Securities registered pursuant to Section 12(g) of the Act: Common stock, $0.01 par value per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act: Yes ¨ No x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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.

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of the most recently completed second fiscal quarter (June 30, 2014), based on the price at which the common equity was last sold on such date ($2.60): $13,032,167

Indicate the number of shares outstanding of each of the registrant’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 March 25, 2015 was 16,155,357.

Certain information called for by Part III of this Form 10-K is incorporated by reference to certain sections of the Proxy Statement for the 2015 Annual Meeting of our stockholders, which will be filed with the Securities and Exchange Commission no later than 120 days from December 31, 2014.

Affirmative Insurance Holdings, Inc. is a provider of non-standard personal automobile insurance policies for individual consumers in targeted geographic markets. We were incorporated in Delaware in June 1998 and completed an initial public offering of our 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.

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.

Our subsidiaries include insurance companies licensed to write insurance policies in 39 states, two underwriting agencies and a service company. We are party to an agreement with an unaffiliated underwriting agency that distributes our policies in the state of California. We also distribute and service non-standard insurance policies underwritten by a Texas county mutual insurance company. Prior to the sale of our retail agency distribution business on September 30, 2013, we also provided premium financing services and distributed third-party insurance products and services. We are currently distributing insurance policies through approximately 5,000 independent agents or brokers including the retail agency stores sold on September 30, 2013. We currently operate in seven states (Louisiana, Texas, California, Alabama, Illinois, Indiana and Missouri). We discontinued writing business in South Carolina in 2012.

Our operating structure consists of insurance companies that possess the regulatory authority and capital necessary to issue insurance policies and underwriting agencies that supply centralized infrastructure and personnel required to design and service insurance policies.

Our insurance products. We issue non-standard personal automobile insurance policies through our insurance company subsidiaries and a relationship with a Texas county mutual insurance company. Our insurance companies possess the certificates of authority and capital necessary to transact insurance business and issue policies, but they rely on both our underwriting agencies and unaffiliated underwriting agency to design, distribute and service those policies.

Our non-standard personal automobile insurance policies, which generally are issued for the minimum limits of liability coverage mandated by state laws, provide coverage to drivers who find it difficult to obtain insurance from standard insurance companies due to a number of factors, including lack of prior coverage, failure to maintain continuous coverage, age, prior accidents, driving violations, type of vehicle or limited financial resources. We believe that the majority of customers who purchase our non-standard personal automobile insurance policies do not qualify for standard policies because of financial reasons, such as the failure to maintain continuous coverage or the lack of flexible payment options in the standard market. In general, customers in the non-standard market have higher average premiums for a comparable amount of coverage than customers who qualify for the standard market resulting from an increase in the frequency of loss costs and transaction expenses, which is partially offset by the lower severity of losses resulting from lower limits of coverage.

We offer a wide range of coverage options to meet our policyholders’ needs. We offer both liability-only policies, as well as full coverage policies, which include first-party coverage for the insured’s vehicle. Our liability-only policies generally include:

The liability-only policies may also include personal injury protection coverage and/or medical payment coverage, depending on state statutes. These policies provide coverage for injuries without regard to fault, as well as uninsured/underinsured motorist coverage.

In addition to our liability-only coverage, the full coverage policies we sell include:

Full coverage policies may also include optional coverages such as towing, rental reimbursement and special equipment.

Our policies are designed to be priced to allow us to achieve our targeted underwriting margin while at the same time meeting our customers’ needs for low down payments and flexible payment plans. We offer a variety of policy terms ranging from one month to one year. Our policy processing systems enable us to offer a variety of payment plans while minimizing the potential credit risk of uncollectible premiums. We may offer discounts for such items as proof of having purchased automobile insurance within a prescribed prior time period, maintaining homeowners’ insurance, or owning a vehicle with safety features or anti-theft equipment. In certain markets, we may also surcharge the customer for traffic violations and accidents, among other things.

In Texas, we distribute non-standard insurance policies underwritten by a county mutual insurance company. Prior to 2013, this business was assumed by one of our insurance subsidiaries. Beginning in 2013, we received commission income for producing this business which was assumed by a third-party reinsurance company.

We distribute insurance policies through an established network of independent agencies and an unaffiliated underwriting agency. As at December 31, 2014, gross premiums managed were distributed through the following:

Former retail agencies. On September 30, 2013, we sold our retail agency distribution business to a third-party, which is now our largest independent agency relationship. In addition to selling our insurance policies to customers, the former retail agency distribution business also sold third-party insurance policies as well as complimentary and ancillary insurance products. Retail revenue generated from third-parties prior to the September 30, 2013 transaction is included in commission and fees revenue in our consolidated financial statements.

Other independent agencies. Other independent agencies sell insurance policies managed by our underwriting agencies to individual customers. Our ability to develop strong and mutually beneficial relationships with independent agencies is important to the success of our distribution strategy. We believe that strong product positioning and high service standards are key to independent agency loyalty. We foster our independent agency relationships by providing them our agency software applications designed to strengthen and expand their sales and service capabilities for our products. These software applications provide independent agencies with the ability to service their customers’ accounts and access their own commission information. We maintain strict and high standards for call answering and abandonment rate service levels in our customer service call centers. We believe the level and array of services that we offer to independent agencies creates value in their businesses.

Our underwriting agencies’ centralized marketing department is responsible for managing our relationships with independent agencies. This department is split into two key areas, promotion and service. The promotion function includes prospecting and establishing independent agency relationships, initial contracting and appointment of independent agencies, establishing initial independent agency production goals and implementing market penetration strategies. The service function includes training independent agencies to sell our products and supporting their sales efforts, ongoing monitoring of independent agency performance to ensure compliance with our production and profitability standards and paying independent agency commissions.

Unaffiliated underwriting agency. We also issue insurance policies that are designed, distributed and serviced by an unaffiliated underwriting agency. We issue insurance policies sold through this unaffiliated underwriting agency with established customer bases in order to capture business in markets other than those targeted by our own underwriting agencies. In these instances, we collect fees to compensate us both for the use of our certificates of authority to transact insurance business in selected markets, as well as for assuming the risk that the unaffiliated underwriting agency will continuously and effectively administer these policies.

We believe that our insurance product management approach to risk analysis and segmentation is a driving factor in maximizing underwriting performance. We employ an insurance product management approach that requires the extensive involvement of product managers with the direct oversight of rate-level structure by our most senior managers. Our product managers are experienced insurance professionals with backgrounds in the major functional areas of the insurance business — accounting, actuarial, claims, information technology, operations, pricing, product development and underwriting. Our product managers have experience in the non-standard personal automobile insurance market, enabling them to develop products to meet the distinctive needs of non-standard customers.

Our product managers work with our actuaries who provide them with profitability and rate assessments. These actuarial evaluations are combined with economic and business modeling information and competitive intelligence monitored by our product managers to be proactive in making appropriate revisions and enhancements to our rate levels, product structures and underwriting guidelines. As part of our pricing and product management process, pricing and underwriting guidelines and policy attributes are developed by our product managers for each of the products that we administer and products underwritten by our insurance companies through underwriting agencies. These metrics are monitored on a weekly, monthly and quarterly basis to determine if there are deviations from expected results for each product. Based on the review of these metrics, our product managers make revisions and enhancements to products to help assure that our underwriting profit targets are being attained.

We believe that the analysis of competitive intelligence is a critical element of understanding the performance of our products and our position in markets. Although we put more weight on our own product experience and performance data, we gain insights into our markets, our customers, our agents and trends in the business by monitoring changes made by our competitors. We routinely analyze changes made by competitors to understand the rate and product adjustments they are making, and we routinely compare and rank our rates against those of our competitors to understand our market position.

We believe that effective claims management is critical to our success. Our claims vision is to deliver an accurate settlement at the earliest possible time in the claims cycle in an efficient and cost effective manner. We strive to pay the right amount on every claim consistent with our contractual obligations and legal responsibilities. Our measures and behaviors are geared toward a holistic claims quality process which focuses on the outcome of the claim. We are customer focused and deliver on the promise of the insurance contract by providing prompt and fair claims handling, meeting expectations, and proactively keeping customers informed on the status of their claim.

Claims are handled directly by our employees for the insurance policies we distribute. Our primary claims operations are located in Addison, Texas and Baton Rouge, Louisiana.

We have staff appraisers positioned throughout our markets where we have sufficient market penetration. Through the utilization of well-trained field appraisal personnel, we are able to maintain tighter control of the vehicle repair process, thereby reducing the amount we pay for repairs, storage costs and auto rental costs. We have a national centralized claims unit which manages first notice of loss, salvage, subrogation and special investigations. We have an aligned audit and control function responsible to ensure compliance with our claims standards and ensure consistent claims handling throughout the organization. We defend litigation by employing staff counsel for those areas in which there is a sufficient volume of claims to make staff counsel economical and using outside counsel where it is not.

Automobile accidents generally result in insurance companies paying settlements resulting from physical damage to an automobile or other property and injury to a person. Because our insureds and claimants typically notify us within a short time frame after an accident has occurred, our ultimate liability for losses and loss adjustment expenses on our policies generally emerges in a relatively short period of time. In some cases, however, the period of time between the occurrence of an insured event and the final settlement of a claim may be several months or years, and during this period it often becomes necessary to adjust the loss reserve estimates either upward or downward.

We record loss reserves to cover our estimated ultimate liability for reported and incurred but not reported losses under insurance policies that we write and for losses and loss adjustment expenses relating to the investigation and settlement of claims. We estimate liabilities for the cost of losses and loss adjustment expenses for both reported and unreported claims based on historical trends adjusted for changes in loss costs, underwriting standards, policy provisions and other factors. Estimating the liability for unpaid losses and loss adjustment expenses is inherently a matter of judgment and is influenced by factors that are subject to significant variation. We monitor items such as the effect of inflation on medical, hospitalization, material repair and replacement costs, general economic trends and the legal environment. While the ultimate liability may be higher or lower than recorded loss

reserves, the loss reserves for personal auto coverage can be established with a greater degree of certainty in a shorter period of time than that associated with many other property and casualty coverages which, due to the nature of the coverage being provided, take a longer period of time to establish a similar level of certainty.

We may selectively utilize the reinsurance markets to increase our underwriting capacity and to reduce our exposure to losses. Reinsurance refers to an arrangement in which a reinsurer agrees in a contract to assume specified risks written by an insurance company, commonly referred to as the “ceding” company, by paying the insurance company all or a portion of the insurance company’s losses arising under specified classes of insurance policies. Generally, we cede premium and losses to reinsurers under quota-share reinsurance arrangements, pursuant to which our reinsurers agree to assume a specified percentage of our losses in exchange for a corresponding portion of the policy premiums we receive.

Although our reinsurers are liable for loss to the extent of the coverage they assume, our reinsurance contracts do not discharge our insurance company subsidiaries from primary liability for the full amount of policies issued. In order to mitigate the credit risk of reinsurance companies, we select financially strong reinsurers with an A.M. Best rating of “A-” or better and continue to evaluate their financial condition. We also utilize trust funds and letters of credit to collateralize the reinsurer’s obligation to us when appropriate.

The non-standard personal automobile insurance business is highly competitive and, except for regulatory considerations, there are relatively few barriers to entry. We compete based on factors such as price, coverages offered, availability of flexible down payment arrangements and billing plans, customer service, claims handling and agent commission. We compete with other insurance companies that sell non-standard personal automobile insurance policies through independent agencies as well as with insurance companies that sell such policies directly to their customers. The independent agencies that sell our insurance products compete both with these direct writers and with other independent agencies. Therefore, our competitors are not only large national insurance companies, but also smaller regional insurance companies and independent agencies that operate in a specific region or single state in which we operate. As of December 31, 2014, the top ten non-standard insurance companies accounted for 74.1% of direct premiums earned in the $25.1 billion market segment.

The non-standard personal automobile insurance industry historically has been cyclical in nature, characterized by periods of severe price competition and excess underwriting capacity followed by periods of high premium rates and shortages of underwriting capacity. These fluctuations in the non-standard personal automobile insurance business cycle may negatively impact our profitability.

Some of our competitors have substantially greater financial and other resources and may offer a broader range of products or competing products at lower prices. In addition, existing competitors may attempt to increase market share by lowering rates and new competitors may enter this market, particularly larger insurance companies that do not presently write non-standard personal automobile insurance in our markets. As a result, we may experience a reduction in our underwriting margins or sales of our insurance policies may decrease as individuals purchase lower-priced products from other insurance companies. A loss of business to competitors offering similar insurance products at lower prices or having other competitive advantages would negatively affect our revenues and net income.

We are subject to comprehensive regulation and supervision by government agencies in Illinois, Louisiana, Michigan and New York, the states in which our insurance company subsidiaries are domiciled, as well as in the states where we sell insurance products, issue policies and handle claims. Certain states impose restrictions or require prior regulatory approval of certain corporate actions, which may adversely affect our ability to operate, innovate, obtain necessary rate adjustments in a timely manner or grow our business profitably. These regulations provide safeguards for policy owners and are not intended to protect the interests of stockholders. Our ability to comply with these laws and regulations, and to obtain necessary regulatory action in a timely manner, is and will continue to be critical to our success.

Required licensing. We operate under licenses issued by various state insurance authorities. These licenses govern, among other things, the types of insurance coverage and agency and claim services that we may offer consumers in these states. Such licenses typically are issued only after we file an appropriate application and satisfy prescribed criteria. We must apply for and obtain the appropriate new licenses before we can implement any plan to expand into a new state or offer a new line of insurance or other new product that requires separate licensing.

Transactions between insurance companies and their affiliates. We are a holding company and are subject to regulation in the jurisdictions in which our insurance company subsidiaries conduct business. The insurance laws in those states provide that all transactions among members of an insurance holding company system must be fair and reasonable. Transactions between our

insurance company subsidiaries and their affiliates generally must be disclosed to state regulators and prior regulatory approval generally is required before any material or extraordinary transaction may be consummated or any management agreement, services agreement, expense sharing arrangement or other contract providing for the rendering of services on a regular, systematic basis is entered into. State regulators may refuse to approve or delay approval of such a transaction, which may impact our ability to innovate or operate efficiently.

Regulation of insurance rates and approval of policy forms. The insurance laws of most states in which our insurance subsidiaries operate require insurance companies to file insurance rate schedules and insurance policy forms for review and approval. State insurance regulators have broad discretion in judging whether our rates are adequate, not excessive and not unfairly discriminatory and whether our policy forms comply with law. The speed at which we can change our rates depends, in part, on the method by which the applicable state’s rating laws are administered. Generally, state insurance regulators have the authority to disapprove our rates or requested changes in our rates.

Restrictions on cancellation, non-renewal or withdrawal. Many states have laws and regulations that limit an insurance company’s ability to exit or significantly reduce its writings in a market. For example, certain states limit an automobile insurance company’s ability to cancel or not renew policies. Some states prohibit an insurance company from withdrawing from one or more lines of business in the state, except pursuant to a plan approved by the state insurance department. In some states, this applies to reductions of anything greater than 50% in the amount of insurance written, not just to a complete withdrawal. The state insurance department may disapprove a plan that may lead to market disruption.

Investment restrictions. We are subject to state laws and regulations that require diversification of our investment portfolios and that limit the amount of investments in certain categories. Failure to comply with these laws and regulations would cause non-conforming investments to be treated as non-admitted assets for purposes of measuring statutory surplus and, in some instances, would require divestiture.

Capital requirements. 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 December 31, 2014, three of our insurance subsidiaries maintained a risk-based capital level that was in excess of an amount that would require any corrective actions. The risk-based capital level of Affirmative Insurance Company (AIC) triggered a regulatory action level event under the NAIC standard. As a result, AIC is required to submit a plan to the Illinois Department of Insurance (IDOI) in April 2015 detailing corrective actions it will take to return its risk-based capital ratio to an acceptable level. Upon receipt of the plan, the IDOI may accept the plan, require further amendments to the plan or take additional regulatory action including, but not limited to, placing AIC in receivership.

State departments of insurance financial strength requirements. 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. At December 31, 2014, our Illinois domiciled insurance subsidiary maintained sufficient qualifying assets to satisfy this requirement.

IRIS Ratios. The NAIC Insurance Regulatory Information System (IRIS) is part of a collection of analytical tools designed to provide state insurance regulators with an integrated approach to screening and analyzing the financial condition of insurance companies operating in their respective states. IRIS is intended to assist state insurance regulators in targeting resources to those insurers in greatest need of regulatory attention. IRIS consists of two phases: statistical and analytical. In the statistical phase, the NAIC database generates key financial ratio results based on financial information obtained from insurers’ annual statutory statements. The analytical phase is a review of the annual statements, financial ratios and other automated solvency tools. The primary goal of the analytical phase is to identify companies that appear to require immediate regulatory attention. A ratio result falling outside the usual range of IRIS ratios is not considered a failing result; rather, unusual values are viewed as part of the regulatory early monitoring system. Furthermore, in some years, it may not be unusual for financially sound companies to have several ratios with results outside the usual ranges. An insurance company may fall outside of the usual range for one or more ratios because of specific transactions that are in themselves not significant.

As of December 31, 2014, our insurance subsidiary, Affirmative Insurance Company (AIC) had twelve ratios outside the usual ranges.

Regulation of dividends. We are a holding company with no business operations of our own. Consequently, our ability to pay dividends to stockholders and meet our debt payment obligations is largely dependent on dividends or other payments from our operating subsidiaries, which include our agency subsidiaries and our insurance company subsidiaries. State insurance laws restrict the ability of our insurance company subsidiaries to declare stockholder dividends. Our insurance companies 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 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 that, together with other distributions made within the preceding 12 months, exceeds the greater of 10% 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.

Generally, the net admitted assets of insurance companies that, subject to other applicable insurance laws and regulations, are available for transfer to the parent company cannot include the net admitted assets required to meet the minimum statutory surplus requirements of the states where the companies are licensed.

Acquisition of control. The acquisition of control of our insurance company subsidiaries requires the prior approval of their applicable insurance regulators. Generally, any person who directly or indirectly through one or more affiliates acquires 10% or more of the outstanding securities of an insurance company or its parent company is presumed to have acquired control of the insurance company. In addition, certain state insurance laws contain provisions that require pre-acquisition notification to state agencies of a change in control with respect to a non-domestic insurance company licensed to do business in that state. While such pre-acquisition notification statutes do not authorize the state agency to disapprove the change of control, such statutes do authorize certain remedies, including the issuance of a cease and desist order with respect to the non-domestic insurer if certain conditions exist, such as undue market concentration. Such approval requirements may deter, delay or prevent certain transactions affecting the ownership of our common stock.

Shared or residual markets. Like other insurance companies, we are required to participate in mandatory shared market mechanisms or state pooling arrangements as a condition for maintaining our automobile insurance licenses to do business in various states. The purpose of these state-mandated arrangements is to provide insurance coverage to individuals who, because of poor driving records or other underwriting reasons, are unable to purchase such coverage voluntarily provided by private insurers. These risks can be assigned to all insurers licensed in the state and the maximum volume of such risks that any one insurance company may be assigned typically is proportional to that insurance company’s annual premium volume in that state. The underwriting results of this mandatory business traditionally have been unprofitable. The amount of premiums we might be required to assume in a given state in connection with an involuntary arrangement may be reduced because of credits we may receive for non-standard personal automobile insurance policies that we write voluntarily.

Guaranty funds. Under state insurance guaranty fund laws, insurance companies doing business in a state can be assessed for certain obligations of insolvent insurance companies to policyholders and claimants. Maximum contributions required by laws in any one year vary between 1% and 2% of annual written premiums in that state, but it is possible that caps on such contributions could be raised if there are numerous or large insolvencies. In most states, guaranty fund assessments are recoverable either through future policy surcharges or offsets to state premium tax liability.

Privacy Regulations. The Gramm-Leach-Bliley Act protects consumers from the unauthorized dissemination of certain personal information. The majority of states have implemented additional regulations to address privacy issues. These laws and regulations apply to all financial institutions, including insurance and finance companies, and require us to maintain appropriate procedures for managing and protecting certain personal information of our customers and to fully disclose our privacy practices to our customers.

Trade practices. The manner in which we conduct the business of insurance is regulated in an effort to prohibit practices that constitute unfair methods of competition or unfair or deceptive acts or practices. Prohibited practices include disseminating false information or advertising; defamation; boycotting, coercion and intimidation; false statements or entries; unfair discrimination; rebating; improper tie-ins with lenders and the extension of credit; failure to maintain proper records; improper use of proprietary information; sliding, packaging or other deceptive sales conduct; failure to maintain proper complaint handling procedures; and making false statements in connection with insurance applications for the purpose of obtaining a fee, commission or other benefit. We set business conduct policies for our employees and we require them, among other things, to conduct their activities in compliance with these statutes.

Unfair claims practices. Generally, insurance companies, adjusting companies and individual claims adjusters are prohibited by state statutes from engaging in unfair claims practices on a flagrant basis or with such frequency to indicate a general business practice. Unfair claims practices include:

We set business conduct policies and conduct training to make our employee-adjusters and other claims personnel aware of these prohibitions and we require them to conduct their activities in compliance with these statutes.

