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 September 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 November 12, 2012: 15,408,358

AFFIRMATIVE INSURANCE HOLDINGS, INC.

NINE MONTHS ENDED SEPTEMBER 30, 2012

INDEX TO FORM 10-Q

PART I – FINANCIAL INFORMATION	3
Item 1. Financial Statements	3
Consolidated Balance Sheets – September 30, 2012 and December 31, 2011	3
Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2012 and 2011	4
Consolidated Statements of Comprehensive Income (Loss) – Three and Nine Months Ended September  30, 2012 and 2011	5
Consolidated Statements of Stockholders’ Equity (Deficit) – Nine Months Ended September  30, 2012 and 2011	6
Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2012 and 2011	7
Notes to Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3. Quantitative and Qualitative Disclosures About Market Risk	31
Item 4. Controls and Procedures	33
PART II – OTHER INFORMATION	34
Item 1. Legal Proceedings	34
Item 1A. Risk Factors	34
Item 1B. Unresolved Staff Comments	34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3. Defaults Upon Senior Securities	34
Item 4. Mine Safety Disclosures	34
Item 5. Other Information	34
Item 6. Exhibits	34
SIGNATURES	36

2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

AFFIRMATIVE INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share data)

	September 30, 2012			December 31, 2011
				(As Adjusted See Note 1)
Assets
Available-for-sale securities, at fair value	$	70,142		$	122,922
Other invested assets		3,309			2,898
Cash and cash equivalents		24,413			28,559
Fiduciary and restricted cash		568			2,478
Accrued investment income		644			1,058
Premiums and fees receivable, net		28,619			22,579
Premium finance receivable, net		41,490			38,082
Commissions receivable		1,698			1,786
Receivable from reinsurers		118,487			131,447
Income taxes receivable		16			739
Investment in real property, net		11,176			11,776
Property and equipment (net of accumulated depreciation of $57,990 for 2012 and $51,204 for 2011)		26,219			32,130
Goodwill		—			23,448
Other intangible assets (net of accumulated amortization of $7,665 for 2012 and 2011)		14,265			14,609
Prepaid expenses		6,971			5,147
Other assets (net of allowance for doubtful accounts of $7,213 for 2012 and 2011)		1,944			1,944
Total assets	$	349,961		$	441,602
Liabilities and Stockholders’ Deficit
Liabilities:
Reserves for losses and loss adjustment expenses	$	143,323		$	183,836
Unearned premium		67,671			58,242
Amounts due to reinsurers		30,245			38,224
Deferred revenue		5,967			4,816
Capital lease obligation		16,291			20,301
Senior secured credit facility		92,276			91,683
Notes payable		76,845			76,857
Deferred tax liability		3,180			2,928
Deferred acquisition costs, net		1,202			6,464
Other liabilities		37,928			39,228
Total liabilities		474,928			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 September 30, 2012 and at December 31, 2011		182			182
Additional paid-in capital		166,613			166,342
Treasury stock, at cost (2,793,863 shares at September 30, 2012 and December 31, 2011)		(32,910	)		(32,910	)
Accumulated other comprehensive loss		(855	)		(227	)
Retained deficit		(257,997	)		(214,364	)
Total stockholders’ deficit		(124,967	)		(80,977	)
Total liabilities and stockholders’ deficit	$	349,961		$	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 September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
				(As Adjusted See Note 1)						(As Adjusted See Note 1)
Revenues
Net premiums earned	$	35,261		$	42,042		$	104,377		$	139,264
Commission income and fees		14,879			16,265			45,991			53,593
Net investment income		819			1,078			2,572			3,891
Net realized gains (losses)		192			(45	)		921			71
Other income		4			8			504			257
Total revenues		51,155			59,348			154,365			197,076
Expenses
Net losses and loss adjustment expenses		25,397			31,562			77,786			101,376
Selling, general and administrative expenses		24,097			27,099			74,529			88,403
Depreciation and amortization		2,414			2,533			7,044			7,340
Total expenses		51,908			61,194			159,359			197,119
Operating loss		(753	)		(1,846	)		(4,994	)		(43	)
Loss on interest rate swaps		—			—			—			(2	)
Interest expense		4,802			5,561			14,568			16,291
Goodwill and other intangible assets impairment		23,692			—			23,692			—
Loss before income tax expense		(29,247	)		(7,407	)		(43,254	)		(16,336	)
Income tax expense		211			231			379			1,093
Net loss	$	(29,458	)	$	(7,638	)	$	(43,633	)	$	(17,429	)
Basic loss per common share:
Net loss	$	(1.91	)	$	(0.50	)	$	(2.83	)	$	(1.13	)
Diluted loss per common share:
Net loss	$	(1.91	)	$	(0.50	)	$	(2.83	)	$	(1.13	)
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 September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
				(As Adjusted See Note 1)						(As Adjusted See Note 1)
Net loss	$	(29,458	)	$	(7,638	)	$	(43,633	)	$	(17,429	)
Other comprehensive loss:
Unrealized gains (losses) on available-for-sale investment securities arising during period		(15	)		(472	)		172			(360	)
Reclassification adjustment for realized (gains) losses included in net income (loss)		(190	)		45			(800	)		(71	)
Other comprehensive loss, net		(205	)		(427	)		(628	)		(431	)
Total comprehensive loss	$	(29,663	)	$	(8,065	)	$	(44,261	)	$	(17,860	)

See accompanying Notes to Consolidated Financial Statements

5

AFFIRMATIVE INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

(in thousands, except share data)

	Nine Months Ended September 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				271					359
Balance at end of period				166,613					166,135
Treasury stock
Balance at beginning of year		2,793,863		(32,910	)		2,360,363		(32,906	)
Issuance of restricted stock awards		—		—			433,500		(4	)
Balance at end of period		2,793,863		(32,910	)		2,793,863		(32,910	)
Accumulated other comprehensive income (loss)
Balance at beginning of year				(227	)				445
Unrealized loss on available-for-sale investment securities				(628	)				(431	)
Balance at end of period				(855	)				14
Retained Deficit
Balance at beginning of year				(214,364	)				(51,767	)
Net loss				(43,633	)				(17,429	)
Balance at end of period				(257,997	)				(69,196	)
Total stockholders’ equity (deficit)			$	(124,967	)			$	64,225

See accompanying Notes to Consolidated Financial Statements

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AFFIRMATIVE INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

	Nine Months  Ended September 30,
	2012			2011
				(As Adjusted See Note 1)
Cash flows from operating activities
Net loss	$	(43,633	)	$	(17,429	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		7,644			7,340
Stock-based compensation expense		254			316
Amortization of debt modification costs		280			310
Amortization of debt discount		2,930			3,428
Net realized gains from sales of available-for-sale securities		(800	)		(71	)
Fair value gain on investment in hedge fund		(411	)		(245	)
Gain on disposal of assets		(121	)		—
Amortization of premiums on investments, net		1,271			2,306
Provision for doubtful premiums receivable		609			(180	)
Loss on interest rate swaps		—			2
Proceeds from insurance recoveries		—			(212	)
Paid-in-kind interest		2,681			—
Goodwill and other intangible assets impairment		23,692			—
Change in operating assets and liabilities:
Fiduciary and restricted cash		1,910			3,524
Premiums, fees and commissions receivable, net		(6,561	)		15,764
Reserves for losses and loss adjustment expenses		(40,513	)		10,413
Amounts due from reinsurers		4,981			(66,537	)
Premium finance receivable, net (related to our insurance premiums)		(3,565	)		3,794
Deferred revenue		1,151			(2,201	)
Unearned premium		9,429			(26,425	)
Deferred acquisition costs, net		(5,262	)		744
Deferred taxes		252			956
Income taxes receivable		723			902
Other		(4,499	)		(3,788	)
Net cash used in operating activities		(47,558	)		(67,289	)
Cash flows from investing activities
Proceeds from sales of available-for-sale securities		33,730			56,277
Proceeds from maturities of available-for-sale securities		26,791			27,163
Purchases of available-for-sale securities		(8,839	)		(18,431	)
Premium finance receivable, net (related to third-party insurance premiums)		157			(2,660	)
Purchases of property and equipment		(1,170	)		(2,335	)
Proceeds from insurance recoveries		30			—
Investment in real property, net		—			(550	)
Net cash provided by investing activities		50,699			59,464
Cash flows from financing activities
Principal payments under capital lease obligations		(4,010	)		(3,718	)
Principal payments on senior secured credit facility		(3,277	)		(5,388	)
Debt modification costs paid		—			(769	)
Repurchase of restricted stock		—			(4	)
Net cash used in financing activities		(7,287	)		(9,879	)
Net decrease in cash and cash equivalents		(4,146	)		(17,704	)
Cash and cash equivalents at beginning of year		28,559			46,364
Cash and cash equivalents at end of period	$	24,413		$	28,660
Supplemental disclosure of cash flow information:
Cash paid for interest	$	7,666		$	10,911
Cash paid for income taxes		335			335

See accompanying Notes to Consolidated Financial Statements

7

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 September 30, 2011						Nine Months Ended September 30, 2011
	Previously Reported			As Adjusted			Previously Reported			As Adjusted
Selling, general and administrative expenses	$	27,919		$	27,099		$	89,894		$	88,403
Net loss		(8,458	)		(7,638	)		(18,920	)		(17,429	)
Net loss per share:
Basic		(0.55	)		(0.50	)		(1.23	)		(1.13	)
Diluted		(0.55	)		(0.50	)		(1.23	)		(1.13	)

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

8

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 standard 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 at the time of disposal.

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair  Value
September 30, 2012
U.S. Treasury and government agencies	$	11,503	$	139	$	—		$	11,642
Mortgage-backed securities		3,687		20		(50	)		3,657
States and political subdivisions		4,083		117		(2	)		4,198
Corporate debt securities		29,684		379		(5	)		30,058
FDIC-insured certificates of deposit		20,501		86		—			20,587
Total	$	69,458	$	741	$	(57	)	$	70,142
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

9

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 September 30, 2012 by contractual maturity were as follows (in thousands):

	Amortized Cost		Estimated Fair  Value
Due in one year or less	$	41,140	$	41,334
Due after one year through five years		24,251		24,734
Due after five years through ten years		380		417
Mortgage-backed securities		3,687		3,657
Total	$	69,458	$	70,142

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

	2012			2011
Gross gains	$	921		$	237
Gross losses		(121	)		(166	)
Total	$	800		$	71

The following table summarizes the Company’s available-for-sale securities in an unrealized loss position at September 30, 2012 and December 31, 2011, the estimated 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):

	September 30, 2012
	Less Than Twelve Months					Twelve Months or Greater					Total
	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
Mortgage-backed securities		1,450		(24	)		792		(26	)		2,242		(50	)
States and political subdivisions		—		—			72		(2	)		72		(2	)
Corporate debt securities		672		(1	)		620		(4	)		1,292		(5	)
Total	$	2,122	$	(25	)	$	1,484	$	(32	)	$	3,606	$	(57	)
	December 31, 2011
	Less Than Twelve Months					Twelve Months or Greater					Total
	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated 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 20 and 34 individual investment securities that were in an unrealized loss position as of September 30, 2012 and December 31, 2011, respectively.

The unrealized losses at September 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,

10

(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 September 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 $21.1 million and $61.2 million during the three and nine months ended September 30, 2012, respectively. Written premiums ceded under this agreement totaled $84.1 million since inception through September 30, 2012.

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 September 30,
	2012									2011
	Written Premium			Earned Premium			Loss and Loss Adjustment Expenses			Written Premium			Earned Premium			Loss and Loss Adjustment Expenses
Direct	$	50,667		$	44,665		$	28,837		$	46,296		$	50,672		$	88,983
Reinsurance assumed		9,095			9,997			7,538			8,224			9,127			9,299
Reinsurance ceded		(21,252	)		(19,401	)		(10,978	)		(15,918	)		(17,757	)		(66,720	)
Total	$	38,510		$	35,261		$	25,397		$	38,602		$	42,042		$	31,562
	Nine Months Ended September 30,
	2012									2011
	Written Premium			Earned Premium			Loss and Loss Adjustment Expenses			Written Premium			Earned Premium			Loss and Loss Adjustment Expenses
Direct	$	143,313		$	135,688		$	93,234		$	154,363		$	173,983		$	184,557
Reinsurance assumed		29,115			26,925			21,559			27,536			33,185			18,569
Reinsurance ceded		(45,889	)		(58,236	)		(37,007	)		(52,084	)		(67,904	)		(101,750	)
Total	$	126,539		$	104,377		$	77,786		$	129,815		$	139,264		$	101,376

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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 September 30,						Nine Months  Ended September 30,
	2012			2011			2012			2011
Selling, general and administrative expenses	$	(7,059	)	$	(5,119	)	$	(19,430	)	$	(18,604	)

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):

	September 30, 2012		December 31, 2011
Losses and loss adjustment expense reserves	$	72,482	$	78,510
Unearned premium reserve		24,326		36,674
Total	$	96,808	$	115,184

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

	September 30, 2012		December 31, 2011
Quota-share reinsurer for agreement effective September 1, 2011	$	49,206	$	22,102
Michigan Catastrophic Claims Association		42,066		44,049
Vesta Insurance Group		9,839		10,068
Quota-share reinsurer for agreements effective in fourth quarter of 2010 and January 2011		9,264		46,103
Excess of loss reinsurers		4,983		5,458
Other		3,129		3,667
Total reinsurance receivable	$	118,487	$	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 September 30, 2012, the VFIC Trust held $16.8 million (after cumulative withdrawals of $8.7 million through September 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 $9.8 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 $30.0 million and $34.4 million as of September 30, 2012 and December 31, 2011, respectively.

At September 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 a reinsurance agreement with a VIG affiliated company. Affirmative established a trust account to collateralize this payable, which currently holds $20.7 million in a money market cash equivalent account (the AIC Trust). The Special Deputy Receiver in Texas had cumulative withdrawals from the AIC Trust of $0.4 million through September 2012, and the Special Deputy Receiver in Hawaii had cumulative withdrawals from the AIC Trust of $1.7 million through September 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 September 30, 2012 and December 31, 2011 (in thousands):

	September 30, 2012			December 31, 2011
Premium finance contracts	$	44,324		$	40,472
Unearned finance charges		(2,304	)		(1,911	)
Allowance for credit losses		(530	)		(479	)
Total	$	41,490		$	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 $0.2 million, or 0.4% of total premiums financed, for the three months ended September 30, 2012, and $0.2 million, or 0.5% of total premiums financed, for the three months ended September 30, 2011. Losses due to non-realization of premium finance receivables were $0.4 million, or 0.4% of total premiums financed, for the nine months ended September 30, 2012, and $0.5 million, or 0.4% of total premiums financed, for the nine months ended September 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 September 30, 2012 and 2011 (in thousands):

	Gross			Ceded			Net
Balance at July 1, 2012	$	4,961		$	(6,398	)	$	(1,437	)
Additions		5,051			(6,014	)		(963	)
Amortization		(4,286	)		5,484			1,198
Ending balance at September 30, 2012	$	5,726		$	(6,928	)	$	(1,202	)
Balance at July 1, 2011, as adjusted	$	5,104		$	(5,330	)	$	(226	)
Additions		3,793			(4,191	)		(398	)
Amortization		(4,323	)		4,663			340
Ending balance at September 30, 2011, as adjusted	$	4,574		$	(4,858	)	$	(284	)

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

	Gross			Ceded			Net
Balance at January 1, 2012	$	3,668		$	(10,132	)	$	(6,464	)
Additions		13,741			(13,176	)		565
Amortization		(11,683	)		16,380			4,697
Ending balance at September 30, 2012	$	5,726		$	(6,928	)	$	(1,202	)
Balance at January 1, 2011, as adjusted	$	9,432		$	(8,972	)	$	460
Additions		13,048			(13,169	)		(121	)
Amortization		(17,906	)		17,283			(623	)
Ending balance at September 30, 2011, as adjusted	$	4,574		$	(4,858	)	$	(284	)

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6. Goodwill and Other Intangible Assets

The Company completed its annual goodwill and indefinite lived intangible asset impairment analyses as of September 30, 2012. The Company reports under a single reporting segment and, as such, the goodwill analysis is measured under one reporting unit. Current trends and recent developments resulted in management concluding that it is more likely than not that a goodwill impairment exists at September 30, 2012. Specifically, operating income and cash flow was less than plan, and premium production was below forecast. Due to the Company’s negative equity position of $101.3 million as of September 30, 2012, prior to goodwill impairment, ASC 350-20-35-30 requires that the Company perform step two of the goodwill impairment test.

Consistent with prior assessments, the fair value of the Company was determined using an internally developed discounted cash flow method. Management made significant assumptions and estimates about the extent and timing of future cash flows, growth rates, and discount rates that represent unobservable inputs into the valuation methodologies used to calculate fair value. A discount rate of 19% was used at September 30, 2012, which the Company believes adequately reflects an appropriate risk-adjusted discount rate based on its overall cost of capital and company-specific risk factors related to cash flow, debt covenant compliance and regulatory risk, as discussed in Notes 7, 10 and 14. The cash flows were estimated over a significant future period of time, which made those estimates and assumptions subject to a high degree of uncertainty. Based upon the results of the assessment, the Company concluded that the carrying value of goodwill was fully impaired as of September 30, 2012. In step two of the goodwill impairment analysis, the Company determined the fair values of the Company’s assets and liabilities (including any unrecognized intangible assets) as if the Company had been acquired in a business combination. Determining the implied fair value of goodwill was judgmental in nature and involved the use of significant estimates and assumptions. The resulting implied fair value of goodwill was compared to the carrying value of goodwill, resulting in the write-off of the remaining goodwill balance of $23.4 million.

Indefinite-lived intangible assets primarily consist of trade names. In measuring the fair value of these intangible assets, the Company utilizes the relief-from-royalty method. This method assumes that trade names have value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires an estimate of future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital. This analysis indicated an impairment of indefinite-lived intangible assets of $0.2 million as of September 30, 2012.

7. Debt

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

	September 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		20,143		20,155
Total notes payable		76,845		76,857
Senior secured credit facility, net of discount		92,276		91,683
Total long-term debt	$	169,121	$	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 September 30, 2012 was 3.99%.

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 September 30, 2012 was 3.94%.

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 September 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 $1.7 million as of September 30, 2012.

The $20.1 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 3.95%. The interest rate as of September 30, 2012 was 4.34%.

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 September 30, 2012 was 10.5%. As of September 30, 2012, the principal balance of the senior secured credit facility was $97.3 million. The facility expires in January 2014.

The Company breached its leverage ratio covenant under the senior secured credit facility as of September 30, 2012. However, the lenders for the facility waived all defaults and events of default arising in connection with the breach. The Company will need to enter into certain transactions, such as asset sales, to be in compliance with the leverage ratio covenant as of December 31, 2012. The Company cannot provide assurance that it will be in compliance with the leverage ratio covenant at December 31, 2012. 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 the Company was not in compliance with the leverage ratio covenant and unable to negotiate a waiver with its lenders, it could have a material adverse effect on the Company’s operations and the interests of its stockholders. These conditions and events raise significant uncertainty about the Company’s 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 November 2012, a new class of loans under the senior secured credit facility was created allowing for an incremental term loan. The incremental term loan has the following characteristics:

• Face amount of $8.0 million with a funded amount of $5.5 million, of which the Company contributed $4.6 million to Affirmative Insurance Company.

• Repayment will be on a first out basis, payable in full, on or prior to January 17, 2014, with priority over all other amounts outstanding under the senior secured credit facility.

• All additional proceeds not used to satisfy Affirmative Insurance Company’s reserve requirement as of September 30, 2012 as described in Note 10 are to be used solely for paying the incremental term loan lenders’ and administrative agent’s professional fees.

• A $60,000 principal payment is due as of March 31, 2013 and $40,000 is due each quarter end for the remainder of 2013. The remaining balance is due at maturity.

• A commitment fee of $550,000 is due for any asset sales of the Company’s non-regulated operations in excess of $10.0 million if such sale is consummated by December 31, 2012. If no such sale occurs by December 31, 2012, the commitment fee will be added to the principal amount of the incremental term loan.

• The incremental term loan lenders will receive an 8% prepayment premium of the principal amount if the incremental term loan is prepaid.

• The incremental term loan lenders have the right to retain a financial advisor to assess the financial, operational and regulatory condition of the Company.

8. Capital Lease Obligation

In May 2010, the Company entered into a capital lease obligation related to certain computer software, software licenses, and hardware used in the Company’s insurance operations. The Company received cash proceeds from the financing in the amount of $28.2 million. As required by the lease agreements, the Company purchased $28.2 million of FDIC-insured certificates of deposit held in brokerage accounts and pledged 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 September 30, 2012 and December 31, 2011 (in thousands):

	September 30, 2012			December 31, 2011
Computer software, software licenses and hardware	$	28,189		$	28,189
Accumulated depreciation		(12,321	)		(8,821	)
Computer software, software licenses and hardware, net	$	15,868		$	19,368

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

2012	$	1,684
2013		6,736
2014		6,736
2015		2,807
Total estimated future lease payments		17,963
Less: Amount representing interest		1,672
Present value of future lease payments	$	16,291

See Note 14 for subsequent event related to the Company’s capital lease obligation.

