	(0.64	)

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Document and Entity Information	6 Months Ended
	Jun. 30, 2012	Aug. 10, 2012
Document and Entity Information [Abstract]
Entity Registrant Name	AFFIRMATIVE INSURANCE HOLDINGS INC
Entity Central Index Key	0001282543
Document Type	10-Q
Document Period End Date	Jun. 30, 2012
Amendment Flag	false
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q2
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		15,408,358

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Related Party Transactions

6 Months Ended

Jun. 30, 2012

Related Party Transactions [Abstract]

Related Party Transactions

11. Related Party Transactions

The Company has entered into certain transactions with a partnership that is affiliated with J. Christopher Flowers. Mr. Flowers is affiliated with New Affirmative LLC, the majority shareholder of the Company.

In the fourth quarter of 2010, the Company committed to invest $2.5 million in Varadero, a hedge fund, and $10.0 million in a related liquidity-focused product. The investment manager of Varadero is Varadero Capital, L.P., of which Varadero GP, LLC is the general partner. Both the investment manager and general partner are partially-owned by an entity affiliated with Mr. Flowers. As of June 30, 2012, the Company had funded $2.5 million in the hedge fund and approximately $3.9 million in the related liquidity-focused product. At June 30, 2012, the fair value of the hedge fund was approximately $3.1 million, based on net asset value and recorded as other invested assets, and the fair value of the liquidity-focused product was approximately $3.9 million, included in available-for-sale securities in the consolidated balance sheets.

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Consolidated Statements of Operations (Unaudited) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Revenues
Net premiums earned	$ 34,935	$ 46,671	$ 69,116	$ 97,222
Commission income and fees	14,929	17,298	31,112	37,328
Net investment income	693	1,290	1,753	2,813
Net realized gains (losses)	702	(36)	729	116
Other income	500	221	500	249
Total revenues	51,759	65,444	103,210	137,728
Expenses
Net losses and loss adjustment expenses	26,719	29,409	52,389	69,814
Selling, general and administrative expenses	23,611	27,441	50,432	61,304
Depreciation and amortization	2,252	2,430	4,630	4,807
Total expenses	52,582	59,280	107,451	135,925
Operating income (loss)	(823)	6,164	(4,241)	1,803
Loss on interest rate swaps				(2)
Interest expense	4,850	5,727	9,766	10,730
Income (loss) before income tax expense	(5,673)	437	(14,007)	(8,929)
Income tax expense	22	418	168	862
Net income (loss)	$ (5,695)	$ 19	$ (14,175)	$ (9,791)
Basic loss per common share:
Net loss	$ (0.37)		$ (0.92)	$ (0.64)
Diluted loss per common share:
Net loss	$ (0.37)		$ (0.92)	$ (0.64)
Weighted average common shares outstanding:
Basic	15,408	15,408	15,408	15,408
Diluted	15,408	15,408	15,408	15,408

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Deferred Policy Acquisition Costs

6 Months Ended

Jun. 30, 2012

Deferred Policy Acquisition Costs [Abstract]

Deferred Policy Acquisition Costs

5. Deferred Policy Acquisition Costs

Policy acquisition costs, consisting of primarily commissions and premium taxes, net of ceding commission income, are deferred and charged against income ratably over the terms of the related policies. The components of deferred policy acquisition costs and the related amortization expense were as follows for the three months ended June 30, 2012 and 2011 (in thousands):

	Gross			Ceded			Net
Balance at April 1, 2012	$	4,963		$	(7,222	)	$	(2,259	)
Additions		3,923			(4,698	)		(775	)
Amortization		(3,925	)		5,522			1,597
Ending balance at June 30, 2012	$	4,961		$	(6,398	)	$	(1,437	)
Balance at April 1, 2011, as adjusted	$	7,348		$	(7,251	)	$	97
Additions		3,451			(3,550	)		(99	)
Amortization		(5,695	)		5,471			(224	)
Ending balance at June 30, 2011, as adjusted	$	5,104		$	(5,330	)	$	(226	)

The components of deferred policy acquisition costs and the related amortization expense were as follows for the six months ended June 30, 2012 and 2011 (in thousands):

	Gross			Ceded			Net
Balance at January 1, 2012	$	3,668		$	(10,132	)	$	(6,464	)
Additions		8,690			(7,162	)		1,528
Amortization		(7,397	)		10,896			3,499
Ending balance at June 30, 2012	$	4,961		$	(6,398	)	$	(1,437	)
Balance at January 1, 2011, as adjusted	$	9,432		$	(8,972	)	$	460
Additions		9,255			(8,978	)		277
Amortization		(13,583	)		12,620			(963	)
Ending balance at June 30, 2011, as adjusted	$	5,104		$	(5,330	)	$	(226	)