Licensing of agents and adjusters. Generally, individuals who sell, solicit or negotiate insurance, such as our independent agents, are required to be licensed by the state in which they work for the applicable line or lines of insurance they offer. Agents generally must renew their licenses annually and complete a certain number of hours of continuing education. In certain states in which we operate, insurance claims adjusters are also required to be licensed and some must fulfill annual continuing education requirements.

Financial reporting. We are required to file quarterly and annual financial reports with states using statutory accounting practices that are different from U.S. generally accepted accounting principles (GAAP), which reflect our insurance company subsidiaries on a going concern basis. The statutory accounting practices used by state regulators, in keeping with the intent to assure policyholder protection, are generally based on a liquidation concept. For a summary of significant differences for our insurance companies between statutory accounting practices and GAAP, see Note 3 of Notes to Consolidated Financial Statements contained in Item 8 of this report.

Periodic financial and market conduct examinations. The state insurance departments that have jurisdiction over our insurance company subsidiaries may conduct on-site visits and examinations of the insurance companies’ affairs, especially as to their financial condition, ability to fulfill their obligations to policyholders, market conduct, claims practices and compliance with other laws and applicable regulations. Typically, these examinations are conducted every three to five years. In addition, if circumstances dictate, regulators are authorized to conduct special or target examinations of insurance companies to address particular concerns or issues. The results of these examinations can give rise to regulatory orders requiring remedial, injunctive or other corrective action on the part of the company that is the subject of the examination or assessing fines or other penalties against that company.

Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are made available free of charge through the “SEC Filings” link within the Investor Relations section of our website at www.affirmative.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the U.S. Securities and Exchange Commission.

There is Substantial Doubt About the Company’s Ability to Continue as a Going Concern.

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.

The Company incurred losses from operations over the last six years, including an operating loss of $31.0 million for the year ended December 31, 2014. Losses over this period were primarily due to underwriting losses, significant revenue declines, expenses declining less than the amount of revenue declines, and goodwill impairments. The losses from operations were the result of significant new business written in 2012 and 2013, prior pricing issues in some states in which the Company has taken significant pricing and underwriting actions to address profitability, losses from states that the Company has exited, such as Florida and Michigan, and goodwill impairment charges as a result of such losses.

The senior secured and subordinated credit facilities contain quarterly debt covenants that set forth, among other things, minimum risk-based capital requirements for the Company’s insurance subsidiaries as well as minimum cash flow requirements for the Company’s non-regulated businesses. The credit facilities have been amended to waive compliance with the risk-based capital measurement requirement as of December 31, 2014 and as of March 31, 2015, and to postpone the principal payment of $3.5 million due March 31, 2015 to June 30, 2015. Except for the minimum risk-based capital requirement for which the Company obtained a waiver, the Company was in compliance with these covenants as of December 31, 2014. However, it is probable the Company will not meet certain of these covenants in future periods. If the Company is unable to achieve compliance with the covenants or obtain a forbearance or waiver of any non-compliance or amend the agreements to change such covenants, the lenders could declare all amounts outstanding under the facilities to be immediately due and payable. Even if the Company is compliant with the covenants or, if not compliant, obtains additional forbearance or waivers from its lenders, there is still substantial uncertainty that the Company will be able to refinance or extend the maturity of the senior secured facility when it becomes due in March 2016. If the Company’s lenders declare the amounts outstanding to be immediately due and payable or if the Company is unable to refinance or extend the maturity of the senior secured credit facility when it becomes due, it would have a material adverse effect on the Company’s operations and the Company’s creditors and stockholders.

The Company’s insurance 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, or NAIC, require insurance companies to report their results of risk-based capital calculations to state departments of insurance and the NAIC. At December 31, 2014, the risk-based capital level of Affirmative Insurance Company (AIC) triggered a regulatory action level event under the NAIC standard. As a result, AIC is required to submit a plan to the Illinois Department of Insurance (IDOI) in April 2015 detailing corrective actions it will take to return its risk-based capital ratio to an acceptable level. Upon receipt of the plan, the IDOI may accept the plan, require further amendments to the plan or take additional regulatory action including, but not limited to, placing AIC in receivership. Such additional regulatory action by the Illinois Department of Insurance would have a material adverse effect on the Company’s operations and the interest of its creditors and stockholders. Such additional regulatory action by the Illinois Department of Insurance also would trigger a further event of default under the Company’s senior secured credit facility and subordinated credit facility allowing the Company’s lenders to declare all amounts outstanding under the facilities to be immediately due and payable, and if such amounts were declared immediately due and payable by the lenders, it would have a material adverse effect on the Company’s operations and the interests of its creditors and stockholders.

The Company has taken and will continue to pursue appropriate actions to improve the underwriting results. The Company is also pursuing various other actions to address these issues. However, there can be no assurance that these actions will be effective.

The Company’s recent history of recurring losses from operations, its failure to comply with certain financial covenants in its senior secured and subordinated credit facilities, its need to meet debt repayment requirements and its failure to comply with the Illinois Department of Insurance minimum risk-based capital requirements raise substantial doubt 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 of this uncertainty on the recoverability or classification of recorded asset amounts or the amounts or classification of liabilities.

Disruptions in the overall economy and the financial markets may adversely impact our business and results of operations.

The insurance industry can be affected by many macroeconomic factors, including changes in national, regional, and local economic conditions, employment levels and consumer spending patterns. Disruptions in the overall economy and financial markets could reduce consumer confidence in the economy and adversely affect consumers’ ability to purchase automobile insurance policies from us, which could be harmful to our financial position and results of operations, adversely affect our ability to comply with our covenants under our credit facilities. Such declines may also, in addition to negatively impacting our operating results, adversely

impact our overall financial condition, liquidity, credit rating, ability to access capital markets, and ability to retain and attract key employees. There can be no assurances that government responses to the recent disruptions in the financial markets will restore consumer confidence, stabilize the markets or increase liquidity and the availability of credit.

Our largest stockholder controls a significant percentage of our common stock and its interests may conflict with those of our other stockholders.

New Affirmative LLC (New Affirmative) beneficially owns 48.7% of our outstanding common stock. As a result, New Affirmative exercises significant influence over matters requiring stockholder approval, including the election of directors, changes to our charter documents and significant corporate transactions. This concentration of ownership makes it unlikely that any other holder or group of holders of our common stock will be able to affect the way we are managed or the direction of our business. The interests of New Affirmative with respect to matters potentially or actually involving or affecting us, such as future acquisitions, financings and other corporate opportunities and attempts to acquire us, may conflict with the interests of our other stockholders. New Affirmative’s continued concentrated ownership may have the effect of delaying or preventing a change of control of us, including transactions in which stockholders might otherwise receive a premium for their shares over then current market prices.

The market for trading our common stock may become unstable or cease to exist, which would adversely affect the market price and liquidity of our common stock.

In 2012, our common stock was delisted from the NASDAQ Global Select Market. Our common stock is now traded exclusively in the over-the-counter market. We cannot predict the actions of market makers, investors or other market participants, and can offer no assurances that the market for our common stock will remain stable. If there is no active trading market in our common stock, the market price and liquidity of our common stock will be adversely affected.

Future issuances or sales of our common stock, including under our equity incentive plan or in connection with future acquisition activities, may adversely affect our common stock price.

As of the date of this filing, we had an aggregate of 56,050,780 shares of our common stock authorized but unissued and not reserved for specific purposes. In general, we may issue all of these shares without any action or approval by our stockholders. We have reserved 3,000,000 shares of our common stock for issuance under our equity incentive plan, of which 1,904,806 shares are issuable upon vesting and exercise of options granted as of the date of this filing, including exercisable options of 1,250,000 as of the date of this filing. In addition, we may pursue acquisitions of competitors and related businesses and may issue shares of our common stock in connection with these acquisitions. Sales or issuances of a substantial number of shares of common stock, or the perception that such sales could occur, could adversely affect prevailing market prices of our common stock, and any sale or issuance of our common stock will dilute the percentage ownership held by our stockholders.

New Affirmative, our largest stockholder, beneficially owns 48.7% of our common stock. New Affirmative has certain demand and piggyback registration rights with respect to the shares of our common stock it beneficially owns. Sales of a substantial number of shares of common stock by our largest stockholder, New Affirmative, or the perception that such sales could occur, could adversely affect prevailing market prices of our common stock.

Because of our significant concentration in non-standard personal automobile insurance and in a limited number of states, our profitability may be adversely affected by negative developments and cyclical changes in the industry or negative developments in these states.

Substantially all of our gross written premiums and our commission income and fees are generated from sales of non-standard personal automobile insurance policies. As a result of our concentration in this line of business, negative developments in the business, economic, competitive or regulatory conditions affecting the non-standard personal automobile insurance industry could have a negative effect on our profitability and would have a more pronounced effect on us as compared to more diversified companies. Examples of such negative developments would be increasing trends in automobile repair costs, automobile parts costs, used car prices and medical care expenses, increased regulation, as well as increased litigation of claims and higher levels of fraudulent claims. All of these events can result in reduced profitability.

In addition, the non-standard personal automobile insurance industry historically has been cyclical in nature, characterized by periods of severe price competition and excess underwriting capacity followed by periods of high premium rates and shortages of underwriting capacity. These fluctuations in the non-standard personal automobile insurance business cycle may negatively impact our profitability.

Our financial results may be adversely affected by conditions in the states where our business is concentrated.

Our business is concentrated in a limited number of states. For the year ended December 31, 2014, 34.6% of our gross written premiums managed related to policies issued to customers in Louisiana, 28.7% to customers in Texas, 22.9% to customers in California and 6.9% to customers in Alabama. Our revenues and profitability are therefore subject to prevailing regulatory, legal, economic, demographic, competitive and other conditions in these states. Changes in any of these conditions could make it less attractive for us to do business in these states and could have an adverse effect on our financial results.

The non-standard personal automobile insurance business is highly competitive and, except for regulatory considerations, there are relatively few barriers to entry. Our insurance companies compete with other insurance companies that sell non-standard personal automobile insurance policies through independent agencies as well as with insurance companies that sell such policies directly to their customers. The independent agencies that sell our insurance products compete both with these direct writers and with other independent agencies. Therefore, our competitors are not only large national insurance companies, but also smaller regional insurance companies and independent agencies. Some of our competitors have substantially greater financial and other resources than we have and may offer a broader range of products or competing products at lower prices. In addition, existing competitors may attempt to increase market share by lowering rates and new competitors may enter this market, particularly larger insurance companies that do not presently write non-standard personal automobile insurance. In this environment, we may experience a reduction in our underwriting margins or sales of our insurance policies may decrease as individuals purchase lower-priced products from other insurance companies. A loss of business to competitors offering similar insurance products at lower prices or having other competitive advantages could negatively affect our revenues and net income.

The results of our operations and the financial condition of our insurance companies depend on our ability to underwrite and set premium rates accurately for a wide variety of risks. Rate adequacy is necessary to generate sufficient premiums to pay losses, loss adjustment expenses and underwriting expenses and to earn a profit. In order to price our products accurately, we must collect and properly analyze a substantial amount of data; develop, test and apply appropriate rating formulas; closely monitor and timely recognize changes in trends and project both severity and frequency of losses with reasonable accuracy. Our ability to undertake these efforts successfully, and as a result, price our products accurately, is subject to a number of risks and uncertainties, some of which are outside our control, including:

Consequently, we could under-price risks, which would negatively affect our profit margins, or we could overprice risks, which could reduce our sales volume and competitiveness. In either event, the profitability of our insurance companies could be materially and adversely affected.

If our actual losses and loss adjustment expenses exceed our loss and loss adjustment expense reserves, we will incur additional charges to earnings.

We maintain reserves to cover our estimated ultimate liability for losses and the related loss adjustment expenses for both reported and unreported claims on 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 in multiple markets and other variable factors such as inflation. Due to the inherent uncertainty of estimating reserves, it has been necessary, and will continue to be necessary, to revise estimated future liabilities as reflected in our reserves for claims and related expenses.

We cannot be sure that our ultimate losses and loss adjustment expenses will not materially exceed our reserves. To the extent that our reserves prove to be inadequate in the future, we would be required to increase our reserves for losses and the related loss adjustment expenses and incur a charge to earnings in the subsequent period during which such reserves are increased, which could have a material and adverse impact on our financial condition and results of operations in the subsequent period. In addition, we have a limited history in establishing reserves in certain states, and our reserves for losses and loss adjustment expenses may not necessarily accurately predict future trends in our models to assess these amounts.

We may not be successful in reducing our risk and increasing our underwriting capacity through reinsurance arrangements, which could adversely affect our business, financial condition and results of operations.

We use quota-share reinsurance primarily to increase our underwriting capacity and to reduce our exposure to losses. Quota-share reinsurance is a form of pro rata reinsurance arrangement in which the reinsurer participates in a specified percentage of the premiums and losses on every risk that comes within the scope of the reinsurance agreement in return for a portion of the corresponding premiums. The availability, cost and structure of reinsurance protection is subject to changing market conditions that are outside of our control. In order for these contracts to qualify for reinsurance accounting and thereby provide the additional underwriting capacity that we might need, the reinsurer generally must assume significant risk and have a reasonable possibility of a significant loss. Reinsurance may not be continuously available to us to the same extent and on the same terms and rates that are currently available.

Although the reinsurer is liable to us to the extent we transfer, or “cede,” risk to the reinsurer, we remain ultimately liable to the policyholder on all risks reinsured. As a result, ceded reinsurance arrangements do not limit our ultimate obligations to policyholders to pay claims. We are subject to credit risks with respect to the financial strength of our reinsurers. The reinsurers for our quota-share and excess of loss reinsurance agreements all have A- or better ratings from A.M. Best. When appropriate, we obtain irrevocable letters of credit or require the reinsurer to establish trust funds to secure their obligations to us. Accordingly, we believe there is minimal credit risk related to these reinsurance receivables.

We are also subject to the risk that our reinsurers may dispute their obligations to pay our claims. As a result, we may not recover claims made to our reinsurers in a timely manner, if at all. In addition, if insurance departments deem that under our existing or future reinsurance contracts the reinsurer does not assume significant risk and does not have a reasonable possibility of significant loss, we may not be able to increase our ability to write business based on this reinsurance. Any of these events could have a material adverse effect on our business, financial condition and results of operations.

We may incur significant losses if any of our reinsurers do not pay our claims in a timely manner.

Although our reinsurers are liable to us to the extent we transfer risk to the reinsurers, we remain ultimately liable to our policyholders on all risks reinsured. Consequently, if any of our reinsurers cannot pay their reinsurance obligations, or dispute these obligations, we remain liable to pay the claims of our policyholders. In addition, our reinsurance agreements are subject to specified contractual limits on the amounts and types of losses covered, and we do not have reinsurance coverage to the extent our losses exceed those limits or are not of the type reinsured. If any of our reinsurers are unable or unwilling to pay amounts they owe us in a timely fashion, we could suffer a significant loss, which would have a material adverse effect on our business, financial condition and results of operations.

As of December 31, 2014, we had a $9.3 million net recoverable from Vesta Fire Insurance Corporation (VFIC). We have, with the approval of the VFIC Special Deputy Receiver and the District Court, Austin, Texas, withdrawn $9.0 million from the trust securing our reinsurance recoverables from VFIC, which represented 100% of the amount we paid in losses as of the date of the withdrawal covered by the VFIC reinsurance. In March 2015, we received a notice of determination from the VFIC Special Deputy Receiver on multiple proofs of claim for an aggregate amount of $15.3 million for various reinsurance balances with VFIC. As part of the notice of determination, we entered into a settlement agreement and release with the VFIC Special Deputy Receiver. We expect to receive the $15.3 million in settlement proceeds by May 2015.

We are subject to comprehensive regulation that may restrict our ability to earn profits.

We are subject to comprehensive regulation and supervision by government agencies in the states in which our insurance company subsidiaries are domiciled, as well as in the states where our subsidiaries sell insurance products, issue policies and handle claims. Certain states impose restrictions or require prior regulatory approval of certain corporate actions, which may adversely affect our ability to operate, innovate, obtain necessary rate adjustments in a timely manner or grow our business profitably. These regulations provide safeguards for policy owners and are not intended to protect the interests of stockholders. Our ability to comply with these laws and regulations at reasonable expense and to obtain necessary regulatory actions or approvals in a timely manner is and will continue to be critical to our success.

Compliance with laws and regulations addressing these and other issues often will result in increased administrative costs. In addition, these laws and regulations may limit our ability to underwrite and price risks accurately, prevent us from obtaining timely rate increases necessary to cover increased costs and may restrict our ability to discontinue unprofitable relationships or exit unprofitable markets. These results, in turn, may adversely affect our profitability or our ability to grow our business in certain jurisdictions. The failure to comply with these laws and regulations may also result in actions by regulators, fines and penalties, and in extreme cases, revocation of our ability to do business in that jurisdiction. In addition, we may face individual and class action lawsuits by our insureds and other parties for alleged violations of certain of these laws or regulations.

Regulation may become more extensive in the future, which may adversely affect our business.

We cannot assure that states will not make existing insurance-related laws and regulations more restrictive in the future or enact new restrictive laws. New or more restrictive regulation in any state in which we conduct business could make it more expensive for us to conduct our business, restrict the premiums we are able to charge or otherwise change the way we do business. In such events, we may seek to reduce our writings in, or to withdraw entirely from these states. In addition, from time to time, the United States Congress and certain federal agencies, including the recently created Federal Insurance Office, investigate the current condition of the insurance industry to determine whether federal regulation is necessary. We are unable to predict whether and to what extent new laws and regulations that would affect our business will be adopted in the future, the timing of any such adoption and what effects, if any, they may have on our operations, profitability and financial condition.

New pricing, claims, coverage and financing issues and class action litigation are continually emerging in the automobile insurance industry, and these issues could adversely impact our revenues or our methods of doing business.

As automobile insurance industry practices and regulatory, judicial and consumer conditions change, unexpected and unintended issues related to claims, coverages, business practices and premium financing plans may emerge. These issues can have an

adverse effect on our business by changing the way we price our products, by extending coverage beyond our underwriting intent, or by increasing the size of claims. Examples of such issues include:

The effects and costs of these and other unforeseen issues could negatively affect our revenues, income or our methods of business.

Our insurance companies are subject to minimum capital and surplus requirements, and our failure to meet these requirements could subject us to regulatory action.

Our insurance companies 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, or NAIC, require our insurance companies to report their results of risk-based capital calculations to state departments of insurance and the NAIC. These risk-based capital standards provide for different levels of regulatory attention depending upon the ratio of an insurance company’s total adjusted capital, as calculated in accordance with NAIC guidelines, to its authorized control level risk-based capital and trend test. Authorized control level risk-based capital is the number determined by applying the NAIC’s risk-based capital formula, which measures the minimum amount of capital that an insurance company needs to support its overall business operations.

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. Additionally, certain contractual agreements to which we are a party, including our senior and subordinated credit facility agreements, require us to achieve or maintain certain risk-based capital ratios. Failure to achieve or maintain such risk-based capital ratios may result in a default or breach or prevent us from obtaining certain benefits under such agreements. Any changes in existing risk-based capital requirements or minimum statutory capital requirements may require us to increase our statutory capital levels. At December 31, 2014, three of our insurance subsidiaries maintained a risk-based capital level that was in excess of an amount that would require any corrective actions. The risk-based capital level of Affirmative Insurance Company (AIC) triggered a regulatory action level event under the NAIC standard. As a result, AIC is required to submit a plan to the Illinois Department of Insurance (IDOI) in April 2015 detailing corrective actions it will take to return its risk-based capital ratio to an acceptable level. Upon receipt of the plan, the IDOI may accept the plan, require further amendments to the plan or take additional regulatory action including, but not limited to, placing AIC in receivership.

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.

Our failure to pay claims accurately could adversely affect our business, financial results and capital requirements.

We must accurately evaluate and pay claims that are made under our policies. Many factors affect our ability to pay claims accurately, including the training and experience of our claims representatives, the culture of our claims organization and the effectiveness of our management, our ability to develop or select and implement appropriate procedures and systems to support our claims functions and other factors. Our failure to pay claims accurately could lead to material litigation or regulatory scrutiny, undermine our reputation in the marketplace, impair our image, as a result, and negatively affect our financial results.

In addition, if we do not train new claims employees effectively or if we lose a significant number of experienced claims employees, our claims department’s ability to handle an increasing workload as we grow could be adversely affected. In addition to

potentially requiring that growth be slowed in the affected markets, we could suffer decreased quality of claims work, which in turn could lower our operating margins.

If we are unable to retain and recruit qualified personnel, our ability to implement our business strategies could be hindered.

Our success depends in part on our ability to attract and retain qualified personnel. Our inability to recruit and retain qualified personnel could prevent us from fully implementing our business strategies and could materially and adversely affect our business, growth and profitability. We maintain key person insurance for our chief executive officer.

Our underwriting operations are vulnerable to a reduction in the amount of business written by independent agencies.