9. Income Taxes

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

	Three Months  Ended September 30,					Nine Months  Ended September 30,
	2012		2011			2012		2011
Current tax expense (benefit)	$	127	$	(88	)	$	127	$	137
Deferred tax expense		84		319			252		956
Net income tax expense	$	211	$	231		$	379	$	1,093

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Loss before income taxes	$	(29,247	)	$	(7,407	)	$	(43,254	)	$	(16,336	)
Tax provision computed at the federal statutory income tax rate		(10,237	)		(2,593	)		(15,139	)		(5,718	)
Increases (reductions) in tax resulting from:
Tax-exempt interest		(10	)		(32	)		(61	)		(106	)
State income taxes		40			(427	)		335			(457	)
IRS audit settlement		—			—			(118	)		—
Goodwill impairment (non-deductible)		5,623			—			5,623			—
Valuation allowance		4,809			3,415			9,770			7,433
Other		(14	)		(132	)		(31	)		(59	)
Income tax expense	$	211		$	231		$	379		$	1,093
Effective tax rate		(0.7	)%		(3.1	)%		(0.9	)%		(6.7	)%

Our gross deferred tax assets prior to recognition of valuation allowance were $101.4 million and $92.7 million at September 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 $98.8 million and $88.9 million at September 30, 2012 and December 31, 2011, respectively.

10. Legal and Regulatory Proceedings

The Company and its subsidiaries are named from time to time as parties in various legal actions arising in the ordinary course of the Company’s business and arising out of or related to claims made in connection with the Company’s insurance policies and claims handling. There are no material changes with respect to legal 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

15

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 now engaged in 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 engaged in 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. Affirmative Insurance Company is currently in compliance with the reserve requirement.

Affirmative Insurance Company will need to enter into certain transactions, such as asset sales or other transactions, to be in compliance with the reserve requirement as of December 31, 2012. The Company cannot provide assurance that it will be in compliance with the reserve requirement at December 31, 2012. 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 Affirmative Insurance Company is not in compliance with the reserve requirement as of December 31, 2012, it could have a material adverse effect on the Company’s operations and the interests of its creditors and stockholders. These conditions and events raise significant uncertainty about the Company’s 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.

11. Net Loss Per Common Share

Net loss per common share is based on the weighted average number of shares outstanding. Diluted weighted average shares is calculated by adjusting basic weighted average shares outstanding by all potentially dilutive stock options and restricted stock. Stock options outstanding of 906,999 for the three and nine months ended September 30, 2012 and stock options outstanding of 1,772,500 for the three and nine months ended 2011 were not included in the computation of diluted earnings per share because there is a loss from continuing operations in the respective periods.

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Numerator:
Loss from continuing operations	$	(29,458	)	$	(7,638	)	$	(43,633	)	$	(17,429	)
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:	$	(1.91	)	$	(0.50	)	$	(2.83	)	$	(1.13	)
Diluted loss per common share from continuing operations:	$	(1.91	)	$	(0.50	)	$	(2.83	)	$	(1.13	)

12. Related Party Transactions

The Company has entered into certain transactions with a partnership that is affiliated with J. Christopher Flowers. Mr. Flowers is affiliated with New Affirmative LLC, the majority shareholder of the Company. In the fourth quarter of 2010, the Company committed to invest $2.5 million in Varadero, a hedge fund, and $10.0 million in a related liquidity-focused product. The investment manager of Varadero is Varadero Capital, L.P., of which Varadero GP, LLC is the general partner. Both the investment manager and general partner are partially-owned by an entity affiliated with Mr. Flowers. As of September 30, 2012, the Company had funded $2.5 million in the hedge fund and approximately $3.7 million in the related liquidity-focused product. At September 30, 2012, the fair value of the hedge fund was approximately $3.3 million, based on net asset value and recorded as other invested assets, and the fair value of the liquidity-focused product was approximately $3.7 million, included in available-for-sale securities in the consolidated balance sheets.

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13. 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 September 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	$	11,642	$	11,642	$	—	$	—
Mortgage-backed securities		3,657		—		3,657		—
States and political subdivisions		4,198		—		4,198		—
Corporate debt securities		30,058		—		30,058		—
FDIC-insured certificates of deposit		20,587		—		20,587		—
Total investment securities		70,142		11,642		58,500		—
Other invested assets		3,309		—		—		3,309
Total assets	$	73,451	$	11,642	$	58,500	$	3,309

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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 September 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 elected the fair value option for its investment in the hedge fund and measures 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 September 30, 2012 were as follows (in thousands):

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Other Invested Assets
Balance at July 1, 2012	$	3,098
Transfers into Level 3		—
Total gains included in earnings as net investment income		211
Settlements		—
Balance at September 30, 2012	$	3,309

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

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Other Invested Assets
Balance at July 1, 2011	$	2,840
Transfers into Level 3		—
Total losses included in earnings as net investment income		(31	)
Settlements		—
Balance at September 30, 2011	$	2,809

Fair value measurements for assets in Level 3 for the nine months ended September 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		411
Settlements		—
Balance at September 30, 2012	$	3,309

Fair value measurements for assets in Level 3 for the nine months ended September 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		245
Settlements		—
Balance at September 30, 2011	$	2,809

The Company did not have any transfers between Levels 1 and 2 during the period ended September 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 estimated fair value of the Company’s financial assets and liabilities disclosed, but not carried, at fair value at September 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		Estimated Fair  Value		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	24,413	$	24,413	$	24,413	$	—	$	—
Fiduciary and restricted cash		568		568		568		—		—
Total	$	24,981	$	24,981	$	24,981	$	—	$	—
Liabilities:
Notes payable	$	76,845	$	12,728	$	—	$	—	$	12,728
Senior secured credit facility		92,276		76,531		—		—		76,531
Total	$	169,121	$	89,259	$	—	$	—	$	89,259

The following table presents the carrying value and estimated 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		Estimated 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

14. Subsequent Event

Related to the capital lease obligation described in Note 8, on October 17, 2012, the Company received notice from one of the lessors (Lessor) that, based upon Lessor’s claim of an alleged default under the terms of the lease and security agreements, it elected to immediately seek recovery of an amount equal to the casualty loss value of the leased property, together with all other sums allegedly due to Lessor, which Lessor calculated as $9.6 million. Lessor informed the Company that it had directed the escrow agent to redeem the CDs securing the Company’s lease payment obligation and disburse to it the approximately $8.3 million in proceeds, which Lessor received on October 15, 2012. Lessor seeks payment from the Company of the remaining $1.4 million, alleged liquidated damages. Lessor has stated that it will convey all rights and interest in the leased property back to the Company upon receipt of this payment.

Lessor alleges that the deficiency in the reserve requirement under the Illinois Insurance Code applicable to AIC, as described in Note 10, and the recent downgrades in Company’s rating by Moody’s Investor Services give rise to certain events of default under the lease and security agreements. The Company contests that any event of default has occurred and also disputes Lessor’s demand for payment of the casualty loss value of the leased property. The Company is reviewing all available options, including legal recourse, to appropriately challenge Lessor’s declaration of alleged default and attempt to seek liquidated damages, although there can be no assurance that any such actions, if taken, will be successful.

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A second lessor holds the remaining capital lease obligations of the Company pursuant to a separate lease schedule. As of the date of this report, that lessor has not taken any action whatsoever to either assert an alleged default or to increase or accelerate the Company’s payment obligations under the lease and security agreements between the Company and that lessor, although there can be no assurance that it will not seek to do so.

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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 September 30, 2012, our subsidiaries included insurance companies licensed to write insurance policies in 39 states, underwriting agencies, retail agencies with 199 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 5,100 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	)

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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 September 30, 2011						Nine Months Ended September 30, 2011
	Previously Reported			As Adjusted			Previously Reported			As Adjusted
Selling, general and administrative expenses	$	27,919		$	27,099		$	89,894		$	88,403
Net loss		(8,458	)		(7,638	)		(18,920	)		(17,429	)
Net loss per share:
Basic		(0.55	)		(0.50	)		(1.23	)		(1.13	)
Diluted		(0.55	)		(0.50	)		(1.23	)		(1.13	)

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.

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.

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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 September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Our underwriting agencies:
Retail agencies	$	37,208	$	39,043	$	115,874	$	125,262
Independent agencies		19,836		12,034		47,760		44,973
Subtotal		57,044		51,077		163,634		170,235
Unaffiliated underwriting agencies		2,718		3,443		8,794		11,664
Total	$	59,762	$	54,520	$	172,428	$	181,899

Total gross premiums written for the three months ended September 30, 2012 increased $5.2 million, or 9.6%, compared with the prior year quarter. Total gross premiums written for the nine months ended September 30, 2012 decreased $9.5 million, or 5.2%, compared with the prior year period. The decrease for the nine-month period 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 67.6% for the three months ended September 30, 2012 compared to the prior year quarter, which was comprised of a 19.5% increase from our retail stores and a 227.8% increase from independent agents. New business policies increased 26.7% for the nine months ended September 30, 2012 compared to the prior year period, which was comprised of an 8.9% increase from our retail stores and an 81.0% increase from independent agents.

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 September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Our policies	$	37,208	$	39,043	$	115,874	$	125,262
Third-party carrier policies		11,532		15,163		38,301		42,718
Total	$	48,740	$	54,206	$	154,175	$	167,980

Gross premiums written of our policies in our retail distribution channel for the three and nine months ended September 30, 2012 decreased $1.8 million and $9.4 million, or 4.7% and 7.5%, respectively, compared with the prior year. This decrease is a result of the decline in renewal policies. Third-party policies for the three and nine months ended September 30, 2012 decreased $3.6 million and $4.4 million, or 23.9% and 10.3%, respectively, compared with the prior year.

In our independent agency distribution channel, gross premiums written for the three months ended September 30, 2012 increased $7.8 million, or 64.8%, compared with the prior year quarter. Gross premiums written for the nine months ended September 30, 2012 increased $2.8 million, or 6.2%, compared with the prior year period.

Gross premiums written by our unaffiliated underwriting agencies for the three and nine months ended September 30, 2012 decreased $0.7 million and $2.9 million, or 21.1% and 24.6%, respectively, compared with the prior year.

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

	Three Months Ended September 30,					Nine Months Ended September 30,
	2012		2011			2012			2011
Louisiana	$	26,550	$	28,791		$	83,035		$	93,400
Texas		15,806		8,362			35,981			28,019
Illinois		5,799		5,980			18,166			19,816
Alabama		5,010		5,644			16,736			19,357
California		2,703		3,419			8,743			11,583
Indiana		2,178		1,497			5,960			4,983
Missouri		1,133		418			2,058			1,546
South Carolina		564		756			1,762			2,503
Michigan		—		(382	)		—			633
Other		19		35			(13	)		59
Total	$	59,762	$	54,520		$	172,428		$	181,899

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Our underwriting agencies:
Retail agencies – gross premiums written	$	37,208		$	39,043		$	115,874		$	125,262
Ceded reinsurance		(14,402	)		(11,152	)		(33,705	)		(34,370	)
Subtotal retail agencies net premiums written		22,806			27,891			82,169			90,892
Independent agencies – gross premiums written		19,836			12,034			47,760			44,973
Ceded reinsurance		(6,714	)		(3,515	)		(12,110	)		(12,479	)
Subtotal independent agencies net premiums written		13,122			8,519			35,650			32,494
Unaffiliated underwriting agencies – gross premiums written		2,718			3,443			8,794			11,664
Ceded reinsurance		(8	)		(969	)		616			(3,253	)
Subtotal unaffiliated underwriting agencies net premiums written		2,710			2,474			9,410			8,411
Excess of loss coverages with various reinsurers		(6	)		(121	)		(276	)		(1,496	)
Catastrophe coverages with various reinsurers		(122	)		(161	)		(414	)		(486	)
Total net premiums written	$	38,510		$	38,602		$	126,539		$	129,815

Total net premiums written for the three months ended September 30, 2012 decreased $0.1 million, or 0.2%, compared with the prior year quarter. Total net premiums written for the nine months ended September 30, 2012 decreased $3.3 million, or 2.5%, compared with the prior year period. The decrease for the period was primarily due to the decline in gross written premium and a higher level of ceded written premium, which was partially offset during the first nine 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 nine months ended September 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 $21.1 million and $61.2 million during the three and nine months ended September 30, 2012, respectively. Written premiums ceded under this agreement totaled $84.1 million since inception.

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RESULTS OF OPERATIONS

We had a net loss of $29.5 million and $7.6 million for the three months ended September 30, 2012 and September 30, 2011, respectively. We had a net loss of $43.6 million and $17.4 million for the nine months ended September 30, 2012 and 2011, respectively.

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

Total revenues for the three months ended September 30, 2012 decreased $8.2 million, or 13.8%, compared with the three months ended September 30, 2011. The decrease was due to decreases in net premiums earned, commission income and fees, net investment income, and other income partially offset by an increase in net realized gains.

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 $6.8 million, or 16.1%, to $35.3 million compared with the prior year quarter of $42.0 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 September 30,
	2012		2011
Policyholder fees	$	5,135	$	5,660
Premium finance revenue		5,122		5,428
Commissions and fees		3,780		4,147
Agency fees		842		1,030
Total commission income and fees	$	14,879	$	16,265

Total commission income and fees decreased $1.4 million, or 8.5%, compared with the prior year quarter. Policyholder fees decreased $0.5 million, or 9.3%, due to the lower overall volume of premiums written and a change in mix of states. Premium finance revenue decreased $0.3 million, or 5.6%, due to decreases in the number of policies financed and revenue per policy. Commissions and fees decreased $0.4 million, or 8.8%, 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 $0.3 million, or 24.0%, compared with the prior year quarter. The decrease was primarily due to a 50.1% decrease in total average invested assets to $73.8 million during the current quarter from $147.8 million in the prior year quarter. The average investment yield was 1.6% (1.7% on a taxable equivalent basis) in the current quarter, compared with 2.3% (2.4% on a taxable equivalent basis) in the prior year quarter.

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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. 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 $6.2 million, or 19.5%, compared with the prior year quarter. The percentage of net losses and loss adjustment expense to net premiums earned (the net loss ratio) was 72.0% in the current quarter, compared with 75.1% 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 4.7 points for the three months ended September 30, 2012 and 3.8 points for the prior year quarter. Excluding the impact of the quota-share, the net loss ratio for the current accident quarter was 68.3%, compared with 71.3% for the prior year quarter. This reduction was due to the pricing and underwriting actions that we started taking in late 2010 through 2011.

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 $3.0 million, or 11.1%, compared with the prior year quarter, primarily due to a $2.3 million decline in policy acquisition expenses and a $2.0 million decline in employee compensation and benefits due to management actions to reduce expenses, partially offset by a $1.0 million charge related to restructuring of an IT outsourcing contract.

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):

	Three Months  Ended September 30,
	2012			2011, As Adjusted
Amortization of deferred acquisition costs, net	$	(1,198	)	$	(340	)
Other selling, general and administrative expenses		25,295			27,439
Total selling, general and administrative expenses	$	24,097		$	27,099
Total as a percentage of net premiums earned		68.3	%		64.5	%
Beginning deferred acquisition costs, net	$	(1,437	)	$	(226	)
Additions, net of ceding commission		(963	)		(398	)
Amortization, net of ceding commissions		1,198			340
Ending deferred acquisition costs	$	(1,202	)	$	(284	)
Amortization of deferred acquisition costs, net, as a percentage of net premiums earned		(3.4	%)		(0.8	%)

Interest Expense. Interest expense for the current quarter decreased $0.8 million, or 13.6%, compared with the prior year quarter. This decrease was primarily due to a decrease in the average debt outstanding.

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Goodwill and Other Intangible Asset Impairment Charge. Current trends and recent developments resulted in management concluding that it is more likely than not that a goodwill impairment exists at September 30, 2012. Specifically, operating income and cash flow was less than plan, and premium production was below forecast. Due to the Company’s negative equity position of $101.3 million as of September 30, 2012, prior to goodwill impairment, ASC 350-20-35-30 requires that the Company perform step two of the goodwill impairment test.

Consistent with prior assessments, the fair value of the Company was determined using an internally developed discounted cash flow method. Management made significant assumptions and estimates about the extent and timing of future cash flows, growth rates, and discount rates that represent unobservable inputs into the valuation methodologies used to calculate fair value. A discount rate of 19% was used at September 30, 2012, which we believe adequately reflects an appropriate risk-adjusted discount rate based on its overall cost of capital and company-specific risk factors related to cash flow, debt covenant compliance and regulatory risk, as discussed in Notes 7, 10 and 14. The cash flows were estimated over a significant future period of time, which made those estimates and assumptions subject to a high degree of uncertainty. Based upon the results of the assessment, we concluded that the carrying value of goodwill was fully impaired as of September 30, 2012. In step two of the goodwill impairment analysis, we determined the fair values of our assets and liabilities (including any unrecognized intangible assets) as if we had been acquired in a business combination. Determining the implied fair value of goodwill was judgmental in nature and involved the use of significant estimates and assumptions. The resulting implied fair value of goodwill was compared to the carrying value of goodwill, resulting in the write-off of the remaining goodwill balance of $23.4 million.

Indefinite-lived intangible assets primarily consist of trade names. In measuring the fair value of these intangible assets, we utilizes the relief-from-royalty method. This method assumes that trade names have value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires an estimate of future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital. This analysis indicated an impairment of indefinite-lived intangible assets of $0.2 million as of September 30, 2012.

Income Taxes. Income tax expense for the current quarter and the prior year quarter was $0.2 million. Income tax expense for both periods represents increasing deferred tax liabilities arising from timing differences on goodwill and other intangible assets.

Comparison of the Nine Months Ended September 30, 2012 to the Nine Months Ended September 30, 2011

Total revenues for the nine months ended September 30, 2012 decreased $42.7 million, or 21.7%, compared with the nine months ended September 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 $34.9 million, or 25.1%, to $104.4 million compared with the prior year period of $139.3 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):

	Nine Months  Ended September 30,
	2012		2011
Policyholder fees	$	14,853	$	19,620
Premium finance revenue		16,201		17,716
Commissions and fees		12,179		12,810
Agency fees		2,758		3,447
Total commission income and fees	$	45,991	$	53,593

Total commission income and fees decreased $7.6 million, or 14.2%, compared with the prior year period. Policyholder fees decreased $4.8 million, or 24.3%, due to the lower overall volume of premiums written and a change in mix of states. Premium finance revenue decreased $1.5 million, or 8.6%, due to decreases in the number of policies financed and revenue per policy. Commissions and fees decreased $0.6 million, or 4.9%, 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 $1.3 million, or 33.9%, compared with the prior year period. The decrease was primarily due to a 48.5% decrease in total average invested assets to $88.2 million during the current period from $171.3 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 2.0% (2.1% on a taxable equivalent basis) in the current period, compared with 2.3% (2.4% on a taxable equivalent basis) in the prior year period.

Losses and Loss Adjustment Expenses. Net losses and loss adjustment expenses for the current period decreased $23.6 million, or 23.3%, compared with the prior year period. The percentage of net losses and loss adjustment expense to net premiums earned (the net loss ratio) was 74.5% in the current period, compared with 72.8% 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 74.5% in the current period, compared with 76.4% 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 3.5 points for the prior year period. Excluding the impact of the quota-share, the net loss ratio for the current accident year was 69.8% for the nine months ended September 30, 2012 and 71.9% for the comparable prior year period. This decrease reflects the pricing, claims and underwriting actions that commenced in the second half of 2010 through 2011. Also reflected in the above numbers is the effect of catastrophes. In the current accident year we have incurred catastrophes, net of reinsurance, equal to 1.8 points for the current period compared to 1.2 points in the prior period. Both of these numbers are higher than our long term average expectation of 0.5 points.

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 $13.9 million, or 15.7%, compared with the prior year period, primarily due to an $8.3 million decline in policy acquisition expenses due to a decrease in premiums and a $7.5 million decline in employee compensation and benefits due to management actions to reduce expenses.

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.

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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):

	Nine Months  Ended September 30,
	2012			2011, As Adjusted
Amortization of deferred acquisition costs, net	$	(4,697	)	$	623
Other selling, general and administrative expenses		79,226			87,780
Total selling, general and administrative expenses	$	74,529		$	88,403
Total as a percentage of net premiums earned		71.4	%		63.5	%
Beginning deferred acquisition costs, net	$	(6,464	)	$	460
Additions, net of ceding commission		565			(121	)
Amortization, net of ceding commissions		4,697			(623	)
Ending deferred acquisition costs	$	(1,202	)	$	(284	)
Amortization of deferred acquisition costs, net, as a percentage of net premiums earned		(4.5	%)		(0.4	%)

Interest Expense. Interest expense for the current period decreased $1.7 million, or 10.6%, 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 $2.9 million in the current period as compared with $3.4 million for the prior year period.

Income Taxes. Income tax expense for the current period was $0.4 million as compared with income tax expense of $1.1 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 $101.4 million and $92.7 million at September 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 $98.8 million and $88.9 million at September 30, 2012 and December 31, 2011, respectively.

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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 September 30, 2012, we had $3.6 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 September 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.