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Premium Finance Receivables, Net

6 Months Ended

Jun. 30, 2012

Premium Finance Receivables, Net [Abstract]

Premium Finance Receivables, Net

4. Premium Finance Receivables, Net

Premium finance receivables (related to policies of both the Company and third-party carriers) were as follows at June 30, 2012 and December 31, 2011 (in thousands):

	June 30, 2012			December 31, 2011
Premium finance contracts	$	42,987		$	40,472
Unearned finance charges		(2,136	)		(1,911	)
Allowance for credit losses		(500	)		(479	)
Total	$	40,351		$	38,082

Premium finance receivables are secured by the underlying unearned policy premiums for which the Company obtains assignment from the policyholder in the event of non-payment. When a payment becomes past due, the Company cancels the underlying policy with the insurance carrier and receives the unearned premium to clear unpaid principal and interest. The loan is closed by writing off any uncollected amounts or refunding any overpayment to the customer. An insignificant amount of finance receivables are past due in excess of thirty days. Losses due to non-realization of premium finance receivables were $0.1 million, or 0.3% of total premiums financed, for the three months ended June 30, 2012, and $0.3 million, or 0.7% of total premiums financed, for the three months ended June 30, 2011. Losses due to non-realization of premium finance receivables were $0.3 million, or 0.4% of total premiums financed, for the six months ended June 30, 2012, and $0.7 million, or 0.8% of total premiums financed, for the six months ended June 30, 2011.

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Reinsurance (Tables)

6 Months Ended

Jun. 30, 2012

Reinsurance [Abstract]

Effect of reinsurance on premiums written and earned

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

	Three Months Ended June 30,
	2012									2011
	Written Premium			Earned Premium			Loss and Loss Adjustment Expenses			Written Premium			Earned Premium			Loss and Loss Adjustment Expenses
Direct	$	37,352		$	45,551		$	33,854		$	42,191		$	58,072		$	45,810
Reinsurance assumed		9,746			9,041			8,527			7,409			10,641			(891	)
Reinsurance ceded		(16,807	)		(19,657	)		(15,662	)		(14,624	)		(22,042	)		(15,510	)
Total	$	30,291		$	34,935		$	26,719		$	34,976		$	46,671		$	29,409
	Six Months Ended June 30,
	2012									2011
	Written Premium			Earned Premium			Loss and Loss Adjustment Expenses			Written Premium			Earned Premium			Loss and Loss Adjustment Expenses
Direct	$	92,646		$	91,023		$	64,397		$	108,067		$	123,311		$	95,574
Reinsurance assumed		20,020			16,928			14,021			19,312			24,058			9,270
Reinsurance ceded		(24,637	)		(38,835	)		(26,029	)		(36,166	)		(50,147	)		(35,030	)
Total	$	88,029		$	69,116		$	52,389		$	91,213		$	97,222		$	69,814

Selling, general and administrative expenses

Ceding commissions recognized, reflected as a reduction of selling, general and administrative expenses, were as follows (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Selling, general and administrative expenses	$	(5,876	)	$	(6,313	)	$	(12,371	)	$	(13,485	)

Summary of companies loss reserves and unearned premium

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

	June 30, 2012		December 31, 2011
Losses and loss adjustment expense reserves	$	75,615	$	78,510
Unearned premium reserve		22,475		36,674
Total	$	98,090	$	115,184

Amount of receivables due from reinsurers

The table below presents the total amount of receivables due from reinsurers as of June 30, 2012 and December 31, 2011 (in thousands):

	June 30, 2012		December 31, 2011
Michigan Catastrophic Claims Association	$	43,044	$	44,049
Quota-share reinsurer for agreement effective September 1, 2011		42,231		22,102
Quota-share reinsurer for agreements effective in fourth quarter of 2010 and January 2011		12,077		46,103
Vesta Insurance Group		10,071		10,068
Excess of loss reinsurers		5,624		5,458
Other		3,217		3,667
Total reinsurance receivable	$	116,264	$	131,447

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Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2012

Fair Value of Financial Instruments [Abstract]

Fair Value of Financial Instruments

12. Fair Value of Financial Instruments

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

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

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

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

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

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

Financial assets measured at fair value on a recurring basis

The following table provides information as of June 30, 2012 about the Company’s financial assets measured at fair value on a recurring basis (in thousands):

	Total		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
U.S. Treasury and government agencies	$	11,504	$	11,504	$	—	$	—
Mortgage-backed securities		3,922		—		3,922		—
States and political subdivisions		11,823		—		11,823		—
Corporate debt securities		38,142		—		38,142		—
FDIC-insured certificates of deposit		16,949		—		16,949		—
Total investment securities		82,340		11,504		70,836		—
Other invested assets		3,098		—		—		3,098
Total assets	$	85,438	$	11,504	$	70,836	$	3,098