On September 30, 2013, we sold our affiliated retail agency distribution business to a third-party, which is now our largest independent agency relationship. A significant amount of our gross written premiums are produced by independent agencies. Consequently, our business depends in part on the marketing efforts of independent agencies and on our ability to offer insurance products and services that meet the requirements of these independent agencies and their customers. Independent agencies are not obligated to sell or promote our products, and since many of our competitors rely significantly on the independent agency market, we must compete with other insurance companies and underwriting agencies for independent agencies’ business. Some of our competitors offer a larger variety of products, lower prices for insurance coverage or higher commissions, and we therefore may not be able to continue to attract and retain independent agencies to sell our insurance products. A material reduction in the amount of business our independent agencies sell would negatively impact our revenues.

We face litigation, which if decided adversely to us, could adversely impact our financial results.

We are a party in a number of lawsuits. These lawsuits are described more fully elsewhere in this report. Litigation, by its very nature, is unpredictable and the outcome of these cases is uncertain. The precise nature of the relief that may be sought or granted in any lawsuits is uncertain and may, if these lawsuits are determined adversely to us, negatively impact our earnings.

In addition, potential litigation involving new claim, coverage and business practice issues could adversely affect our business by changing the way we price our products, extending coverage beyond our underwriting intent or increasing the size of claims. The effects of these and other unforeseen emerging claims, coverage and business practice issues could negatively impact our profitability or our methods of doing business.

Adverse securities market conditions can have a significant and negative impact on our investment portfolio.

Our results of operations depend in part on the performance of our invested assets. As of December 31, 2014, our investment portfolio was primarily invested in fixed-income securities. Certain risks are inherent in connection with fixed maturity securities including loss upon default and price volatility in reaction to changes in interest rates and general market factors. In general, the fair value of a portfolio of fixed-income securities increases or decreases inversely with changes in the 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. We attempt to mitigate this risk by investing in securities with varied maturity dates, so that only a portion of the portfolio will mature at any point in time. Furthermore, actual net investment income and/or cash flows from investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, may differ from those anticipated at the time of investment as a result of interest rate fluctuations. An investment has prepayment risk when there is a risk that the timing of cash flows that result from the repayment of principal might occur earlier than anticipated because of declining interest rates or later than anticipated because of rising interest rates. If market interest rates were to change 1.0% (for example, the difference between 5.0% and 6.0%), the fair value of our fixed-income securities would change approximately $0.8 million. The change in fair value was determined using duration modeling assuming no prepayments.

If we are unable to make required payments or refinance our debt as it matures, it could have an adverse impact on our business and overall liquidity.

In 2013, we entered into a $40.0 million senior secured credit facility (senior facility) and a $10.0 million subordinated secured credit facility (subordinated facility). The senior facility matures on March 30, 2016, and the subordinated facility matures on March 30, 2017. The principal amount of the senior facility is payable in quarterly installments, and we are also required to make certain annual principal payments calculated based on our financial performance. Additionally, certain events, such as receipt of contingent proceeds from the sale of our retail business, the sale of other material assets, or the issuance of new equity, may necessitate additional required principal payments. After we have discharged all obligations under the senior facility, we will incur similar required payment obligations under the subordinated facility. We made $6.5 million and $5.0 million in principal payments under our senior facility during 2014 and 2013, respectively.

Our obligations under the senior facility and subordinated facility are guaranteed by our material operating subsidiaries (other than our insurance companies) and are secured by first and second lien security interests on all of our assets and the assets of our material operating subsidiaries (other than our insurance companies), including a pledge of 100% of the stock of AIC.

In February 2012, we exercised our 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. Accumulated deferred interest will be due and payable at the expiration of the extension period.

If we are unable to make required payments under the senior facility, subordinated facility and notes payable, or if we are unable to payoff, refinance or extend the maturity of our credit facilities when they mature, it would have a material adverse effect on our operations and on our creditors and stockholders.

We are subject to a number of restrictive debt covenants under our credit facilities that may restrict our business and financing activities.

Our credit facilities contain restrictive debt covenants that, among other things, restrict our ability to:

Our credit facilities also require us to meet certain financial tests, and our need to meet the requirements of these financial tests may limit our ability to expand or pursue our business strategies. If we are unable to maintain compliance with our debt covenants, it would have a material adverse effect on our operations and on our creditors and stockholders.

We rely on our information technology and telecommunications systems, and the failure of these systems could disrupt our operations.

Our business is highly dependent upon the successful and uninterrupted functioning of our current information technology and telecommunications systems as well as our recently implemented integrated policy and claims system. We rely on these systems to process new and renewal business, provide customer service, make claims payments and facilitate collections and cancellations, as well as to perform actuarial and other analytical functions necessary for pricing and product development. As a result, the failure of these systems could interrupt our operations and adversely affect our financial results. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such service exceeds capacity or such third-party systems fail or experience interruptions. If sustained or repeated, a system failure or service denial could result in a deterioration of our ability to write and process new and renewal business and provide customer service or compromise our ability to pay claims in a timely manner. This could result in a material adverse effect on our business.

We may experience difficulties in transitioning to new or upgraded systems, including loss of data and decreases in productivity until personnel become familiar with new systems. In addition, our management information systems will require modification and refinement as we grow and as our business needs change, which could prolong difficulties we experience with systems transitions, and we may not always employ the most effective systems for our purposes. If we experience difficulties in implementing new or upgraded information systems or experience significant system failures, or if we are unable to successfully modify our management information systems and respond to changes in our business needs, our operating results could be harmed or we may fail to meet our reporting obligations.

Because we rely on information technology and telecommunications systems to operate our business, and we store large amounts of data, including personal information regarding our customers, a loss of data or security breach involving those systems could expose us or our customers to a risk of loss or misuse of such information, adversely affect our operating results, result in litigation or potential liability, or otherwise harm our business. Additionally, we rely on third parties and their information technology systems to provide services associated with certain aspects of our business. Although we have implemented systems and processes designed to protect personal information regarding our customers and prevent data loss and other security breaches, such measures cannot provide absolute security.

Severe weather conditions and other catastrophes may result in an increase in the number and amount of claims filed against us.

Our business is exposed to the risk of severe weather conditions and other catastrophic events, such as rainstorms, snowstorms, hail and ice storms, hurricanes, tornadoes, earthquakes, fires and other events such as explosions, terrorist attacks and riots. The incidence and severity of catastrophes and severe weather conditions are inherently unpredictable. Such conditions generally result in higher incidence of automobile accidents and an increase in the number of claims filed, as well as the amount of compensation sought by claimants.

As a holding company, we are dependent on the results of operations of our operating subsidiaries to meet our obligations.

We are organized as a holding company, a legal entity separate and distinct from our operating subsidiaries. As a holding company without significant operations of our own, we are dependent upon dividends and other payments from our operating subsidiaries, which include our agency subsidiaries and our insurance company subsidiaries.

State insurance laws restrict the ability of our insurance company subsidiaries to declare stockholder dividends. These subsidiaries may not issue 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 December 31, 2014, 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, our non-insurance company subsidiaries provide adequate cash flow to fund their own operations.

As of December 31, 2014, we leased an aggregate of 160,420 square feet of office space in various locations throughout the United States. These leased properties included the following:

We subleased an aggregate of 65,532 square feet of office space comprising of 38,341 square feet of the common building in Burr Ridge effective November 2012 through November 2016, 23,188 square feet of the common building in Baton Rouge effective November 2014 through December 2019 and 4,003 square feet of office space in Chicago effective October 2014 through July 2016.

In Baton Rouge, Louisiana, we own a building of approximately 177,469 square feet for investment purposes. The building is under a lease agreement with a federal agency. The lease expires on November 16, 2020. However, the federal agency may terminate the lease, in whole or in part, on or after December 17, 2015 by giving at least one hundred twenty days’ written notice.

We believe that our properties have been adequately maintained, are in generally good condition and are suitable for our business as presently conducted. We believe our existing facilities sufficiently provide for both our present and presently anticipated needs. We also believe that, with respect to leased properties, upon the expiration of our current leases, we will be able to either secure renewal terms or enter into leases for alternative locations on acceptable market terms.

We and our subsidiaries are named from time to time as parties in various legal actions arising in the ordinary course of our business and arising out of or related to claims made in connection with our insurance policies and claims handling. We believe that the resolution of these legal actions will not have a material adverse effect on our consolidated financial position or results of operations. However, the ultimate outcome of these matters is uncertain.

On October 21, 2014, Affirmative Insurance Company (AIC) filed a complaint for breach of contract and declaratory judgment in the U.S. District Court for the District of South Carolina, styled Affirmative Insurance Company v. Travis K. Williams, et al., Case No. 5:14-CV-4087-JMC. The lawsuit arises out of AIC’s defense of its insured who was involved in a fatal automobile accident in November 2007. Plaintiffs in the underlying lawsuits have threatened bad faith litigation against AIC based on their belief that they will obtain an excess judgment against AIC’s insured in the future. AIC believes the allegation of bad faith lacks merit and intends to defend itself vigorously should an excess verdict be obtained and a bad faith action pursued. Further, AIC asserts that its insured breached the insurance policy by, among other things, failing to cooperate in the defense of the underlying lawsuit and entering into competing settlement negotiations with plaintiffs in the underlying lawsuit. AIC seeks a finding that defendants breached the insurance policy, a declaration that AIC has no duty to defend or indemnify the insured in the underlying lawsuits, and a declaration that AIC has not acted in bad faith under South Carolina law. On December 2, 2014, defendants filed a motion to dismiss, which is fully briefed and awaiting decision. No accurate estimate of the range of potential loss nor an assessment of the likelihood of unfavorable outcome can be made at this time.

Our common stock is traded on the over-the-counter market under the symbol AFFM. Prior to being delisted on June 25, 2012, our common stock traded on the NASDAQ Global Select Market under the symbol AFFM. The following table sets forth, for the periods indicated, the high, low and closing sales prices for our common stock as reported on the OTC Market and the NASDAQ Global Select Market:

On March 25, 2015, the closing sales price of our common stock as reported by the OTC Market was $0.95 per share, there were 16,155,357 shares of our common stock issued and outstanding and there were 10 known holders of record of our common stock and approximately 600 beneficial owners.

The declaration and payment of dividends is subject to the discretion of our board of directors and will depend on our financial condition, results of operations, cash requirements, future prospects, regulatory and contractual restrictions on the payment of dividends by our subsidiaries, and other factors deemed relevant by our board of directors. Under the terms of the senior secured credit facility, effective September 2013, dividend payments are restricted. No dividends were paid in 2014, 2013 or 2012. There is no requirement that we must, and we cannot assure that we will, declare and pay any dividends in the future. Our board of directors may determine to retain such capital for repayment of indebtedness, general corporate or other purposes. For a discussion of our cash resources and needs, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Liquidity and Capital Resources”.

We are a holding company and a legal entity separate and distinct from our operating subsidiaries. As a holding company without significant operations of our own, our principal sources of funds are dividends and other payments from our operating subsidiaries. The ability of our insurance subsidiaries to pay dividends is subject to limits under insurance laws of the states in which they are domiciled. Furthermore, there are no restrictions on payment of dividends from our administrative and consumer products subsidiaries, other than typical state corporation law requirements.

We are a provider 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 December 31, 2014, our subsidiaries included insurance companies licensed to write insurance policies in 39 states, two underwriting agencies and a service company. We are also party to an agreement with an unaffiliated underwriting agency that distributes our policies in the state of California. We distribute and service non-standard insurance policies underwritten by a Texas county mutual insurance company. Prior to the sale of our retail agency distribution business on September 30, 2013, we also provided premium financing services and distributed third-party insurance products and services. We are currently distributing insurance policies through approximately 5,000 independent agents or brokers including the retail agency stores sold on September 30, 2013. We currently operate in seven states (Louisiana, Texas, California, Alabama, Illinois, Indiana and Missouri). We discontinued writing business in South Carolina in 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.

We incurred losses from operations over the last six years, including an operating loss of $31.0 million for the year ended December 31, 2014. Losses over this period were primarily due to underwriting losses, significant revenue declines, expenses declining less than the amount of revenue declines, and goodwill impairments. The losses from operations were the result of significant new business written in 2012 and 2013, prior pricing issues in some states in which we have taken significant pricing and underwriting actions to address profitability, losses from states that we have exited, such as Florida and Michigan, and goodwill impairment charges as a result of such losses.

The senior secured and subordinated credit facilities contain quarterly debt covenants that set forth, among other things, minimum risk-based capital requirements for our insurance subsidiaries as well as minimum cash flow requirements for our non-regulated businesses. The credit facilities have been amended to waive compliance with the risk-based capital measurement requirement as of December 31, 2014 and as of March 31, 2015, and to postpone the principal payment of $3.5 million due March 31, 2015 to June 30, 2015. Except for the minimum risk-based capital requirement for which we obtained a waiver, we were in compliance with these covenants as of December 31, 2014. However, it is probable we will not meet certain of these covenants in future periods. If we are unable to achieve compliance with the covenants or obtain a forbearance or waiver of any non-compliance or amend the agreements to change such covenants, the lenders could declare all amounts outstanding under the facilities to be immediately due and payable. Even if we were compliant with the covenants or, if not compliant, obtain additional forbearance or waivers from our lenders, there is still substantial uncertainty that we will be able to refinance or extend the maturity of the senior secured facility when it becomes due in March 2016. If our lenders declare the amounts outstanding to be immediately due and payable or if we were unable to refinance or extend the maturity of the senior secured credit facility when it becomes due, it would have a material adverse effect on our operations and our creditors and stockholders.

Our insurance 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, or NAIC, require insurance companies to report their results of risk-based capital calculations to state departments of insurance and the NAIC. At December 31, 2014, the risk-based capital level of Affirmative Insurance Company (AIC) triggered a regulatory action level event under the NAIC standard. As a result, AIC is required to submit a plan to the Illinois Department of Insurance (IDOI) in April 2015 detailing corrective actions it will take to return its risk-based capital ratio to an acceptable level. Upon receipt of the plan, the IDOI may accept the plan, require further amendments to the plan or take additional regulatory action including, but not limited to, placing AIC in receivership. Such additional regulatory action by the Illinois Department of Insurance would have a material adverse effect on our operations and the interest of our creditors and stockholders. Such additional regulatory action by the Illinois Department of Insurance also would trigger a further event of default under our senior secured credit facility and subordinated credit facility allowing our lenders to declare all amounts outstanding under the facilities to be immediately due and payable, and if such amounts were declared immediately due and payable by the lenders, it would have a material adverse effect on our operations and the interests of our creditors and stockholders.

We have taken and will continue to pursue appropriate actions to improve the underwriting result. We are also pursuing various other actions to address these issues. However, there can be no assurance that these actions will be effective.

Our recent history of recurring losses from operations, our failure to comply with certain financial covenants in our senior secured and subordinated credit facilities, our need to meet debt repayment requirements and our failure to comply with the Illinois Department of Insurance minimum risk-based capital requirements raise substantial doubt about the Company’s ability to continue as a going concern.

The preparation of our consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires us to make estimates and assumptions when applying our accounting policies. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. Our critical accounting policies are described below. For a detailed discussion on the application of these and other accounting policies, see Note 3 of Notes to Consolidated Financial Statements which appears in Item 8 of this Annual Report.

Reserving for unpaid losses and loss adjustment expenses. On a quarterly basis at the end of each financial reporting period, we record management’s best estimate of our overall reserve for both current and prior accident years. The amount recorded represents the remaining amount we expect to pay for all covered losses, including case reserves, reserves for unreported losses, and supplemental development on losses with reserves as of the statement date, as well as the amount we expect to pay for all claim settlement expenses. The overall reserve estimate for loss and loss adjustment expenses (LAE) is the difference between management’s best estimate of the ultimate loss and LAE and the paid loss and LAE through the current financial statement date. Management’s best estimate consists of separate estimates for loss, defense and cost containment expenses, and adjusting and other expenses.

We estimate loss and LAE reserves by using detailed statistical analyses and judgment, including adjustments for internal or external variables that may affect our loss exposure. The underlying methods require using estimates and informed judgment. As a result the loss and LAE reserve estimation process is inherently uncertain. We use the following generally accepted actuarial loss and LAE reserving methods in our analysis:

We consider multiple internal and external factors as part of evaluating the reasonability of the methods and selecting management’s best estimates. Many of these factors vary by state, coverage, program, and time period. Some examples of internal factors include: changes to product mix, changes to claims-handling practices, changes to coverage or products, or changes to underwriting rules. External factors include: frequency trends, severity trends, changes to state-mandated minimum limits, medical inflation, inflation in repair or replacement costs, general economic trends, and changes to the legislative environment.

We monitor the actual emergence of loss and LAE data and compare it to the expected emergence implied by our central point estimates. Differences in these are part of our considerations for whether it’s appropriate to modify our assumptions for developing loss and LAE reserve estimates.

We review loss reserve adequacy quarterly by accident year, state, program, and coverage. We adjust carried reserves as we learn additional information, and reflect these adjustments in our current year operations.

The range of potential ultimate values for any accident year diminishes with the age of the accident year. Recent accident years tend to have wider ranges of potential values because claims may still be emerging and injuries may still be unknown. As accident years age, the number of open claims decreases, injury specifics become clear, and the ranges of potential values narrow.

There can be no assurance that actual future loss and LAE development, or variability in loss and LAE, will be consistent with the development or variability in our historical loss and LAE experience. We expect that the final outcome for a given accident year will be within the range of estimates if development emerges normally.

Reinsurance recoverable on paid and incurred losses. We record the amounts we expect to receive from reinsurers as an asset on our balance sheet. Our insurance companies report as assets the estimated reinsurance recoverable on paid losses and unpaid losses, including an estimate for losses incurred but not reported. These amounts are estimated based on our interpretation of each reinsurer’s obligations pursuant to the individual reinsurance contracts between us and each reinsurer, as well as judgments we make regarding the financial viability of each reinsurer and its ability to pay us what is owed under the reinsurance contract.

We routinely monitor the collectability of the reinsurance recoverables of our insurance companies to determine if an amount is potentially uncollectible. Our evaluation is based on periodic reviews of our aged recoverables, as well as our assessment of recoverables due from reinsurers known to be in financial difficulty. When appropriate, we obtain irrevocable letters of credit or require the reinsurer to establish trust funds to secure their obligations to us. All significant reinsurers are currently rated A- or better by A. M. Best excluding the run-off business reinsured by Vesta Fire Insurance Company (VFIC). Our estimates and judgment about collectability of the recoverables and the financial condition of reinsurers can change, and these changes can affect the level of reserve required.

At December 31, 2014, our receivables from reinsurers included $9.3 million net recoverable from VFIC. At December 31, 2014, the VFIC Trust held $16.6 million to collateralize the $9.3 million net recoverable from VFIC. We have, with the approval of the VFIC Special Deputy Receiver and the District Court, Austin, Texas, withdrawn $9.0 million through December 31, 2014 from the trust securing our reinsurance recoverables from VFIC, which represented 100% of the amount we paid in losses as of the date of the withdrawal covered by the VFIC reinsurance. In March 2015, we received a notice of determination from the VFIC Special Deputy Receiver on multiple proofs of claim for an aggregate amount of $15.3 million for various reinsurance balances with VFIC. As part of the notice of determination, we entered into a settlement agreement and release with the VFIC Special Deputy Receiver. We expect to receive the $15.3 million in settlement proceeds by May 2015.

As of December 31, 2014 and 2013, we had no reserve for uncollectible reinsurance recoverables. We assessed the collectability of our year-end receivables and believe all amounts are collectible based on currently available information.

Valuation of available-for-sale investments. Our available-for-sale investment securities are recorded at fair value, which is typically based on publicly-available quoted prices. When quoted market prices in active markets are unavailable, we determine fair value based on independent external valuation sources. From time to time, the carrying value of our investments may be temporarily impaired because of the inherent volatility of publicly-traded investments. We do not adjust the carrying value of any investment unless management determines that the impairment of an investment’s value is other than temporary.

We conduct regular reviews to assess whether our investments are impaired and if any impairment is other than temporary. Factors considered by us in assessing whether an impairment is other than temporary include the credit quality of the investment, the duration of the impairment, our ability and intent to hold the investment until recovery or maturity and overall economic conditions. An other-than-temporary impairment is 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 (loss), a component of stockholders’ equity (deficit). All impairments on our available-for-

sale investment securities were considered temporary in nature as of December 31, 2014 and 2013, respectively. Accordingly, unrealized losses are recorded in other comprehensive income (loss) on our consolidated balance sheet.

Gains and losses realized on the disposition of investment securities are determined on the specific-identification basis and credited or charged to income. Premium and discount on investment securities are amortized and accreted using the interest method and charged or credited to investment income.

Deferred acquisition costs. Deferred acquisition costs represent the deferral of expenses that we incur in the successful acquisition of new business or renewing existing business. Policy acquisition costs (primarily commissions, premium taxes, net of ceding commission income, related to the successful issuance of a policy) are deferred and charged against income ratably over the terms of the related policies. Management regularly reviews the categories of acquisition costs that are deferred and assesses the recoverability of this asset. A premium deficiency and a corresponding charge to income is recognized if the sum of the expected losses and loss adjustment expenses, unamortized acquisition costs and maintenance costs exceeds related unearned premiums and anticipated investment income. At December 31, 2014 and 2013, there were no premium deficiencies. Judgments as to the ultimate recoverability of such deferred costs are highly dependent upon estimated future loss costs associated with unearned premiums.