In May 2010, we entered into a sale-leaseback transaction with two equipment finance companies, as lessors, wherein we sold and leased back certain computer software, software licenses and hardware used in our insurance operations. We account for the lease payment obligations as a capital lease. To secure the lease payment obligations, we purchased FDIC-insured Certificates of Deposit (CDs) which were then deposited into escrow to serve as collateral. We account for these CDs as available-for-sale securities. On October 17, 2012, we received notice from one of the lessors (Lessor) that, based upon Lessor’s claim of an alleged default under the terms of the lease and security agreements, it elected to immediately seek recovery of an amount equal to the casualty loss value of the leased property, together with all other sums allegedly due to Lessor, which Lessor calculated as $9.6 million. Lessor informed us that it had directed the escrow agent to redeem the CDs securing our lease payment obligation and disburse to it the approximately $8.3 million in proceeds, which Lessor received on October 15, 2012. Lessor seeks payment from us of the remaining $1.4 million, alleged liquidated damages. Lessor has stated that it will convey all rights and interest in the leased property back to us upon receipt of this payment.

The Lessor alleged that the deficiency in the reserve requirement under the Illinois Insurance Code applicable to AIC and the recent downgrades in our rating by Moody’s Investor Services gave rise to certain events of default under the lease and security agreements. We contest that any event of default has occurred and also dispute Lessor’s demand for payment of the casualty loss value of the leased property. We are reviewing all available options, including legal recourse, to appropriately challenge Lessor’s declaration of alleged default and attempt to seek liquidated damages, although there can be no assurance that any such actions, if taken, will be successful.

A second lessor holds the remaining capital lease obligations of ours pursuant to a separate lease schedule. As of the date of this report, that lessor has not taken any action whatsoever to either assert an alleged default or to increase or accelerate our payment obligations under the lease and security agreements between us and that lessor, although there can be no assurance that it will not seek to do so.

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. Affirmative Insurance Company is currently in compliance with the reserve requirement.

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We breached our leverage ratio covenant under the senior secured credit facility as of September 30, 2012. However, the lenders for the facility waived all defaults and events of default arising in connection with the breach. We will need to enter into certain transactions, such as asset sales or other transactions, to be in compliance with the reserve requirement and leverage ratio covenant as of December 31, 2012. We cannot provide assurance that we will be in compliance with the leverage ratio covenant or reserve requirement at December 31, 2012.

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 we are not in compliance with the reserve requirement or leverage ratio covenant and unable to negotiate a waiver with our lenders, it could have a material adverse effect on our operations and the interests of our stockholders. These conditions and events 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.

In November 2012, a new class of loans under the senior secured credit facility was created allowing for an incremental term loan. The incremental term loan has the following characteristics:

• Face amount of $8.0 million with a funded amount of $5.5 million, of which we contributed $4.6 million to Affirmative Insurance Company.

• Repayment will be on a first out basis, payable in full, on or prior to January 17, 2014, with priority over all other amounts outstanding under the senior secured credit facility.

• All additional proceeds not used to satisfy Affirmative Insurance Company’s reserve requirement as of September 30, 2012 as described in Note 10 are to be used solely for paying the incremental term loan lenders’ and administrative agent’s professional fees.

• A $60,000 of principal payment is due as of March 31, 2013 and $40,000 is due each quarter end for the remainder of 2013. The remaining balance is due at maturity.

• A commitment fee of $550,000 is due for any asset sales of our non-regulated operations in excess of $10.0 million if such sale is consummated by December 31, 2012. If no such sale occurs by December 31, 2012, the commitment fee will be added to the principal amount of the incremental term loan.

• The incremental term loan lenders will receive an 8% prepayment premium of the principal amount if the incremental term loan is prepaid.

• The incremental term loan lenders have the right to retain a financial advisor to assess the financial, operational and regulatory condition of the Company.

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 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 September 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 September 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 nine months ended September 30, 2012, our net cash used in operations was $47.6 million. We believe that this amount will be significantly reduced in 2013 due to our exit from the Michigan business and premium production increasing. The exit of the Michigan business and previous decline in insurance premiums had a substantial impact on the net cash used in operations during the nine months ended September 30, 2012. 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 September 30, 2012 was $70.1 million. The effective average duration of the portfolio as of September 30, 2012 was 1.3 years. If market interest rates increase 1.0%, our fixed-income investment portfolio

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would be expected to decline in market value by 1.3%, or $0.9 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 1.3%, or $0.9 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 September 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 September 30, 2012 was 3.99%. The $25.8 million notes adjust quarterly to the three-month LIBOR rate plus 3.55%. The interest rate as of September 30, 2012 was 3.94%. The $20.2 million notes payable bear an interest rate of the three-month LIBOR rate plus 3.95%. The interest rate as of September 30, 2012 was 4.34%.

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 September 30, 2012 and December 31, 2011, respectively, our investments were in the following:

	September 30, 2012			December 31, 2011
Corporate debt securities		42.9	%		50.1	%
FDIC-insured certificates of deposit		29.3			17.2
U.S. Treasury and government agencies		16.6			9.8
States and political subdivisions		6.0			14.0
Mortgage-backed securities		5.2			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):

	September 30, 2012			December 31, 2011
Total invested assets	$	70,142		$	122,922
Tax-equivalent book yield		2.1	%		2.44	%
Average duration in years		1.32			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 $3.3 million at September 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 September 30, 2012 and December 31, 2011, respectively (in thousands):

	September 30, 2012		December 31, 2011
Quota-share reinsurer for agreement effective September 1, 2011	$	49,206	$	22,102
Michigan Catastrophic Claims Association		42,066		44,049
Vesta Insurance Group		9,839		10,068
Quota-share reinsurer for agreements effective in fourth quarter of 2010 and January 2011		9,264		46,103
Excess of loss reinsurers		4,983		5,458
Other		3,129		3,667
Total reinsurance receivable	$	118,487	$	131,447

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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 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 September 30, 2012, the VFIC Trust held $16.8 million (after cumulative withdrawals of $8.7 million through September 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 $9.8 million net recoverable (net of $2.9 million payable) from VFIC.

At September 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 a reinsurance agreement with a VIG affiliated company, including Hawaiian Insurance and Guaranty Company, Ltd (Hawaiian). Affirmative established a trust account to collateralize this payable, which currently holds $20.7 million in a money market cash equivalent account (the AIC Trust). The Special Deputy Receiver (SDR) in Texas drew down the AIC Trust $0.4 million through September 2012, and the Special Deputy Receiver in Hawaii had cumulative withdrawals from the AIC Trust of $1.7 million through September 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 September 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 September 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.

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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 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 and in our Form 10-Q for the quarterly period ended June 30, 2012.

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. We are currently in compliance with the reserve requirement. However, we cannot provide assurance that we will be in compliance with the reserve requirement in future periods.

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 Affirmative Insurance Company is not in compliance with the reserve requirement in future periods, 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.

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.

Item 3. Defaults Upon Senior Securities

Not Applicable.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

Not Applicable.

Item 6. Exhibits

10.32* Sixth Amendment to Credit Agreement dated as of September 20, 2012, among Affirmative Insurance Holdings, Inc., as borrower, the lenders party thereto, Credit Suisse, AG, Cayman Islands Branch, as administrative agent and collateral agent.

10.33* Seventh Amendment to Credit Agreement dated as of November 19, 2012, among Affirmative Insurance Holdings, Inc., as borrower the lenders party thereto, Credit Suisse, AG, Cayman Islands Branch, as administrative agent and collateral agent.

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

34

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 September 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.

35

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: November 19, 2012	By:	/s/ Michael J. McClure
		Michael J. McClure
		Executive Vice President and Chief Financial Officer (and in his capacity as Principal Financial Officer)

36

EX-10.32

Exhibit 10.32

SIXTH AMENDMENT TO

CREDIT AGREEMENT

This SIXTH AMENDMENT TO CREDIT AGREEMENT (this “Amendment”) is dated as of September [ ], 2012, and entered into by and among AFFIRMATIVE INSURANCE HOLDINGS, INC., a Delaware corporation (“Borrower”), the lenders listed on the signature pages hereto, CREDIT SUISSE AG, CAYMAN ISLANDS BRANCH (formerly known as Credit Suisse, Cayman Islands Branch), as Administrative Agent (in such capacity, “Administrative Agent”) and as Collateral Agent (in such capacity, the “Collateral Agent”), and for purposes of Section 5 hereof, the other Loan Parties listed on the signature pages hereto. Capitalized terms used but not defined herein having the meaning given them in the Credit Agreement, hereinafter defined.

Recitals

Whereas, the Borrower, the Lenders from time to time party thereto, the Agents and the other parties thereto have entered into that certain Credit Agreement dated as of January 31, 2007 (as amended, amended and restated, extended, supplemented or otherwise modified from time to time, the “Credit Agreement”);

Whereas, the Borrower has requested an amendment to the Credit Agreement, pursuant to and in accordance with Section 9.08(b) of the Credit Agreement; and

Whereas, the Required Lenders and the Agents are willing to agree to the amendment requested by the Borrower, on the terms and conditions set forth in this Amendment;

Now Therefore, in consideration of the premises and the mutual agreements set forth herein, the Borrower, Required Lenders and Agents agree as follows:

1. AMENDMENTS TO CREDIT AGREEMENT. Subject to the conditions and upon the terms set forth in this Amendment and in reliance on the representations and warranties of the Borrower set forth in this Amendment, Section 6.05(a) of the Credit Agreement shall be amended by (a) deleting the “and” at the end of Clause (iii) thereof and (b) adding a clause (v) immediately following clause (iv) thereof as follows:

“and (v) any wholly owned Regulated Insurance Subsidiary may merge into or consolidate with any other Regulated Insurance Subsidiary.”

2. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. In order to induce the Required Lenders and the Agents to enter into this Amendment, the Borrower represents and warrants to each Lender and the Agents that the following statements are true, correct and complete:

2.1. Power and Authority. Each of the Loan Parties has all requisite corporate or limited liability company power and authority to enter into this Amendment and to carry out the transactions contemplated by, and to perform its obligations under or in respect of, the Credit Agreement.

2.2. Corporate Action. The execution and delivery of this Amendment and the performance of the obligations of each of the Loan Parties under or in respect of the Credit Agreement as amended hereby have been duly authorized by all necessary corporate or limited liability company action on the part of each of the Loan Parties.

2.3. No Conflict or Violation or Required Consent or Approval. The execution and delivery of this Amendment and the performance of the obligations of each of the Loan Parties under or in respect of the Credit Agreement as amended hereby do not and will not conflict with or violate (a) any provision of the certificate or articles of incorporation or other constitutive documents or by-laws of any Loan Party or any of its Subsidiaries, (b) any provision of any law or any governmental rule or regulation applicable to any Loan Party or any of its Subsidiaries, (c) any order of any Governmental Authority or arbitrator binding on any Loan Party or any of its Subsidiaries, or (d) any indenture, agreement or instrument to which any Loan Party or any of its Subsidiaries is a party or by which any Loan Party or any of its Subsidiaries, or any property of any of them, is bound (except where such violation could not reasonably be expected to have a Material Adverse Effect), and do not and will not require any consent or approval of any Person (other than any approval or consent obtained and is in full force and effect or approvals or consents the failure to obtain could not reasonably be expected to have a Material Adverse Effect or which are not material to the consummation of the transaction contemplated hereby).

2.4. Execution, Delivery and Enforceability. This Amendment has been duly executed and delivered by each Loan Party which is a party hereto and is the legal, valid and binding obligation of such Loan Party, enforceable in accordance with their terms, except as enforceability may be affected by applicable bankruptcy, insolvency, and similar proceedings affecting the rights of creditors generally, and general principles of equity. The Agents’ Liens in all Collateral continue to be valid, binding and enforceable Liens which secure the Borrower Obligations to the extent valid, binding and enforceable on the Closing Date, except as enforceability may be affected by applicable bankruptcy, insolvency and similar proceedings affecting the rights of creditors generally, and general principles of equity.

2.5. No Default or Event of Default. After giving effect to this Amendment, no event has occurred and is continuing or will result from the execution and delivery of this Amendment that would constitute a Default or an Event of Default.

2.6. No Material Adverse Effect. No event, change or condition has occurred since December 31, 2011 that has caused, or could reasonably be expected to cause, a Material Adverse Effect.

2.7. Representations and Warranties. Each of the representations and warranties contained in the Loan Documents is and will be true and correct in all material respects on and as of the date hereof and as of the effective date of this Amendment, except to the extent that such representations and warranties specifically relate to an earlier date, in which case they were true, correct and complete in all material respects as of such earlier date.

3. CONDITIONS TO EFFECTIVENESS OF THIS AMENDMENT. This Amendment, and the consents and approvals contained herein, shall be effective immediately upon delivery to the Agents of executed counterparts hereof by each Loan Party and each Required Lender (by hand delivery, mail, telecopy or other electronic transmission).

4. EFFECT OF AMENDMENT; RATIFICATION. This Amendment is a Loan Document. From and after the date on which this Amendment becomes effective, all references in the Loan Documents to the Credit Agreement and other Loan Documents shall mean the Credit Agreement as amended hereby. Except as expressly amended hereby, the Credit Agreement and the other Loan Documents, including the Liens granted thereunder, shall remain in full force and effect, and all terms and provisions thereof are hereby ratified and confirmed.

5. MISCELLANEOUS. Each of the Loan Parties confirms that as amended hereby, each of the Loan Documents to which it is a party is in full force and effect, and that as of the date hereof, none of the Loan Parties has any defenses, setoffs or counterclaims to its Obligations.

6. APPLICABLE LAW. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES THAT WOULD REQUIRE THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION.

7. NO WAIVER. The execution, delivery and effectiveness of this Amendment does not constitute a waiver of any Default or Event of Default, amend or modify any provision of any Loan Document except as expressly set forth herein or constitute a course of dealing or any other basis for altering the Obligations of any Loan Party.

8. COMPLETE AGREEMENT. This Amendment sets forth the complete agreement of the parties in respect of any amendment to any of the provisions of any Loan Document.

9. CAPTIONS; COUNTERPARTS. The catchlines and captions herein are intended solely for convenience of reference and shall not be used to interpret or construe the provisions hereof. This Amendment may be executed by one or more of the parties to this Amendment on any number of separate counterparts (including by telecopy or other electronic transmission), all of which taken together shall constitute but one and the same instrument.

[signatures follow; remainder of page intentionally left blank]

IN WITNESS WHEREOF, each of the undersigned has duly executed this Sixth Amendment to Credit Agreement as of the date set forth above.

AFFIRMATIVE INSURANCE HOLDINGS, INC., as Borrower
By:	/s/ Joseph G. Fisher
	Name: Joseph G. Fisher
	Title: Executive Vice President
LOAN PARTIES: AFFIRMATIVE INSURANCE HOLDINGS, INC. AFFIRMATIVE MANAGEMENT SERVICES, INC. AFFIRMATIVE PROPERTY HOLDINGS, INC. AFFIRMATIVE SERVICES, INC. AFFIRMATIVE INSURANCE GROUP, INC. AFFIRMATIVE UNDERWRITING SERVICES, INC. A-AFFORDABLE INSURANCE AGENCY, INC. AFFIRMATIVE INSURANCE SERVICES, INC. (f/k/a AFFIRMATIVE INSURANCE SERVICES OF TEXAS, INC.) DRIVER’S CHOICE INSURANCE SERVICES, LLC INSUREONE INDEPENDENT INSURANCE AGENCY, LLC USAGENCIES, L.L.C. LIFCO, L.L.C. USAGENCIES MANAGEMENT SERVICES, INC. AFFIRMATIVE RETAIL, INC. AFFIRMATIVE PREMIUM FINANCE HOLDINGS, INC. AFFIRMATIVE PREMIUM FINANCE, INC.
By:	/s/ Joseph G. Fisher
Name: Joseph G. Fisher Title: Executive Vice President

CREDIT SUISSE AG, CAYMAN ISLANDS BRANCH, as Administrative Agent and as Collateral Agent
By:	/s/ John Toronto
	Name: John Toronto Title: Managing Director
By:	/s/ Vipul Dhadda
	Name: Vipul Dhadda Title: Associate

The Lender acknowledges and agrees that this signature page shall be fully valid and binding upon the Lender upon its execution and delivery by the Lender to the Administrative Agent and may not thereafter be revoked, terminated or cancelled by the Lender.

[LENDER] as Required Lender
By:
	Name:
	Title:

EX-10.33

Exhibit 10.33

WAIVER, CONSENT AND SEVENTH

AMENDMENT TO CREDIT AGREEMENT

This WAIVER, CONSENT AND SEVENTH AMENDMENT TO CREDIT AGREEMENT (this “Amendment”), dated as of November 19, 2012, is entered into by and among AFFIRMATIVE INSURANCE HOLDINGS, INC., a Delaware corporation (the “Borrower”), CREDIT SUISSE AG, CAYMAN ISLANDS BRANCH, as Administrative Agent (“Administrative Agent”), CREDIT SUISSE AG, CAYMAN ISLANDS BRANCH, as Collateral Agent (“Collateral Agent” and together with the Administrative Agent, the “Agents”), the Lenders party hereto and the GUARANTORS listed on the signature pages hereto, and is made with reference to that certain CREDIT AGREEMENT, dated as of January 31, 2007 (as amended, restated, supplemented or otherwise modified through the date hereof, the “Credit Agreement”) by and among the Borrower, the Lenders, Administrative Agent, Collateral Agent and the other Agents and Arrangers named therein. Capitalized terms used herein and not defined shall have the meanings ascribed to such terms in the Credit Agreement.

RECITALS

WHEREAS, the Borrower has requested that each Lender agree to waive and amend certain provisions of the Credit Agreement and consent to certain actions of the Borrower, pursuant to and in accordance with Section 9.08(b) of the Credit Agreement in the manner set forth herein; and

WHEREAS, subject to the terms and conditions set forth herein, each Incremental Term Loan Lender, which Lenders constitute Required Lenders and the majority in interest of the outstanding Loans, and the Agents are willing to agree to such waivers, consents and amendments relating to the Credit Agreement as more fully set forth herein.

NOW THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows:

1. AMENDMENTS TO CREDIT AGREEMENT. Subject to the conditions and upon the terms set forth in this Amendment and in reliance on the representations and warranties of the Borrower set forth in this Amendment, the Credit Agreement is hereby amended as follows:

1.1. Amendment to Section 1.01: Definitions

(A) Section 1.01 of the Credit Agreement is hereby amended by adding the following new definitions in proper alphabetical sequence:

“Closing Fee” shall have the meaning ascribed to such term in Section 2.05(d).

“Disclosure Exceptions” shall have the meaning ascribed to such term in Section 5.17.

“Financial Advisor” shall have the meaning ascribed to such term in Section 5.16.

“Funding Commitment” shall have the meaning ascribed to such term in Section 2.01(b).

“Incremental Term Loan” shall mean an incremental term loan made by the Incremental Term Loan Lenders to the Borrower pursuant to Section 2.01.

“Incremental Term Loan Commitment” shall mean, with respect to an Incremental Term Loan Lender, the commitment of such Incremental Term Loan Lender to make or otherwise fund an Incremental Term Loan. The aggregate principal amount of the Incremental Term Loan Commitment as of the Seventh Amendment Closing Date prior to borrowing is in an aggregate principal amount of $8,000,000 and shall be funded in the manner set forth in Section 2.01. The allocations of the Incremental Term Loan Commitments amongst the Incremental Term Loan Lenders shall be as separately notified in writing to the Administrative Agent.

“Incremental Term Loan Lender” shall mean a Lender holding an outstanding Incremental Term Loan. For the avoidance of doubt, the Incremental Term Loan Lenders are and constitute “Lenders”.

“Incremental Term Loan Maturity Date” shall mean January 17, 2014.

“Real Estate Subsidiary” shall mean the Subsidiary formed by one or more Regulated Insurance Subsidiaries for the purpose of holding the Specified Property.

“Real Estate Subsidiary Financing” shall mean up to $15,000,000 in aggregate principal amount of Indebtedness of the Real Estate Subsidiary and/or any Regulated Insurance Subsidiary, which shall be secured solely by the Specified Property, and including any renewals, extensions or refinancings thereof (but not increases in the aggregate principal amount thereof in excess of $15,000,000 plus an amount equal to accrued interest, fees, premiums, costs and expenses incurred in connection therewith); provided, that in all cases (a) such Real Estate Subsidiary Financing shall not be guaranteed by any Loan Party; and (b) such Real Estate Subsidiary Financing shall not be secured by any Lien other than a Real Estate Subsidiary Lien.

“Real Estate Subsidiary Lien” shall mean a Lien that secures the Real Estate Subsidiary Financing, encumbering only the Specified Property and any leases and rents with respect to the lease currently existing on the Specified Property on the Seventh Amendment Closing Date.

“Seventh Amendment” shall mean that certain Waiver, Consent and Seventh Amendment to Credit Agreement, dated as of November 19, 2012, by and among the Borrower, the Required Lenders party thereto, Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent, and the other Loan Parties signatory thereto.

“Seventh Amendment Closing Date” shall mean November 19, 2012.

“Specified Property” shall mean that certain parcel of owned real estate located at 1500 Main Street, Baton Rouge, Louisiana 70802 (including all fixtures, appurtenances, and any assignment of leases and rents with respect to the lease currently existing on such property on the date of this Seventh Amendment).