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

	Total		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
U.S. Treasury and government agencies	$	11,975	$	11,975	$	—	$	—
Mortgage-backed securities		10,951		—		10,951		—
States and political subdivisions		17,178		—		17,178		—
Corporate debt securities		61,637		—		61,637		—
FDIC-insured certificates of deposit		21,181		—		21,181		—
Total investment securities		122,922		11,975		110,947		—
Other invested assets		2,898		—		—		2,898
Total assets	$	125,820	$	11,975	$	110,947	$	2,898

Level 1 Financial assets

Financial assets classified as Level 1 in the fair value hierarchy include U.S. Treasury and government agencies securities and cash and cash equivalents. These securities are actively traded and the Company estimates the fair value of these securities using unadjusted quoted market prices.

Level 2 Financial assets

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

Level 3 Financial assets

At June 30, 2012, the Company’s Level 3 financial assets include an investment in a hedge fund, which is presented as other invested assets in the consolidated balance sheets. The Company measured the fair value of the hedge fund on the basis of the net asset value of the fund as reported by the fund manager. The hedge fund is primarily invested in residential mortgage-backed securities and other asset-backed securities which are recorded at fair value as determined by the fund manager. Such fair value determination is based on quoted marked prices, bid prices, or the fund manager’s proprietary valuation models where quoted prices are unavailable or deemed to be inadequately representative of fair value. Significant decreases in the fair value of the underlying securities in the hedge fund would result in a significantly lower fair value measurement of other invested assets as reported in the consolidated balance sheets.

Fair value measurements for assets in Level 3 for the three months ended June 30, 2012 were as follows (in thousands):

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Other Invested Assets
Balance at April 1, 2012	$	3,016
Transfers into Level 3		—
Total gains included in earnings as net investment income		82
Settlements		—
Balance at June 30, 2012	$	3,098

Fair value measurements for assets in Level 3 for the three months ended June 30, 2011 were as follows (in thousands):

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Other Invested Assets
Balance at April 1, 2011	$	2,735
Transfers into Level 3		—
Total gains included in earnings as net investment income		105
Settlements		—
Balance at June 30, 2011	$	2,840

Fair value measurements for assets in Level 3 for the six months ended June 30, 2012 were as follows (in thousands):

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Other Invested Assets
Balance at January 1, 2012	$	2,898
Transfers into Level 3		—
Total gains included in earnings as net investment income		200
Settlements		—
Balance at June 30, 2012	$	3,098

Fair value measurements for assets in Level 3 for the six months ended June 30, 2011 were as follows (in thousands):

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Other Invested Assets
Balance at January 1, 2011	$	2,564
Transfers into Level 3		—
Total gains included in earnings as net investment income		276
Settlements		—
Balance at June 30, 2011	$	2,840

The Company did not have any transfers between Levels 1 and 2 during the period ended June 30, 2012.

Financial Instruments Disclosed, But Not Carried, At Fair Value

Fair values represent the Company’s best estimates and may not be substantiated by comparisons to independent markets and, in many cases, could not be realized in immediate settlement of the instruments.

The following table presents the carrying value and fair value of the Company’s financial assets and liabilities disclosed, but not carried, at fair value at June 30, 2012 and the level within the fair value hierarchy at which such assets and liabilities are measured on a recurring basis (in thousands):

	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	29,248	$	29,248	$	29,248	$	—	$	—
Fiduciary and restricted cash		779		779		779		—		—
Total	$	30,027	$	30,027	$	30,027	$	—	$	—
Liabilities:
Notes payable	$	76,849	$	12,997	$	—	$	—	$	12,997
Senior secured credit facility		91,266		73,701		—		—		73,701
Total	$	168,115	$	86,698	$	—	$	—	$	86,698

The following table presents the carrying value and fair value of the Company’s financial assets and liabilities disclosed, but not carried, at fair value at December 31, 2011 and the level within the fair value hierarchy at which such assets and liabilities are measured on a recurring basis (in thousands):

	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	28,559	$	28,559	$	28,559	$	—	$	—
Fiduciary and restricted cash		2,478		2,478		2,478		—		—
Total	$	31,037	$	31,037	$	31,037	$	—	$	—
Liabilities:
Notes payable	$	76,857	$	17,433	$	—	$	—	$	17,433
Senior secured credit facility		91,683		79,554		—		—		79,554
Total	$	168,540	$	96,987	$	—	$	—	$	96,987

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Income Taxes

6 Months Ended

Jun. 30, 2012

Income Taxes [Abstract]