Income taxes. Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities, and the valuation allowance recorded against net deferred tax assets. The process involves summarizing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. In addition, we assess whether valuation allowances should be established against deferred tax assets based on consideration of all available evidence using a “more likely than not” standard. To the extent a valuation allowance is established in a period, an expense must be recorded within the income tax provision in the consolidated statement of operations. We carry a full valuation allowance as of December 31, 2014 and 2013 that was initially established in 2009.

If sufficient positive evidence arises in the future indicating that all or a portion of the deferred tax assets meet the more likely than not standard, the valuation allowance would be reversed accordingly in the period that such a conclusion is reached, which would materially impact our financial position and results of operations in a favorable manner.

Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers issued in May 2014 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition and most industry-specific guidance. Insurance contracts have been excluded from the scope of the guidance, which is effective for fiscal years beginning after December 15, 2016. We do not expect the adoption of this standard to have a material impact on our consolidated financial position, results of operations, or cash flows.

Accounting Standards Update (ASU) No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern issued in August 2014 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. Specifically, this ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. The amendments are effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. We do not expect the adoption of this standard to have a material impact on our consolidated financial position, results of operations, or cash flows.

On September 30, 2013, we sold our retail agency distribution business to Confie Seguros (Confie). Our retail agency distribution business consisted of 195 retail locations in Louisiana, Alabama, Texas, Illinois, Indiana, Missouri, Kansas, South Carolina and Wisconsin and two premium finance companies (the retail business). Proceeds from the sale were $101.9 million in cash with the potential to receive an additional $20.0 million of cash proceeds. The initial cash proceeds included a working capital adjustment of $1.9 million that was received in 2013 and $20.0 million placed in an escrow account. The funds held in escrow were available, dependent upon the quarterly risk-based capital status of Affirmative Insurance Company (AIC), to be utilized to either infuse capital into AIC or pay down debt. As of the first risk-based measurement date of September 30, 2013, AIC met the risk-based capital target and in November 2013, $5.0 million was released from the escrow account and was used to pay down the senior secured credit facility. As of December 31, 2013, AIC met the risk-based capital target and in April 2014, an additional $5.0 million was released from the escrow account and was used to pay down the senior secured credit facility. In March 2014, the purchase agreement was amended to eliminate the measurement of risk-based capital as of March 31, 2014. In June 2014, the remaining $10.0 million in the escrow account was utilized to infuse capital into AIC.

The additional $20.0 million of proceeds may be used to pay down debt or infuse capital into Affirmative Insurance Company (AIC). The additional proceeds are contingent on AIC meeting certain risk-based capital thresholds and maintaining the obligations of the distribution agreement. The risk-based capital measurement begun as of June 30, 2014 for up to $10.0 million of additional proceeds and the remaining balance up to $20.0 million can be achieved on any following quarterly measurement date through December 31, 2015. These contingent proceeds will be recognized as risk-based capital measurement thresholds are achieved. In September 2014, $10.0 million of additional proceeds were received of which, $9.9 million was used to infuse capital into AIC and $0.1 million was used to pay down the senior secured credit facility.

In connection with the sale of the retail business, we also entered into a distribution agreement pursuant to which the purchaser will continue to produce insurance business for our insurance subsidiaries at least until the earlier of December 15, 2015, or when Confie’s obligation to pay the contingent proceeds pursuant to the purchase agreement is discharged. Among other things, the distribution agreement sets forth the terms and conditions under which Confie will produce insurance business for the Company after the closing and includes terms designed to preserve the volume of business produced by the retail business for the Company as of the closing. In turn, the distribution agreement obligates our insurance subsidiaries to maintain reinsurance and their underwriting capacity in the markets where the retail business operates for the duration of the distribution agreement, including certain restrictions on increasing fees and rates beyond certain thresholds without Confie’s consent. Additionally, Confie will continue to provide premium financing capability for the Company’s policies, including for business written through other independent agencies in certain markets, and the parties will share equally in any increased profits from premium financing other independent agency business during the term of the distribution agreement. Due to the Company’s significant continuing involvement as the underwriter for business produced by the retail agency distribution business and the ongoing premium finance arrangements, the operating activities of the retail agency distribution are not reflected as discontinued operations.

We realized a pretax gain on the sale of $10.0 million and $65.0 million for the years ended December 31, 2014 and 2013, respectively. The Company’s consolidated results of operations as of December 31, 2013 include the retail business’s results of operations through the date of the sale, September 30, 2013.

We are a provider of non-standard personal automobile insurance policies for individual consumers in targeted geographic markets. Prior to the sale of our retail agency distribution business on September 30, 2013, we also provided premium financing services and third-party insurance products and services. 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. On September 30, 2013, we sold our retail agency distribution business to a third-party, which is now our largest independent agency relationship. In addition to selling our insurance policies to customers, the former retail agency distribution business also sold third-party insurance policies as well as complimentary and ancillary insurance products. Retail revenue generated from third-parties prior to the September 30, 2013 transaction is included in commission and fees revenue in our consolidated financial statements.

Our ability to develop strong and mutually beneficial relationships with independent agencies is important to the success of our distribution strategy. We believe that strong product positioning and high service standards are key to independent agency loyalty. We foster our independent agency relationships by providing them our agency software applications designed to strengthen and expand their sales and service capabilities for our products. These software applications provide independent agencies with the ability to service their customers’ accounts and access their own commission information. We maintain strict and high standards for call answering and abandonment rate service levels in our customer service call centers. We believe the level and array of services that we offer to independent agencies creates value in their businesses.

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

Total gross written premiums managed for 2014 increased $17.8 million, or 5.2% compared with 2013. The increase was primarily due to an increase in renewal policies as well as pricing increases taken over the last year. The growth in renewal policies was primarily caused by the significant increase in new policies that began in the second half of 2012 and continued through the majority of 2013. In December 2014, we voluntarily stopped writing new business for independent agents, other than our former retail agents, in Illinois, Indiana and Missouri. Additionally, new policies declined in the state of California in February 2015. As a result of this decline in new policies, we expect the growth of total written premium managed to diminish in 2015. The growth in renewal policies is important to our business as those policies historically have a significantly lower loss ratio than new business policies.

Total gross written premiums managed for 2013 increased $103.4 million, or 43.6%, compared with 2012. This increase was primarily due to an increase in new business policies generated in Texas and California. We believe this growth in Texas and California was due to a number of competitors that had been aggressive on pricing in the past either exiting the marketplace or reducing their writings significantly. Historically, we assumed premiums from a Texas county mutual insurance company (the county mutual) whereby we assumed 100% of the policies issued by the county mutual for business produced by our owned general agents. The county mutual did not retain any of this business and there were no loss limits other than the underlying policy limits. The assumed reinsurance agreement was terminated on January 1, 2013 on a cut-off basis and the third-party reinsurance company that we had quota-share agreements with since September 2011 was assuming 100% of the business originated through the county mutual. However, we continue to manage the business as a general agent. Unearned premium of $11.8 million was returned to the Texas county mutual as of January 1, 2013 related to the termination of the reinsurance agreement.

In our other independent agency distribution channel, gross written premiums managed for 2014 increased $9.0 million, or 7.3% compared with 2013 and gross written premiums for 2013 increased $53.7 million, or 77.0%, compared with 2012. We believe the increases were primarily due to a reduction in competition from companies that were aggressive in pricing.

Gross written premiums managed by our unaffiliated underwriting agency for 2014 increased $8.2 million, or 11.1%, compared with 2013 and gross written premiums managed by our unaffiliated underwriting agency for 2013 increased $56.0 million, or 315.0%, compared with 2012. We believe the increases were primarily due to a reduction in competition from companies that were aggressive on pricing.

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

Net Premiums Written. The following table reflects the premiums ceded and assumed under reinsurance agreements in our consolidated financial statements (in thousands):

Total net premiums written for 2014 decreased $26.9 million, or 20.9%, compared with 2013. The decrease was primarily due to changes in the amount of quota-share reinsurance, which was partially offset by the growth in direct premiums written. Net premiums written was impacted by the termination of the March 2013 quota-share reinsurance contract on January 1, 2014 with the return of $47.2 million in unearned premiums and the termination of the December 2013 quota-share reinsurance contract on June 30, 2014 with the return of $51.7 million in unearned premiums. Offsetting this increase was the new reinsurance agreement entered into on June 30, 2014 to cede 85% of business written in our five largest states.

Total net premiums written for 2013 decreased $41.9 million, or 24.6%, compared with 2012. The decrease was due to an increase in reinsurance. Net written premium was impacted by the 40% quota-share reinsurance contract that was effective March 31, 2013 with the initial cession of $27.2 million unearned premiums, the amendment ceding an additional 40% effective June 30, 2013, ceding additional $24.4 million of unearned premium, and impacted by the termination of a reinsurance agreement with a county mutual that was terminated on January 1, 2013, which reduced gross written premiums by $11.8 million.

Reinsurance. In 2011, we entered into a 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 $82.0 million during the year ended December 31, 2012, and this agreement was extended under the same terms through March 31, 2013 and terminated on a cutoff basis as of April 1, 2013. Upon termination, we recorded $27.2 million of returned premium, net of $7.7 million of deferred ceding commissions. Written premiums under this agreement during 2013 represented a return of previously ceded premiums totaling $5.5 million. Written premiums ceded under this agreement totaled $99.3 million. This agreement was commuted in March 2015.

In 2013, we entered into a new quota-share agreement with the same third-party reinsurance company effective March 31, 2013, under which we ceded 40% for the same four states as the expiring agreement. This agreement was amended effective June 30, 2013, under which we ceded an additional 40% for the same four states for the remainder of 2013. This agreement was further amended to provide a $10.0 million reduction in ceded premiums in the fourth quarter. Written premiums ceded under this agreement totaled $145.8 million during the year ended December 31, 2013. This agreement terminated on January 1, 2014, resulting in the return of $47.2 million unearned premiums, net of $13.9 million of ceding commissions. Written premiums ceded under the agreement totaled $98.6 million.

Effective December 31, 2013, we entered into a reinsurance agreement with four third-party reinsurance companies. Under this agreement, we ceded 20% of premiums and losses in Alabama, Illinois, Louisiana and Texas, and 60% in California on policies in force on December 31, 2013 or written or renewed on and after that date. Written premiums ceded under this agreement totaled $22.2 million as of December 31, 2013. On January 1, 2014, the quota-share rate increased to 60% for all business in force in these same states and for new and renewal business. On June 30, 2014, the reinsurance agreement was terminated, resulting in the return of $51.7 million of unearned premiums, net of $14.5 million of ceding commissions. Written premiums ceded under the agreement totaled $95.9 million. In March 2015, two of the quota share reinsurers commuted their participation on this agreement.

Effective June 30, 2014, a new reinsurance agreement with five third-party reinsurance companies was put in place to cede 85% of all business in force in these same states and for new and renewal business through June 30, 2015. Written premiums ceded under this agreement totaled $201.9 million through December 31, 2014. In March 2015, one of the quota share reinsurers commuted their participation on this agreement, reducing the effective ceding percentage to 50%.

The amount of recoveries pertaining to reinsurance contracts that were deducted from losses and loss adjustment expenses incurred during 2014, 2013 and 2012 was approximately $160.0 million, $80.1 million and $49.8 million, respectively. The amount of loss reserves and unearned premium we would remain liable for in the event our reinsurers are unable to meet their obligations was as follows (in thousands):

The following table summarizes the ceded incurred losses and loss adjustment expenses (consisting of ceded paid losses and loss adjustment expenses and change in reserves for loss and loss adjustment expenses ceded) to various reinsurers (in thousands):

The Michigan Catastrophic Claims Association (MCCA) is the mandatory reinsurance facility that covers no-fault medical losses above a specific retention amount in Michigan. We discontinued writing policies in Michigan in 2011. For policies effective in 2011, the retention amount was $0.5 million. When we wrote personal automobile policies in the state of Michigan, we ceded 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.

Commission Income, Fees and Managing General Agent Revenue. Another measurement of our performance is the relative level of production of fee revenue. Policy origination fees and installment fees compensate us for the costs of policy administration and providing installment payment plans. Policy and installment fees are earned for business managed by our general agencies and must be approved by the applicable state’s department of insurance. Managing general agent revenues are earned for business produced for a Texas county mutual insurance company beginning January 1, 2013. We receive compensation for underwriting services and providing claims handling on the business. Premium finance, commission income, and agency fees represent revenues from the retail agency business prior to being sold on September 30, 2013. Premium finance fees consist of origination and servicing fees as well as interest on premiums that customers choose to finance. Commission income consist of the income earned on sales of unaffiliated, third-party companies’ insurance policies or other products sold by our retail agencies. Agency fees compensated the Company for the costs of policy cancellation, policy rewrite and reinstatement.

The following sets forth the components of consolidated commission income, fees and managing general agent revenue earned for the years ended December 31, 2014, 2013 and 2012 (in thousands):

Commission income, fees and managing general agent revenue for 2014 decreased $34.1 million, or 44.0%, compared with 2013. The decrease was due to the sale of our former retail business in September 2013. Policyholder fees increased $2.1 million, or 5.9%, due to the higher overall volume of premiums written and an increase in California fees. Managing general agent revenue decreased $4.1 million, or 43.3%, compared with the prior year period. Managing general agent revenue is related to the Texas county mutual book of business that we manage, but no longer assume the underwriting risk beginning January 1, 2013. This business has declined as we are writing more of the Texas business within our insurance company.

Commission income, fees and managing general agent revenue for 2013 increased $16.0 million, or 26.1%, compared with 2012. Policyholder fees increased $14.7 million, or 70.8%, due to the higher overall volume of premiums written and a change in mix of states. Managing general agent revenue is related to the Texas county mutual book of business that we manage, but no longer assume the underwriting risk beginning January 1, 2013.

Prior to the sale of our retail agency distribution business, we earned commission income and fees in our retail distribution channel for sales of third-party insurance policies in addition to policies under our management. In 2013, commissions and fees decreased $3.0 million, or 18.8%, due to decreased third-party sales. Commissions and fees for 2012 decreased $0.2 million, or 1.0%, due to a decrease in ancillary product sales. The following represents third-party gross written premiums produced by our former retail agencies (in thousands):

Third-party policies for 2013 decreased $5.9 million, or 12.0%, compared with 2012. Retail premium volume was impacted by the sale of our retail agency distribution business effective September 30, 2013. Third-party policies for 2012 decreased $4.8 million, or 8.8%, compared with 2011.

Premium finance revenue for 2013 decreased $4.8 million, or 22.8%, compared to 2012 due to the sale of the retail business.

Net Investment Income and Other 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 2014 increased $0.3 million, or 10.6%, compared with 2013. The increase was primarily due to an increase in the annualized average investment yield of 7.1% to 1.5% in 2014, compared with 1.4% in 2013. This was partially offset by the 4.6% decrease in total average invested assets to $46.5 million during 2014 from $48.7 million during 2013.

Net investment income for 2013 decreased $0.4 million, or 12.4%, compared with 2012. The decrease was primarily due to a 36.2% decrease in total average invested assets to $48.7 million during 2013 from $76.3 million during 2012. The annualized average investment yield was 1.4% in 2013, compared with 1.9% in 2012.

At December 31, 2014, our fixed-income investments were invested in the following: corporate debt securities 52.2%; U.S. Treasury and government agencies securities 25.0%; certificates of deposit 8.3%; mortgage-backed securities 10.0%; and states and political subdivisions securities 4.5%. The average quality of our portfolio was A- at December 31, 2014. We attempt to mitigate interest rate risk by managing the duration of our fixed-income portfolio to the duration of our reserves. As of December 31, 2014, the effective duration of our fixed-income investment portfolio was 2.5 years.

Our investment strategy is to conservatively manage our investment portfolio by primarily investing in readily marketable, investment-grade, fixed-income securities. We currently do not invest in common equity securities and we have no direct exposure to foreign currency risk. The Investment Committee of our Board of Directors has established investment guidelines and periodically reviews portfolio performance for compliance with our guidelines.

Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses for 2014 decreased $32.1 million, or 21.7%, compared with 2013. Losses and loss adjustment expenses for 2013 increased $36.0 million, or 32.1%, compared with 2012.

In 2014, the percentage of net losses and loss adjustment expense to net premiums earned (the net loss ratio) was 119.2% compared with 89.2% in 2013. The current year included $21.2 million of unfavorable prior period development primarily related to Louisiana, Texas, and California losses from 2013 and 2012, which was primarily due to increases in estimated severity of liability claims. Excluding the prior year development, the current accident year net loss ratio was 97.4% compared with 81.8% in 2013. The use of quota-share reinsurance overstates the net loss ratio. 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. Excluding the impact of the quota-share, the loss ratio for the 2014 accident year was 75.2% and 74.6% for the 2013 accident year. The increase in the current year was due to our increasing of 2014 losses based on the prior period development.

compared with 74.0% in 2012. The use of quota-share reinsurance overstates the net loss ratio. 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. Excluding the impact of the quota-share, the loss ratio for the 2013 accident year was 74.6% and 69.4% for the 2012 accident year. The increase in the current year was primarily due to a significant increase in new business, which tends to have a higher loss ratio than renewal business. 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 2.0% for 2013 and 2012. Both of these numbers are higher than our long term average expectation of 0.5%.

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.

If existing estimates of the ultimate liability for losses and related loss adjustment expenses are lowered, then that favorable development is recognized in the subsequent period in which the reserves are reduced. This has the effect of benefiting that subsequent period, when the aggregate losses and loss adjustment expenses (reflecting the favorable development related to previously reported earned premiums) are reduced relative to that period’s earned premium. Although the favorable development must be included in that subsequent period’s financial statements, it is appropriate for measurement purposes to compare only the losses and loss adjustment expenses related to any specific period’s earned premiums in evaluating performance during that particular period.

The following table provides a reconciliation of the beginning and ending reserves for unpaid losses and loss adjustment expenses (in thousands):

Our losses and loss adjustment expense reserves of $132.8 million on a gross basis and $46.3 million on a net basis are our best estimates as of December 31, 2014. The analysis provided by our internal valuation methods indicated that the expected range for the ultimate liability for our losses and loss adjustment expense reserves, as of December 31, 2014, was between $127.5 million and $152.7 million on a gross basis and between $42.6 million and $56.0 million on a net basis.

The following table presents the development of reserves for unpaid losses and loss adjustment expenses from 2005 through 2014 for our insurance company subsidiaries, net of reinsurance recoveries or recoverables. The first line of the table presents the reserves at December 31 for each indicated year. This represents the estimated amounts of losses and loss adjustment expenses for claims arising in that year and all prior years that are unpaid at the balance sheet date, including losses incurred but not reported to us. The upper portion of the table presents the cumulative amounts subsequently paid as of successive years with respect to those claims. The lower portion of the table presents an update of the estimated amount of the previously recorded reserves based upon the experience as of the end of each succeeding year. The estimates are revised as more information becomes known about the payments, frequency and severity of claims for individual years. A redundancy (deficiency) exists when the reestimated reserves at each December 31 is less (greater) than the prior reserve estimate. The cumulative redundancy (deficiency) depicted in the table, for any particular calendar year, represents the aggregate change in the initial estimates over all subsequent calendar years.