(B) Section 1.01 of the Credit Agreement is hereby amended by amending and restating the following definitions in their entirety:

“Class” when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are Revolving Loans, Term Loans, Incremental Term Loans or Swingline Loans and, when used in reference to any Commitment, refers to whether such Commitment is a Revolving Credit Commitment, Term Loan Commitment, Incremental Term Loan Commitment or Swingline Commitment.

“Commitment” shall mean, with respect to any Lender, such Lender’s Revolving Credit Commitment, Term Loan Commitment, Incremental Term Loan Commitment and Swingline Commitment.

“Facility” shall mean, each of (a) the Term Loan Commitments and the Term Loans made thereunder (the “Term Loan Facility”), (b) the Revolving Credit Commitments and the extensions of credit made thereunder (the “Revolving Credit Facility”) and (c) Incremental Term Loan Commitments and the Incremental Term Loans made thereunder.

“Fees” shall mean the Commitment Fees, the Administrative Agent Fees, the L/C Participation Fees, the Issuing Bank Fees and the Closing Fee.

“Lenders” shall mean (a) the persons that deliver a Lender Addendum (other than any such person that has ceased to be a party hereto pursuant to an Assignment and Acceptance) and (b) any person that has become a party hereto pursuant to an Assignment and Acceptance. Unless the context otherwise requires, the term “Lenders” shall include the Swingline Lender. For the avoidance of doubt, the Incremental Term Loan Lenders are and constitute “Lenders”.

“Loans” shall mean the Revolving Loans, the Term Loans, the Incremental Term Loans and the Swingline Loan.

“Repayment Date” shall have the meaning ascribed to such term in Section 2.11(a).

“Subsidiary Guarantor” shall mean, initially, each Subsidiary specified on Schedule 1.01(b) and, at any time thereafter, shall include each other Subsidiary that is not an Excluded Foreign Subsidiary, the Real Estate Subsidiary or a Regulated Insurance Subsidiary.”

“Term Borrowing” shall mean a Borrowing or Borrowings comprised of Term Loans and Incremental Term Loans.

1.2. Amendment to Section 1.02: Terms Generally.

(A) Section 1.02 of the Credit Agreement is hereby amended by amending and restating the last sentence thereof as follows:

Notwithstanding anything to the contrary contained herein, (a) any interest expense or Indebtedness incurred in connection with the Electronic Data Processing Equipment and Software Sale and Leaseback Transaction shall be excluded for purposes of calculating the financial covenants set forth in Sections 6.11, 6.12 and 6.15 and (b) any fees, costs and expenses actually paid by the Borrower in connection with the execution, delivery and performance of the Seventh Amendment shall be excluded for purposes of calculating the financial covenants set forth in Section 6.11, 6.12, 6.13, 6.14, 6.15, and 6.16, solely with respect to the periods in which they were paid.

1.3. Amendment to Article II: The Credits

(A) Section 2.01 of the Credit Agreement is hereby amended by amending and restating such section in its entirety as follows:

Section 2.01. Commitments. (a) Subject to the terms and conditions hereof and relying upon the representations and warranties set forth herein, (i) each Term Lender agrees, severally and not jointly, to make a Term Loan to the Borrower on the Closing Date in a principal amount not to exceed its Term Loan Commitment, (ii) each Revolving Credit Lender agrees, severally and not jointly, to make Revolving Loans to the Borrower, at any time and from time to time on or after the date that is sixty (60) days following Closing Date (or such earlier date as the Borrower and the Revolving Credit Lenders as of such date may agree) and until the earlier of the Revolving Credit Maturity Date and the termination of the Revolving Credit Commitment of such Revolving Credit Lender in accordance with the terms hereof, in an aggregate principal amount at any time outstanding that will not result in such Revolving Credit Lender’s Revolving Credit Exposure exceeding such Revolving Credit Lender’s Revolving Credit Commitment and (iii) subject in all cases to Section 2.01(b) below, each Incremental Term Loan Lender agrees, on a several basis, to make an Incremental Term Loan to the Borrower on the Seventh Amendment Closing Date in a principal amount not to exceed its Incremental Term Loan Commitment. Within the limits set forth in clause (ii) of the preceding sentence and subject to the terms, conditions and limitations set forth herein, the Borrower may borrow, pay or prepay and reborrow Revolving Loans, provided that no Revolving Credit Borrowings shall be requested or made during each sixty (60) day period commencing on each Zero Balance Period Commencement Date. Amounts paid or prepaid in respect of Term Loans or Incremental Term Loans may not be reborrowed.

(b) Incremental Term Loan Funding. Notwithstanding anything to the contrary contained in this Agreement or any other Loan Document (and without affecting any other provisions hereof), the funded portion of each

Incremental Term Loan to be made on the Seventh Amendment Closing Date by each Incremental Term Loan Lender (i.e., the amount advanced to the Borrower on the Seventh Amendment Date) shall be equal to 68.75% of the principal amount of their Incremental Term Loan (the “Funding Commitment”) (it being agreed that the full principal amount of each Incremental Term Loan will be deemed outstanding on the Seventh Amendment Closing Date and the Borrower shall be obligated to repay 100% of the principal amount of the Incremental Term Loan as provided hereunder).

(B) Section 2.03 of the Credit Agreement shall be amended by: (i) adding “, the Incremental Term Loans” immediately after the words “Swingline Loan” on the second line thereof and (ii) by adding a new paragraph at the end of such Section as follows:

With respect to the Incremental Term Loans, each Incremental Term Loan Lender shall make the amount of its Funding Commitment available to the Administrative Agent, subject in all cases to the terms of Section 2.01(b), not later than 4:00 p.m. (New York City time) on the Seventh Amendment Closing Date by wire transfer of same day funds in dollars, at an office designated by the Administrative Agent. The Administrative Agent shall make the proceeds of such Incremental Term Loan available to the Borrower on the Seventh Amendment Closing Date by causing an amount of same day funds in dollars equal to the proceeds of all such Incremental Term Loans received by the Administrative Agent from Incremental Term Loan Lenders to be credited to the account of the Borrower at the office designated by the Administrative Agent or such other account as may be designated in writing to Administrative Agent by the Borrower.

(C) Section 2.04(a) of the Credit Agreement shall be amended by deleting the first sentence thereof and replacing it with the following:

(a) The Borrower hereby unconditionally promises to pay to the Administrative Agent for the account of each Lender (i) the principal amount of each Term Loan of such Lender made to the Borrower as provided in Section 2.11, (ii) the then unpaid principal amount of each Revolving Loan (including any Swingline Loan) of such Lender made to the Borrower on the Revolving Credit Maturity Date and (iii) the principal amount of each Incremental Term Loan made to the Borrower on the Seventh Amendment Closing Date, as provided in Section 2.11(c).

(D) Section 2.05(d) of the Credit Agreement is hereby amended by (i) placing the existing text of such clause into a new clause (e) and (ii) inserting a new clause (d) as follows:

The Borrower agrees to pay a fee to each Incremental Term Loan Lender in an amount equal to 10% of the funded amount of its Incremental Term Loan (the “Closing Fee”) upon the earlier of: (i) the consummation of any asset sale in the non-regulated operations in excess of $10,000,000, with such

Closing Fee to be paid in cash, or (ii) January 1, 2013, with such Closing Fee to be paid-in-kind and added to the principal amount of the Incremental Term Loans on such date.

(E) Section 2.11(b) of the Credit Agreement is hereby amended by: (i) inserting “or Incremental Term Loan Commitments” immediately after the words “Term Loan Commitments” in the first line thereof, and (ii) inserting “or Incremental Term Loan” immediately after the words “Term Loan” in the second line thereof.

(F) Section 2.11(c) of the Credit Agreement is hereby amended and restated in its entirety as follows:

(c) To the extent not previously paid, (i) all Term Loans shall be due and payable on the Term Loan Maturity Date, together with accrued and unpaid interest on the principal amount to be paid to but excluding the date of payment and (ii) the Incremental Term Loans shall be due and payable on the Incremental Term Loan Maturity Date, together with accrued and unpaid interest on the principal amount to be paid to but excluding the date of payment.

(G) Section 2.11 is hereby amended by adding a new subsection (e) as follows:

(e) On the dates set forth below, the Borrower shall pay to the Administrative Agent, for the account of the Incremental Term Loan Lenders, a principal amount of the Incremental Term Loans equal to the amount set forth below for such date, together in each case with accrued and unpaid interest and Fees on the amount to be paid to but excluding the date of such payment:

Repayment Date	Amount
March 31, 2013	$60,000
June 30, 2013	$40,000
September 30, 2013	$40,000
December 31, 2013	$40,000
Incremental Term Loan Maturity Date	The remaining outstanding aggregate principal amount of the Incremental Term Loans.

(H) Section 2.12(b) of the Credit Agreement shall be amended by adding “and the Incremental Term Loans” immediately after each reference to “Term Loans” in such Section.

(I) Section 2.12(c) of the Credit Agreement shall be amended by adding “, the Incremental Term Loan Maturity Date” immediately after the words “Term Loan Maturity Date” in the last line of such Section.

(J) Section 2.12 of the Credit Agreement shall be amended by adding a new subsection (e) as follows:

(e) In the event that the principal amount of any outstanding Incremental Term Loans are prepaid or repaid in whole or in part prior to the Incremental Term Loan Maturity Date (other than as contemplated by Section 2.11(e)), the Borrower shall pay to the Incremental Term Loan Lenders a prepayment premium on the aggregate principal amount equal to 8.0% of the Incremental Term Loans so prepaid or repaid.

(K) Section 2.13(b) of the Credit Agreement is hereby amended and restated its entirety as follows:

(b) Not later than the fifth Business Day following the completion of any Asset Sale or the occurrence of any Recovery Event, in each case by the Borrower or any Subsidiary thereof, the Borrower shall apply the Required Payment Percentage of the Net Cash Proceeds received with respect thereto, first, to prepay the Incremental Term Loans in full in cash, second, to prepay outstanding Term Loans in full in cash, and third, to prepay the Revolving Credit Facility, in each case, in accordance with Section 2.13(g).

(L) Section 2.13(c) of the Credit Agreement is hereby amended and restated in its entirety as follows:

(c) In the event and on each occasion that an Equity Issuance occurs, the Borrower shall, substantially simultaneously with (and in any event not later than the fifth Business Day next following) the occurrence of such Equity Issuance, apply the Required Prepayment Percentage of the Net Cash Proceeds therefrom, first, to prepay the Incremental Term Loans in full in cash, second, to prepay outstanding Term Loans in full in cash, and third, to prepay the Revolving Credit Facility, in each case accordance with Section 2.13(g).

(M) Section 2.13(d) of the Credit Agreement is hereby amended and restated in its entirety as follows:

(d) In the event that any Loan Party or any subsidiary of a Loan Party shall receive Net Cash Proceeds from the issuance or other incurrence of Indebtedness of any Loan Party or any subsidiary of a Loan Party (other than Indebtedness permitted pursuant to Section 6.01) (other than pursuant to Section 6.01(g)), the Borrower shall, substantially simultaneously with (and in any event not later than the third Business Day next following) the receipt of such Net Cash Proceeds by such Loan Party or such subsidiary, apply an amount equal to the Required Prepayment Percentage of such Net Cash Proceeds, first, to prepay the Incremental Term Loans in full in cash, second, to prepay outstanding Term Loans in full in cash, and third, to prepay the Revolving Credit Facility, in accordance with Section 2.13(g). For the

avoidance of doubt, this paragraph (d) in no event or circumstances shall be interpreted to permit the Borrower to incur any Indebtedness that is not permitted under Section 6.01.

(N) Section 2.13(e) of the Credit Agreement is hereby amended by adding and “and Incremental Term Loans” after the words “Term Loans” in each place that it appears therein.

(O) Section 2.13(f) of the Credit Agreement is hereby amended and restated in its entirety as follows:

(f) Immediately upon receipt by the Borrower or any Subsidiary of any Extraordinary Receipts (other than Extraordinary Receipts received by any Regulated Insurance Subsidiary, in each case, of less than $500,000), the Borrower shall apply the Required Prepayment Percentage of the Net Cash Proceeds received with respect thereto, first, to prepay the Incremental Term Loans in full in cash, second, to prepay outstanding Term Loans in full in cash, and third, to prepay the Revolving Credit Facility, in each case in accordance with Section 2.13(g), provided that, with respect to the receipt of any Extraordinary Receipt in excess of $500,000 by any Regulated Insurance Subsidiary, any prepayment pursuant to this Section 2.13(f) shall be subject to Requirements of Law and the receipt of any required Governmental Authority approval, if any, which the Borrower shall use commercially reasonable efforts to obtain so long as there is a reasonable expectation of obtaining such approval.

(P) Section 2.13(g) of the Credit Agreement is hereby amended and restated in its entirety as follows:

(g) Mandatory prepayments of outstanding Loans pursuant to clauses (b) through (f) above shall be applied, first, pro rata to prepay the Incremental Term Loans against the remaining scheduled installments due in respect of the Incremental Term Loans under Section 2.11 until the Incremental Term Loans are repaid in full in cash, second pro rata against the remaining scheduled installments due in respect of the Term Loans under Section 2.11, third, to prepay outstanding Swingline Loans to the full extent thereof, fourth, to prepay Revolving Loans to the full extent thereof (with a corresponding permanent decrease in the Revolving Credit Commitments) and fifth, to prepay outstanding reimbursement obligations with respect to Letters of Credit. Any Lender may elect, by notice to the Administrative Agent by facsimile at least two Business Days of receiving notice of such prepayment, as set forth in Section 2.13(h), to decline its portion of any prepayment of its Loans pursuant to clauses (b) through (f) above, in which case the aggregate amount of the prepayment that would have been applied to prepay such Loans but was so declined shall be re-offered to those Lenders under this Agreement who have initially accepted such prepayment (such re-offer to be made to each such Lender based on the percentage which such Lender’s Loans represents of

the aggregate Loans of all such Lenders who have initially accepted such prepayment). In the event of such a re-offer, each of the relevant Lenders may elect, by notice to the Administrative Agent by telephone by facsimile within two Business Days of receiving notification of such re-offer, to decline its portion of the amount of such prepayment that is re-offered to them and, to the extent so declined by such Lenders, with any remaining amounts being retained by the Borrower to be used for any other purpose not prohibited by this Agreement.

1.4. Amendment to Article III: Representations and Warranties

(A) Section 3.13 of the Credit Agreement shall be amended by adding the following new paragraph at the end of such section as follows:

The Borrower will use the proceeds of the Incremental Term Loans solely as follows: (i) $4,600,000 shall be used to make a contribution to Affirmative Insurance Company solely for the purpose of being a qualified investment to satisfy Illinois Insurance Code requirements, and (ii) to pay fees and expenses of (y) the Administrative Agent and its counsel in accordance with the terms of the Credit Agreement, and (z) any professional retained by the Incremental Term Loan Lenders (including, without limitation, the reasonable, invoiced fees and expenses of counsel to the Incremental Term Loan Lenders and the Financial Advisor) in accordance with the terms of the Credit Agreement.

1.5. Amendment to Article V: Affirmative Covenants

(A) Section 5.09(c) of the Credit Agreement shall be amended by adding “, the Real Estate Subsidiary” after the words “an Excluded Foreign Subsidiary” in each case therein.

(B) Section 5 of the Credit Agreement is hereby amended by adding a new Section 5.16 as follows:

5.16. Financial Advisor to Incremental Term Loan Lenders. The Incremental Term Loan Lenders shall have the right to retain, at the Borrower’s sole reasonable cost and expense and in consultation with the Borrower (which consultation shall not be in any manner considered a consent right), a financial advisor (the “Financial Advisor”) to assess, inter alia, the financial, operational and regulatory condition of the Borrower, including the projections developed by the Borrower, issues pertaining to possible asset sales and the regulatory position and status of the Borrower.

(C) Section 5 of the Credit Agreement is hereby amended by adding a new Section 5.17 as follows:

5.17. Access to Documents, Management and Board of Directors, Meetings. The Borrower shall: (i) give the Incremental Term Loan Lenders and their advisors (including, without limitation, the Financial Advisor) reasonable access to (y) relevant documents (other than documents subject to

attorney-client privilege, contractually binding confidentiality obligations owed to a third party existing prior to the date of this Amendment or confidential agreements entered into in the ordinary course of business consistent with past practice (and not made in contemplation of this Amendment) and prohibited by applicable law which determination, if requested by the Incremental Term Loan Lenders, shall be made in consultation with outside finance counsel to the Borrower, and, upon request of the Incremental Term Loan Lenders, furnished to the Incremental Term Loan Lenders in writing (the “Disclosure Exceptions”)), and (z) Borrower’s management team and board of directors, together with their respective advisors, in each case for the purpose of understanding the financial, operational and regulatory condition, and financial projections prepared by, the Borrower and/or its advisors and status of the Borrower, including, without limitation, any possible asset sales and the regulatory position of the Borrower, and (ii) provide the Incremental Term Loan Lenders with copies of all material correspondence between the Borrower (or its advisors) and the Borrower’s insurance regulators (including by electronic submission), each of which shall be delivered promptly, and in any event, within three (3) Business Days of its transmission or receipt, and (iii) agree to use commercially reasonable efforts to arrange meetings with the insurance regulators promptly following a request by the Incremental Term Loan Lenders.

(D) Section 5 of the Credit Agreement is hereby amended by adding a new Section 5.18 as follows:

5.18. Weekly Conference Calls. Hold weekly calls, beginning with the week of November 26, 2012, with the Incremental Term Loan Lenders and their advisors to discuss detailed information with the Incremental Term Loan Lenders regarding the financial, operational and regulatory condition of, and financial projections prepared by, the Borrower, possible asset sales and regulatory position and status of the Borrower (subject to the Disclosure Exceptions) and on each such weekly call, Borrower shall provide the Incremental Term Loan Lenders a summary of each material meeting, phone call, conference or other interaction between the Borrower (or its advisors) and the Borrower’s insurance regulators, except to the extent such information was already provided pursuant to Section 5.20.

(E) Section 5 of the Credit Agreement is hereby amended by adding a new Section 5.19 as follows:

5.19. Detailed Financial Projections. Prepare, promptly following the reasonable request of the Incremental Term Loan Lenders, their counsel or the Financial Advisor, reasonably detailed financial projections and other financial information which shall include reports showing each line of business, state-by-state detail and any such other type of reporting reasonably requested by the Financial Advisor.

(F) Section 5 of the Credit Agreement is hereby amended by adding a new Section 5.20 as follows:

5.20. Notice and Summary of Material Meeting or Call. The Borrower shall: (i) provide the Financial Advisor and/or counsel to the Incremental Term Loan Lenders with advance notice, where practicable, of any material meeting or call with an insurance regulator and the Financial Advisor and/or counsel shall have the opportunity, subject to such regulator’s consent, to attend such meeting as an observer or to listen to such conference call, and (ii) provide the Financial Advisor and the Incremental Term Loan Lenders, within no less than one (1) Business Day, with a summary of any material meeting or call with an insurance regulator, including, without limitation, any meeting or call regarding any affiliate of the Borrower being out of compliance with the applicable regulatory requirements (except to the extent that the Incremental Term Loan Lenders, their counsel or Financial Advisor was in attendance at or participated in such meeting or call or were invited and did not attend any such meeting or, call provided that such meeting or call shall still be summarized on the Borrower’s weekly call with the Incremental Term Loan Lenders pursuant to Section 5.18 hereof).

1.6. Amendment to Article VI: Negative Covenants

(A) Section 6.01(i) of the Credit Agreement is amended by deleting “[RESERVED]” and inserting in its place “Indebtedness of Real Estate Subsidiary and/or any Regulated Insurance Subsidiary under or in respect of the Real Estate Subsidiary Financing.”

(B) Section 6.02(m) of the Credit Agreement is amended by deleing “[RESERVED]” and inserting in its place “the Real Estate Subsidiary Lien.”

(C) Section 6.04(a) of the Credit Agreement is amended by (i) adding “, the Real Estate Subsidiary” immediately following the reference to “any Excluded Foreign Subsidiary” in Proviso (A); (ii) adding “, the Real Estate Subsidiary” immediately following the reference to “Excluded Foreign Subsidiaries” in Proviso (B)(x); and (iii) adding “and (iii) Investments constituting a permitted Real Estate Subsidiary Financing;” at the end thereof.

(D) Section 6.05(b) of the Credit Agreement is amended by deleting such Section in its entirety and replacing it with the following:

(b) Engage in any Asset Sale otherwise permitted under paragraph (a) above unless (x)(i) such Asset Sale is for consideration at least 80% of which is cash (and no portion of the remaining consideration shall be in the form of Indebtedness of the Borrower or any Subsidiary), (ii) such consideration is at least equal to the fair market value of the assets being sold, transferred, leased or disposed of, and (iii) the fair market value of all assets sold, transferred, leased or disposed of pursuant to this paragraph (b)(x) shall not exceed $1,000,000 in the aggregate, (y) such sale, transfer, lease or disposition of assets is from USAgencies or a Subsidiary thereof to the Borrower or its

Subsidiaries, and the acquirer of such assets is not USAgencies or a Subsidiary thereof or (z)(i) such Asset Sale is in connection with the Electronic Data Processing Equipment and Software Sale and Leaseback Transaction and is for consideration at least 80% of which is cash (and no portion of the remaining consideration shall be in the form of Indebtedness issued by the Borrower or any Subsidiary), (ii) such consideration is at least equal to the fair market value of the assets being sold, transferred, leased or disposed of and (iii) the value of the assets sold, transferred or disposed of pursuant to this paragraph (b)(y) after the Seventh Amendment Closing Date shall not exceed $30,000,000 in the aggregate; provided, that, to the extent any such Asset Sale described in clause (z) is consummated after the Seventh Amendment Closing Date, the terms of such transaction shall be reasonably acceptable to the Required Lenders (such consent not to be unreasonably withheld, delayed or conditioned). Notwithstanding anything to the contrary contained herein, the Borrower or any Subsidiary may engage in any Asset Sale otherwise permitted under paragraph (a) above in which the non-cash portion of the consideration for such Asset Sale is in the form of Indebtedness of the applicable purchaser made in favor of the Borrower or any Subsidiary and exceeds 20% of the total consideration for such Asset Sale solely to the extent such non-cash portion does not exceed $1,000,000.