Income Taxes

8. Income Taxes

The provision for income taxes for the three and six months ended June 30, 2012 and 2011 consisted of the following (in thousands):

	Three Months Ended June 30,					Six Months Ended June 30,
	2012			2011		2012		2011
Current tax expense (benefit)	$	(62	)	$	100	$	—	$	225
Deferred tax expense		84			318		168		637
Net income tax expense	$	22		$	418	$	168	$	862

The Company’s effective tax rate differed from the statutory rate of 35% for the three and six months ended June 30 as follows (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Income (loss) before income taxes	$	(5,673	)	$	437		$	(14,007	)	$	(8,929	)
Tax provision computed at the federal statutory income tax rate		(1,985	)		153			(4,902	)		(3,125	)
Increases (reductions) in tax resulting from:
Tax-exempt interest		(23	)		(35	)		(51	)		(74	)
State income taxes		(28	)		104			295			(30	)
IRS audit settlement		(118	)		—			(118	)		—
Valuation allowance		2,185			162			4,961			4,018
Other		(9	)		34			(17	)		73
Income tax expense	$	22		$	418		$	168		$	862
Effective tax rate		(0.4	)%		95.7	%		(1.2	)%		(9.7	)%

Our gross deferred tax assets prior to recognition of valuation allowance were $97.0 million and $92.7 million at June 30, 2012 and December 31, 2011, respectively. In assessing the realizability of our deferred tax assets, we considered whether it was more likely than not that our deferred tax assets will be realized based upon all available evidence, including scheduled reversal of deferred tax liabilities, historical operating results, projected future operating results, tax carry-back availability, and limitations pursuant to Section 382 of the Internal Revenue Code, among others. Based on this assessment, we have recorded a valuation allowance of $94.0 million and $88.9 million at June 30, 2012 and December 31, 2011, respectively.

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Fair Value of Financial Instruments (Details 1) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Fair value measurements for assets
Beginning Balance	$ 3,016	$ 2,735	$ 2,898	$ 2,564
Transfers into Level 3
Total gains included in earnings as net investment income	82	105	200	276
Settlements
Ending Balance	$ 3,098	$ 2,840	$ 3,098	$ 2,840

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Debt

6 Months Ended

Jun. 30, 2012

Debt [Abstract]

Debt

6. Debt

The Company’s long-term debt instruments and balances outstanding at June 30, 2012 and December 31, 2011 were as follows (in thousands):

	June 30, 2012		December 31, 2011
Notes payable due 2035	$	30,928	$	30,928
Notes payable due 2035		25,774		25,774
Notes payable due 2035		20,147		20,155
Total notes payable		76,849		76,857
Senior secured credit facility, net of discount		91,266		91,683
Total long-term debt	$	168,115	$	168,540

The $30.9 million notes payable due 2035 are redeemable in whole or in part by the Company. The notes adjust quarterly to the three-month LIBOR rate plus 3.60%. The interest rate as of June 30, 2012 was 4.07%.

The $25.8 million notes payable due 2035 are redeemable in whole or in part by the Company. The notes adjust quarterly to the three-month LIBOR rate plus 3.55%. The interest rate as of June 30, 2012 was 4.02%.

On February 28, 2012, the Company exercised its right to defer interest payments on the two Notes Payable mentioned above beginning with the scheduled interest payment due in March 2012 and continuing for a period of up to five years. The affected notes are associated with obligations to the Company’s unconsolidated trusts. The outstanding balance of the affected notes was $56.7 million as of June 30, 2012. The Company will continue to accrue interest on the principal during the extension period and the unpaid deferred interest will also accrue interest. Deferred interest will be due and payable at the expiration of the extension period and totaled $1.1 million as of June 30, 2012.

The $20.1 million notes payable due 2035 are redeemable in whole or in part by the Company. The notes adjust to the three-month LIBOR rate plus 3.95%. The interest rate as of June 30, 2012 was 4.42%.

The pricing under the senior secured credit facility is currently subject to a LIBOR floor of 3.00% plus 6.25%, and is tiered based on the Company’s leverage ratio. The interest rate as of June 30, 2012 was 10.5%. As of June 30, 2012, the principal balance of the senior secured credit facility was $97.2 million.