The following table summarizes the development of reserves for unpaid losses and loss adjustment expenses (in thousands):

	2005		2006		2007			2008			2009			2010			2011			2012			2013			2014
Net liability for unpaid losses and LAE:
Originally estimated	$	116,109	$	138,421	$	180,745		$	163,454		$	160,955		$	158,787		$	105,326		$	71,688		$	61,223		$	46,331
Reserve adjustment from acquisition of USAgencies		—		27,810		—			—			—			—			—			—			—			—
Adjusted reserves, net of reinsurance		116,109		166,231		180,745			163,454			160,955			158,787			105,326			71,688			61,223			46,331
Cumulative paid as of December 31,
One year later		62,715		99,235		126,991			118,314			131,474			104,002			78,580			69,556			67,144
Two years later		83,974		131,873		160,754			155,317			157,213			139,023			108,412			88,424
Three years later		94,879		145,652		176,911			164,463			166,837			156,206			118,813
Four years later		100,444		153,103		181,381			167,830			172,169			163,095
Five years later		104,699		155,618		182,830			170,043			174,986
Six years later		105,674		156,224		183,861			171,729
Seven years later		105,963		156,626		184,517
Eight years later		106,221		156,949
Nine years later		106,613
Ten years later
Liability re-estimated as of December 31,
One year later		110,875		161,208		184,470			178,262			189,001			163,887			110,805			83,950			82,435
Two years later		109,193		161,734		195,550			187,370			182,790			169,978			119,777			95,678
Three years later		110,015		168,066		198,643			179,900			179,767			171,267			123,997
Four years later		116,171		169,075		190,450			176,847			180,019			167,999
Five years later		117,353		162,578		188,458			176,871			179,703
Six years later		113,860		160,890		188,491			176,158
Seven years later		112,445		160,921		188,280
Eight years later		112,479		160,954
Nine years later		112,592
Ten years later
Net cumulative redundancy/ (deficiency)	$	3,517	$	5,277	$	(7,535	)	$	(12,704	)	$	(18,748	)	$	(9,212	)	$	(18,671	)	$	(23,990	)	$	(21,212	)	N/A

The following table is a reconciliation of our net liability to our gross liability for losses and loss adjustment expenses (in thousands):

	2005		2006		2007			2008			2009			2010		2011			2012			2013			2014
As originally estimated:
Net liability shown above	$	116,109	$	138,421	$	180,745		$	163,454		$	160,955		$	158,787	$	105,326		$	71,688		$	61,223		$	46,331
Add reinsurance recoverable		19,169		21,590		46,854			40,667			32,447			93,084		78,510			67,166			72,366			86,421
Gross liability		135,278		160,011		227,599			204,121			193,403			251,871		183,836			138,854			133,589			132,752
Adjusted for acquisition of USAgencies		—		71,522		—			—			—			—		—			—			—			—
Adjusted gross liability		135,278		231,533		227,599			204,121			193,403			251,871		183,836			138,854			133,589			132,752
As re-estimated as of December 31, 2014:
Net liability shown above		112,592		160,954		188,280			176,158			179,703			167,999		123,997			95,678			82,434
Add reinsurance recoverable		9,630		61,859		41,429			43,728			45,047			67,566		78,592			69,978			79,561
Gross liability		122,223		222,813		229,709			219,886			224,750			235,565		202,589			165,656			161,995
Net cumulative redundancy/ (deficiency)	$	13,055	$	8,720	$	(2,110	)	$	(15,765	)	$	(31,347	)	$	16,306	$	(18,753	)	$	(26,802	)	$	(28,406	)

The adverse prior period development recognized in 2014, 2013, 2012 and 2011 was primarily due to an increase in the estimated severity for Louisiana, Texas and/or California liability claims as well as growth, starting in 2013, of new business which typically has a higher loss ratio than renewal business. The gross cumulative redundancy in 2010 was primarily due to a reduction of Michigan case reserves for 2010 due to revised estimates of losses.

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 former 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 for 2014 decreased by $46.9 million, or 47.0%, compared to 2013. A decrease of $25.9 million resulted from the sale of the retail business which, in the prior year period, accounted for $15.6 million in personnel costs and $10.3 million in overhead costs such as rent, advertising, postage and other expenses. Excluding the impact of the direct costs of the retail operations, SG&A expenses decreased $21.0 million, or 28.0%, compared with the 2013 due to the decrease of $7.1 million in professional fees, $6.5 million in bad debt allowance reversal, $3.7 million in personnel costs, and $3.7 million in other overhead costs due to management actions to reduce expenses.

Selling, general and administrative expenses for 2013 increased $3.7 million, or 3.8%, compared with 2012, primarily due to a $26.8 million increase in policy acquisition expenses due to the increase in gross written premiums. This was partially offset by a $7.0 million decline in employee compensation and benefits, $6.7 million decline in professional fees, $4.2 million decline in advertising costs and $5.3 million in other overhead costs due to management actions to reduce expenses and the departure of employees with the sale of the retail business.

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):

Additions to deferred acquisition costs in 2014 increased by $5.3 million, and additions to the related amortization increased by $5.7 million compared with 2013. The increase in additions is primarily due to the increase in policy acquisition expenses incurred for independent agents due to the increase in premiums written as well as the increase in policy acquisition costs of our former retail business which previously was eliminated in the consolidated financial statements. This increase is partially offset by the increase of $15.5 million of deferred acquisition costs ceded to our reinsurers.

Additions to deferred acquisition costs in 2013 decreased by $10.9 million, and additions to the related amortization decreased by $3.3 million compared with 2012. The decrease in additions is primarily due to the increase of $13.1 million of deferred acquisition costs ceded to our reinsurers, partially offset by the policy acquisition expenses incurred for independent agents due to the increase in premiums written as well as the increase in policy acquisition costs in the fourth quarter of our former retail business which previously was eliminated in the consolidated financial statements.

Net expenses, defined as the sum of selling, general and administrative expenses and depreciation and amortization less commission income, fees and managing general agent revenue, as a percentage of net premiums earned (the net expense ratio) decreased to 15.8% in 2014 compared with 17.7% in 2013. The decrease was primarily due a 47.0% decrease in selling, general and administrative expenses, a 44.0% decrease in commission income, fees and managing general agent revenue, and a 15.9% decrease in depreciation and amortization, partially offset by a 41.4% decrease in net premiums earned. Net expenses as a percentage of net premiums earned (the net expense ratio) decreased to 17.7% in 2013 compared with 31.0% in 2012. The decrease was primarily due to a 15.3% increase in net premiums earned, a 26.1% increase in commission income, fees and managing general agent revenue, and a 29.6% decrease in depreciation and amortization. The following table sets forth the components of the net expenses and the computation of the net expense ratios (in thousands):

Depreciation and Amortization. Depreciation and amortization expenses for 2014 decreased $1.1 million, or 15.9%, compared with 2013. Depreciation and amortization expenses for 2013 decreased $3.0 million, or 29.6%, compared with 2012. The decrease was due to the sale of the retail business.

Loss on Extinguishment of Debt. On September 30, 2013, we replaced our existing senior credit facility with the proceeds from the sale of the retail agency distribution business and with proceeds from two new debt arrangements. Our new debt arrangement consists of a $40.0 million senior secured credit facility with a maturity date of March 30, 2016, and a $10.0 million subordinated secured credit facility with a maturity date of March 30, 2017.

We recorded a $4.2 million pretax loss on extinguishment of debt as a result of this transaction for 2013. The $4.2 million debt extinguishment loss resulted from the write-off of $2.2 million of deferred debt issuance costs and unamortized debt discount relating to the senior secured credit facility effective January 2007, $1.4 million of legal fees and a $0.6 million prepayment premium.

Interest Expense. Interest expense for 2014 decreased $7.7 million, or 37.3%, compared with 2013. This decrease was primarily due to a decrease in financing costs associated with the new debt arrangement effective September 2013.

Interest expense for 2013 increased $0.9 million, or 4.7%, compared with 2012. This increase was primarily due to an increase in amortization of debt discount, which was $4.9 million in 2013 as compared with $4.1 million for 2012 due to the incremental term loan that was borrowed in November 2012 and the new debt arrangement effective September 2013.

Income Taxes. Income tax benefit for 2014 was $1.7 million as compared with income tax expense of $0.9 million for 2013. Income tax benefit for 2014 was primarily due to the state tax benefit.

Income tax expense for 2013 was $0.9 million as compared to $0.3 million for 2012. Income tax expense for 2013 was primarily due to the sale of the retail business.

Our gross deferred tax assets prior to recognition of valuation allowance were $98.5 million and $90.0 million at December 31, 2014 and 2013, 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 $97.2 million and $84.8 million at December 31, 2014 and 2013, respectively.

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 December 31, 2014, we had $3.5 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 issue 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 December 31, 2014, 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.

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 December 31, 2014, three of our insurance subsidiaries maintained a risk-based capital level that was in excess of an amount that would require any corrective actions. The risk-based capital level of Affirmative Insurance Company (AIC) triggered a regulatory action level event under the NAIC standard. As a result, AIC is required to submit a plan to the Illinois Department of Insurance (IDOI) in April 2015 detailing corrective actions it will take to return its risk-based capital ratio to an acceptable level. Upon receipt of the plan, the IDOI may accept the plan, require further amendments to the plan or take additional regulatory action including, but not limited to, placing AIC in receivership.

Effective January 1, 2012, the State of Illinois adopted the revised NAIC Risk-Based Capital Model Act that includes a risk-based capital trend test as another manner under which the company action level could be triggered and will be applied beginning 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%. At December 31, 2014, three of our insurance subsidiaries maintained a risk-based capital level

that was in excess of an amount that would require any corrective actions. Affirmative Insurance Company (AIC) was at the Regulatory Action Level, thus, this test does not apply.

In December 2013, we entered into a capital lease obligation related to certain computer software, software licenses and hardware used in our insurance operations. A receivable for settlement of this transaction was included in other assets as of December 31, 2013. In January 2014, we received cash proceeds from the financing in the amount of $4.9 million. The transaction proceeds were pledged as collateral against all 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. At the end of the initial term, we will have the right to purchase the software for a nominal fee, after which all rights, title and interest would transfer to us.

In May 2010, we entered into a capital lease obligation related to certain computer software, software licenses, and hardware currently used by and on the books of Affirmative Insurance Company (AIC). The lease term was 60 months and the lease obligation was fully secured with certificates of deposit. In October 2012, one of the Lessors terminated their capital lease agreement and in December 2012, the Lessor conveyed all rights and interest in the leased property back to the Company.

In March 2013, we entered into a $4.8 million loan secured by commercial real estate to provide liquidity to AIC. The loan is evidenced by a promissory note secured by a mortgage security agreement and assignment of leases and rents on real estate located in Baton Rouge, Louisiana, which is held as investment in real property in the accompanying consolidated balance sheet. The mortgage bears interest at a per annum fixed rate of 4.95%. The mortgage requires monthly payments of principal and interest with the final payment due on the maturity date of December 15, 2015. As security for payments, we assigned rents due under the lease to a trustee. Pursuant to an escrow and servicing agreement, the trustee will receive rent due under the lease, make required payments due under the mortgage and maintain certain escrow accounts to pay for the necessary expenses of the property until the mortgage is paid in full. The principal balance of the mortgage payable was $1.8 million at December 31, 2014.

On February 28, 2012, we exercised our 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 our unconsolidated trusts. The outstanding balance of the affected notes was $56.7 million as of December 31, 2014. We 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, fee income and managing general agency revenue, 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 year ended December 31, 2014, cash and cash equivalents decreased $20.7 million in 2014 as compared with an increase of $6.4 million in 2013. Our net cash used in operations was $51.3 million in 2014 as compared to net cash used in operations of $3.1 million in 2013. This increase was primarily due to the increase in gross written premiums ceded to reinsurers and net loss from operations in 2014. Net cash provided by investing activities was $41.1 million in 2014 as compared to net cash provided by investing activities of $77.3 million in 2013. The decrease in cash flows was primarily due to the proceeds from the sale of the retail business recorded during the periods. In 2014, $25.0 million of proceeds were recognized compared to $84.3 million for 2013. Net cash used in financing activities was $10.6 million in 2014 as compared to net cash used in financing activities of $67.8 million in 2013. This primarily resulted from the refinancing of the Company’s senior secured credit facility effective January 2007, partially offset by the net cash proceeds received from the capital lease entered into during the current year.

On September 30, 2013, we replaced our existing senior credit facility with the proceeds from the sale of the retail business and with proceeds from two new debt arrangements. Our new debt arrangement consisted of a $40.0 million senior secured credit facility with a maturity date of March 30, 2016, and a $10.0 million subordinated secured credit facility with a maturity date of March 30, 2017.

The pricing under the senior secured credit facility was amended effective September 30, 2014 to an adjusted LIBOR rate floor of 1.25%, plus 9.25%. The interest rate as of December 31, 2014 was 10.50%. We made principal payments of $6.5 million and $5.0 million in 2014 and 2013, respectively. As of December 31, 2014, the principal balance of the senior secured credit facility was $28.5 million. The senior secured credit facility was issued at a discount of $2.0 million that is amortized as interest expense over the expected term of the loan using the effective interest method. Repayment of the facility is due quarterly with $2.0 million payable for each quarter through September 30, 2014, $3.5 million payable each quarter through September 30, 2015, $4.5 million payable on December 31, 2015 and the remaining balance of $13.5 million due in full on March 30, 2016. Prepayments under this agreement are applied to the earliest payments due. Effective December 31, 2014, the senior secured credit facility was amended to postpone the principal payment of $3.5 million due March 31, 2015. The next payment due is $7.0 million on June 30, 2015.

The pricing under the subordinated secured credit facility is currently subject to an adjusted LIBOR rate floor of 1.25%, plus 18.00%. The interest rate as of December 31, 2014 was 19.25%. The subordinated secured credit facility included a commitment fee of $3.0 million that was added to the principal balance outstanding. Accrued interest is added to the outstanding principal balance until the senior secured credit facility is paid. Capitalized interest totaling $2.9 million was added to the principal balance during 2014. As of December 31, 2014, the principal balance of the subordinated secured credit facility was $16.6 million.

We recorded a $4.2 million pretax loss on extinguishment of debt as a result of the refinancing on September 30, 2013. The $4.2 million debt extinguishment loss resulted from the write-off of $2.2 million of deferred debt issuance costs and unamortized discount relating to the senior secured credit facility effective January 2007, $1.4 million of legal fees and a $0.6 million prepayment premium.

Debt issuance costs of $5.2 million were capitalized and will be amortized to interest expense over the expected term of the new credit agreements.

Our obligations under the credit facilities are guaranteed by our material operating subsidiaries (other than the Company’s insurance companies) and are secured by a first lien security interest on all of our assets and the assets of our material operating subsidiaries (other than the Company’s insurance companies), including a pledge of 100% of the stock of AIC.

The following table summarizes our contractual obligations at December 31, 2014 (in thousands):

	2015		2016		2017		2018		2019		Thereafter		Total
Operating leases, net(1)	$	872	$	1,390	$	1,412	$	1,385	$	1,347	$	4,542	$	10,948
Capital lease obligation(2)		3,344		—		—		—		—		—		3,344
Notes payable(3)		—		—		—		—		—		76,815		76,815
Senior secured credit facility(5)		15,000		13,500		—		—		—		—		28,500
Subordinated secured credit facility(5)		—		—		16,566		—		—		—		16,566
Mortgage payable (4)		1,825		—		—		—		—		—		1,825
Interest on capital lease obligation		63		—		—		—		—		—		63
Interest on notes payable(3)		3,268		3,372		2,966		2,966		2,966		45,754		61,292
Interest on senior secured credit facility(5)		2,472		354		—		—		—		—		2,826
Interest on subordinated secured credit facility(5)		—		—		9,040		—		—		—		9,040
Interest on mortgage (4)		49		—		—		—		—		—		49
Reserves for loss and loss adjustment expense(6)		101,636		20,946		7,029		2,074		682		385		132,752
Total	$	128,529	$	39,562	$	37,013	$	6,425	$	4,995	$	127,496	$	344,020

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 December 31, 2014 was $33.3 million. The effective average duration of the portfolio as of December 31, 2014 was 2.5 years. If market interest rates increase 1.0%, our fixed-income investment portfolio would be expected to decline in market value by 2.5%, or $0.8 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 2.5%, or $0.8 million, increase in the market value of our fixed-income investment portfolio.

The pricing under the senior secured credit facility was amended effective September 30, 2014 to an adjusted LIBOR rate floor of 1.25%, plus 9.25%. The interest rate as of December 31, 2014 was 10.50%. The Company made principal payments of $6.5 million and $5.0 million in 2014 and 2013, respectively. As of December 31, 2014, the principal balance of the senior secured credit facility was $28.5 million. The senior secured credit facility was issued at a discount of $2.0 million that is amortized as interest expense over the expected term of the loan using the effective interest method. Repayment of the facility is due quarterly with $2.0 million payable for each quarter through September 30, 2014, $3.5 million payable each quarter through September 30, 2015, $4.5 million payable on December 31, 2015 and the remaining balance of $13.5 million due in full on March 30, 2016. Prepayments under this agreement are applied to the earliest payments due. Effective December 31, 2014, the senior secured credit facility was amended to postpone the principal payment of $3.5 million due March 31, 2015. The next payment due is $7.0 million on June 30, 2015.

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 December 31, 2014 was 3.84%. The $25.8 million notes adjust quarterly to the three-month LIBOR rate plus 3.55%. The interest rate as of December 31, 2014 was 3.79%. The $20.1 million notes payable bear an interest rate of the three-month LIBOR rate plus 3.95%. The interest rate as of December 31, 2014 was 4.19%.

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 December 31, 2014 and 2013, respectively, our investments were in the following:

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

We are subject to credit risk 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. When appropriate, we obtain irrevocable letters of credit or require the reinsurer to establish trust funds to secure their obligations to us.

Our hedge fund investment of $4.5 million at December 31, 2014 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 reinsurers as of December 31, 2014 and 2013 (in thousands):

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

In 2011, we entered into a 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 $82.0 million during the year ended December 31, 2012, and this agreement was extended under the same terms through March 31, 2013 and terminated on a cutoff basis as of April 1, 2013. Upon termination, we recorded $27.2 million of returned premium, net of $7.7 million of deferred ceding commissions. Written premiums under this agreement during 2013 represented a return of previously ceded premiums totaling $5.5 million. Written premiums ceded under this agreement totaled $99.3 million. This agreement commuted in March 2015.

Effective December 31, 2013, we entered into a new reinsurance agreement with four third-party reinsurance companies. Under this agreement, we ceded 20% of premiums and losses in Alabama, Illinois, Louisiana and Texas, and 60% in California on policies in force on December 31, 2013 or written or renewed on and after that date. Written premiums ceded under this agreement totaled $22.2 million as of December 31, 2013. On January 1, 2014, the quota-share rate increased to 60% for all business in force in these same states and for new and renewal business. On June 30, 2014, the reinsurance agreement was terminated, resulting in the return of $51.7 million of unearned premiums, net of $14.5 million of ceding commissions. Written premiums ceded under the agreement totaled $95.9 million. In March 2015, two of the quota share reinsurers commuted their participation on this agreement.

Historically, we assumed reinsurance from a Texas county mutual insurance company (the county mutual) whereby we assumed 100% of the policies issued by the county mutual for business produced by our owned general agents with policies in force prior to January 1, 2013. We have established a trust to secure our obligation under this reinsurance contract with a balance of $4.3 million as of December 31, 2014. On January 1, 2013, we terminated this agreement on a cut-off basis.

The Michigan Catastrophic Claims Association (MCCA) is the mandatory reinsurance facility that covers no-fault medical losses above a specific retention amount in Michigan. We discontinued writing business in Michigan in 2011. For policies effective in 2011 and 2010 the retention amount was $0.5 million. When we wrote personal automobile policies in the state of Michigan, we ceded 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) 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 from VFIC under the reinsurance agreement. Accordingly, AIC 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 December 31, 2014, the VFIC Trust held $16.6 million (after cumulative withdrawals of $9.0 million through December 31, 2014), consisting of a $16.6 million U.S. Treasury money market account, to collateralize the $9.3 million net recoverable from VFIC. In March 2015, we received a notice of determination from the VFIC Special Deputy Receiver on multiple proofs of claim for an aggregate amount of $15.3 million for various reinsurance balances with VFIC. As part of the notice of determination, we entered into a settlement agreement and release with the VFIC Special Deputy Receiver. We expect to receive the $15.3 million in settlement proceeds by May 2015.

At December 31, 2014, $0.2 million was included in reserves for losses and loss adjustment expenses that represented the amounts owed by AIC under a reinsurance agreement with VIG affiliated companies. Affirmative established a trust account to secure the Company’s obligations under this reinsurance contract, which currently holds $10.7 million in a money market cash equivalent account (the AIC Trust). Cumulative withdrawals by the Special Deputy Receiver of $2.1 million were made through December 31, 2014.

As part of the terms of the acquisition of AIC, VIG 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 December 31, 2014, all such unaffiliated reinsurers had A.M. Best ratings of “A-” or better.