(E) Section 6.06(b) of the Credit Agreement is amended by adding “and documents executed in connection with the Real Estate Subsidiary Financing” at the end of Proviso (A) thereof.

(F) Section 6.07 of the Credit Agreement is amended by adding “and (d) the transactions consented to pursuant to Section 2 of the Third Amendment” immediately prior to the “.” at the end thereof.

1.7. Amendment to Article VII: Events of Default

(A) Article VII of the Credit Agreement shall be amended by (i) deleting the word “or” at the end of subsection (l) thereof, (ii) inserting the word “or” at the end of subsection (m) thereof and (iii) adding a new clause (n) as follows:

(n) default shall be made in the due observance or performance by the Borrower or any subsidiary of any covenant, condition or agreement contained in Sections 5.16, 5.17, 5.18, 5.19 and 5.20, and such default shall continue unremedied for a period of two (2) Business Days; provided, however, if a default in the observance or performance of Section 5.16 results from the resignation of the Financial Advisor or the termination of the Financial Advisor by the Incremental Term Loan Lenders, then solely in such instance, such default continues unremedied for a period of time longer than is necessary to retain a new financial advisor;

(B) The final paragraph of Section 7 of the Credit Agreement, beginning with “Notwithstanding anything to the contrary contained in Article VII,” shall be amended by deleting subclause (e) and replacing it with the following:

(e) the proceeds of all Specified Equity Contributions will be applied to prepay, first, the Incremental Term Loans in full in cash and second, the Term Loans.

1.8. Amendment to Article IX: Miscellaneous

(A) Section 9.05(c) of the Credit Agreement shall be amended by adding “, outstanding amounts under the Incremental Term Loan” after the words “Term Loans” in the second to last line of such Section.

2. CONSENT.

2.1. Notwithstanding anything to the contrary contained in the Credit Agreement (including, without limitation, Sections 5.09, 6.04, 6.05 and 6.07) or any other Loan Document, the Required Lenders hereby consent to (i) the formation of a wholly-owned Subsidiary of one or more Regulated Insurance Subsidiaries (the “Real Estate Subsidiary”) and (ii) the transfer of the Specified Property (as defined herein) to the Real Estate Subsidiary (all documents, instruments and agreements governing such transfer, each as amended, modified or supplemented from time to time, the “Transfer Documents”), (iii) the incurrence of the Real Estate Subsidiary Financing (all documents, instruments and agreements governing such Real Estate Subsidiary Financing, each as amended, modified or supplemented from time to time, the “Real Estate Loan Documents”), (iv) the guarantee of such Indebtedness described in clause (iii) by one or more Regulated Insurance Subsidiaries, and (v) the performance by the New Real Estate Subsidiary and/or one or more Regulated Insurance Subsidiaries of their respective obligations under the Real Estate Loan Documents and the Transfer Documents (the transactions contemplated in clauses (i) through (v) hereof, the “Real Estate Transaction”); provided that the Real Estate Transaction is consummated within seventy-five (75) days of the Seventh Amendment Closing Date (or such later date as approved by the Administrative Agent at the direction of the Required Lenders). The transfer consummated pursuant to the terms of the Transfer Documents shall be deemed to not constitute an Asset Sale for purposes of the Loan Documents, including without limitation, Section 2.13 of the Credit Agreement; provided that the Real Estate Transaction is consummated within seventy-five (75) days of the Seventh Amendment Closing Date (or such later date as approved by the Administrative Agent at the direction of the Required Lenders).

2.2. The Incremental Term Loan Lenders, in their capacity as Required Lenders, and not in their capacity as Incremental Term Loan Lenders, consent to the change in the provisions of the Credit Agreement pursuant to Section 9.08(b) of the Credit Agreement.

3. WAIVER. Pursuant to Section 9.08(b) of the Credit Agreement, the Required Lenders hereby waive the following Defaults and Events of Default:

3.1. Financial Covenant. Defaults and Events of Default arising as a result of (i) the breach of Section 6.12 for the period ending September 30, 2012 (the “Financial Covenant Breach”), (ii) the Borrower failing to provide prompt written notice of the Financial Covenant

Breach or the Defaults and Events of Default otherwise described in this Section 3.1, (iii) the breach of any representations or warranties as a result of the Defaults and Events of Default described in this Section 3.1 and (iv) the conversion and/or continuation of Eurodollar Borrowings during the continuance of the Defaults and Events of Default described in this Section 3.1;

3.2. Financial Reporting. Defaults and Events of Default in connection with the breach of Sections 5.04(b) and 5.04(d) for the period ending September 30, 2012 (the “Financial Reporting Covenants Breach”), (ii) the Borrower failing to provide prompt written notice of the Financial Reporting Covenants Breach or the Defaults and Events of Default otherwise described in this Section 3.2, (iii) the breach of any representations or warranties as a result of the Defaults and Events of Default described in this Section 3.2 and (iv) the conversion and/or continuation of Eurodollar Borrowings during the continuance of the Default described in this Section 3.2; and

3.3. Sale and Leaseback. Defaults and Events of Default (if any) arising as a result of the existence of defaults alleged by one or more lessees under the documentation governing the Electronic Data Processing Equipment and Software Sale and Leaseback Transaction, as described in the Borrower’s Form 8-K filed on October 23, 2012 with the U.S. Securities and Exchange Commission (“Sale-Leaseback Breach”), (ii) the Borrower failing to provide prompt written notice of the Sale-Leaseback Breach or the Defaults and Events of Default otherwise described in this Section 3.2 (if any), (iii) the breach of any representations or warranties as a result of the Defaults and Events of Default described in this Section 3.3 (if any) and (iv) the conversion and/or continuation of Eurodollar Borrowings during the continuance of the Defaults and Events of Default described in this Section 3.3 (if any). The waivers described in this Section 3.2 are being sought by the Borrower out of an abundance of caution and do not constitute any admission by the Loan Parties that such Sale-Leaseback Breach occurred or exists as of the date hereof.

4. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. In order to induce the Required Lenders and the Agents to enter into this Amendment, the Borrower represents and warrants to each Lender and the Agents that the following statements are true, correct and complete:

4.1. Power and Authority. Each of the Loan Parties has all requisite corporate or limited liability company power and authority to enter into this Amendment and to carry out the transactions contemplated by, and to perform its obligations under or in respect of, the Credit Agreement.

4.2. Corporate Action. The execution and delivery of this Amendment and the performance of the obligations of each of the Loan Parties under or in respect of the Credit Agreement as amended hereby have been duly authorized by all necessary corporate or limited liability company action on the part of each of the Loan Parties.

4.3. No Conflict or Violation or Required Consent or Approval. The execution and delivery of this Amendment and the performance of the obligations of each of the Loan Parties under or in respect of the Credit Agreement as amended hereby do not and will not conflict with or violate (a) any provision of the certificate or articles of incorporation or other

constitutive documents or by-laws of any Loan Party or any of its Subsidiaries, (b) any provision of any law or any governmental rule or regulation applicable to any Loan Party or any of its Subsidiaries, (c) any order of any Governmental Authority or arbitrator binding on any Loan Party or any of its Subsidiaries, or (d) any indenture, agreement or instrument to which any Loan Party or any of its Subsidiaries is a party or by which any Loan Party or any of its Subsidiaries, or any property of any of them, is bound (except where such violation could not reasonably be expected to have a Material Adverse Effect), and do not and will not require any consent or approval of any Person (other than any approval or consent obtained and is in full force and effect or approvals or consents the failure to obtain could not reasonably be expected to have a Material Adverse Effect or which are not material to the consummation of the transaction contemplated hereby).

4.4. Execution, Delivery and Enforceability. This Amendment has been duly executed and delivered by each Loan Party which is a party hereto and is the legal, valid and binding obligation of such Loan Party, enforceable in accordance with their terms, except as enforceability may be affected by applicable bankruptcy, insolvency, and similar proceedings affecting the rights of creditors generally, and general principles of equity. The Agents’ Liens in all Collateral continue to be valid, binding and enforceable Liens which secure the Borrower Obligations to the extent valid, binding and enforceable on the Closing Date, except as enforceability may be affected by applicable bankruptcy, insolvency and similar proceedings affecting the rights of creditors generally, and general principles of equity.

4.5. No Default or Event of Default. After giving effect to this Amendment and excluding any matters described in that certain default notice delivered by the Borrower to the Lenders on October 22, 2012 (the “Default Notice”) and all other matters previously disclosed in writing to all of the Required Lenders on or prior to the date hereof (collectively with the matters in the Default Notice, the “Excluded Matters”), no event has occurred and is continuing or will result from the execution and delivery of this Amendment that would constitute a Default or an Event of Default.

4.6. Reserved.

4.7. Representations and Warranties. After giving effect to this Amendment and excluding the Excluded Matters, each of the representations and warranties contained in the Loan Documents is and will be true and correct in all material respects on and as of the date hereof and as of the effective date of this Amendment, except to the extent that such representations and warranties specifically relate to an earlier date, in which case they were true, correct and complete in all material respects as of such earlier date, provided, that, in each case, such materiality qualifier shall not be applicable to any representations and warranties that are already qualified or modified by materiality in the text thereof.

5. CONDITIONS TO EFFECTIVENESS OF THIS AMENDMENT. This Amendment, and the consents , waivers and approvals contained herein, shall be effective as of November 19, 2012 immediately upon delivery to the Agents of executed counterparts hereof by each Loan Party and each Incremental Term Loan Lender (by hand delivery, mail, telecopy or other electronic transmission), upon the satisfaction or the waiver of the following conditions:

5.1. Illinois Department of Insurance Filings. The Required Lenders shall have received all drafts of Affirmative Insurance Company’s DRRR forms (and all supplements thereto) described in that certain letter, dated November 14, 2012, addressed to the Borrower from the Illinois Department of Insurance, such forms and supplements to be in the form in which they are to be filed.

5.2. Fees. The Administrative Agent and the primary counsel to the Incremental Term Loan Lenders shall have received all invoiced, reasonable out-of-pocket fees and expenses due and payable on or prior to the Seventh Amendment Closing Date, including, to the extent invoiced, reimbursement or other payment of all out-of-pocket expenses required to be reimbursed or paid by the Borrower hereunder or any other Loan Documents (including, without limitation, the reasonable fees and out-of-pocket expenses of Stroock & Stroock & Lavan LLP and Latham & Watkins LLP).

5.3. Necessary Consents. Each Loan Party shall have obtained all material consents necessary or advisable in connection with the transactions contemplated by this Amendment.

5.4. SEC Filings. The Loan Parties shall have provided to the Required Lenders a draft of the filing on form 10-Q to be filed on or around November 19, 2012 with the Securities and Exchange Commission prior to the filing thereof.

5.5. Reserved.

5.6. Organizational Documents; Incumbency. The Required Lenders (with a copy to the Administrative Agent) shall have received (i) to the extent received by the Loan Parties by 10:30 a.m. (New York time) on the Seventh Amendment Closing Date, copies of the each Loan Party’s organizational documents, and, to the extent applicable, certified as of a recent date by the appropriate governmental official; (ii) signature and incumbency certificates of the officers of such Person executing the Loan Documents to which it is a party; (iii) resolutions of the board of directors or similar governing body of each Loan Party approving and authorizing the execution, delivery and performance of this Amendment as of the Seventh Amendment Closing Date, certified as of such date by its secretary or an assistant secretary as being in full force and effect without modification or amendment; and (iv) to the extent received by the Loan Parties by 10:30 a.m. (New York time) on the Seventh Amendment Closing Date, a good standing certificate from the applicable Governmental Authority of each Loan Party’s jurisdiction of incorporation, organization or formation, in each case, dated as the Seventh Amendment Closing Date or a recent date prior to the Seventh Amendment Closing Date; provided, that such deliverables in clauses (i) and (iv) above will be delivered promptly upon receipt to the extent not provided by such time. In lieu of the deliverables contemplated by clauses (i) and (ii) above, the applicable Loan Party may instead provide a certificate dated as of the Seventh Amendment Closing Date certifying that there have been no changes to the documents delivered to the Administrative Agent on the Seventh Amendment Closing Date (or such later date as the applicable Loan Party became party to the Loan Documents applicable to it).

5.7. Representations and Warranties. The representations and warranties set forth in Section 4 above shall be true in all material respects provided, that, in each case, such materiality qualifier shall not be applicable to any representations and warranties that are already qualified or modified by materiality in the text thereof.

6. CONDITIONS SUBSEQUENT.

6.1. Mortgages. On or prior to the date that is 30 Business Days after the Seventh Amendment Closing Date (or such longer date as agreed by the Administrative Agent), the Loan Parties shall have amended the mortgages reflecting the Incremental Term Loan Commitment in form and substance reasonably acceptable to the Administrative Agent to the extent necessary or reasonably advisable to provide a perfected security interest securing the Incremental Term Loans.

6.2. Cash Flow Forecast. The Administrative Agent and the Incremental Term Loan Lenders shall have received on or before November 30, 2012, and on each Friday thereafter, from the Borrower a rolling 13-week cash flow forecast prepared by the Borrower which forecast shall, among other things, reasonably detail projected cash receipts and cash disbursements on a weekly basis for the then-current week and the next 12 weeks (the “Cash Flow Forecast”), which Cash Flow Forecast shall be in form reasonably satisfactory to the Incremental Term Loan Lenders in their sole and absolute discretion.

6.3. Professional Fee Escrow Account. The Administrative Agent shall deposit, in an escrow account with Stroock & Stroock & Lavan LLP, any excess proceeds of the Incremental Term Loans not used as forth in Section 3.13(i) of the Credit Agreement, which funds in such account shall be released to the Borrower at the sole discretion of the Incremental Term Loan Lenders for the purpose of paying the reasonable and invoiced fees and out-of-pocket expenses of professionals retained by the Incremental Term Loan Lenders (including, without limitation, the fees and expenses of counsel to the Incremental Term Loan Lenders and the Financial Advisor) with such direction to be given when such amounts are due and payable. To the extent that such proceeds are not used for the payment of such fees and expenses, they shall be applied against the outstanding Incremental Term Loans.

6.4. Certificate from Illinois Department of Insurance. The Borrower shall have received (and delivered to the Required Lenders, with a copy to the Administrative Agent), within fifteen (15) calendar days following the Seventh Amendment Closing Date, a certificate (or other confirmatory evidence reasonably satisfactory to the Incremental Term Loan Lenders) from the Illinois Department of Insurance indicating that the Incremental Term Loan Commitment satisfies the Borrower’s regulated insurance subsidiary’s reserve requirement under the Illinois Insurance Code as of September 30, 2012.

7. DIRECTION, CONSENT AND ACKNOWLEDGEMENT. The Incremental Term Loan Lenders, in their capacity as Required Lenders, hereby request and direct that the Agents acknowledge this Amendment and consent to its execution and the terms hereunder, solely to the extent that the Amendment amends, modifies or otherwise affects such Person’s rights or duties under the Credit Agreement and the Agents hereby provide such limited consent pursuant to such direction. The Borrower and each Guarantor hereby acknowledges that it has

reviewed the terms and provisions of the Credit Agreement and this Agreement and consents to the supplement of the Credit Agreement effected pursuant to this Agreement.

8. RELEASE AND WAIVER. The Loan Parties hereby (i) release, acquit, and forever discharge the Agents and each of the Lenders, and each and every past and present subsidiary, affiliate, stockholder, officer, director, agent, servant, employee, representative, and attorney of the Agents and the Lenders, from any and all claims, causes of action, suits, debts, liens, obligations, liabilities, demands, losses, costs and expenses (including reasonable attorneys’ fees) of any kind, character, or nature whatsoever, known or unknown, fixed or contingent, which the Loan Parties may have or claim to have now or which may hereafter arise out of or connected with any act of commission or omission of the Agents or the Lenders existing or occurring prior to the date of this Amendment, in each case arising with respect to the Credit Agreement or the other Loan Documents and (ii) waive any and all claims, counterclaims, causes of action, offsets, rights of recoupment, defenses and demands, whether known or unknown, arising on or before the date of this Amendment, in each case under or with respect to any of the Loans or Obligations or under any of the Loan Documents; provided, that, such releases and waivers described in (i) and (ii) above shall not be applicable with respect to any claims, counterclaims, causes of action, offsets, suits, debts, liens, obligations, liabilities, losses, costs, expenses, demands, defenses or rights of recoupment resulting primarily from the gross negligence or willful misconduct of the Agents or the Lenders as determined by a court of competent jurisdiction by final and nonappealable judgment. The provisions of this Section 6 shall be binding upon the Borrower and each of the other Loan Parties, if any, and shall inure to the benefit of Agents, the Lenders and their respective subsidiaries, affiliates, stockholders, officers, directors, agents, employees, representatives, attorneys, executors, administrators, successors and assigns.

9. EFFECT OF AMENDMENT; RATIFICATION. This Amendment is a Loan Document. From and after the date on which this Amendment becomes effective, all references in the Loan Documents to the Credit Agreement and other Loan Documents shall mean the Credit Agreement as amended, waived and modified hereby. Except as expressly amended, waived and modified hereby, the Credit Agreement and the other Loan Documents, including the Liens granted thereunder, shall remain in full force and effect, and all terms and provisions thereof are hereby ratified and confirmed.

10. MISCELLANEOUS. Each of the Loan Parties confirms that as amended hereby, each of the Loan Documents to which it is a party is in full force and effect, and that as of the date hereof, none of the Loan Parties has any defenses, setoffs or counterclaims to its Obligations.

11. APPLICABLE LAW. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES THAT WOULD REQUIRE THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION.

12. NO WAIVER. The execution, delivery and effectiveness of this Amendment does not constitute a waiver of any Default or Event of Default, amend or modify any provision

of any Loan Document, in each case except as expressly set forth herein or constitute a course of dealing or any other basis for altering the Obligations of any Loan Party.

13. COMPLETE AGREEMENT. This Amendment sets forth the complete agreement of the parties in respect of any waiver, consent or amendment to any of the provisions of any Loan Document.

14. CAPTIONS; COUNTERPARTS. The catchlines and captions herein are intended solely for convenience of reference and shall not be used to interpret or construe the provisions hereof. This Amendment may be executed by one or more of the parties to this Amendment on any number of separate counterparts (including by telecopy or other electronic transmission), all of which taken together shall constitute but one and the same instrument.

[Remainder of Page Intentionally Left Blank.]

IN WITNESS WHEREOF, each of the undersigned has duly executed this Waiver, Consent and Seventh Amendment to Credit Agreement as of the date set forth above.

AFFIRMATIVE INSURANCE HOLDINGS, INC.,
	as Borrower
By:	/s/ Joseph G. Fisher
	Name: Joseph G. Fisher
	Title: Executive Vice President
LOAN PARTIES:
AFFIRMATIVE INSURANCE HOLDINGS, INC.
AFFIRMATIVE MANAGEMENT SERVICES, INC.
AFFIRMATIVE PROPERTY HOLDINGS, INC.
AFFIRMATIVE SERVICES, INC.
AFFIRMATIVE INSURANCE GROUP, INC.
AFFIRMATIVE UNDERWRITING SERVICES, INC.
A-AFFORDABLE INSURANCE AGENCY, INC.
AFFIRMATIVE INSURANCE SERVICES, INC. (f/k/a AFFIRMATIVE INSURANCE SERVICES OF TEXAS, INC.)
DRIVER’S CHOICE INSURANCE SERVICES, LLC
INSUREONE INDEPENDENT INSURANCE AGENCY, LLC
USAGENCIES, L.L.C.
LIFCO, L.L.C.
USAGENCIES MANAGEMENT SERVICES, INC.
AFFIRMATIVE RETAIL, INC.
AFFIRMATIVE PREMIUM FINANCE HOLDINGS, INC.
AFFIRMATIVE PREMIUM FINANCE, INC.
By:	/s/ Joseph G. Fisher
	Name: Joseph G. Fisher
	Title: Executive Vice President

CREDIT SUISSE AG, CAYMAN ISLANDS BRANCH, as Administrative Agent and as Collateral Agent
By:	/s/ John Toronto
	Name: John Toronto
	Title: Managing Director
By:	/s/ Vipul Dhadda
	Name: Vipul Dhadda
	Title: Associate

The Lender acknowledges and agrees that this signature page shall be fully valid and binding upon the Lender upon its execution and delivery by the Lender to the Administrative Agent and may not thereafter be revoked, terminated or cancelled by the Lender.