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Capital Lease Obligation

6 Months Ended

Jun. 30, 2012

Capital Lease Obligation [Abstract]

Capital Lease Obligation

7. Capital Lease Obligation

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

Property under capital lease consisted of the following as of June 30, 2012 and December 31, 2011 (in thousands):

	June 30, 2012			December 31, 2011
Computer software, software licenses and hardware	$	28,189		$	28,189
Accumulated depreciation		(11,154	)		(8,821	)
Computer software, software licenses and hardware, net	$	17,035		$	19,368

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

2012	$	3,368
2013		6,736
2014		6,736
2015		2,807
Total estimated future lease payments		19,647
Less: Amount representing interest		1,996
Present value of future lease payments	$	17,651

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Legal and Regulatory Proceedings

6 Months Ended

Jun. 30, 2012

Legal and Regulatory Proceedings [Abstract]

Legal and Regulatory Proceedings

9. Legal and Regulatory Proceedings

The Company and its subsidiaries are named from time to time as parties in various legal actions arising in the ordinary course of the Company’s business and arising out of or related to claims made in connection with the Company’s insurance policies and claims handling. There are no material changes with respect to legal and regulatory proceedings previously disclosed in Note 15 to the consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 2011. The Company believes that the resolution of these legal actions will not have a material adverse effect on the Company’s consolidated financial position or results of operations. However, the ultimate outcome of these matters is uncertain.

On February 3, 2012, the Chapter 7 Trustee for the Estate of Inga Nikokhosyan filed suit against Affirmative Insurance Company (AIC) and Platinum Claims Services, Inc. (Platinum) in the Superior Court for the State of California, County of Los Angeles. Platinum is a third-party claims administrator contracted by AIC to handle claims written through an unaffiliated program managed by Carnegie General Insurance Agency. The lawsuit alleges claims for breach of contract, breach of the implied covenant of good faith and fair dealing, intentional infliction of emotional distress, and punitive damages arising out of Platinum’s handling of a claim. The parties are proceeding to discovery. The Company believes that these claims lack merit and intends to defend itself vigorously. No estimate of the range of potential loss can be made at this time.

On May 27, 2011, PropertyOne, Inc. filed suit against USAgencies, LLC and Affirmative Insurance Holdings, Inc. in the 19^th Judicial District Court, Parish of East Baton Rouge, Louisiana. PropertyOne’s petition asserts equitable claims for payment of broker commissions arising out of the December 2009 execution of a lease with a federal agency for the Company’s building located in Baton Rouge, Louisiana. The Company removed the lawsuit to the U.S. District Court for the Middle District of Louisiana. The parties are now proceeding to discovery. The Company believes that these claims lack merit and intends to defend itself vigorously. No estimate of the range of potential loss can be made at this time.

The Illinois Insurance Code includes a reserve requirement that an insurer maintain an amount of qualifying investments, as defined, at least equal to the lesser of $250.0 million or 100% of its adjusted loss reserves and loss adjustment expenses reserves, as defined. As of December 31, 2011, Affirmative Insurance Company was deficient in meeting the qualifying investments requirement by $18.9 million. Management submitted a plan to cure the deficiency and the Illinois Department of Insurance approved management’s plan to cure the deficiency by September 30, 2012. Management is working on a number of actions to cure the deficiency. If AIC is not compliant as of September 30, 2012, AIC could be deemed to be in hazardous financial condition and the Director of the Illinois Department of Insurance could take one or more of the actions authorized by law for insurers in hazardous financial condition.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. This assumes continuing operations and the realization of assets and liabilities in the normal course of business. If AIC was not in compliance with the requirement by September 30, 2012, it could have a material adverse effect on the Company’s operations and the interests of its creditors and stockholders and could raise significant uncertainty about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or liabilities related to the going concern uncertainty.

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Available-for-Sale Investment Securities (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Summary of Available for sale securities
Amortized Cost	$ 81,451	$ 121,610
Gross Unrealized Gains	964	1,610
Gross Unrealized Losses	(75)	(298)
Fair Value	82,340	122,922
U.S. Treasury and government agencies [Member]
Summary of Available for sale securities
Amortized Cost	11,367	11,804
Gross Unrealized Gains	140	172
Gross Unrealized Losses	(3)	(1)
Fair Value	11,504	11,975
Mortgage-backed securities [Member]
Summary of Available for sale securities
Amortized Cost	3,947	10,803
Gross Unrealized Gains	28	283
Gross Unrealized Losses	(53)	(135)
Fair Value	3,922	10,951
States and political subdivisions [Member]
Summary of Available for sale securities
Amortized Cost	11,581	16,841
Gross Unrealized Gains	244	338
Gross Unrealized Losses	(2)	(1)
Fair Value	11,823	17,178
Corporate debt securities [Member]
Summary of Available for sale securities
Amortized Cost	37,690	61,031
Gross Unrealized Gains	466	764
Gross Unrealized Losses	(14)	(158)
Fair Value	38,142	61,637
FDIC-insured certificates of deposit [Member]
Summary of Available for sale securities
Amortized Cost	16,866	21,131
Gross Unrealized Gains	86	53
Gross Unrealized Losses	(3)	(3)
Fair Value	$ 16,949	$ 21,181