We have audited the accompanying consolidated balance sheets of Affirmative Insurance Holdings, Inc. and subsidiaries (the Company) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ deficit, and cash flows for each of the years in the three-year period ended December 31, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Affirmative Insurance Holdings, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company’s recent history of recurring losses from operations, its failure to comply with certain financial covenants in the senior secured and subordinated credit facilities, its need to meet debt repayment requirements and its failure to comply with the Illinois Department of Insurance minimum risk-based capital requirements raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

	December 31,
	2014			2013
Assets
Available-for-sale securities, at fair value	$	33,285		$	62,321
Other invested assets		4,501			4,085
Cash and cash equivalents		23,863			44,569
Fiduciary and restricted cash		4,794			1,369
Accrued investment income		149			231
Premiums and fees receivable, net		53,167			53,442
Commissions receivable		487			—
Receivable from reinsurers		182,804			165,819
Income taxes receivable		149			—
Investment in real property, net		9,558			10,277
Property and equipment (net of accumulated depreciation of $59,127 for 2014 and $53,222 for 2013)		8,389			13,978
Other intangible assets (net of accumulated amortization of $7,765 for 2014 and 2013)		1,500			1,500
Prepaid expenses		5,623			7,126
Other assets (net of allowance for doubtful accounts of $576 for 2014 and $7,739 for 2013)		9,420			22,124
Total assets	$	337,689		$	386,841
Liabilities and Stockholders’ Deficit
Liabilities:
Reserves for losses and loss adjustment expenses	$	132,752		$	133,589
Unearned premium		84,055			81,598
Amounts due to reinsurers		80,126			64,910
Due to third-party carriers		5,106			7,221
Deferred revenue		6,537			6,763
Capital lease obligation		3,344			9,428
Debt		123,341			127,563
Income taxes payable		—			3,641
Deferred acquisition costs, net liability		4,214			7,544
Other liabilities		32,613			47,476
Total liabilities		472,088			489,733
Stockholders’ deficit:
Common stock, $0.01 par value; 75,000,000 shares authorized, 18,949,220 shares issued and 16,155,357 shares outstanding at December 31, 2014; 18,202,221 shares issued and 15,408,358 shares outstanding at December 31, 2013		190			182
Additional paid-in capital		167,623			167,049
Treasury stock, at cost (2,793,863 shares at December 31, 2014 and 2013)		(32,910	)		(32,910	)
Accumulated other comprehensive loss		(1,536	)		(1,654	)
Retained deficit		(267,766	)		(235,559	)
Total stockholders’ deficit		(134,399	)		(102,892	)
Total liabilities and stockholders’ deficit	$	337,689		$	386,841

	Year Ended December 31,
	2014			2013			2012
Revenues
Net premiums earned	$	97,036		$	165,683		$	143,736
Commission income, fees and managing general agent revenue		43,428			77,534			61,495
Net investment income		3,009			2,721			3,105
Net realized gains		57			61			922
Other income		3			125			503
Total revenues		143,533			246,124			209,761
Expenses
Net losses and loss adjustment expenses		115,682			147,818			111,858
Selling, general and administrative expenses		52,854			99,735			96,055
Depreciation and amortization		5,952			7,079			10,062
Total expenses		174,488			254,632			217,975
Operating loss		(30,955	)		(8,508	)		(8,214	)
Gain on sale of retail business		10,000			64,971			—
Loss on extinguishment of debt		—			(4,193	)		—
Interest expense		(12,954	)		(20,663	)		(19,743	)
Goodwill and other intangible assets impairment		—			—			(23,692	)
Income (loss) before income taxes		(33,909	)		31,607			(51,649	)
Income tax expense (benefit)		(1,702	)		889			264
Net income (loss)	$	(32,207	)	$	30,718		$	(51,913	)
Basic income (loss) per common share:
Net income (loss)	$	(2.07	)	$	1.99		$	(3.37	)
Diluted income (loss) per common share:
Net income (loss)	$	(2.07	)	$	1.97		$	(3.37	)
Weighted average common shares outstanding:
Basic		15,525			15,408			15,408
Diluted		15,525			15,622			15,408

	2014					2013					2012
	Shares		Amounts			Shares		Amounts			Shares		Amounts
Common stock
Balance at January 1		18,202,221	$	182			18,202,221	$	182			18,202,221	$	182
Issuance of restricted stock awards		472,000		5			—		—			—		—
Exercise of stock options		274,999		3			—		—			—		—
Balance at December 31		18,949,220		190			18,202,221		182			18,202,221		182
Additional paid-in capital
Balance at January 1				167,049					166,749					166,342
Issuance of restricted stock awards				(5	)				—					—
Exercise of stock options				207					—					—
Stock-based compensation				372					300					407
Balance at December 31				167,623					167,049					166,749
Treasury stock
Balance at beginning of year and end of year		2,793,863		(32,910	)		2,793,863		(32,910	)		2,793,863		(32,910	)
Accumulated other comprehensive income (loss)
Balance at January 1				(1,654	)				(998	)				(227	)
Unrealized gain (loss) on available-for-sale investment securities				118					(656	)				(771	)
Balance at December 31				(1,536	)				(1,654	)				(998	)
Retained deficit
Balance at January 1				(235,559	)				(266,277	)				(214,364	)
Net income (loss)				(32,207	)				30,718					(51,913	)
Balance at December 31				(267,766	)				(235,559	)				(266,277	)
Total stockholders’ deficit			$	(134,399	)			$	(102,892	)			$	(133,254	)

	Year Ended December 31,
	2014			2013			2012
Cash flows from operating activities
Net income (loss)	$	(32,207	)	$	30,718		$	(51,913	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		6,671			7,798			10,842
Stock-based compensation expense		372			369			390
Amortization of debt costs		1,946			1,314			435
Amortization of debt discount		1,112			4,944			4,126
Net realized gains from sales of available-for-sale securities		(46	)		(49	)		(888	)
Fair value gain on investment in hedge fund		(416	)		(695	)		(492	)
Gain on disposal of assets		(11	)		(12	)		(34	)
Gain on sale of retail business		(10,000	)		(64,971	)		—
Amortization of premiums on investments, net		616			557			1,515
Provision for doubtful accounts		(7,225	)		88			451
Paid-in-kind interest		2,916			2,083			1,543
Loss on extinguishment of debt		—			4,193			—
Goodwill and other intangible assets impairment		—			—			23,692
Deferred tax asset valuation allowance		11,420			(13,303	)		12,708
Change in operating assets and liabilities:
Fiduciary and restricted cash		(1,325	)		(800	)		1,909
Premiums, fees and commissions receivable, net		(212	)		(4,007	)		(7,833	)
Reserves for losses and loss adjustment expenses		(837	)		(5,265	)		(44,982	)
Amounts due from reinsurers		(1,769	)		(7,594	)		3,500
Due to third-party carriers		(2,115	)		8,193			(948	)
Premium finance receivable, net (related to our insurance premiums)		—			(3,932	)		(2,251	)
Deferred revenue		(226	)		2,398			1,301
Unearned premium		2,457			8,737			14,619
Deferred acquisition costs, net		(3,330	)		7,642			(6,562	)
Deferred taxes		(11,420	)		10,125			(12,458	)
Income taxes receivable		(3,790	)		3,791			589
Other		(3,853	)		4,543			(7,067	)
Net cash used in operating activities		(51,272	)		(3,135	)		(57,808	)
Cash flows from investing activities
Fiduciary and restricted cash		(2,100	)		—			—
Proceeds from sale of retail business, net		25,000			84,270			—
Proceeds from sales of available-for-sale securities		16,193			8,964			37,447
Proceeds from maturities of available-for-sale securities		19,270			54,302			37,871
Purchases of available-for-sale securities		(16,879	)		(69,004	)		(9,392	)
Premium finance receivable, net (related to third-party insurance premiums)		—			(281	)		1,391
Purchases of property and equipment		(367	)		(917	)		(1,443	)
Proceeds from sale of property and equipment		11			—			—
Proceeds from insurance recoveries		—			—			30
Net cash provided by investing activities		41,128			77,334			65,904
Cash flows from financing activities
Borrowings under senior secured credit facility effective January 2007		—			12,500			5,500
Borrowings under credit facilities effective September 2013		—			48,000			—
Proceeds from financing under capital lease obligation		4,858			—			—
Principal payments under capital lease obligations		(6,319	)		(2,943	)		(4,937	)
Principal payments on senior secured credit facility effective September 2013		(6,500	)		(5,000	)		—
Principal payments on senior secured credit facility effective January 2007		—			(120,192	)		(3,530	)
Principal payments on mortgage security agreement		(1,737	)		(1,248	)		—
Issuance of mortgage security agreement		—			4,809			—
Proceeds from stock options exercised		207			—			—
Debt issuance costs paid		(532	)		(860	)		—
Bank overdrafts		(539	)		(2,872	)		4,488
Net cash provided by (used in) financing activities		(10,562	)		(67,806	)		1,521
Net increase (decrease) in cash and cash equivalents		(20,706	)		6,393			9,617
Cash and cash equivalents at beginning of year		44,569			38,176			28,559
Cash and cash equivalents at end of year	$	23,863		$	44,569		$	38,176
Supplemental disclosure of cash flow information:
Cash paid for interest	$	4,333		$	10,004		$	10,941
Cash paid for income taxes		2,748			390			336
Disclosure of non-cash information:
Capital lease obligation settled by transfer of securities	$	—		$	—		$	7,851
Debt issuance costs		—			3,000			—

Affirmative Insurance Holdings, Inc. (the Company), was incorporated in Delaware in June 1998. The Company is a provider of non-standard personal automobile insurance policies for individual consumers in targeted geographic areas. The Company is a party to an agreement with an unaffiliated underwriting agency in the state of California and provides non-standard insurance policies written by a Texas county mutual. The Company is currently distributing insurance policies through approximately 5,000 independent agents or brokers in 7 states (Louisiana, Texas, California, Alabama, Illinois, Indiana and Missouri).

Basis of Presentation • The consolidated financial statements include the accounts of Affirmative Insurance Holdings, Inc. and its subsidiaries (together the Company), and have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). All material intercompany transactions and balances have been eliminated in consolidation.

Certain prior year amounts have been reclassified to conform to the current presentation.

Use of Estimates • The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. These estimates and assumptions are particularly important in determining reserves for losses and loss adjustment expenses, deferred policy acquisition costs, reinsurance receivables, valuation of investments, other intangible assets, and deferred income taxes.

Cash and Cash Equivalents • Cash and cash equivalents are highly liquid investments with an original maturity of ninety days or less and include principally money market funds, repurchase agreements, and other bank deposits. Unless the right-of-setoff requirements have been met, bank overdrafts or negative book cash balances, if material, are recorded in other liabilities in the consolidated balance sheet. As of December 31, 2014 and 2013, $1.1 million and $1.6 million negative book cash balance was reflected in other liabilities in the consolidated balance sheets, respectively.

Fiduciary and Restricted Cash • Fiduciary and restricted cash consists of non-operating certificates of deposit required by state regulations and/or under various agreements with third parties.

Investments • Investment securities consist of debt securities, and are recorded at fair value on the consolidated balance sheet. These investments are classified as available-for-sale with unrealized gains and losses recorded in accumulated other comprehensive income (loss), a separate component of stockholders’ 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. The Investment Committee periodically reviews investment portfolio results and evaluates strategies to maximize yields, to match maturity durations with anticipated needs, and to maintain compliance with investment guidelines.

Fair value is based on quoted prices in active markets or third-party valuation sources when observable market prices are not available. Gains and losses realized on the disposition of investment securities are determined on the specific-identification basis and credited or charged to income. Premium and discount on investment securities are amortized and accreted using the interest method and charged or credited to investment income.

Other invested assets is comprised of an investment in a hedge fund, which primarily invests in mortgage-backed securities with the strategy of seeking attractive yields on commercial and residential mortgage-backed securities. The Company elected the fair value option for its investment in the hedge fund and measures the fair value of this investment using the net asset value of the fund as reported by the fund manager. The financial statements of the hedge fund are subject to annual audits evaluating the net asset positions of the underlying investments. The fair value is included in the Level 3 fair value hierarchy. The Company records changes in the value of its other invested assets as a component of net investment income.

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, the 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 (loss). The Company also considers potential adverse conditions related to the financial health of the issuer based on rating agency actions.

Amounts Due from/to Reinsurers • The Company collects premiums from insureds and after deducting its authorized commissions, the Company remits these premiums to the appropriate reinsurance companies. The Company’s obligation to remit these premiums is recorded as amounts due reinsurers in its consolidated balance sheet. The Company records the amounts it expects to receive from reinsurers for paid and unpaid losses as an asset on its consolidated balance sheet.

Deferred Policy Acquisition Costs, net of ceding commission • Deferred policy acquisition costs represent the deferral of expenses that the Company incurs in the successful acquisition of new business or renewal of existing insurance policies. 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 Company regularly reviews the categories of acquisition costs that are deferred and assesses the recoverability of this asset. A premium deficiency, and a corresponding charge to income, is recognized if the sum of the expected losses and loss adjustment expenses, unamortized acquisition costs, and maintenance costs exceeds related unearned premiums and anticipated investment income. Amounts received as ceding commissions on reinsurance contracts are recorded as reductions of deferred acquisition costs and are recognized into income ratably as the related ceded premium is earned. Amortization of deferred policy acquisition costs is recorded in selling, general and administrative expenses in the consolidated statement of operations.

Property and Equipment, Net • Property and equipment is stated at cost, less accumulated depreciation. Depreciation is recognized using the straight-line method over the estimated useful lives of the Company’s assets, typically ranging from three to eight years. Leasehold improvements are depreciated over the shorter of the estimated useful lives of the assets or the remainder of the lease term.

Other Intangible Assets, Net • Other intangible assets with indefinite useful lives are tested for impairment annually as of September 30 or more frequently if events or changes in circumstances indicate that the assets might be impaired.

Identifiable intangible assets consist of state insurance company licenses. The Company reviews such intangibles for impairment whenever an impairment indicator exists. Management continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets, including intangible assets, may not be recoverable. When such events or changes in circumstances occur, management assesses recoverability by determining whether the carrying value of such assets will be recovered through the undiscounted expected future cash flows. If the future undiscounted cash flows are less than the carrying amount of these assets, an impairment loss is recognized based on the excess of the carrying amount over the fair value of the assets.

Variable Interest Entities • Affirmative Insurance Holdings Statutory Trust I (“Trust I”), is an unconsolidated trust subsidiary established for the sole purpose of issuing $30.0 million trust preferred securities in 2004. Trust I used the proceeds from the sale of these securities and the Company’s initial capital contribution to purchase $30.9 million of subordinated debt securities from the Company. The debt securities are the sole assets of Trust I, and the payments under the debt securities are the sole revenues of Trust I. The Company’s initial capital contribution consisted of the purchase of 928,000 common securities issued by Trust I for $928,000, which represented 3% of the total dollar amount of subordinated debentures issued.

Affirmative Insurance Holdings Statutory Trust II (“Trust II”), is an unconsolidated trust subsidiary established for the sole purpose of issuing $25.0 million trust preferred securities in 2005. Trust II used the proceeds from the sale of these securities and the Company’s initial capital contribution to purchase $25.8 million of subordinated debt securities from the Company. The debt securities are the sole assets of Trust II, and the payments under the debt securities are the sole revenues of Trust II. The Company’s initial capital contribution consisted of the purchase of 774,000 common securities issued by Trust II for $774,000, which represented 3% of the total dollar amount of subordinated debentures issued.

The investment in the common securities totaling $1.7 million is reflected in other assets in the Company’s consolidated balance sheets. The subordinated debentures totaling $56.7 million are included in debt in the Company’s consolidated balance sheets.

Management evaluates on an ongoing basis the Company’s investments in Trust I and II (collectively the “Trusts”) and continue to conclude that, while the Trusts continue to be variable interest entities (“VIE’s”), the Company is not the primary beneficiary. Therefore, the Trusts are not included in the Company’s consolidated financial statements.

Reserves for Losses and Loss Adjustment Expenses • The Company maintains reserves for the estimated ultimate liability for unpaid losses and loss adjustment expenses related to incurred claims and estimates of unreported claims. The estimation of the ultimate liability for unpaid losses and loss adjustment expenses is based on projections developed by the Company’s actuaries using analytical methodologies commonly used in the property-casualty insurance industry. Liabilities for unpaid claims and for expenses of investigation and adjustment of unpaid claims are based on: (1) the accumulation of estimates of individual claims for losses reported prior to the close of the accounting period; (2) estimates received from ceding companies, reinsurers and insurance pools and associations; (3) estimates of unreported losses based on past experience; (4) estimates based on past experience of expenses for investigating and adjusting claims; and (5) estimates of subrogation and salvage collections. Management periodically adjusts the losses and loss adjustment expense reserves for changes in product mix, underwriting standards, loss cost trends and other factors. Losses and loss adjustment expense reserves may also be impacted by factors such as the rate of inflation, claims settlement patterns, litigation and legislative and regulatory activities. Unpaid losses and loss adjustment expenses have not been reduced for amounts recoverable from reinsurers. Changes in estimates of liabilities for unpaid losses and loss adjustment expenses are reflected in the consolidated statement of operations in the period in which determined. Ultimately, the actual losses and loss adjustment expenses may differ materially from recorded estimates.

Treasury Stock • Treasury stock purchases are accounted for using the cost method, whereby the entire cost of the acquired stock is recorded as treasury stock. When reissued, shares of treasury stock will be removed from the treasury stock account at the average purchase price per share of the aggregate treasury shares held.

Revenue Recognition • Premium income — Premiums, net of premiums ceded, is earned over the life of the underlying policies. Unearned premiums represent that portion of premiums written that are applicable to the unexpired terms of policies in force. Premiums receivable are recorded net of an estimated allowance for uncollectible amounts.

Commission income — Represents revenues from the retail agency business prior to being sold on September 30, 2013. Commission income and related policy fees, written for third-party insurance companies, are recognized, net of an allowance for estimated policy cancellations, at the date the customer is initially billed or as of the effective date of the insurance policy, whichever is later. Commissions on premium endorsements are recognized when premiums are processed. The allowance for estimated third-party cancellations is periodically evaluated and adjusted as necessary.

Profit-sharing commissions, which enable the Company to collect commission income and fees in excess of provisional commissions, are recorded when it is probable that estimates of loss ratios will be below the levels stated in the Company’s agency contracts. Provisional commissions may be reduced when it is probable that estimates of loss ratios will be above the levels stated in the related agency contract.

Fee Income — Policy origination fees and installment fees compensate the Company for the costs of policy administration and providing installment payment plans. Policy origination fees are recognized over the underlying policy terms. Other fees are recognized when services are provided.

Agency Fees — Represents revenues from the retail agency business prior to being sold on September 30, 2013. These fees compensated the Company for the costs of policy cancellation, policy rewrite and reinstatement and were recognized when the services were provided. Premium finance and origination fees were recognized over the term of the finance contracts.

Managing general agent revenue — Revenues earned for business produced for a Texas county mutual insurance agency beginning January 1, 2013. The Company receives compensation for distribution and underwriting services and providing claims handling on the business. Revenue for distribution and underwriting services are recognized, net of an allowance for estimated policy cancellations, at the date the customer is initially billed or as of the effective date of the insurance policy, whichever is later. Claims handling revenue is recognized as the services are provided.

Accounting and Reporting for Reinsurance • Income and expense on reinsurance contracts are recognized principally over the term of the reinsurance contracts or until the reinsurers maximum liability is exhausted, whichever comes first. Reinsurance contracts do not relieve the Company from its obligations to policyholders. The Company continually monitors reinsurers to minimize the exposure to significant losses from reinsurer insolvencies. The Company only cedes risks to reinsurers whom it believes to be financially sound.

Stock-Based Compensation • Compensation cost is measured based on the grant-date fair value of an award utilizing the assumptions discussed in Note 17. Compensation cost is recognized for financial reporting purposes on a straight-line basis over the period in which the employee is required to provide service in exchange for the award.

Income Taxes • The Company accounts for income taxes under the asset and liability method. Under this method, deferred income taxes are recognized for temporary differences between the financial statement and tax return bases of assets and liabilities. Recorded amounts are adjusted to reflect changes in income tax rates for the period in which the change is enacted. Any resulting future tax benefits are recognized to the extent that realization of such benefits is more likely than not, and a valuation allowance is established for any portion of a deferred tax asset that management believes will not be realized. While the Company typically does not incur significant interest or penalties on income tax liabilities, the Company’s policy is to classify such amounts as income tax expense on the consolidated statement of operations.

Net Income (Loss) Per Common Share • Basic net income (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the year. Diluted net income (loss) per share is computed by giving effect to the potential dilution that could occur if securities or other contracts to issue common shares were exercised and converted into common shares during the year.

Fair Value of Financial Instruments • The Company determines fair value for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, the Company considers the principal

or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk.

Segment Reporting • The Company’s operations consist of designing, underwriting and servicing non-standard personal automobile insurance policies. The Company is a holding company, with no operating revenues and only interest expense on corporate debt. The Company’s subsidiaries consist of several types of legal entities: insurance companies, underwriting agencies and a service company from which all employees are paid. Insurance subsidiaries possess the certificates of authority and capital necessary to transact insurance business and issue policies, but they rely on both affiliated and an unaffiliated underwriting agency to design, distribute and service those policies. Underwriting agencies primarily design, distribute and service policies issued or reinsured by the Company’s insurance subsidiaries and that are distributed by independent agents. Given the homogeneity of the Company’s products, the regulatory environments in which the Company operates, the nature of the Company’s customers and distribution channels, Company management monitors, controls and manages the business as an integrated entity offering non-standard personal automobile insurance products through multiple distribution channels.

Statutory Accounting Practices • The Company’s insurance subsidiaries are required to report results of operations and financial position to insurance regulatory authorities based upon statutory accounting principles (SAP). The more significant differences between SAP and GAAP are as follows:

Recently Issued Accounting Standards • Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers issued in May 2014 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition and most industry-specific guidance. Insurance contracts have been excluded from the scope of the guidance, which is effective for fiscal years beginning after December 15, 2016. The Company does not expect the adoption of this standard to have a material impact on the consolidated financial position, results of operations, or cash flows.

Accounting Standards Update (ASU) No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern issued in August 2014 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. Specifically, this ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. The amendments are effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The Company does not expect the adoption of this standard to have a material impact on the consolidated financial position, results of operations, or cash flows.

