Affirmative Insurance Holdings (AFFM)

PART I

Affirmative Insurance Holdings, Inc., formerly known as Instant Insurance Holdings, Inc., was incorporated in Delaware in June 1998 and completed an initial public offering of its common stock in July 2004. In this report, the terms “Affirmative,” “the Company,” “we,” “us” or “our” mean Affirmative Insurance Holdings, Inc. and all entities included in our consolidated financial statements. We are a distributor and producer of non-standard personal automobile insurance policies and related products and services 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 December 31, 2008, our subsidiaries included insurance companies licensed to write policies in 40 states, underwriting agencies, and retail agencies with 219 owned stores and 33 operating franchise retail store locations and relationships with two unaffiliated underwriting agencies. We are currently active in offering insurance directly to individual consumers through retail stores in 10 states (Louisiana, Texas, Illinois, Alabama, Florida, Missouri, Indiana, South Carolina, Kansas and Wisconsin) including our franchised stores in Florida and distributing our own insurance policies through 8,000 independent agents or brokers in 10 states (Louisiana, Texas, Illinois, California, Michigan, Florida, Missouri, Indiana, South Carolina and New Mexico).

On January 31, 2007, we completed the acquisition of USAgencies L.L.C. (USAgencies), a non-standard automobile insurance distributor and provider headquartered in Baton Rouge, Louisiana, in a fully-financed all cash transaction valued at approximately $199.1 million. At the time of acquisition, USAgencies had two insurance companies, 91 operating retail sales locations in Louisiana, Illinois and Alabama selling its products directly to consumers through its owned retail stores, virtual call center and internet site and a premium finance company. The acquisition gives us a leading market position in Louisiana, the twelfth largest non-standard automobile insurance market. The transaction was effective as of January 1, 2007.

PART I

SIZE="2">Affirmative Insurance Holdings, Inc., formerly known as Instant Insurance Holdings, Inc., was incorporated in Delaware in June 1998 and completed an initial public offering of its common stock in July 2004. In this report, the terms
“Affirmative,” “the Company,” “we,” “us” or “our” mean Affirmative Insurance Holdings, Inc. and all entities included in our consolidated financial statements. We are a distributor and producer of
non-standard personal automobile insurance policies and related products and services 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 December 31, 2008, our
subsidiaries included insurance companies licensed to write policies in 40 states, underwriting agencies, and retail agencies with 219 owned stores and 33 operating franchise retail store locations and relationships with two unaffiliated
underwriting agencies. We are currently active in offering insurance directly to individual consumers through retail stores in 10 states (Louisiana, Texas, Illinois, Alabama, Florida, Missouri, Indiana, South Carolina, Kansas and Wisconsin)
including our franchised stores in Florida and distributing our own insurance policies through 8,000 independent agents or brokers in 10 states (Louisiana, Texas, Illinois, California, Michigan, Florida, Missouri, Indiana, South Carolina and New
Mexico).

On January 31, 2007, we completed the acquisition of USAgencies L.L.C. (USAgencies), a non-standard
automobile insurance distributor and provider headquartered in Baton Rouge, Louisiana, in a fully-financed all cash transaction valued at approximately $199.1 million. At the time of acquisition, USAgencies had two insurance companies, 91 operating
retail sales locations in Louisiana, Illinois and Alabama selling its products directly to consumers through its owned retail stores, virtual call center and internet site and a premium finance company. The acquisition gives us a leading market
position in Louisiana, the twelfth largest non-standard automobile insurance market. The transaction was effective as of January 1, 2007.

FACE="Times New Roman" SIZE="2">Our Operating Structure

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

PART II

PART II

PART III

The information relating to this Item 10 is incorporated by reference to the disclosure in the sections headed “Item 1 — Election of Directors,” “Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance” in the Proxy Statement for our 2009 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2008.

The information relating to this Item 11 is incorporated by reference to the disclosure in the sections headed “Compensation Discussion and Analysis,” “Compensation Committee Report” and “ Executive Compensation” in the Proxy Statement for our 2009 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2008.

The information relating to this Item 12 is incorporated by reference to the disclosure in the sections headed “Equity Compensation Plan Information” and “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement for our 2009 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2008.

PART IV

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Table of Contents

PART III

ALIGN="justify">The information relating to this Item 10 is incorporated by reference to the disclosure in the sections headed “Item 1 — Election of Directors,” “Executive
Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance” in the Proxy Statement for our 2009 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission no later than 120 days after December 31, 2008.

FACE="Times New Roman" SIZE="2">The information relating to this Item 11 is incorporated by reference to the disclosure in the sections headed “Compensation Discussion and Analysis,” “Compensation Committee Report” and
“ Executive Compensation” in the Proxy Statement for our 2009 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2008.

PART IV

PART IV

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PART IV