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Capital Lease Obligation (Details Textual) (USD $) In Millions, unless otherwise specified	6 Months Ended
	Jun. 30, 2012
Capital Lease Obligation (Textual) [Abstract]
Cash proceeds received from financing	$ 28.2
Purchase of FDIC-insured certificates of deposit	28.2
Lease term	60 months
Total rental monthly payments	$ 0.6

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Summary of Significant Accounting Policies (Tables)

6 Months Ended

Jun. 30, 2012

Summary of Significant Accounting Policies [Abstract]

Consolidated balance sheets

	December 31, 2011
	Previously Reported			As Adjusted
Deferred acquisition costs, net	$	3,206		$	(6,464	)
Stockholders’ deficit		(71,307	)		(80,977	)

Consolidated statements of operations

	Three Months Ended June 30, 2011					Six Months Ended June 30, 2011
	Previously Reported			As Adjusted		Previously Reported			As Adjusted
Selling, general and administrative expenses	$	28,274		$	27,441	$	61,975		$	61,304
Net income (loss)		(814	)		19		(10,462	)		(9,791	)
Net loss per share:
Basic		(0.05	)		—		(0.68	)		(0.64	)
Diluted		(0.05	)		—		(0.68	)		(0.64	)

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Debt (Tables)

6 Months Ended

Jun. 30, 2012

Debt [Abstract]

Summary of company's long-term debt instruments and balances outstanding

The Company’s long-term debt instruments and balances outstanding at June 30, 2012 and December 31, 2011 were as follows (in thousands):

	June 30, 2012		December 31, 2011
Notes payable due 2035	$	30,928	$	30,928
Notes payable due 2035		25,774		25,774
Notes payable due 2035		20,147		20,155
Total notes payable		76,849		76,857
Senior secured credit facility, net of discount		91,266		91,683
Total long-term debt	$	168,115	$	168,540

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Capital Lease Obligation (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Jun. 30, 2011
Property under capital lease
Computer software, software licenses and hardware	$ 28,189	$ 28,189
Accumulated depreciation	(11,154)	(8,821)
Computer software, software licenses and hardware, net	$ 17,035	$ 19,368

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Reinsurance (Details 2) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Summary of companies loss reserves and unearned premium
Losses and loss adjustment expense reserves	$ 75,615	$ 78,510
Unearned premium reserve	22,475	36,674
Total	$ 98,090	$ 115,184

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Consolidated Statements of Comprehensive Income (Loss) (Unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Consolidated Statements of Comprehensive Income (Loss) [Abstract]
Net income (loss)	$ (5,695)	$ 19	$ (14,175)	$ (9,791)
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale investment securities arising during period	(48)	384	187	112
Reclassification adjustment for realized (gains) losses included in net income (loss)	(601)	36	(610)	(116)
Other comprehensive income (loss), net	(649)	420	(423)	(4)
Total comprehensive income (loss)	$ (6,344)	$ 439	$ (14,598)	$ (9,795)

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Reinsurance

6 Months Ended

Jun. 30, 2012

Reinsurance [Abstract]

Reinsurance

3. Reinsurance

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

A quota-share reinsurance agreement was put in place effective January 1, 2011 ceding 28% of gross written premium in all states other than Michigan through December 31, 2011. This contract terminated on January 1, 2012 on a cut-off basis and resulted in the return of $11.8 million of ceded unearned premium, net of $4.3 million of deferred ceding commissions. Written premiums ceded under this agreement totaled $50.6 million.

In 2011, the Company entered into an additional quota-share agreement with a third-party reinsurance company under which the Company ceded 10% of business produced in Louisiana, Alabama, Texas and Illinois from September 1, 2011 through December 31, 2011. At December 31, 2011, this contract converted to a 40% quota-share reinsurance contract on the in-force business for the applicable states throughout 2012. Written premiums ceded under this agreement totaled $16.5 million and $40.1 million during the three and six months ended June 30, 2012, respectively. Written premiums ceded under this agreement totaled $63.0 million since inception.

In June 2012, the Company entered into a reinsurance agreement with third-party reinsurers which provides $5.0 million in excess of the first $3.0 million of losses coverage for catastrophic events that may involve multiple insured losses.