On September 30, 2013, the Company sold its retail agency distribution business to Confie Seguros (Confie). The Company’s retail agency distribution business consisted of 195 retail locations in Louisiana, Alabama, Texas, Illinois, Indiana, Missouri, Kansas, South Carolina and Wisconsin and two premium finance companies (the retail business). Proceeds from the sale were $101.9 million in cash with the potential to receive an additional $20.0 million of cash proceeds. The initial cash proceeds included a working capital adjustment of $1.9 million that was received in 2013 and $20.0 million placed in an escrow account. The funds held in escrow were available, dependent upon the quarterly risk-based capital status of Affirmative Insurance Company (AIC), to be utilized to either infuse capital into AIC or pay down debt. As of the first risk-based measurement date of September 30, 2013, AIC met the risk-based capital target and in November 2013, $5.0 million was released from the escrow account and was used to pay down the senior secured credit facility. As of December 31, 2013, AIC met the risk-based capital target and in April 2014, an additional $5.0 million was released from the escrow account and was used to pay down the senior secured credit facility. In March 2014, the purchase agreement was amended to eliminate the measurement of risk-based capital as of March 31, 2014. In June 2014, the remaining $10.0 million in the escrow account was utilized to infuse capital into AIC.

The additional $20.0 million of proceeds may be used to pay down debt or infuse capital into Affirmative Insurance Company (AIC). The additional proceeds are contingent on AIC meeting certain risk-based capital thresholds and maintaining the obligations of the distribution agreement. The risk-based capital measurement begun as of June 30, 2014 for up to $10.0 million of additional proceeds and the remaining balance up to $20.0 million can be achieved on any following quarterly measurement date through December 31, 2015. These contingent proceeds are recognized as risk-based capital measurement thresholds are achieved. In September 2014, $10.0 million of additional proceeds were received of which, $9.9 million was used to infuse capital into AIC and $0.1 million was used to pay down the senior secured credit facility.

In connection with the sale of the retail business, the Company also entered into a distribution agreement pursuant to which the purchaser will continue to produce insurance business for the Company’s insurance subsidiaries at least until the earlier of December 15, 2015, or when Confie’s obligation to pay the contingent proceeds pursuant to the purchase agreement is discharged. Among other things, the distribution agreement sets forth the terms and conditions under which Confie will produce insurance business for the Company after the closing and includes terms designed to preserve the volume of business produced by the retail business for the Company as of the closing. In turn, the distribution agreement obligates the Company’s insurance subsidiaries to maintain reinsurance and their underwriting capacity in the markets where the retail business operates for the duration of the distribution agreement, including certain restrictions on increasing fees and rates beyond certain thresholds without Confie’s consent. Additionally, Confie will continue to provide premium financing capability for the Company’s policies, including for business written through other independent agencies in certain markets, and the parties will share equally in any increased profits from premium financing other independent agency business during the term of the distribution agreement. Due to the Company’s significant continuing involvement as the underwriter for business produced by the retail agency distribution business and the ongoing premium finance arrangements, the operating activities of the retail agency distribution are not reflected as discontinued operations.

The Company realized a pretax gain on the sale of $10.0 million and $65.0 million for the years ended December 31, 2014 and 2013, respectively. The Company’s consolidated results of operations as of December 31, 2013 include the retail business’s results of operations through the date of the sale, September 30, 2013. The net assets sold consisted of (in thousands):

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’ 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 December 31, 2014 and 2013, were as follows (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
December 31, 2014
U.S. Treasury and government agencies	$	8,311	$	33	$	(30	)	$	8,314
Mortgage-backed securities		3,386		19		(92	)		3,313
States and political subdivisions		1,485		34		—			1,519
Corporate debt securities		17,340		90		(58	)		17,372
Certificates of deposit		2,760		8		(1	)		2,767
Total	$	33,282	$	184	$	(181	)	$	33,285
December 31, 2013
U.S. Treasury and government agencies	$	17,830	$	55	$	(51	)	$	17,834
Mortgage-backed securities		4,023		4		(47	)		3,980
States and political subdivisions		3,265		68		—			3,333
Corporate debt securities		32,458		135		(310	)		32,283
Certificates of deposit		4,860		32		(1	)		4,891
Total	$	62,436	$	294	$	(409	)	$	62,321

The Company had $10.0 million of unsettled investment purchases as of December 31, 2013.

For additional disclosures regarding methods and assumptions used in estimating fair values of these securities see Note 23.

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 December 31, 2014 by contractual maturity were as follows (in thousands):

Major categories of net investment income for the years ended December 31 were as follows (in thousands):

Gross realized gains and losses on available-for-sale investments for the years ended December 31 were as follows (in thousands):

The following table summarizes the Company’s available-for-sale securities in an unrealized loss position at December 31, 2014 and 2013, 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):

The Company’s portfolio contained approximately 65 and 53 individual investment securities that were in an unrealized loss position as of December 31, 2014 and 2013, respectively.

The unrealized losses at December 31, 2014 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 (loss). The Company also considers potential adverse conditions related to the financial health of the issuer based on rating agency actions. As a result of management’s quarterly analyses for the years ended December 31, 2014 and 2013, no individual securities were considered other-than-temporarily impaired.

As of December 31, 2014 and 2013, certificates of deposit in the amount of $2.8 million and $4.9 million, respectively, were pledged as collateral associated with the capital lease related to certain computer software, software licenses, and hardware used in the Company’s insurance operations. See Note 12 for discussion of the associated capital lease obligation.

At December 31, 2014 and 2013, investments in fixed-maturity securities with an approximate carrying value of $7.0 million and $6.9 million, respectively, were on deposit with regulatory authorities as required by insurance regulations.

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. The Company’s reinsurance agreements provide for recovery of a portion of losses and loss expenses from reinsurers and reinsurance recoverables are recorded as assets. The Company is liable if the reinsurers are unable to satisfy their obligations under the agreements. The Company seeks to cede business to reinsurers generally with a financial strength rating of “A-” or better.

In 2011, the Company entered into a 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 $82.0 million during the year ended December 31, 2012, and this agreement was extended under the same terms through March 31, 2013 and terminated on a cutoff basis as of April 1, 2013. Upon termination, the Company recorded $27.2 million of returned premium, net of $7.7 million of deferred ceding commissions. Written premiums under this agreement during 2013 represented a return of previously ceded premiums totaling $5.5 million. Written premiums ceded under this agreement totaled $99.3 million. This agreement commuted in March 2015.

In 2013, the Company entered into a new quota-share agreement with the same third-party reinsurance company effective March 31, 2013, under which the Company ceded 40% for the same four states as the expiring agreement. This agreement was amended effective June 30, 2013, under which the Company ceded an additional 40% for the same four states for the remainder of 2013. This agreement was further amended to provide a $10.0 million reduction in ceded premiums in the fourth quarter. Written premiums ceded under this agreement totaled $145.8 million during the year ended December 31, 2013. This agreement terminated on January 1, 2014, resulting in the return of $47.2 million unearned premiums, net of $13.9 million of ceding commissions. Written premiums ceded under the agreement totaled $98.6 million.

Effective December 31, 2013, the Company entered into a new reinsurance agreement with four third-party reinsurance companies. Under this agreement, the Company ceded 20% of premiums and losses in Alabama, Illinois, Louisiana and Texas, and 60% in California on policies in force on December 31, 2013 or written or renewed on and after that date. Written premiums ceded under this agreement totaled $22.2 million as of December 31, 2013. On January 1, 2014, the quota-share rate increased to 60% for all business in force in these same states and for new and renewal business. On June 30, 2014, the reinsurance agreement was terminated, resulting in the return of $51.7 million of unearned premiums, net of $14.5 million of ceding commissions. Written premiums ceded under the agreement totaled $95.9 million. In March 2015, two of the quota share reinsurers commuted their participation on this agreement.

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 with policies in force prior to January 1, 2013. 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 $4.3 million and $15.0 million as of December 31, 2014 and 2013, of which $0.6 million and $3.6 million was held in cash equivalents as of December 31, 2014 and 2013, respectively. On January 1, 2013, the Company terminated this agreement on a cut-off basis and unearned premium of $11.8 million was returned to the ceding company.

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

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):

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):

The Michigan Catastrophic Claims Association (MCCA) is the mandatory reinsurance facility that covers no-fault medical losses above a specific retention amount in Michigan. The Company discontinued writing policies in Michigan in 2011. For policies effective in 2011 and 2010, the retention amount was $0.5 million. When the Company wrote personal automobile policies in the state of Michigan, the Company ceded 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.

The table below presents the total amount of receivables due from reinsurers as of December 31, 2014 and 2013 (in thousands):

The quota-share reinsurers and the excess of loss reinsurers all have at least 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), AIC 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. At December 31, 2014, the VFIC Trust held $16.6 million (after cumulative withdrawals of $9.0 million through December 31, 2014), consisting of a U.S. Treasury money market account held in cash and cash equivalents, to collateralize the $9.3 million net recoverable from VFIC. In March 2015, AIC received a notice of determination from the VFIC Special Deputy Receiver on multiple proofs of claim for an aggregate amount of $15.3 million for various reinsurance balances with VFIC. As part of the notice of determination, AIC entered into a settlement agreement and release with the VFIC Special Deputy Receiver. AIC expects to receive the $15.3 million in settlement proceeds by May 2015.

At December 31, 2014, $0.2 million was included in reserves for losses and loss adjustment expenses that represented the amounts owed by AIC under a reinsurance agreement with a VIG-affiliated company. Affirmative established a trust account to secure the Company’s obligations under this reinsurance contract, which currently holds $10.7 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 December 2014, and the Special Deputy Receiver in Hawaii had cumulative withdrawals from the AIC Trust of $1.7 million through December 2014.

In June 2006, the Texas Department of Insurance (TDI) placed VFIC, along with several of its affiliates, into rehabilitation and subsequently into liquidation (except for VIG which remains in rehabilitation). In accordance with the TDI liquidation orders, all VIG subsidiary reinsurance agreements were terminated. Prior to the termination, the Company assumed various quota-share percentages according to which managing general agents (MGAs) produced the business. With respect to business produced by certain MGAs, the Company assumed 100% of the contracts. For business produced by other MGAs, the Company’s assumption was net after VIG cession to other reinsurers. For this latter assumed business, the other reinsurers and their participation varied by MGA. Prior to the termination of the VIG subsidiary reinsurance agreements, the agreements contained no maximum loss limit other than the underlying policy limits. The ceding company’s retention was zero and these agreements could be terminated at the end of any calendar quarter by either party with prior written notice of not less than 90 days.

VIG indemnified the Company for any losses due to uncollectible reinsurance related to reinsurance agreements entered into with unaffiliated reinsurers prior to December 31, 2003. As of December 31, 2014, all such unaffiliated reinsurers had A.M. best ratings of A- or better. The Company had reinsurance recoverable from VIG of $2.0 million and $2.2 million as of December 31, 2014 and 2013, respectively.

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 were as follows (in thousands):

Property and equipment, net, consisted of the following as of December 31, 2014 and 2013 (in thousands):

The Company’s depreciation expense was $6.0 million, $7.1 million, and $10.0 million for the years ended December 31, 2014, 2013 and 2012, respectively.

The Company reports no carrying value for goodwill since the impairment analysis as of September 30, 2012. The Company reports under a single reporting segment and, as such, the goodwill analysis was measured under one reporting unit. Trends and developments resulted in management concluding that it is more likely than not that a goodwill impairment existed 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 required 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 reflected an appropriate risk-adjusted discount rate based on its overall cost of capital and company-specific risk factors related to cash flow, debt covenants compliance, and regulatory risk. 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. 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 in 2012.

Indefinite-lived intangible assets primarily consist of state insurance licenses. Prior to the sale of the retail business, intangible assets included brand names that were evaluated for impairment utilizing 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. Impairment of intangible assets is recorded in goodwill and other intangible assets impairment on the consolidated statements of operations.

Other intangible assets at December 31, 2014 and 2013 were as follows (in thousands):

The Company sold $12.8 million of trade name intangibles as part of the retail sale in 2013, as discussed in Note 4.

The following table provides a reconciliation of the beginning and ending reserves for unpaid losses and loss adjustment expenses for the periods indicated (in thousands):

In 2014, the percentage of net losses and loss adjustment expense to net premiums earned (the net loss ratio) was 119.2% compared with 89.2% in 2013. The current year included $21.2 million of unfavorable prior period development primarily related to Louisiana, Texas and California losses from 2013 and 2012, which was primarily due to increases in estimated severity of liability claims. Excluding the prior year development, the current accident year net loss ratio was 97.4% compared with 81.8% in 2013. The use of quota-share reinsurance overstates the net loss ratio. 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. Excluding the impact of the quota-share, the loss ratio for the 2014 accident year was 75.2% and 74.6% for the 2013 accident year. The increase in the current year was primarily due to the increase of 2014 losses based on the prior period development.

In 2013, the percentage of net losses and loss adjustment expense to net premiums earned (the net loss ratio) was 89.2% compared with 77.8% in 2012. The current year included $7.0 million of unfavorable prior period development primarily related to the 2011 accident year for our Louisiana business, $3.6 million related to the 2011 and 2012 Texas business, and $1.3 million for the accident year 2012 California business. Excluding the prior year development, the current accident year net loss ratio was 81.8% compared with 74.0% in 2012. The use of quota-share reinsurance overstates the net loss ratio. 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. Excluding the impact of the quota-share, the loss ratio for the 2013 accident year was 74.6% and 69.4% for the 2012 accident year. The increase in the current year was primarily due to a significant increase in new business, which tends to

have a higher loss ratio than renewal business. 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 2.0% for 2013 and 2012. Both of these numbers are higher than our long term average expectation of 0.5%.

The Company’s long-term debt instruments and balances outstanding at December 31, 2014 and 2013 were as follows (in thousands):

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 December 31, 2014 was 3.84%.

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 December 31, 2014 was 3.79%.

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 December 31, 2014. The Company will continue to accrue interest on the principal during the interest deferral period and the unpaid deferred interest will also accrue interest. Deferred interest will be due and payable at the expiration of the interest deferral period and totaled $6.9 million as of December 31, 2014.

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 December 31, 2014 was 4.19%.

On September 30, 2013, the Company replaced its existing senior credit facility with the proceeds from the sale of the retail business and with proceeds from two new debt arrangements. The Company’s new debt arrangement consisted of a $40.0 million senior secured credit facility with a maturity date of March 30, 2016, and a $10.0 million subordinated secured credit facility with a maturity date of March 30, 2017.

The pricing under the senior secured credit facility was amended effective September 30, 2014 to an adjusted LIBOR rate floor of 1.25%, plus 9.25%. The interest rate as of December 31, 2014 was 10.50%. The Company made principal payments of $6.5 million and $5.0 million in 2014 and 2013, respectively. As of December 31, 2014, the principal balance of the senior secured credit facility was $28.5 million. The senior secured credit facility was issued at a discount of $2.0 million that is amortized as interest expense over the expected term of the loan using the effective interest method. Repayment of the facility is due quarterly with $2.0 million payable for each quarter through September 30, 2014, $3.5 million payable each quarter through September 30, 2015, $4.5 million payable on December 31, 2015 and the remaining balance of $13.5 million due in full on March 30, 2016. Prepayments under this agreement are applied to the earliest payments due. Effective December 31, 2014, the senior secured credit facility was amended to postpone the principal payment of $3.5 million due March 31, 2015. The next payment due is $7.0 million on June 30, 2015.

In March 2015, the Company entered into an amendment to the senior secured and subordinated credit facilities. The amendment included the following significant items:

In November 2014, the Company entered into an amendment to the senior secured and subordinated credit facilities. The amendment included the following significant items:

The Company recorded a $4.2 million pretax loss on extinguishment of debt as a result of the refinancing on September 30, 2013. The $4.2 million debt extinguishment loss resulted from the write-off of $2.2 million of deferred debt issuance costs and unamortized discount relating to the senior secured credit facility effective January 2007, $1.4 million of legal fees and a $0.6 million prepayment premium.

Debt issuance costs of $5.2 million were capitalized and will be amortized to interest expense over the expected term of the new credit agreements.

The Company’s obligations under the credit facilities are guaranteed by its material operating subsidiaries (other than the Company’s insurance companies) and are secured by a first lien security interest on all of the Company’s assets and the assets of its material operating subsidiaries (other than the Company’s insurance companies), including a pledge of 100% of the stock of AIC.

The following table summarizes the Company’s credit facilities scheduled principal payments (in thousands):

In March 2013, the Company, through one of its indirect, wholly-owned subsidiaries, entered into a $4.8 million loan secured by commercial real estate to provide liquidity to AIC. The loan is evidenced by a promissory note secured by a mortgage security agreement and assignment of leases and rents on real estate located in Baton Rouge, Louisiana, which is held as investment in real property on the consolidated balance sheet. The mortgage bears interest at a per annum fixed rate of 4.95%. The mortgage requires monthly payments of principal and interest with the final payment due on the maturity date of December 15, 2015. As security for payments, the Company assigned rents due under the lease to a trustee. Pursuant to an escrow and servicing agreement, the trustee will receive rent due under the lease, make required payments due under the mortgage and maintain certain escrow accounts to pay for the necessary expenses of the property until the mortgage is paid in full.

In December 2013, the Company entered into a capital lease obligation related to certain computer software, software licenses and hardware used in the Company’s insurance operations. A receivable for settlement of this transaction was included in other assets as of December 31, 2013. In January 2014, the Company received cash proceeds from the financing in the amount of $4.9 million. The transaction proceeds are pledged as collateral against all 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. 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.

In May 2010, the Company entered into two capital lease obligations 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 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. 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.

In October 2012, one of the Lessors terminated their capital lease agreement with the Company. In December 2012, the Lessor conveyed all rights and interest in the leased property to the Company.

The remaining lease term for both capital leases is 6 months with monthly rental payments totaling approximately $0.6 million. Cash and securities pledged as collateral and held as available-for-sale securities were $4.9 million and $5.9 million as of December 31, 2014 and 2013, respectively.

Property under capital lease consisted of the following as of December 31, 2014 and 2013 (in thousands):

The provision for income taxes for the years ended December 31 consisted of the following (in thousands):

The Company’s effective tax rate differed from the statutory rate of 35% for the years ended December 31 as follows (in thousands):

Tax effects of temporary differences that give rise to significant portions of the Company’s deferred tax assets and deferred tax liabilities at December 31, 2014 and 2013 were as follows (in thousands):

	2014		2013
Deferred tax assets:
Unearned and advance premiums	$	1,115	$	763
Net operating loss carryforward		80,041		68,318
Discounted unpaid losses		704		1,085
Deferred revenue		2,288		2,367
Allowance for doubtful accounts		184		2,709
Goodwill		3,066		3,655
Rent deferral		712		752
Deferred acquisition costs, net asset		1,475		2,640
Depreciation on fixed assets		709		325
Alternative minimum tax and work opportunity credits		696		1,276
Paid in kind interest		1,248		—
Unrealized losses		—		40
Intangibles		47		68
Stock options		1,585		1,580
State deferred tax assets		3,146		2,598
Other deferred tax assets		1,455		1,782
Total deferred tax assets		98,471		89,958
Deferred tax liabilities:
Unrealized gains		1		—
Debt extinguishment		128		517
Gain on sale of retail business		—		3,600
Other deferred tax liabilities		1,158		1,013
Total deferred tax liabilities		1,287		5,130
Deferred tax assets, net, before valuation allowance		97,184		84,828
Valuation allowance		97,184		84,828
Deferred tax liabilities, net	$	—	$	—

The change in valuation allowance attributable to continuing operations and other comprehensive income is presented for the years ended December 31 as follows (in thousands):

If actual results differ from these estimates or these estimates are adjusted in future periods, the valuation allowance may need to be adjusted, which could materially impact the Company’s financial position and results of operations. If sufficient positive evidence arises in the future indicating that all or a portion of the deferred tax assets meet the more likely than not standard, the valuation allowance would be reversed accordingly in the period that such a conclusion is reached.

As of December 31, 2014, the Company has available for income tax purposes federal net operating loss carryforwards (NOL’s), which may be used to offset future taxable income. The Company’s NOL’s expire as follows (in thousands):

At December 31, 2014, the Company’s 2007 and prior tax years were closed by the IRS.

The Company leases office space for its insurance companies in various locations throughout the United States. The Company’s operating lease rental expenses were $2.5 million, $6.8 million and $8.8 million for the years ended December 31, 2014, 2013 and 2012, respectively.

The following table summarizes the Company’s minimum commitments at December 31, 2014 (in thousands):

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. 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.

Net income (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. Restricted stock awards outstanding of 472,000 for the year ended December 31, 2014 (Nil for 2013 and 2012), were not included in the computation of diluted earnings per share because there was a loss from continuing operations during the period. Stock options outstanding of 1,263,000, 323,000 and 2,407,000 for the years ended December 31, 2014, 2013 and 2012, respectively, were not included in the computation of diluted earnings per share because the exercise price of the options was greater than the average market price of the common stock or there was 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 each of the years ended December 31, 2014, 2013 and 2012 (in thousands, except per share amounts):

In May 2004, the Company’s board of directors adopted and its stockholders approved the 2004 Stock Incentive Plan (2004 Plan) to enable the Company to attract, retain and motivate eligible employees, directors and consultants through equity-based compensatory awards, including stock options, stock bonus awards, restricted and unrestricted stock awards, performance stock awards, stock appreciation rights and dividend equivalent rights. The maximum number of shares of common stock reserved for issuance under the 2004 Plan, as amended, is 3,000,000, subject to adjustment to reflect certain corporate transactions or changes in the Company’s capital structure. At December 31, 2014, 807,195 shares were reserved for future grants under the 2004 Plan.