[LENDER] as Required Lender
By:
	Name:
	Title:

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: November 19, 2012

/s/ Gary Y. Kusumi

Gary Y. Kusumi

Chief Executive Officer

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: November 19, 2012

/s/ Michael J. McClure

Michael J. McClure

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

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 September 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: November 19, 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.

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 September 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: November 19, 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.

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Available-for-Sale Investment Securities (Details 3) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value [Abstract]
Less Than Twelve Months Esimated Fair Value	$ 2,122	$ 18,133
Twelve Months or Greater Estimated Fair Value	1,484	5,078
Total Estimated Fair Value	3,606	23,211
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses [Abstract]
Less Than Twelve Months Gross Unrealized Losses	(25)	(175)
Twelve Months or Greater Gross Unrealized Losses	(32)	(123)
Gross Unrealized Losses	(57)	(298)
U.S. Treasury and government agencies [Member]
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value [Abstract]
Less Than Twelve Months Esimated Fair Value		505
Twelve Months or Greater Estimated Fair Value
Total Estimated Fair Value		505
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses [Abstract]
Less Than Twelve Months Gross Unrealized Losses		(1)
Twelve Months or Greater Gross Unrealized Losses
Gross Unrealized Losses		(1)
Mortgage-backed securities [Member]
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value [Abstract]
Less Than Twelve Months Esimated Fair Value	1,450	2,688
Twelve Months or Greater Estimated Fair Value	792	3,312
Total Estimated Fair Value	2,242	6,000
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses [Abstract]
Less Than Twelve Months Gross Unrealized Losses	(24)	(36)
Twelve Months or Greater Gross Unrealized Losses	(26)	(99)
Gross Unrealized Losses	(50)	(135)
States and political subdivisions [Member]
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value [Abstract]
Less Than Twelve Months Esimated Fair Value
Twelve Months or Greater Estimated Fair Value		74
Total Estimated Fair Value	72	74
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses [Abstract]
Less Than Twelve Months Gross Unrealized Losses
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 Esimated Fair Value	672	13,982
Twelve Months or Greater Estimated Fair Value	620	1,344
Total Estimated Fair Value	1,292	15,326
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses [Abstract]
Less Than Twelve Months Gross Unrealized Losses	(1)	(137)
Twelve Months or Greater Gross Unrealized Losses	(4)	(21)
Gross Unrealized Losses	(5)	(158)
FDIC-insured certificates of deposit [Member]
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value [Abstract]
Less Than Twelve Months Esimated Fair Value		958
Twelve Months or Greater Estimated Fair Value		348
Total Estimated Fair Value		1,306
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses [Abstract]
Less Than Twelve Months Gross Unrealized Losses		(1)
Twelve Months or Greater Gross Unrealized Losses		(2)
Gross Unrealized Losses		$ (3)

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Capital Lease Obligation (Details Textual) (USD $) In Millions, unless otherwise specified	9 Months Ended
	Sep. 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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Deferred Policy Acquisition Costs (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Deferred policy acquisition costs, Gross [Member]
Summary of policy acquisition costs
Beginning balance	$ 4,961	$ 5,104	$ 3,668	$ 9,432
Additions	5,051	3,793	13,741	13,048
Amortization	(4,286)	(4,323)	(11,683)	(17,906)
Ending balance	5,726	4,574	5,726	4,574
Deferred policy acquisition costs, Ceded [Member]
Summary of policy acquisition costs
Beginning balance	(6,398)	(5,330)	(10,132)	(8,972)
Additions	(6,014)	(4,191)	(13,176)	(13,169)
Amortization	5,484	4,663	16,380	17,283
Ending balance	(6,928)	(4,858)	(6,928)	(4,858)
Deferred policy acquisition costs, Net [Member]
Summary of policy acquisition costs
Beginning balance	(1,437)	(226)	(6,464)	460
Additions	(963)	(398)	565	(121)
Amortization	1,198	340	4,697	(623)
Ending balance	$ (1,202)	$ (284)	$ (1,202)	$ (284)

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Income Taxes (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Provision for income taxes
Current tax expense (benefit)	$ 127	$ (88)	$ 127	$ 137
Deferred tax expense	84	319	252	956
Net income tax expense	$ 211	$ 231	$ 379	$ 1,093

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Premium Finance Receivables, Net (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Summary of premium finance receivables
Premium finance contracts	$ 44,324	$ 40,472
Unearned finance charges	(2,304)	(1,911)
Allowance for credit losses	(530)	(479)
Total	$ 41,490	$ 38,082

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Summary of Significant Accounting Policies (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011	Sep. 30, 2011
Consolidated Balance Sheets
Stockholders' deficit	$ (124,967)	$ (80,977)	$ 64,225
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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Income Taxes (Details Textual) (USD $) In Millions, unless otherwise specified	3 Months Ended	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2012	Dec. 31, 2011
Income Taxes (Textual) [Abstract]
Effective tax rate from statutory rate	35.00%	35.00%
Gross deferred tax assets, valuation allowance of prior to recognition	$ 101.4	$ 101.4	$ 92.7
Valuation allowance of prior to recognition	$ 98.8	$ 98.8	$ 88.9

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Reinsurance (Tables)

9 Months Ended

Sep. 30, 2012

Reinsurance [Abstract]

Effect of reinsurance on premiums written and earned

	Three Months Ended September 30,
	2012									2011
	Written Premium			Earned Premium			Loss and Loss Adjustment Expenses			Written Premium			Earned Premium			Loss and Loss Adjustment Expenses
Direct	$	50,667		$	44,665		$	28,837		$	46,296		$	50,672		$	88,983
Reinsurance assumed		9,095			9,997			7,538			8,224			9,127			9,299
Reinsurance ceded		(21,252	)		(19,401	)		(10,978	)		(15,918	)		(17,757	)		(66,720	)
Total	$	38,510		$	35,261		$	25,397		$	38,602		$	42,042		$	31,562
	Nine Months Ended September 30,
	2012									2011
	Written Premium			Earned Premium			Loss and Loss Adjustment Expenses			Written Premium			Earned Premium			Loss and Loss Adjustment Expenses
Direct	$	143,313		$	135,688		$	93,234		$	154,363		$	173,983		$	184,557
Reinsurance assumed		29,115			26,925			21,559			27,536			33,185			18,569
Reinsurance ceded		(45,889	)		(58,236	)		(37,007	)		(52,084	)		(67,904	)		(101,750	)
Total	$	126,539		$	104,377		$	77,786		$	129,815		$	139,264		$	101,376

Selling, general and administrative expenses

	Three Months  Ended September 30,						Nine Months  Ended September 30,
	2012			2011			2012			2011
Selling, general and administrative expenses	$	(7,059	)	$	(5,119	)	$	(19,430	)	$	(18,604	)

Summary of loss reserves and unearned premium

	September 30, 2012		December 31, 2011
Losses and loss adjustment expense reserves	$	72,482	$	78,510
Unearned premium reserve		24,326		36,674
Total	$	96,808	$	115,184

Amount of receivables due from reinsurers

	September 30, 2012		December 31, 2011
Quota-share reinsurer for agreement effective September 1, 2011	$	49,206	$	22,102
Michigan Catastrophic Claims Association		42,066		44,049
Vesta Insurance Group		9,839		10,068
Quota-share reinsurer for agreements effective in fourth quarter of 2010 and January 2011		9,264		46,103
Excess of loss reinsurers		4,983		5,458
Other		3,129		3,667
Total reinsurance receivable	$	118,487	$	131,447

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Debt (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Summary of Company's long-term debt instruments and balances outstanding
Notes payable	$ 76,845	$ 76,857
Senior secured credit facility, net of discount	92,276	91,683
Total long-term debt	169,121	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	25,774
Notes payable due 2035 [Member]
Summary of Company's long-term debt instruments and balances outstanding
Notes payable	$ 20,143	$ 20,155

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Reinsurance (Details 1) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Selling, general and administrative expenses
Selling, general and administrative expenses	$ (7,059)	$ (5,119)	$ (19,430)	$ (18,604)

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Available-for-Sale Investment Securities (Details 1) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Amortized cost and estimated fair values of fixed-income securities
Amortized Cost	$ 69,458	$ 121,610
Estimated Fair Value	70,142	122,922
Fixed-income securities [Member]
Amortized cost and estimated fair values of fixed-income securities
Due in one year or less, Amortized Cost	41,140
Due after one year through five years, Amortized Cost	24,251
Due after five years through ten years, Amortized Cost	380
Due in one year or less, Estimated Fair Value	41,334
Due after one year through five years, Estimated Fair Value	24,734
Due after five years through ten years, Estimated Fair Value	417
Mortgage-backed securities [Member]
Amortized cost and estimated fair values of fixed-income securities
Amortized Cost	3,687	10,803
Estimated Fair Value	$ 3,657	$ 10,951

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Capital Lease Obligation (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Property under capital lease
Computer software, software licenses and hardware	$ 28,189	$ 28,189
Accumulated depreciation	(12,321)	(8,821)
Computer software, software licenses and hardware, net	$ 15,868	$ 19,368

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Related Party Transactions (Details) (USD $) In Millions, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2010
Related Party Transactions (Textual) [Abstract]
Investment in hedge fund	$ 2.5	$ 2.5
Related liquidity-focused product	3.7	10.0
Fair value of hedge fund	3.3
Fair value of liquidity-focused product	$ 3.7

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Premium Finance Receivables, Net (Details Textual) (USD $) In Millions, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 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	$ 0.2	$ 0.2	$ 0.4	$ 0.5
Percentage of premiums financed	0.40%	0.50%	0.40%	0.40%

XML

Available-for-Sale Investment Securities

9 Months Ended

Sep. 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 at the time of disposal.

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair  Value
September 30, 2012
U.S. Treasury and government agencies	$	11,503	$	139	$	—		$	11,642
Mortgage-backed securities		3,687		20		(50	)		3,657
States and political subdivisions		4,083		117		(2	)		4,198
Corporate debt securities		29,684		379		(5	)		30,058
FDIC-insured certificates of deposit		20,501		86		—			20,587
Total	$	69,458	$	741	$	(57	)	$	70,142
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 September 30, 2012 by contractual maturity were as follows (in thousands):

	Amortized Cost		Estimated Fair  Value
Due in one year or less	$	41,140	$	41,334
Due after one year through five years		24,251		24,734
Due after five years through ten years		380		417
Mortgage-backed securities		3,687		3,657
Total	$	69,458	$	70,142

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

	2012			2011
Gross gains	$	921		$	237
Gross losses		(121	)		(166	)
Total	$	800		$	71

The following table summarizes the Company’s available-for-sale securities in an unrealized loss position at September 30, 2012 and December 31, 2011, the estimated 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):

	September 30, 2012
	Less Than Twelve Months					Twelve Months or Greater					Total
	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
Mortgage-backed securities		1,450		(24	)		792		(26	)		2,242		(50	)
States and political subdivisions		—		—			72		(2	)		72		(2	)
Corporate debt securities		672		(1	)		620		(4	)		1,292		(5	)
Total	$	2,122	$	(25	)	$	1,484	$	(32	)	$	3,606	$	(57	)
	December 31, 2011
	Less Than Twelve Months					Twelve Months or Greater					Total
	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated 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 20 and 34 individual investment securities that were in an unrealized loss position as of September 30, 2012 and December 31, 2011, respectively.

The unrealized losses at September 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 September 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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Fair Value of Financial Instruments (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Financial assets measured at fair value on a recurring basis
Total investment securities	$ 70,142	$ 122,922
Other invested assets	3,309	2,898
Quoted Prices in Active Markets (Level 1) [Member]
Financial assets measured at fair value on a recurring basis
Total assets	24,981	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	70,142	122,922
Other invested assets	3,309	2,898
Total assets	73,451	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	11,642	11,975
Fair Value, Measurements, Recurring [Member] | Mortgage-backed securities [Member]
Financial assets measured at fair value on a recurring basis
Total investment securities	3,657	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	4,198	17,178
Fair Value, Measurements, Recurring [Member] | Corporate debt securities [Member]
Financial assets measured at fair value on a recurring basis
Total investment securities	30,058	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	20,587	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	11,642	11,975
Other invested assets
Total assets	11,642	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	11,642	11,975
Fair Value, Measurements, Recurring [Member] | Quoted Prices in Active Markets (Level 1) [Member] | Mortgage-backed securities [Member]
Financial assets measured at fair value on a recurring basis
Total investment securities
Fair Value, Measurements, Recurring [Member] | Quoted Prices in Active Markets (Level 1) [Member] | States and political subdivisions [Member]
Financial assets measured at fair value on a recurring basis
Total investment securities
Fair Value, Measurements, Recurring [Member] | Quoted Prices in Active Markets (Level 1) [Member] | Corporate debt securities [Member]
Financial assets measured at fair value on a recurring basis
Total investment securities
Fair Value, Measurements, Recurring [Member] | Quoted Prices in Active Markets (Level 1) [Member] | FDIC-insured certificates of deposit [Member]
Financial assets measured at fair value on a recurring basis
Total investment securities
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	58,500	110,947
Other invested assets
Total assets	58,500	110,947
Fair Value, Measurements, Recurring [Member] | Significant Other Observable Inputs (Level 2) [Member] | U.S. Treasury and government agencies [Member]
Financial assets measured at fair value on a recurring basis
Total investment securities
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	3,657	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	4,198	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	30,058	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	20,587	21,181
Fair Value, Measurements, Recurring [Member] | Significant Unobservable Inputs (Level 3) [Member]
Financial assets measured at fair value on a recurring basis
Total investment securities
Other invested assets	3,309	2,898
Total assets	3,309	2,898
Fair Value, Measurements, Recurring [Member] | Significant Unobservable Inputs (Level 3) [Member] | U.S. Treasury and government agencies [Member]
Financial assets measured at fair value on a recurring basis
Total investment securities
Fair Value, Measurements, Recurring [Member] | Significant Unobservable Inputs (Level 3) [Member] | Mortgage-backed securities [Member]
Financial assets measured at fair value on a recurring basis
Total investment securities
Fair Value, Measurements, Recurring [Member] | Significant Unobservable Inputs (Level 3) [Member] | States and political subdivisions [Member]
Financial assets measured at fair value on a recurring basis
Total investment securities
Fair Value, Measurements, Recurring [Member] | Significant Unobservable Inputs (Level 3) [Member] | Corporate debt securities [Member]
Financial assets measured at fair value on a recurring basis
Total investment securities
Fair Value, Measurements, Recurring [Member] | Significant Unobservable Inputs (Level 3) [Member] | FDIC-insured certificates of deposit [Member]
Financial assets measured at fair value on a recurring basis
Total investment securities

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Reinsurance (Details 2) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Summary of loss reserves and unearned premium
Losses and loss adjustment expense reserves	$ 72,482	$ 78,510
Unearned premium reserve	24,326	36,674
Total	$ 96,808	$ 115,184

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Capital Lease Obligation (Tables)

9 Months Ended

Sep. 30, 2012

Capital Lease Obligation [Abstract]

Property under capital lease

	September 30, 2012			December 31, 2011
Computer software, software licenses and hardware	$	28,189		$	28,189
Accumulated depreciation		(12,321	)		(8,821	)
Computer software, software licenses and hardware, net	$	15,868		$	19,368

Estimated future lease payments

2012	$	1,684
2013		6,736
2014		6,736
2015		2,807
Total estimated future lease payments		17,963
Less: Amount representing interest		1,672
Present value of future lease payments	$	16,291

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Debt (Tables)

9 Months Ended

Sep. 30, 2012

Debt [Abstract]

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

	September 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		20,143		20,155
Total notes payable		76,845		76,857
Senior secured credit facility, net of discount		92,276		91,683
Total long-term debt	$	169,121	$	168,540

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Income Taxes (Details 1) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Summary of effective tax rate differed from the statutory rate
Loss before income taxes	$ (29,247)	$ (7,407)	$ (43,254)	$ (16,336)
Tax provision computed at the federal statutory income tax rate	(10,237)	(2,593)	(15,139)	(5,718)
Increases (reductions) in tax resulting from:
Tax-exempt interest	(10)	(32)	(61)	(106)
State income taxes	40	(427)	335	(457)
IRS audit settlement			(118)
Goodwill impairment (non-deductible)	5,623		5,623
Valuation allowance	4,809	3,415	9,770	7,433
Other	(14)	(132)	(31)	(59)
Income tax expense	$ 211	$ 231	$ 379	$ 1,093
Effective tax rate	(0.70%)	(3.10%)	(0.90%)	(6.70%)

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Reinsurance (Details 3) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Amount of receivables due from reinsurers
Total reinsurance receivable	$ 118,487	$ 131,447
Quota-share reinsurer for agreement effective September 1, 2011 [Member]
Amount of receivables due from reinsurers
Total reinsurance receivable	49,206	22,102
Michigan Catastrophic Claims Association [Member]
Amount of receivables due from reinsurers
Total reinsurance receivable	42,066	44,049
Vesta Insurance Group [Member]
Amount of receivables due from reinsurers
Total reinsurance receivable	9,839	10,068
Quota-share reinsurer for agreements effective in fourth quarter of 2010 and January 2011 [Member]
Amount of receivables due from reinsurers
Total reinsurance receivable	9,264	46,103
Excess of loss reinsurers [Member]
Amount of receivables due from reinsurers
Total reinsurance receivable	4,983	5,458
Other [Member]
Amount of receivables due from reinsurers
Total reinsurance receivable	$ 3,129	$ 3,667

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Income Taxes (Tables)

9 Months Ended

Sep. 30, 2012

Income Taxes [Abstract]

Provision for income taxes

	Three Months  Ended September 30,					Nine Months  Ended September 30,
	2012		2011			2012		2011
Current tax expense (benefit)	$	127	$	(88	)	$	127	$	137
Deferred tax expense		84		319			252		956
Net income tax expense	$	211	$	231		$	379	$	1,093

Summary of effective tax rate differed from the statutory rate

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Loss before income taxes	$	(29,247	)	$	(7,407	)	$	(43,254	)	$	(16,336	)
Tax provision computed at the federal statutory income tax rate		(10,237	)		(2,593	)		(15,139	)		(5,718	)
Increases (reductions) in tax resulting from:
Tax-exempt interest		(10	)		(32	)		(61	)		(106	)
State income taxes		40			(427	)		335			(457	)
IRS audit settlement		—			—			(118	)		—
Goodwill impairment (non-deductible)		5,623			—			5,623			—
Valuation allowance		4,809			3,415			9,770			7,433
Other		(14	)		(132	)		(31	)		(59	)
Income tax expense	$	211		$	231		$	379		$	1,093
Effective tax rate		(0.7	)%		(3.1	)%		(0.9	)%		(6.7	)%

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Net Loss Per Common Share (Tables)

9 Months Ended

Sep. 30, 2012

Net Loss Per Common Share [Abstract]

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Numerator:
Loss from continuing operations	$	(29,458	)	$	(7,638	)	$	(43,633	)	$	(17,429	)
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:	$	(1.91	)	$	(0.50	)	$	(2.83	)	$	(1.13	)
Diluted loss per common share from continuing operations:	$	(1.91	)	$	(0.50	)	$	(2.83	)	$	(1.13	)

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Summary of Significant Accounting Policies

9 Months Ended

Sep. 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 September 30, 2011						Nine Months Ended September 30, 2011
	Previously Reported			As Adjusted			Previously Reported			As Adjusted
Selling, general and administrative expenses	$	27,919		$	27,099		$	89,894		$	88,403
Net loss		(8,458	)		(7,638	)		(18,920	)		(17,429	)
Net loss per share:
Basic		(0.55	)		(0.50	)		(1.23	)		(1.13	)
Diluted		(0.55	)		(0.50	)		(1.23	)		(1.13	)

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 standard will have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

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Fair Value of Financial Instruments (Tables)

9 Months Ended

Sep. 30, 2012

Fair Value of Financial Instruments [Abstract]

Financial assets measured at fair value on a recurring basis

	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	$	11,642	$	11,642	$	—	$	—
Mortgage-backed securities		3,657		—		3,657		—
States and political subdivisions		4,198		—		4,198		—
Corporate debt securities		30,058		—		30,058		—
FDIC-insured certificates of deposit		20,587		—		20,587		—
Total investment securities		70,142		11,642		58,500		—
Other invested assets		3,309		—		—		3,309
Total assets	$	73,451	$	11,642	$	58,500	$	3,309

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 Using Significant Unobservable Inputs (Level 3) Other Invested Assets
Balance at July 1, 2012	$	3,098
Transfers into Level 3		—
Total gains included in earnings as net investment income		211
Settlements		—
Balance at September 30, 2012	$	3,309

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

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Other Invested Assets
Balance at July 1, 2011	$	2,840
Transfers into Level 3		—
Total losses included in earnings as net investment income		(31	)
Settlements		—
Balance at September 30, 2011	$	2,809

Fair value measurements for assets in Level 3 for the nine months ended September 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		411
Settlements		—
Balance at September 30, 2012	$	3,309

Fair value measurements for assets in Level 3 for the nine months ended September 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		245
Settlements		—
Balance at September 30, 2011	$	2,809