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

	Three Months Ended June 30,
	2012									2011
	Written Premium			Earned Premium			Loss and Loss Adjustment Expenses			Written Premium			Earned Premium			Loss and Loss Adjustment Expenses
Direct	$	37,352		$	45,551		$	33,854		$	42,191		$	58,072		$	45,810
Reinsurance assumed		9,746			9,041			8,527			7,409			10,641			(891	)
Reinsurance ceded		(16,807	)		(19,657	)		(15,662	)		(14,624	)		(22,042	)		(15,510	)
Total	$	30,291		$	34,935		$	26,719		$	34,976		$	46,671		$	29,409
	Six Months Ended June 30,
	2012									2011
	Written Premium			Earned Premium			Loss and Loss Adjustment Expenses			Written Premium			Earned Premium			Loss and Loss Adjustment Expenses
Direct	$	92,646		$	91,023		$	64,397		$	108,067		$	123,311		$	95,574
Reinsurance assumed		20,020			16,928			14,021			19,312			24,058			9,270
Reinsurance ceded		(24,637	)		(38,835	)		(26,029	)		(36,166	)		(50,147	)		(35,030	)
Total	$	88,029		$	69,116		$	52,389		$	91,213		$	97,222		$	69,814

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Selling, general and administrative expenses	$	(5,876	)	$	(6,313	)	$	(12,371	)	$	(13,485	)

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

	June 30, 2012		December 31, 2011
Losses and loss adjustment expense reserves	$	75,615	$	78,510
Unearned premium reserve		22,475		36,674
Total	$	98,090	$	115,184

The table below presents the total amount of receivables due from reinsurers as of June 30, 2012 and December 31, 2011 (in thousands):

	June 30, 2012		December 31, 2011
Michigan Catastrophic Claims Association	$	43,044	$	44,049
Quota-share reinsurer for agreement effective September 1, 2011		42,231		22,102
Quota-share reinsurer for agreements effective in fourth quarter of 2010 and January 2011		12,077		46,103
Vesta Insurance Group		10,071		10,068
Excess of loss reinsurers		5,624		5,458
Other		3,217		3,667
Total reinsurance receivable	$	116,264	$	131,447

The quota-share reinsurers and the excess of loss reinsurers all have A ratings from A.M. Best. Accordingly, the Company believes there is minimal credit risk related to these reinsurance receivables. Under the reinsurance agreement with Vesta Insurance Group (VIG), including primarily Vesta Fire Insurance Corporation (VFIC), the Company’s wholly-owned subsidiaries, Affirmative Insurance Company (AIC) and Insura Property and Casualty Insurance Company (Insura), had the right, under certain circumstances, to require VFIC to provide a letter of credit or establish a trust account to collateralize gross amounts due from VFIC under the reinsurance agreement. Accordingly, AIC, Insura and VFIC entered into a Security Fund Agreement effective September 2004. In August 2005, AIC received a letter from VFIC’s President that irrevocably confirmed VFIC’s duty and obligation under the Security Fund Agreement to provide security sufficient to satisfy VFIC’s gross obligations under the reinsurance agreement (the VFIC Trust). At June 30, 2012, the VFIC Trust held $16.8 million (after cumulative withdrawals of $8.7 million through June 30, 2012), consisting of $14.7 million of a U.S. Treasury money market account and $2.1 million of corporate bonds rated BBB+ or higher, to collateralize the $10.1 million net recoverable (net of $2.9 million payable) from VFIC.

The Company assumes reinsurance from a Texas county mutual insurance company (the county mutual) whereby the Company has assumed 100% of the policies issued by the county mutual for business produced by the Company’s owned general agents. The county mutual does not retain any of this business and there are no loss limits other than the underlying policy limits. AIC has established a trust to secure the Company’s obligation under this reinsurance contract with a balance of $29.9 million and $34.4 million as of June 30, 2012 and December 31, 2011, respectively.

At June 30, 2012, $2.5 million was included in reserves for losses and loss adjustment expenses that represented the amounts owed by AIC and Insura under reinsurance agreements with the VIG affiliated companies. Affirmative established a trust account to collateralize this payable, which currently holds $20.7 million in securities (the AIC Trust). The Special Deputy Receiver in Texas had cumulative withdrawals from the AIC Trust of $0.4 million through June 2012, and the Special Deputy Receiver in Hawaii had cumulative withdrawals from the AIC Trust of $1.7 million through June 2012.

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Related Party Transactions (Details) (USD $) In Millions, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2010
Related Party Transactions (Textual) [Abstract]
Investment in hedge fund	$ 2.5	$ 2.5
Related liquidity focused product	3.9	10.0
Fair value of hedge fund	3.1
Fair value of liquidity focused product	$ 3.9

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Capital Lease Obligation (Tables)

6 Months Ended

Jun. 30, 2012

Capital Lease Obligation [Abstract]

Property under capital lease

Property under capital lease consisted of the following as of June 30, 2012 and December 31, 2011 (in thousands):

	June 30, 2012			December 31, 2011
Computer software, software licenses and hardware	$	28,189		$	28,189
Accumulated depreciation		(11,154	)		(8,821	)
Computer software, software licenses and hardware, net	$	17,035		$	19,368

