Headquartered in Addison, Texas, Affirmative Insurance Holdings underwrites services and sells non-standard automobile insurance policies to individual consumers in 13 states, including Texas, Illinois, California, Louisiana, and Florida, which represent nearly three-quarters of the $286.1 million in gross premiums written in 2006. As of September 30, 2007, the company's subsidiaries included five insurance companies licensed to write insurance policies in 40 states, four underwriting agencies and six retail agencies serving 13 states through 230 owned retail stores and 35 franchised retail store locations. The company also acts as an agent for non-affiliated underwriters.
Affirmative's predecessor operations began in 1998, underwriting and selling non-standard* personal automobile insurance directly to the consumer through the Internet and a related call center sales force, and advertised through radio, television and the Internet. Back-office and underwriting operations were outsourced to third-party providers.
After generating substantial losses due to high policy acquisition costs, in December 2000 the company sold a controlling interest in Affirmative to Vesta Insurance Group, Inc. (subsequently increased to 98.1% before the IPO) and hired Thomas E. Mangold, the company's current Chief Executive Officer, to shift the company's distribution channel to retail agencies. In 2001 and 2002, Affirmative acquired six retail and/or underwriting agencies currently operating in eight states, which produced policies for various insurance companies, including Vesta (VTA-NYSE). Through these acquisitions, agency revenues grew to $147.1 million in 2003, from $6.2 million in 2000, and agency pretax income grew to $20.9 million, from a loss of $3.1 million. All premiums during this time were reinsured or retroceded. Therefore, the company's revenues included no premiums earned or risk assumed.
By December 31, 2003, Affirmative acquired its two insurance companies from Vesta, and began underwriting policies. All policies written prior to this time by those operations have been reinsured through an agreement with Vesta, under which Vesta has assumed all reserves and liabilities related to business written prior to January 1,2004.
In July 2004, the company completed an initial public offering of 4,583,000 shares of common stock, during which Vesta sold an additional 3,887,500 shares of common stock, at an initial public offering price of $14 per share. Net proceeds from the offering were $65.3 million. Vesta still holds a roughly 42.6% stake in Affirmative. Following the IPO, A.M. Best upgraded Affirmative's financial strength ratings to B (Very Good), from B (Fair), and assigned issuer credit ratings of "bb-" to Affirmative Insurance Holdings, Inc. and "bbb-" to its insurance companies. However since then the rating has been lowered.
The non-standard market
Non-standard personal automobile insurance policies provide coverage to drivers who find it difficult to obtain insurance from standard insurance companies due to their lack of prior insurance, age, driving record or poor credit record. These policies generally require higher premiums than standard policies for comparable coverage. In general, the nonstandard personal auto market is characterized by higher loss frequency and lower persistency (i.e. policies in force for greater than one year).
The non-standard sector of the personal auto market accounted for 21.3% of the total market in 2002, up from 16.7% in 1995, according to A.M. Best Company. The market has consolidated over the past several years, as smaller, less profitable companies have exited the market, and others have been acquired. The top five players accounted for 58% of total premiums in 2002, led by Progressive, Allstate, State Farm, Berkshire Hathaway and Farmers.