Fair value measurements for assets and liabilities

	Carrying Value		Estimated Fair  Value		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	24,413	$	24,413	$	24,413	$	—	$	—
Fiduciary and restricted cash		568		568		568		—		—
Total	$	24,981	$	24,981	$	24,981	$	—	$	—
Liabilities:
Notes payable	$	76,845	$	12,728	$	—	$	—	$	12,728
Senior secured credit facility		92,276		76,531		—		—		76,531
Total	$	169,121	$	89,259	$	—	$	—	$	89,259

The following table presents the carrying value and estimated 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		Estimated 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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Available-for-Sale Investment Securities (Details Textual)	Sep. 30, 2012 Investment_Securities	Dec. 31, 2011 Investment_Securities
Available-for-Sale Investment Securities (Textual) [Abstract]
Individual investment securities in an unrealized loss position	20	34

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Capital Lease Obligation (Details 1) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2011
Estimated future lease payments
2012	$ 1,684
2013	6,736
2014	6,736
2015	2,807
Total estimated future lease payments	17,963
Less: Amount representing interest	1,672
Present value of future lease payments	$ 16,291

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Consolidated Balance Sheets (Unaudited) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Assets
Available-for-sale securities, at fair value	$ 70,142	$ 122,922
Other invested assets	3,309	2,898
Cash and cash equivalents	24,413	28,559
Fiduciary and restricted cash	568	2,478
Accrued investment income	644	1,058
Premiums and fees receivable, net	28,619	22,579
Premium finance receivable, net	41,490	38,082
Commissions receivable	1,698	1,786
Receivable from reinsurers	118,487	131,447
Income taxes receivable	16	739
Investment in real property, net	11,176	11,776
Property and equipment (net of accumulated depreciation of $57,990 for 2012 and $51,204 for 2011)	26,219	32,130
Goodwill		23,448
Other intangible assets (net of accumulated amortization of $7,665 for 2012 and 2011)	14,265	14,609
Prepaid expenses	6,971	5,147
Other assets (net of allowance for doubtful accounts of $7,213 for 2012 and 2011)	1,944	1,944
Total assets	349,961	441,602
Liabilities:
Reserves for losses and loss adjustment expenses	143,323	183,836
Unearned premium	67,671	58,242
Amounts due to reinsurers	30,245	38,224
Deferred revenue	5,967	4,816
Capital lease obligation	16,291	20,301
Senior secured credit facility	92,276	91,683
Notes payable	76,845	76,857
Deferred tax liability	3,180	2,928
Deferred acquisition costs, net	1,202	6,464
Other liabilities	37,928	39,228
Total liabilities	474,928	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 September 30, 2012 and at December 31, 2011	182	182
Additional paid-in capital	166,613	166,342
Treasury stock, at cost (2,793,863 shares at September 30, 2012 and December 31, 2011)	(32,910)	(32,910)
Accumulated other comprehensive loss	(855)	(227)
Retained deficit	(257,997)	(214,364)
Total stockholders' deficit	(124,967)	(80,977)
Total liabilities and stockholders' deficit	$ 349,961	$ 441,602

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Reinsurance (Details Textual) (USD $)	3 Months Ended		9 Months Ended		12 Months Ended					3 Months Ended	9 Months Ended	13 Months Ended
	Sep. 30, 2012	Dec. 31, 2011	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011	Sep. 30, 2012 Affirmative Insurance Company [Member]	Dec. 31, 2011 Affirmative Insurance Company [Member]	Sep. 30, 2012 Subsidiaries [Member]	Sep. 30, 2012 County mutual insurance company [Member]	Sep. 30, 2012 Quota-share reinsurer [Member]	Sep. 30, 2012 Quota-share reinsurer [Member]	Sep. 30, 2012 Quota-share reinsurer [Member]	Dec. 31, 2011 Quota-share reinsurer [Member]	Sep. 30, 2012 Vesta Insurance Group [Member]	Dec. 31, 2011 Vesta Insurance Group [Member]
Reinsurance Related Transaction [Line Items]
Total deposit														$ 16,800,000
Deposit after cumulative withdrawals														8,700,000
Treasury money market account														14,700,000
Corporate bond deposits														2,100,000
Receivable from reinsurers	118,487,000	131,447,000	118,487,000		131,447,000					9,264,000	9,264,000	9,264,000	46,103,000	9,839,000	10,068,000
Amount payable	30,245,000	38,224,000	30,245,000		38,224,000									2,900,000
Percentage of policies issued									100.00%
Company obligation under reinsurance contract						30,000,000	34,400,000
Reserves for losses and loss adjustment expenses	143,323,000	183,836,000	143,323,000		183,836,000			2,500,000
Funds in a money market cash equivalent account						20,700,000
Cumulative withdrawal by first party						400,000
Cumulative withdrawal by second party						1,700,000
Written premiums ceded	50,600,000									21,100,000	61,200,000	84,100,000
Reinsurance (Textual) [Abstract]
Ceded gross written premium					28.00%
Ceded unearned premium			9,429,000	(26,425,000)	11,800,000
Net deferred ceding commissions			4,300,000
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

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Consolidated 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		(4)
Issuance of restricted stock awards, shares		433,500		433,500
Stock-based compensation			359
Unrealized loss on available-for-sale investment securities					(431)
Net loss	(17,429)					(17,429)
Ending balance at Sep. 30, 2011	64,225	182	166,135	(32,910)	14	(69,196)
Ending balance, shares at Sep. 30, 2011		18,202,221		2,793,863
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
Issuance of restricted stock awards
Issuance of restricted stock awards, shares
Stock-based compensation			271
Unrealized loss on available-for-sale investment securities					(628)
Net loss	(43,633)					(43,633)
Ending balance at Sep. 30, 2012	$ (124,967)	$ 182	$ 166,613	$ (32,910)	$ (855)	$ (257,997)
Ending balance, shares at Sep. 30, 2012	15,408,358	18,202,221		2,793,863

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Net Loss Per Common Share (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Numerator:
Loss from continuing operations	$ (29,458)	$ (7,638)	$ (43,633)	$ (17,429)
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:	$ (1.91)	$ (0.50)	$ (2.83)	$ (1.13)
Diluted loss per common share from continuing operations:	$ (1.91)	$ (0.50)	$ (2.83)	$ (1.13)

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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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Subsequent Event (Details Textual) (USD $) In Millions, unless otherwise specified	Nov. 15, 2012	Oct. 17, 2012	Oct. 15, 2012
Subsequent Event (Textual) [Abstract]
Recovery of an amount equal to the casualty loss value of the leased property		$ 9.6
Disbursement of company's lease payment obligation			8.3
Alleged Liquidated Damages	$ 1.4

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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 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 September 30, 2011						Nine Months Ended September 30, 2011
	Previously Reported			As Adjusted			Previously Reported			As Adjusted
Selling, general and administrative expenses	$	27,919		$	27,099		$	89,894		$	88,403
Net loss		(8,458	)		(7,638	)		(18,920	)		(17,429	)
Net loss per share:
Basic		(0.55	)		(0.50	)		(1.23	)		(1.13	)
Diluted		(0.55	)		(0.50	)		(1.23	)		(1.13	)

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 standard will have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

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Available-for-Sale Investment Securities (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Summary of available-for-sale securities
Amortized Cost	$ 69,458	$ 121,610
Gross Unrealized Gains	741	1,610
Gross Unrealized Losses	(57)	(298)
Estimated Fair Value	70,142	122,922
U.S. Treasury and government agencies [Member]
Summary of available-for-sale securities
Amortized Cost	11,503	11,804
Gross Unrealized Gains	139	172
Gross Unrealized Losses		(1)
Estimated Fair Value	11,642	11,975
Mortgage-backed securities [Member]
Summary of available-for-sale securities
Amortized Cost	3,687	10,803
Gross Unrealized Gains	20	283
Gross Unrealized Losses	(50)	(135)
Estimated Fair Value	3,657	10,951
States and political subdivisions [Member]
Summary of available-for-sale securities
Amortized Cost	4,083	16,841
Gross Unrealized Gains	117	338
Gross Unrealized Losses	(2)	(1)
Estimated Fair Value	4,198	17,178
Corporate debt securities [Member]
Summary of available-for-sale securities
Amortized Cost	29,684	61,031
Gross Unrealized Gains	379	764
Gross Unrealized Losses	(5)	(158)
Estimated Fair Value	30,058	61,637
FDIC-insured certificates of deposit [Member]
Summary of available-for-sale securities
Amortized Cost	20,501	21,131
Gross Unrealized Gains	86	53
Gross Unrealized Losses		(3)
Estimated Fair Value	$ 20,587	$ 21,181

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Available-for-Sale Investment Securities (Tables)

9 Months Ended

Sep. 30, 2012

Available-for-Sale Investment Securities [Abstract]

Summary of available-for-sale securities

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair  Value
September 30, 2012
U.S. Treasury and government agencies	$	11,503	$	139	$	—		$	11,642
Mortgage-backed securities		3,687		20		(50	)		3,657
States and political subdivisions		4,083		117		(2	)		4,198
Corporate debt securities		29,684		379		(5	)		30,058
FDIC-insured certificates of deposit		20,501		86		—			20,587
Total	$	69,458	$	741	$	(57	)	$	70,142
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

	Amortized Cost		Estimated Fair  Value
Due in one year or less	$	41,140	$	41,334
Due after one year through five years		24,251		24,734
Due after five years through ten years		380		417
Mortgage-backed securities		3,687		3,657
Total	$	69,458	$	70,142

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

	2012			2011
Gross gains	$	921		$	237
Gross losses		(121	)		(166	)
Total	$	800		$	71

Summary of available-for-sale securities in an unrealized loss position

	September 30, 2012
	Less Than Twelve Months					Twelve Months or Greater					Total
	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
Mortgage-backed securities		1,450		(24	)		792		(26	)		2,242		(50	)
States and political subdivisions		—		—			72		(2	)		72		(2	)
Corporate debt securities		672		(1	)		620		(4	)		1,292		(5	)
Total	$	2,122	$	(25	)	$	1,484	$	(32	)	$	3,606	$	(57	)
	December 31, 2011
	Less Than Twelve Months					Twelve Months or Greater					Total
	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated 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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Consolidated Statements of Cash Flows (Unaudited) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Cash flows from operating activities
Net loss	$ (43,633)	$ (17,429)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	7,644	7,340
Stock-based compensation expense	254	316
Amortization of debt modification costs	280	310
Amortization of debt discount	2,930	3,428
Net realized gains from sales of available-for-sale securities	(800)	(71)
Fair value gain on investment in hedge fund	(411)	(245)
Gain on disposal of assets	(121)
Amortization of premiums on investments, net	1,271	2,306
Provision for doubtful premiums receivable	609	(180)
Loss on interest rate swaps		2
Proceeds from insurance recoveries		(212)
Paid-in-kind interest	2,681
Goodwill and other intangible assets impairment	23,692
Change in operating assets and liabilities:
Fiduciary and restricted cash	1,910	3,524
Premiums, fees and commissions receivable, net	(6,561)	15,764
Reserves for losses and loss adjustment expenses	(40,513)	10,413
Amounts due from reinsurers	4,981	(66,537)
Premium finance receivable, net (related to our insurance premiums)	(3,565)	3,794
Deferred revenue	1,151	(2,201)
Unearned premium	9,429	(26,425)
Deferred acquisition costs, net	(5,262)	744
Deferred taxes	252	956
Income taxes receivable	723	902
Other	(4,499)	(3,788)
Net cash used in operating activities	(47,558)	(67,289)
Cash flows from investing activities
Proceeds from sales of available-for-sale securities	33,730	56,277
Proceeds from maturities of available-for-sale securities	26,791	27,163
Purchases of available-for-sale securities	(8,839)	(18,431)
Premium finance receivable, net (related to third-party insurance premiums)	157	(2,660)
Purchases of property and equipment	(1,170)	(2,335)
Proceeds from insurance recoveries	30
Investment in real property, net		(550)
Net cash provided by investing activities	50,699	59,464
Cash flows from financing activities
Principal payments under capital lease obligations	(4,010)	(3,718)
Principal payments on senior secured credit facility	(3,277)	(5,388)
Debt modification costs paid		(769)
Repurchase of restricted stock		(4)
Net cash used in financing activities	(7,287)	(9,879)
Net decrease in cash and cash equivalents	(4,146)	(17,704)
Cash and cash equivalents at beginning of year	28,559	46,364
Cash and cash equivalents at end of period	24,413	28,660
Supplemental disclosure of cash flow information:
Cash paid for interest	7,666	10,911
Cash paid for income taxes	$ 335	$ 335

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Consolidated Balance Sheets (Unaudited) (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Consolidated Balance Sheets [Abstract]
Property and equipment, accumulated depreciation	$ 57,990	$ 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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Legal and Regulatory Proceedings

9 Months Ended

Sep. 30, 2012

Legal and Regulatory Proceedings [Abstract]

Legal and Regulatory Proceedings

10. Legal and Regulatory Proceedings

The Company and its subsidiaries are named from time to time as parties in various legal actions arising in the ordinary course of the Company’s business and arising out of or related to claims made in connection with the Company’s insurance policies and claims handling. There are no material changes with respect to legal 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 now engaged in 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 engaged in 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. Affirmative Insurance Company is currently in compliance with the reserve requirement.

Affirmative Insurance Company will need to enter into certain transactions, such as asset sales or other transactions, to be in compliance with the reserve requirement as of December 31, 2012. The Company cannot provide assurance that it will be in compliance with the reserve requirement at December 31, 2012. 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 Affirmative Insurance Company is not in compliance with the reserve requirement as of December 31, 2012, it could have a material adverse effect on the Company’s operations and the interests of its creditors and stockholders. These conditions and events raise significant uncertainty about the Company’s 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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Document and Entity Information	9 Months Ended
	Sep. 30, 2012	Nov. 12, 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	Sep. 30, 2012
Amendment Flag	false
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q3
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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Net Loss Per Common Share

9 Months Ended

Sep. 30, 2012

Net Loss Per Common Share [Abstract]

Net Loss Per Common Share

11. Net Loss Per Common Share

Net loss per common share is based on the weighted average number of shares outstanding. Diluted weighted average shares is calculated by adjusting basic weighted average shares outstanding by all potentially dilutive stock options and restricted stock. Stock options outstanding of 906,999 for the three and nine months ended September 30, 2012 and stock options outstanding of 1,772,500 for the three and nine months ended 2011 were not included in the computation of diluted earnings per share because there is a loss from continuing operations in the respective periods.

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Numerator:
Loss from continuing operations	$	(29,458	)	$	(7,638	)	$	(43,633	)	$	(17,429	)
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:	$	(1.91	)	$	(0.50	)	$	(2.83	)	$	(1.13	)
Diluted loss per common share from continuing operations:	$	(1.91	)	$	(0.50	)	$	(2.83	)	$	(1.13	)

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Consolidated Statements of Operations (Unaudited) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Revenues
Net premiums earned	$ 35,261	$ 42,042	$ 104,377	$ 139,264
Commission income and fees	14,879	16,265	45,991	53,593
Net investment income	819	1,078	2,572	3,891
Net realized gains (losses)	192	(45)	921	71
Other income	4	8	504	257
Total revenues	51,155	59,348	154,365	197,076
Expenses
Net losses and loss adjustment expenses	25,397	31,562	77,786	101,376
Selling, general and administrative expenses	24,097	27,099	74,529	88,403
Depreciation and amortization	2,414	2,533	7,044	7,340
Total expenses	51,908	61,194	159,359	197,119
Operating loss	(753)	(1,846)	(4,994)	(43)
Loss on interest rate swaps				(2)
Interest expense	4,802	5,561	14,568	16,291
Goodwill and other intangible assets impairment	23,692		23,692
Loss before income tax expense	(29,247)	(7,407)	(43,254)	(16,336)
Income tax expense	211	231	379	1,093
Net loss	$ (29,458)	$ (7,638)	$ (43,633)	$ (17,429)
Basic loss per common share:
Net loss	$ (1.91)	$ (0.50)	$ (2.83)	$ (1.13)
Diluted loss per common share:
Net loss	$ (1.91)	$ (0.50)	$ (2.83)	$ (1.13)
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

9 Months Ended

Sep. 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 September 30, 2012 and 2011 (in thousands):

	Gross			Ceded			Net
Balance at July 1, 2012	$	4,961		$	(6,398	)	$	(1,437	)
Additions		5,051			(6,014	)		(963	)
Amortization		(4,286	)		5,484			1,198
Ending balance at September 30, 2012	$	5,726		$	(6,928	)	$	(1,202	)
Balance at July 1, 2011, as adjusted	$	5,104		$	(5,330	)	$	(226	)
Additions		3,793			(4,191	)		(398	)
Amortization		(4,323	)		4,663			340
Ending balance at September 30, 2011, as adjusted	$	4,574		$	(4,858	)	$	(284	)

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

	Gross			Ceded			Net
Balance at January 1, 2012	$	3,668		$	(10,132	)	$	(6,464	)
Additions		13,741			(13,176	)		565
Amortization		(11,683	)		16,380			4,697
Ending balance at September 30, 2012	$	5,726		$	(6,928	)	$	(1,202	)
Balance at January 1, 2011, as adjusted	$	9,432		$	(8,972	)	$	460
Additions		13,048			(13,169	)		(121	)
Amortization		(17,906	)		17,283			(623	)
Ending balance at September 30, 2011, as adjusted	$	4,574		$	(4,858	)	$	(284	)

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Premium Finance Receivables, Net

9 Months Ended

Sep. 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 September 30, 2012 and December 31, 2011 (in thousands):

	September 30, 2012			December 31, 2011
Premium finance contracts	$	44,324		$	40,472
Unearned finance charges		(2,304	)		(1,911	)
Allowance for credit losses		(530	)		(479	)
Total	$	41,490		$	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 $0.2 million, or 0.4% of total premiums financed, for the three months ended September 30, 2012, and $0.2 million, or 0.5% of total premiums financed, for the three months ended September 30, 2011. Losses due to non-realization of premium finance receivables were $0.4 million, or 0.4% of total premiums financed, for the nine months ended September 30, 2012, and $0.5 million, or 0.4% of total premiums financed, for the nine months ended September 30, 2011.

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Summary of Significant Accounting Policies (Tables)

9 Months Ended

Sep. 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 September 30, 2011						Nine Months Ended September 30, 2011
	Previously Reported			As Adjusted			Previously Reported			As Adjusted
Selling, general and administrative expenses	$	27,919		$	27,099		$	89,894		$	88,403
Net loss		(8,458	)		(7,638	)		(18,920	)		(17,429	)
Net loss per share:
Basic		(0.55	)		(0.50	)		(1.23	)		(1.13	)
Diluted		(0.55	)		(0.50	)		(1.23	)		(1.13	)

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Related Party Transactions

9 Months Ended

Sep. 30, 2012

Related Party Transactions [Abstract]

Related Party Transactions

12. Related Party Transactions

The Company has entered into certain transactions with a partnership that is affiliated with J. Christopher Flowers. Mr. Flowers is affiliated with New Affirmative LLC, the majority shareholder of the Company. In the fourth quarter of 2010, the Company committed to invest $2.5 million in Varadero, a hedge fund, and $10.0 million in a related liquidity-focused product. The investment manager of Varadero is Varadero Capital, L.P., of which Varadero GP, LLC is the general partner. Both the investment manager and general partner are partially-owned by an entity affiliated with Mr. Flowers. As of September 30, 2012, the Company had funded $2.5 million in the hedge fund and approximately $3.7 million in the related liquidity-focused product. At September 30, 2012, the fair value of the hedge fund was approximately $3.3 million, based on net asset value and recorded as other invested assets, and the fair value of the liquidity-focused product was approximately $3.7 million, included in available-for-sale securities in the consolidated balance sheets.

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Capital Lease Obligation

9 Months Ended

Sep. 30, 2012

Capital Lease Obligation [Abstract]

Capital Lease Obligation

8. Capital Lease Obligation

In May 2010, the Company entered into a capital lease obligation related to certain computer software, software licenses, and hardware used in the Company’s insurance operations. The Company received cash proceeds from the financing in the amount of $28.2 million. As required by the lease agreements, the Company purchased $28.2 million of FDIC-insured certificates of deposit held in brokerage accounts and pledged 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 September 30, 2012 and December 31, 2011 (in thousands):

	September 30, 2012			December 31, 2011
Computer software, software licenses and hardware	$	28,189		$	28,189
Accumulated depreciation		(12,321	)		(8,821	)
Computer software, software licenses and hardware, net	$	15,868		$	19,368

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

2012	$	1,684
2013		6,736
2014		6,736
2015		2,807
Total estimated future lease payments		17,963
Less: Amount representing interest		1,672
Present value of future lease payments	$	16,291

See Note 14 for subsequent event related to the Company’s capital lease obligation.

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Net Loss Per Common Share (Details Textual)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Net Loss Per Common Share (Textual) [Abstract]
Stock options outstanding	906,999	1,772,500	906,999	1,772,500

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Goodwill and Other Intangible Assets

9 Months Ended

Sep. 30, 2012

Goodwill and Other Intangible Assets [Abstract]

Goodwill and Other Intangible Assets

6. Goodwill and Other Intangible Assets

The Company completed its annual goodwill and indefinite lived intangible asset impairment analyses as of September 30, 2012. The Company reports under a single reporting segment and, as such, the goodwill analysis is measured under one reporting unit. Current trends and recent developments resulted in management concluding that it is more likely than not that a goodwill impairment exists at September 30, 2012. Specifically, operating income and cash flow was less than plan, and premium production was below forecast. Due to the Company’s negative equity position of $101.3 million as of September 30, 2012, prior to goodwill impairment, ASC 350-20-35-30 requires that the Company perform step two of the goodwill impairment test.