Estimated future lease payments

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

2012	$	3,368
2013		6,736
2014		6,736
2015		2,807
Total estimated future lease payments		19,647
Less: Amount representing interest		1,996
Present value of future lease payments	$	17,651

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Available-for-Sale Investment Securities (Details Textual)	Jun. 30, 2012 Investment_Securities	Dec. 31, 2011 Investment_Securities
Available-for-Sale Investment Securities (Textual) [Abstract]
Individual investment securities in an unrealized loss position	24	34

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Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2012

Summary of Significant Accounting Policies [Abstract]

Basis of Presentation

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements of the Company. In the opinion of management, all adjustments necessary for a fair presentation have been included and are of a normal recurring nature. Interim results are not necessarily indicative of the results that may be expected for the year. The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2011 included in the Company’s Annual Report on Form 10-K. The results of operations for interim periods should not be considered indicative of results to be expected for the full year.

Adopted Accounting Standards

Adopted Accounting Standards

In October 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. ASU 2010-26 modified the definitions of the type of costs that can be capitalized in the successful acquisition of new and renewal insurance contracts. ASU 2010-26 requires incremental direct costs of successful contract acquisition as well as certain costs related to underwriting, policy issuance and processing, medical and inspection and sales force contract selling for successful contract acquisition to be capitalized. These incremental direct costs and other costs are those that are essential to the contract transaction and would not have been incurred had the contract transaction not occurred. The Company retrospectively adopted ASU 2010-26 on January 1, 2012. The cumulative effect of the adoption was a decrease of shareholders’ equity by $11.3 million, net of tax, as of January 1, 2011.

The following table illustrates the effect of adopting ASU 2010-26 in the consolidated balance sheets (in thousands):

	December 31, 2011
	Previously Reported			As Adjusted
Deferred acquisition costs, net	$	3,206		$	(6,464	)
Stockholders’ deficit		(71,307	)		(80,977	)

The following table illustrates the effect of adopting ASU 2010-26 in the consolidated statements of operations (in thousands, except per share amounts):

	Three Months Ended June 30, 2011					Six Months Ended June 30, 2011
	Previously Reported			As Adjusted		Previously Reported			As Adjusted
Selling, general and administrative expenses	$	28,274		$	27,441	$	61,975		$	61,304
Net income (loss)		(814	)		19		(10,462	)		(9,791	)
Net loss per share:
Basic		(0.05	)		—		(0.68	)		(0.64	)
Diluted		(0.05	)		—		(0.68	)		(0.64	)

ASU 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment, permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. Additionally, if the carrying amount of a reporting unit is zero or negative, the second step of the impairment test shall be performed to measure the amount of the impairment loss, if any, when it is more likely than not that a goodwill impairment exists. In considering whether it is more likely than not that a goodwill impairment exists, a qualitative assessment will be performed. If an entity concludes it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it need not perform the two-step impairment test. This standard is effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this standard did not have an impact on the Company’s consolidated financial position, results of operations or cash flows.

ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, requires companies to present the components of net income and comprehensive income in either one or two consecutive financial statements. Companies will no longer be permitted to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. This standard is effective for interim and annual periods beginning after December 15, 2011, and should be applied retrospectively. The adoption of this standard did not impact the Company’s consolidated financial position, results of operations or cash flows.

ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, provides identical guidance with concurrently issued International Financial Reporting Standard (IFRS) 13, Fair Value Measurements. Most of the changes in the new standard are clarifications of existing guidance, but it expands the disclosures about fair value measurements, and requires the categorization by level of the fair value hierarchy for items that are not measured at fair value in the statement of financial position, but for which the fair value is required to be disclosed, which would consist of the Company’s debt, cash and cash equivalents, and fiduciary and restricted cash. In addition, for fair value measurements categorized as Level 3 within the fair value hierarchy, the valuation processes and sensitivity of the fair value measurements to changes in unobservable inputs shall be disclosed. This standard is effective for interim and annual periods beginning after December 15, 2011, and should be applied prospectively. The adoption of this standard did not impact the Company’s consolidated financial position, results of operations or cash flows.

Recently Issued Accounting Standards

Recently Issued Accounting Standards

In July 2012, the FASB issued ASU 2012-02, Intangibles — Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. This ASU gives entities testing indefinite-lived intangible assets for impairment the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, the entity is not required to take further action. However, if an entity concludes otherwise, a quantitative impairment test is required. This guidance is effective for annual and interim impairment tests beginning January 1, 2013, with early adoption permitted. Management does not believe the adoption of this update will have a material effect on the Company’s consolidated financial position, results of operations or cash flows.