Consistent with prior assessments, the fair value of the Company was determined using an internally developed discounted cash flow method. Management made significant assumptions and estimates about the extent and timing of future cash flows, growth rates, and discount rates that represent unobservable inputs into the valuation methodologies used to calculate fair value. A discount rate of 19% was used at September 30, 2012, which the Company believes adequately reflects an appropriate risk-adjusted discount rate based on its overall cost of capital and company-specific risk factors related to cash flow, debt covenant compliance and regulatory risk, as discussed in Notes 10 and 14. The cash flows were estimated over a significant future period of time, which made those estimates and assumptions subject to a high degree of uncertainty. Based upon the results of the assessment, the Company concluded that the carrying value of goodwill was fully impaired as of September 30, 2012. In step two of the goodwill impairment analysis, the Company determined the fair values of the Company’s assets and liabilities (including any unrecognized intangible assets) as if the Company had been acquired in a business combination. Determining the implied fair value of goodwill was judgmental in nature and involved the use of significant estimates and assumptions. The resulting implied fair value of goodwill was compared to the carrying value of goodwill, resulting in the write-off of the remaining goodwill balance of $23.4 million.

Indefinite-lived intangible assets primarily consist of trade names. In measuring the fair value of these intangible assets, the Company utilizes the relief-from-royalty method. This method assumes that trade names have value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires an estimate of future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital. This analysis indicated an impairment of indefinite-lived intangible assets of $0.2 million as of September 30, 2012.

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Debt

9 Months Ended

Sep. 30, 2012

Debt [Abstract]

Debt

7. Debt

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

	September 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		20,143		20,155
Total notes payable		76,845		76,857
Senior secured credit facility, net of discount		92,276		91,683
Total long-term debt	$	169,121	$	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 September 30, 2012 was 3.99%.

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 September 30, 2012 was 3.94%.

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 September 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 $1.7 million as of September 30, 2012.

The $20.1 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 3.95%. The interest rate as of September 30, 2012 was 4.34%.

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 September 30, 2012 was 10.5%. As of September 30, 2012, the principal balance of the senior secured credit facility was $97.3 million. The facility expires in January 2014.

The Company breached its leverage ratio covenant under the senior secured credit facility as of September 30, 2012. However, the lenders for the facility waived all defaults and events of default arising in connection with the breach. The Company will need to enter into certain transactions, such as asset sales, to be in compliance with the leverage ratio covenant as of December 31, 2012. The Company cannot provide assurance that it will be in compliance with the leverage ratio covenant at December 31, 2012. 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 the Company was not in compliance with the leverage ratio covenant and unable to negotiate a waiver with its lenders, it could have a material adverse effect on the Company’s operations and the interests of its stockholders. These conditions and events raise significant uncertainty about the Company’s 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 November 2012, a new class of loans under the senior secured credit facility was created allowing for an incremental term loan. The incremental term loan has the following characteristics:

• Face amount of $7.3 million with a funded amount of $5.0 million.

• Repayment will be on a first out basis, payable in full, on or prior to January 17, 2014, with priority over all other amounts outstanding under the senior secured credit facility.

• All additional proceeds not used to satisfy Affirmative Insurance Company’s reserve requirement as of September 30, 2012 as described in Note 11 are to be used solely for paying the incremental term loan lenders’ professional fees.

• $57,000 of principal payment is due as of March 31, 2013 and $38,000 is due each quarter end for the remainder of 2013. The remaining balance is due at maturity.

• A commitment fee of $500,000 is due for any asset sales of the Company’s non-regulated operations in excess of $10.0 million if such sale is consummated by December 31, 2012. If no such sale occurs by December 31, 2012, the commitment fee will be added to the principal amount of the incremental term loan.

• The incremental term loan lenders will receive an 8% prepayment premium of the principal amount if the incremental term loan is prepaid.

• The incremental term loan lenders have the right to retain a financial advisor to assess the financial, operational and regulatory condition of the Company.

• The Company will pay for the incremental lenders’ financial advisor and legal expenses.

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Income Taxes

9 Months Ended

Sep. 30, 2012

Income Taxes [Abstract]

Income Taxes

9. Income Taxes

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

	Three Months  Ended September 30,					Nine Months  Ended September 30,
	2012		2011			2012		2011
Current tax expense (benefit)	$	127	$	(88	)	$	127	$	137
Deferred tax expense		84		319			252		956
Net income tax expense	$	211	$	231		$	379	$	1,093

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Loss before income taxes	$	(29,247	)	$	(7,407	)	$	(43,254	)	$	(16,336	)
Tax provision computed at the federal statutory income tax rate		(10,237	)		(2,593	)		(15,139	)		(5,718	)
Increases (reductions) in tax resulting from:
Tax-exempt interest		(10	)		(32	)		(61	)		(106	)
State income taxes		40			(427	)		335			(457	)
IRS audit settlement		—			—			(118	)		—
Goodwill impairment (non-deductible)		5,623			—			5,623			—
Valuation allowance		4,809			3,415			9,770			7,433
Other		(14	)		(132	)		(31	)		(59	)
Income tax expense	$	211		$	231		$	379		$	1,093
Effective tax rate		(0.7	)%		(3.1	)%		(0.9	)%		(6.7	)%

Our gross deferred tax assets prior to recognition of valuation allowance were $101.4 million and $92.7 million at September 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 $98.8 million and $88.9 million at September 30, 2012 and December 31, 2011, respectively.

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Fair Value of Financial Instruments (Details 2) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Level 1 [Member]
Assets:
Cash and cash equivalents	$ 24,413	$ 28,559
Fiduciary and restricted cash	568	2,478
Total assets	24,981	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	12,728	17,433
Senior secured credit facility	76,531	79,554
Total liabilities	89,259	96,987
Carrying Value [Member]
Assets:
Cash and cash equivalents	24,413	28,559
Fiduciary and restricted cash	568	2,478
Total assets	24,981	31,037
Liabilities:
Notes payable	76,845	76,857
Senior secured credit facility	92,276	91,683
Total liabilities	169,121	168,540
Estimated Fair Value [Member]
Assets:
Cash and cash equivalents	24,413	28,559
Fiduciary and restricted cash	568	2,478
Total assets	73,451	125,820
Liabilities:
Notes payable	12,728	17,433
Senior secured credit facility	76,531	79,554
Total liabilities	89,259	96,987
Estimated Fair Value [Member] | Level 1 [Member]
Assets:
Total assets	11,642	11,975
Estimated Fair Value [Member] | Level 2 [Member]
Assets:
Total assets	58,500	110,947
Estimated Fair Value [Member] | Level 3 [Member]
Assets:
Total assets	$ 3,309	$ 2,898

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Fair Value of Financial Instruments (Details 1) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Fair value measurements for assets
Beginning Balance	$ 3,098	$ 2,840	$ 2,898	$ 2,564
Transfers into Level 3
Total losses included in earnings as net investment income	211	(31)	411	245
Settlements
Ending Balance	$ 3,309	$ 2,809	$ 3,309	$ 2,809

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Summary of Significant Accounting Policies (Details 1) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Consolidated statements of operations
Selling, general and administrative expenses	$ 24,097	$ 27,099	$ 74,529	$ 88,403
Net loss	(29,458)	(7,638)	(43,633)	(17,429)
Net loss per share:
Basic loss per common share from continuing operations:	$ (1.91)	$ (0.50)	$ (2.83)	$ (1.13)
Diluted loss per common share from continuing operations:	$ (1.91)	$ (0.50)	$ (2.83)	$ (1.13)
Previously Reported [Member]
Consolidated statements of operations
Selling, general and administrative expenses		27,919		89,894
Net loss		(8,458)		(18,920)
Net loss per share:
Basic loss per common share from continuing operations:		$ (0.55)		$ (1.23)
Diluted loss per common share from continuing operations:		$ (0.55)		$ (1.23)
As Adjusted [Member]
Consolidated statements of operations
Selling, general and administrative expenses		27,099		88,403
Net loss		$ (7,638)		$ (17,429)
Net loss per share:
Basic loss per common share from continuing operations:		$ (0.50)		$ (1.13)
Diluted loss per common share from continuing operations:		$ (0.50)		$ (1.13)

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Debt (Details Textual) (USD $)	9 Months Ended
	Sep. 30, 2012	Dec. 31, 2011
Debt Instrument [Line Items]
Notes payable	$ 76,845,000	$ 76,857,000
Interest rate	10.50%
Interest rate adjusted	6.25%
Outstanding balance of notes	76,845,000	76,857,000
Debt (Textual) [Abstract]
Principal balance of the senior secured credit facility	97,300,000
Period of interest payments on selected notes payable	5 years
Total deferred interest payable at the expiration of extension period	1,700,000
Leverage ratio under condition one	3.00%
Facility Expiration Date	2014-01
Senior secured credit facility [Member]
Debt Instrument [Line Items]
Incremental term loan period	2012-11
Debt instrument face amount	7,300,000
Debt instrument funded amount	5,000,000
Debt instrument maturity period	Jan. 17, 2014
Principal Periodic Payment of first quater	57,000
Principal Periodic Payment of remainder of year value	38,000
Principal Periodic Payment of remainder of year	2013
Principal Periodic Payment date	Mar. 31, 2013
Commitment fee of any asset sales	500,000
Non-regulated operations in excess	10,000,000
Debt instrument prepayment premium percentage	8.00%
3.60% Notes payable due 2035 [Member]
Debt Instrument [Line Items]
Notes payable	30,928,000	30,928,000
Interest rate	3.99%
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	25,774,000
Interest rate	3.94%
Interest rate adjusted	3.55%
Securities adjusted	Three-month LIBOR
Outstanding balance of notes	25,774,000	25,774,000
3.95% Notes payable due 2035 [Member]
Debt Instrument [Line Items]
Notes payable	20,143,000	20,155,000
Interest rate	4.34%
Interest rate adjusted	3.95%
Securities adjusted	Three-month LIBOR
Outstanding balance of notes	20,143,000	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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Subsequent Event

9 Months Ended

Sep. 30, 2012

Subsequent Event [Abstract]

Subsequent Event

14. Subsequent Event

Related to the capital lease obligation described in Note 8, on October 17, 2012, the Company received notice from one of the lessors (Lessor) that, based upon Lessor’s claim of an alleged default under the terms of the lease and security agreements, it elected to immediately seek recovery of an amount equal to the casualty loss value of the leased property, together with all other sums allegedly due to Lessor, which Lessor calculated as $9.6 million. Lessor informed the Company that it had directed the escrow agent to redeem the CDs securing the Company’s lease payment obligation and disburse to it the approximately $8.3 million in proceeds, which Lessor received on October 15, 2012. Lessor seeks payment from the Company of the remaining $1.4 million, alleged liquidated damages, to be paid no later than November 15, 2012. Lessor has stated that it will convey all rights and interest in the leased property back to the Company upon receipt of this payment.

Lessor alleges that the deficiency in the reserve requirement under the Illinois Insurance Code applicable to AIC, as described in Note 10, and the recent downgrades in Company’s rating by Moody’s Investor Services give rise to certain events of default under the lease and security agreements. The Company contests that any event of default has occurred and also disputes Lessor’s demand for payment of the casualty loss value of the leased property. The Company is reviewing all available options, including legal recourse, to appropriately challenge Lessor’s declaration of alleged default and attempt to seek liquidated damages, although there can be no assurance that any such actions, if taken, will be successful.

A second lessor holds the remaining capital lease obligations of the Company pursuant to a separate lease schedule. As of the date of this report, that lessor has not taken any action whatsoever to either assert an alleged default or to increase or accelerate the Company’s payment obligations under the lease and security agreements between the Company and that lessor, although there can be no assurance that it will not seek to do so.

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Premium Finance Receivables, Net (Tables)

9 Months Ended

Sep. 30, 2012

Premium Finance Receivables, Net [Abstract]

Summary of premium finance receivables

	September 30, 2012			December 31, 2011
Premium finance contracts	$	44,324		$	40,472
Unearned finance charges		(2,304	)		(1,911	)
Allowance for credit losses		(530	)		(479	)
Total	$	41,490		$	38,082

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Goodwill and Other Intangible Assets (Details) (USD $) In Millions, unless otherwise specified	9 Months Ended
	Sep. 30, 2012
Goodwill and Other Intangible Assets (Textual) [Abstract]
Company's negative equity position prior to goodwill impairment	$ 101.3
Appropraiate risk adjusted discount rate used	19.00%
Impairment of goodwill	23.4
Impairment of indefinite-lived intangible assets	$ 0.2

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Reinsurance (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Effect of reinsurance on premiums written and earned
Written Premium, Direct	$ 50,667	$ 46,296	$ 143,313	$ 154,363
Written Premium, Reinsurance assumed	9,095	8,224	29,115	27,536
Written Premium, Reinsurance ceded	(21,252)	(15,918)	(45,889)	(52,084)
Written Premium, Total	38,510	38,602	126,539	129,815
Earned Premium, Direct	44,665	50,672	135,688	173,983
Earned Premium, Reinsurance assumed	9,997	9,127	26,925	33,185
Earned Premium, Reinsurance ceded	(19,401)	(17,757)	(58,236)	(67,904)
Earned Premium, Total	35,261	42,042	104,377	139,264
Loss and Loss Adjustment Expenses, Direct	28,837	88,983	93,234	184,557
Loss and Loss Adjustment Expenses, Reinsurance assumed	7,538	9,299	21,559	18,569
Loss and Loss Adjustment Expenses, Reinsurance ceded	(10,978)	(66,720)	(37,007)	(101,750)
Loss and Loss Adjustment Expenses, Total	$ 25,397	$ 31,562	$ 77,786	$ 101,376

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Consolidated Statements of Comprehensive Income (Loss) (Unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Consolidated Statements of Comprehensive Income (Loss) [Abstract]
Net loss	$ (29,458)	$ (7,638)	$ (43,633)	$ (17,429)
Other comprehensive loss:
Unrealized gains (losses) on available-for-sale investment securities arising during period	(15)	(472)	172	(360)
Reclassification adjustment for realized (gains) losses included in net income (loss)	(190)	45	(800)	(71)
Other comprehensive loss, net	(205)	(427)	(628)	(431)
Total comprehensive loss	$ (29,663)	$ (8,065)	$ (44,261)	$ (17,860)

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Reinsurance

9 Months Ended

Sep. 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 $21.1 million and $61.2 million during the three and nine months ended September 30, 2012, respectively. Written premiums ceded under this agreement totaled $84.1 million since inception through September 30, 2012.

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 September 30,
	2012									2011
	Written Premium			Earned Premium			Loss and Loss Adjustment Expenses			Written Premium			Earned Premium			Loss and Loss Adjustment Expenses
Direct	$	50,667		$	44,665		$	28,837		$	46,296		$	50,672		$	88,983
Reinsurance assumed		9,095			9,997			7,538			8,224			9,127			9,299
Reinsurance ceded		(21,252	)		(19,401	)		(10,978	)		(15,918	)		(17,757	)		(66,720	)
Total	$	38,510		$	35,261		$	25,397		$	38,602		$	42,042		$	31,562
	Nine Months Ended September 30,
	2012									2011
	Written Premium			Earned Premium			Loss and Loss Adjustment Expenses			Written Premium			Earned Premium			Loss and Loss Adjustment Expenses
Direct	$	143,313		$	135,688		$	93,234		$	154,363		$	173,983		$	184,557
Reinsurance assumed		29,115			26,925			21,559			27,536			33,185			18,569
Reinsurance ceded		(45,889	)		(58,236	)		(37,007	)		(52,084	)		(67,904	)		(101,750	)
Total	$	126,539		$	104,377		$	77,786		$	129,815		$	139,264		$	101,376

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 September 30,						Nine Months  Ended September 30,
	2012			2011			2012			2011
Selling, general and administrative expenses	$	(7,059	)	$	(5,119	)	$	(19,430	)	$	(18,604	)

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):

	September 30, 2012		December 31, 2011
Losses and loss adjustment expense reserves	$	72,482	$	78,510
Unearned premium reserve		24,326		36,674
Total	$	96,808	$	115,184

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

	September 30, 2012		December 31, 2011
Quota-share reinsurer for agreement effective September 1, 2011	$	49,206	$	22,102
Michigan Catastrophic Claims Association		42,066		44,049
Vesta Insurance Group		9,839		10,068
Quota-share reinsurer for agreements effective in fourth quarter of 2010 and January 2011		9,264		46,103
Excess of loss reinsurers		4,983		5,458
Other		3,129		3,667
Total reinsurance receivable	$	118,487	$	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 September 30, 2012, the VFIC Trust held $16.8 million (after cumulative withdrawals of $8.7 million through September 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 $9.8 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 $30.0 million and $34.4 million as of September 30, 2012 and December 31, 2011, respectively.

At September 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 a reinsurance agreement with a VIG affiliated company. Affirmative established a trust account to collateralize this payable, which currently holds $20.7 million in a money market cash equivalent account (the AIC Trust). The Special Deputy Receiver in Texas had cumulative withdrawals from the AIC Trust of $0.4 million through September 2012, and the Special Deputy Receiver in Hawaii had cumulative withdrawals from the AIC Trust of $1.7 million through September 2012.

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Legal and Regulatory Proceedings (Details) (USD $)	9 Months Ended
	Sep. 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 (Tables)

9 Months Ended

Sep. 30, 2012

Deferred Policy Acquisition Costs [Abstract]

Summary of deferred policy acquisition costs

	Gross			Ceded			Net
Balance at July 1, 2012	$	4,961		$	(6,398	)	$	(1,437	)
Additions		5,051			(6,014	)		(963	)
Amortization		(4,286	)		5,484			1,198
Ending balance at September 30, 2012	$	5,726		$	(6,928	)	$	(1,202	)
Balance at July 1, 2011, as adjusted	$	5,104		$	(5,330	)	$	(226	)
Additions		3,793			(4,191	)		(398	)
Amortization		(4,323	)		4,663			340
Ending balance at September 30, 2011, as adjusted	$	4,574		$	(4,858	)	$	(284	)

	Gross			Ceded			Net
Balance at January 1, 2012	$	3,668		$	(10,132	)	$	(6,464	)
Additions		13,741			(13,176	)		565
Amortization		(11,683	)		16,380			4,697
Ending balance at September 30, 2012	$	5,726		$	(6,928	)	$	(1,202	)
Balance at January 1, 2011, as adjusted	$	9,432		$	(8,972	)	$	460
Additions		13,048			(13,169	)		(121	)
Amortization		(17,906	)		17,283			(623	)
Ending balance at September 30, 2011, as adjusted	$	4,574		$	(4,858	)	$	(284	)

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Available-for-Sale Investment Securities (Details 2) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Gross realized gains and losses on available-for-sale investments
Gross gains	$ 921	$ 237
Gross losses	(121)	(166)
Total	$ 800	$ 71

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Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2012

Fair Value of Financial Instruments [Abstract]

Fair Value of Financial Instruments

13. 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 September 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	$	11,642	$	11,642	$	—	$	—
Mortgage-backed securities		3,657		—		3,657		—
States and political subdivisions		4,198		—		4,198		—
Corporate debt securities		30,058		—		30,058		—
FDIC-insured certificates of deposit		20,587		—		20,587		—
Total investment securities		70,142		11,642		58,500		—
Other invested assets		3,309		—		—		3,309
Total assets	$	73,451	$	11,642	$	58,500	$	3,309

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 September 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 elected the fair value option for its investment in the hedge fund and measures 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 September 30, 2012 were as follows (in thousands):

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Other Invested Assets
Balance at July 1, 2012	$	3,098
Transfers into Level 3		—
Total gains included in earnings as net investment income		211
Settlements		—
Balance at September 30, 2012	$	3,309

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

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Other Invested Assets
Balance at July 1, 2011	$	2,840
Transfers into Level 3		—
Total losses included in earnings as net investment income		(31	)
Settlements		—
Balance at September 30, 2011	$	2,809

Fair value measurements for assets in Level 3 for the nine months ended September 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		411
Settlements		—
Balance at September 30, 2012	$	3,309

Fair value measurements for assets in Level 3 for the nine months ended September 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		245
Settlements		—
Balance at September 30, 2011	$	2,809

The Company did not have any transfers between Levels 1 and 2 during the period ended September 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 estimated fair value of the Company’s financial assets and liabilities disclosed, but not carried, at fair value at September 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		Estimated Fair  Value		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	24,413	$	24,413	$	24,413	$	—	$	—
Fiduciary and restricted cash		568		568		568		—		—
Total	$	24,981	$	24,981	$	24,981	$	—	$	—
Liabilities:
Notes payable	$	76,845	$	12,728	$	—	$	—	$	12,728
Senior secured credit facility		92,276		76,531		—		—		76,531
Total	$	169,121	$	89,259	$	—	$	—	$	89,259

The following table presents the carrying value and estimated 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		Estimated 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