Under the 2004 Plan, the board or Compensation Committee may fix the term and vesting schedule of each stock option, but no incentive stock option will be exercisable more than ten years after the date of grant. Vested stock options generally remain exercisable for up to three months after a participant’s termination of service or up to 12 months after a participant’s death or disability. Typically, the exercise price of each incentive stock option must not be less than 100% of the fair market value of the Company’s common stock on the grant date, and the exercise price of a nonqualified stock option must not be less than 20% of the fair market value of the Company’s common stock on the grant date. In the event that an incentive stock option is granted to a 10% stockholder, the term of such stock option may not be more than five years and the exercise price may not be less than 110% of the fair market value on the grant date. The exercise price of each stock option granted under the 2004 Plan may be paid in cash or in other forms of consideration in certain circumstances, including shares of common stock, deferred payment arrangements or pursuant to cashless exercise programs. A stock option award may provide that if shares of the Company’s common stock are used to pay the exercise price, additional stock options will be granted to the participant to purchase that number of shares used to pay the exercise price. Generally, stock options are not transferable except by will or the laws of descent and distribution, unless the board or Compensation Committee provides that a nonqualified stock option may be transferred.

The Company has a 1998 Omnibus Incentive Plan (1998 Plan) under which the Company may grant options to employees, directors and consultants for up to 803,169 shares of common stock. The exercise prices are determined by the board of directors, but shall not be less than 100% of the fair market value on the grant date or, in the case of any employee who is deemed to own more than 10% of the voting power of all classes of the Company’s stock, not less than 110% of the fair market value. The terms of the options are also determined by the board of directors, but shall never exceed ten years or, in the case of any employee who is deemed to own more than 10% of the voting power of all classes of the Company’s common stock, shall not exceed five years. The Company does not expect to grant any further equity awards under the 1998 Plan, but intends to make all future awards under the 2004 Plan. While all awards previously granted under the 1998 Plan will remain outstanding, 1998 Plan shares will not be available for re-grant if these outstanding awards are forfeited or cancelled.

Stock Options • There were no stock option awards granted during 2014. In prior years, the Company used the modified Black-Scholes model to estimate the fair value of employee stock options on the date of grant utilizing the assumptions noted below. The risk-free rate is based on the U.S. Treasury bill yield curve in effect at the time of grant for the expected term of the option. The

expected term of options granted represents the period of time that the options are expected to be outstanding. The expected volatility assumption is derived from the historical volatility of the Company’s common stock over the most recent period commensurate with the estimated expected life of the Company’s stock options, adjusted for periods of significant volatility not expected to recur. The dividend yield was based on expected dividends at the time of grant.

A summary of stock option activity for each of the three years ended December 31 follows (shares in thousands):

The Company recognized compensation expense related to the stock options of $50,000, $300,000 and $403,000 during 2014, 2013 and 2012, respectively. The 2014 expense is further reduced by $57,000 to account for forfeited options recorded in the current period. Compensation expense is included in selling, general and administrative expenses in the consolidated statements of operations. Total unrecognized compensation expense related to unvested stock options was $4,002 at December 31, 2014, which will be recognized over a weighted-average period of approximately 1.5 months.

Stock options outstanding and exercisable at December 31, 2014 were as follows (shares in thousands):

The stock options outstanding and exercisable at December 31, 2014 had aggregate intrinsic values of zero as the aggregate exercise price was greater than the aggregate market value. Stock options exercised during 2014 had an aggregate intrinsic value of $481,000. No stock options were exercised in 2013 or 2012. The Company received $207,000 from the exercise of 274,999 share options during 2014.

Restricted Stock Awards • The Company recognized compensation expense related to the restricted stock awards of $381,000 in 2014, $0 in 2013 and $4,000 during 2012. Compensation expense is included in selling, general and administrative expenses in the consolidated statements of operations. As of December 31, 2014, there was $0.9 million of unrecognized compensation cost related to unvested restricted stock awards.

The outstanding restricted stock awards of 472,000 at December 31, 2014 had an aggregate intrinsic value of $585,200. The aggregate fair value of restricted stock awards vested during 2012 was $1,000 at the date of vesting.

The Company sponsors a defined contribution retirement plan under Section 401(k) of the Internal Revenue Code. The plan covers substantially all employees who meet specified service requirements. Under the plan, the Company may, at its discretion, match 100% of each employee’s contribution, up to 3% of the employee’s earnings, plus 50% of each employee’s contribution for the next 2% of the employee’s salary. There were no employer matching contributions to the 401(k) plan in 2012 or 2013. The Company reinstated matching contributions to the 401(k) plan beginning January 1, 2014. Total costs incurred by the Company in 2014 was $0.6 million.

On September 30, 2013, the Company entered into a $10.0 million subordinated secured credit facility with JCF AFFM Debt Holdings, L.P., as Administrative Agent and Collateral Agent. JCF AFFM Debt Holdings, L.P. is an affiliate of J.C. Flowers & Co. LLC and New Affirmative LLC, the Company’s majority shareholder.

The following table sets forth the components of accumulated other comprehensive income (loss), including reclassification adjustments (in thousands):

Net gain in accumulated other comprehensive income (loss) reclassifications for previously unrealized net gains on available-for-sale securities was $46,000 and $49,000 for the years ended December 31, 2014 and 2013, respectively. The gain was not net of any taxes due to the valuation allowance for deferred income taxes.

The Company is subject to comprehensive regulation and supervision by government agencies in Illinois, Louisiana, Michigan and New York, the states in which the Company’s insurance company subsidiaries are domiciled, as well as in the states where its subsidiaries sell insurance products, issue policies, handle claims and finance premiums. Certain states impose restrictions or require prior regulatory approval of certain corporate actions, which may adversely affect the Company’s ability to operate, innovate, obtain necessary rate adjustments in a timely manner or grow its business profitably. These regulations provide safeguards for policy owners and are not intended to protect the interests of stockholders. The Company’s ability to comply with these laws and regulations, and to obtain necessary regulatory action in a timely manner, is and will continue to be critical to its success.

The Company’s 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 the Company’s 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 the Company to further examination or corrective action imposed by state regulators, including limitations on the Company’s writing of additional business, state supervision or liquidation. Any changes in existing risk-based capital requirements or minimum statutory capital requirements may require the Company to increase its statutory capital levels. These risk-based capital standards provide for different levels of regulatory attention depending upon the ratio of an insurance company’s total adjusted capital, as calculated in accordance with NAIC guidelines, to its authorized control level risk-based capital and trend test. Authorized control level risk-based capital is the number determined by applying the NAIC’s risk-based capital formula, which measures the minimum amount of capital that an insurance company needs to support its overall business operations. At December 31, 2014, three of the Company’s insurance subsidiaries maintained a risk-based capital level that was in excess of an amount that would require any corrective actions. The risk-based capital level of Affirmative Insurance Company (AIC) triggered a regulatory action level event under the NAIC standard. As a result, AIC is required to submit a plan to the Illinois Department of Insurance (IDOI) in April 2015 detailing corrective actions it will take to return its risk-based capital ratio to an acceptable level. Upon receipt of the plan, the IDOI may accept the plan, require further amendments to the plan or take additional regulatory action including, but not limited, to placing

AIC in receivership. The following is a comparison of AIC’s total statutory capital to risk-based capital as at December 31, 2014 (in thousands):

Effective January 1, 2012, the State of Illinois adopted the revised NAIC Risk-Based Capital Model Act that includes a risk-based capital trend test as another manner under which the company action level could be triggered. 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%. At December 31, 2014, three of our insurance subsidiaries maintained a risk-based capital level that was in excess of an amount that would require any corrective actions. Affirmative Insurance Company (AIC) was at the Regulatory Action Level, thus, this test does not apply.

State insurance laws restrict the ability of the Company’s insurance company subsidiaries to declare stockholder dividends. These subsidiaries may not issue 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 December 31, 2014, the Company’s insurance companies could not pay ordinary dividends to the Company without prior regulatory approval due to a negative unassigned surplus position of Affirmative Insurance Company.

The majority of the Company’s commission income and fees are directly related to the premiums written through its insurance subsidiaries from policies sold to individuals located in certain states. Accordingly, the Company could be adversely affected by economic downturns, natural disasters, and other conditions that may occur from time-to-time in these states.

The following table displays the Company’s gross written premiums managed and assumed by state (in thousands):

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 observation 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 additional pricing services are used as a comparison to determine the reasonableness of fair values used in pricing the investment portfolio.

The Company recognizes transfers between levels at the actual date of the event or change in circumstances that caused the transfer.

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.

The following table provides information as of December 31, 2014 about the Company’s financial assets measured at fair value on a recurring basis (in thousands):

The following table provides information as of December 31, 2013 about the Company’s financial assets measured at fair value on a recurring basis (in thousands):

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

Financial assets classified as Level 2 in the fair value hierarchy include mortgage-backed securities, tax-exempt securities, corporate bonds and 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.

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 year ended December 31, 2014 were as follows (in thousands):

Fair value measurements for assets in Level 3 for the year ended December 31, 2013 were as follows (in thousands):

The Company did not have any transfers between Levels 1 and 2 during the years ended December 31, 2014 or 2013.

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 December 31, 2014 and the level within the fair value hierarchy (in thousands):

	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	23,863	$	23,863	$	23,863	$	—	$	—
Fiduciary and restricted cash		4,794		4,794		4,794		—		—
Total	$	28,657	$	28,657	$	28,657	$	—	$	—
Liabilities:
Notes payable	$	76,815	$	14,289	$	—	$	—	$	14,289
Senior secured credit facility		28,135		28,254		—		—		28,254
Subordinated secured credit facility		16,566		14,126		—		—		14,126
Mortgage payable		1,825		1,825		—		—		1,825
Total	$	123,341	$	58,494	$	—	$	—	$	58,494

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, 2013 and the level within the fair value hierarchy (in thousands):

	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	44,569	$	44,569	$	44,569	$	—	$	—
Fiduciary and restricted cash		1,369		1,369		1,369		—		—
Total	$	45,938	$	45,938	$	45,938	$	—	$	—
Liabilities:
Notes payable	$	76,828	$	13,181	$	—	$	—	$	13,181
Senior secured credit facility		33,523		34,476		—		—		34,476
Subordinated secured credit facility		13,650		11,723		—		—		11,723
Mortgage payable		3,562		3,562		—		—		3,562
Total	$	127,563	$	62,942	$	—	$	—	$	62,942

The fair values of the notes payable, the senior secured credit facility and the subordinated secured credit facility were estimated using discounted cash flow analyses prepared by a third-party valuation source based on inputs and assumptions, such as credit and default risk associated with the debt. The mortgage payable is reported at par value which approximates its fair value due to its short-term nature.

The Company’s insurance subsidiaries are required to file statutory-basis financial statements with state insurance departments in all states where they are licensed. These statements are prepared in accordance with accounting practices prescribed or permitted by the applicable state of domicile. Each state of domicile requires that insurance companies domiciled in those states prepare their statutory-basis financial statements in accordance with the National Association of Insurance Commissioners Accounting Principles and Procedures Manual subject to any deviations prescribed or permitted by the insurance commissioner in each state of domicile.

Affirmative Insurance Company of Michigan (AIC of Michigan), USAgencies Casualty Insurance Company, Inc. (Casualty), and USAgencies Direct Insurance Company (Direct) are wholly-owned subsidiaries of AIC and are included as common stock investments on AIC’s balance sheet in its statutory surplus. In November 2012, a former subsidiary of AIC, Insura Property and Casualty Company was merged into AIC and Direct was sold from AIC to Casualty. The following table summarizes selected statutory information of the Company’s insurance subsidiaries ended December 31 (in thousands):

The amount of statutory capital and surplus necessary for AIC to satisfy regulatory requirements as of December 31, 2014 was $37.4 million. Except for AIC not achieving the minimum capital and surplus requirement as at December 31, 2014, the statutory capital and surplus of each of the Company’s insurance subsidiaries exceeded the highest level of minimum regulatory required capital as of December 31, 2014, 2013 and 2012.

The following is a summary of the Company’s unaudited quarterly consolidated results from continuing operations for the years ended December 31, 2014 and 2013 (in thousands, except per share data):

	Quarter Ended
	March 31			June 30			September 30			December 31
2014:
Net premiums earned	$	33,364		$	35,188		$	14,274		$	14,210
Total revenues		45,526			46,968			25,395			25,644
Net losses and loss adjustment expenses		27,552			34,560			30,853			22,717
Net income (loss)		664			(7,242	)		(17,755	)		(7,874	)
Diluted income (loss) per common share		0.04			(0.47	)		(1.14	)		(0.50	)
Diluted weighted-average common shares		16,282			15,431			15,572			15,683
2013:
Net premiums earned	$	41,332		$	49,658		$	30,802		$	43,891
Total revenues		63,818			72,780			53,310			56,216
Net losses and loss adjustment expenses		31,563			38,243			33,725			44,287
Net income (loss)		(6,251	)		1,485			47,618			(12,134	)
Diluted income (loss) per common share		(0.41	)		0.10			3.02			(0.76	)
Diluted weighted-average common shares		15,408			15,408			15,772			15,941

The condensed financial information of the parent company, Affirmative Insurance Holdings, Inc. as of December 31, 2014 and 2013, and for each of the three years ended December 31, 2014, 2013 and 2012 is presented as follows (in thousands, except share data):

	2014			2013
Assets
Cash and cash equivalents	$	27		$	1,012
Fiduciary and restricted cash		320			319
Investment in subsidiaries		84,361			106,446
Income taxes receivable		149			—
Other intangible assets, net		273			273
Other assets		5,523			21,903
Total assets	$	90,653		$	129,953
Liabilities and Stockholders’ Deficit
Liabilities:
Payable to subsidiaries	$	116,170		$	120,441
Income taxes payable		—			3,641
Debt		101,402			103,875
Other liabilities		7,480			4,888
Total liabilities		225,052			232,845
Stockholders’ deficit:
Common stock, $0.01 par value; 75,000,000 shares authorized, 18,949,220 shares issued and 16,155,357 shares outstanding at December 31, 2014; 18,202,221 shares issued and 15,408,358 shares outstanding at December 31, 2013		190			182
Additional paid-in capital		167,623			167,049
Treasury stock, at cost (2,793,863 shares at December 31, 2014 and 2013)		(32,910	)		(32,910	)
Accumulated other comprehensive loss		(1,536	)		(1,654	)
Retained deficit		(267,766	)		(235,559	)
Total stockholders’ deficit		(134,399	)		(102,892	)
Total liabilities and stockholders’ deficit	$	90,653		$	129,953

	Year Ended December 31,
	2014			2013			2012
Net cash used in operating activities	$	(29,128	)	$	(24,423	)	$	(16,683	)
Cash flows from investing activities
Dividends received from subsidiaries		9,968			6,700			14,714
Proceeds from sale of retail business, net		25,000			84,270			—
Net cash provided by investing activities		34,968			90,970			14,714
Cash flows from financing activities
Borrowings under senior secured credit facility effective January 2007		—			12,500			5,500
Borrowings under credit facilities effective September 2013		—			48,000			—
Principal payments on senior secured credit facility effective September 2013		(6,500	)		(5,000	)		—
Principal payments on senior secured credit facility effective January 2007		—			(120,192	)		(3,530	)
Proceeds from stock options exercised		207			—			—
Debt issuance costs paid		(532	)		(860	)		—
Net cash provided by (used in) financing activities		(6,825	)		(65,552	)		1,970
Net increase (decrease) in cash and cash equivalents		(985	)		995			1
Cash and cash equivalents at beginning of year		1,012			17			16
Cash and cash equivalents at end of year	$	27		$	1,012		$	17

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 U.S. Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934, as amended (the Exchange Act) as of December 31, 2014. 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.

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as that term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). To evaluate the effectiveness of the Company’s internal control over financial reporting, the Company uses the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission-1992 (the COSO Framework). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis and projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies and procedures may deteriorate.

Using the COSO Framework, the Company’s management, including the Company’s principal executive officer and principal financial officer, evaluated the Company’s internal control over financial reporting. As a result, management has concluded that our internal control over financial reporting was effective as of December 31, 2014 based upon the COSO Framework.

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.

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 2015 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2014.

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 2015 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2014.

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 2015 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2014.

The following table sets forth information as of December 31, 2014 about all of our equity compensation plans. All plans have been approved by our stockholders.

The information relating to this Item 13 is incorporated by reference to the disclosure in the section headed “Certain Relationships and Related Transactions” in the Proxy Statement for our 2015 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2014.

The information relating to this Item 14 is incorporated by reference to the disclosure in the section headed “Corporate Governance — Audit Committee — Fees Paid to Independent Auditor” and “Corporate Governance — Audit Committee — Approval of Audit and Non-Audit Services” in the Proxy Statement for our 2015 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2014.

Pursuant to the requirements of Sections 13 or 15(d) 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.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated below.

The following documents are filed as a part of this report. Those exhibits previously filed and incorporated herein by reference are identified by reference to prior filings. Exhibits not required for this report have been omitted.

Delaware		75-2770432
(State of 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)

Large Accelerated Filer	¨	Accelerated Filer	¨

Non-Accelerated Filer	¨	Smaller Reporting Company	x

PART I
Item 1.	Business	3
Item 1A.	Risk Factors	11
Item 1B.	Unresolved Staff Comments	19
Item 2.	Properties	20
Item 3.	Legal Proceedings	20
Item 4.	Mine Safety Disclosures	20
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	21
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 8.	Financial Statements and Supplementary Data	42
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	76
Item 9A.	Controls and Procedures	76
Item 9B.	Other Information	76
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	77
Item 11.	Executive Compensation	77
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	77
Item 13.	Certain Relationships and Related Transactions, and Director Independence	77
Item 14.	Principal Accounting Fees and Services	77
PART IV
Item 15.	Exhibits, Financial Statement Schedules	78

SIGNATURES		79

	% of Total
Independent agencies:
Former retail agencies		40.1	%
Other independent agencies:
Top ten agencies		11.2	%
All other independent agencies		25.8	%
Unaffiliated underwriting agency		22.9	%
Total non-standard insurance policies distributed		100.0	%

Properties	Expiration	Square footage
Addison, TX	October 31, 2024		56,888
Baton Rouge, LA	January 7, 2020		51,792
Burr Ridge, IL	November 30, 2016		45,635
Chicago, IL	July 31, 2016		4,003
Dallas, TX	December 31, 2017		2,102
Total leased properties			160,420

	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
	Ended		Ended		Ended		Ended
	March 31		June 30		September 30		December 31
2014
High	$	2.95	$	2.80	$	2.62	$	1.90
Low		2.35		2.39		1.90		0.90
Close		2.74		2.60		2.00		1.24
Cash dividends declared per share		—		—		—		—
2013
High	$	0.45	$	0.75	$	3.25	$	3.30
Low		0.24		0.27		0.78		2.00
Close		0.33		0.75		2.45		2.55
Cash dividends declared per share		—		—		—		—

	December 31, 2014			December 31, 2013
Corporate debt securities		52.2	%		51.8	%
U.S. Treasury and government agencies		25.0			28.6
Certificates of deposit		8.3			7.9
Mortgage-backed securities		10.0			6.4
States and political subdivisions		4.5			5.3
Total		100.0	%		100.0	%

	December 31, 2014			December 31, 2013
Total invested assets	$	33,285		$	62,321
Tax-equivalent book yield		1.59	%		1.46	%
Average duration in years		2.49			2.35
Average S&P rating	A-			A+

	December 31, 2014			December 31, 2013
Quota-share reinsurers for agreements effective June 30, 2014	$	130,086		$	—
Michigan Catastrophic Claims Association		27,610			34,878
Quota-share reinsurers for agreements effective December 31, 2013		14,096			22,218
Vesta Insurance Group		9,270			13,435
Quota-share reinsurer for agreements effective January 1, 2011 and other		3,188			(4	)
Excess of loss reinsurers		839			3,413
Quota-share reinsurer for agreements effective September 1, 2011 and March 31, 2013		(2,285	)		91,879
Total reinsurance receivable	$	182,804		$	165,819

		Page
Report of Independent Registered Public Accounting Firm		43
Consolidated Balance Sheets		44
Consolidated Statements of Operations		45
Consolidated Statements of Comprehensive Income (Loss)		46
Consolidated Statements of Stockholders’ Deficit		46
Consolidated Statements of Cash Flows		47
Notes to Consolidated Financial Statements		48

	September 30, 2013
Assets
Cash and cash equivalents	$	2,529
Premium finance and commission receivable		47,847
Other intangible assets		12,764
Other assets		3,709
Total Assets	$	66,849
Liabilities
Due to third-party carriers	$	24,456
Other liabilities		5,419
Total Liabilities		29,875
Net Assets	$	36,974

	Amortized Cost		Estimated Fair Value
Fixed maturities:
Due in one year or less	$	7,672	$	7,716
Due after one year through five years		22,224		22,256
Mortgage-backed securities		3,386		3,313
Total	$	33,282	$	33,285

	December 31, 2014
	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	$	2,217	$	(6	)	$	1,984	$	(24	)	$	4,201	$	(30	)
Mortgage-backed securities		1,388		(22	)		1,273		(70	)		2,661		(92	)
Corporate debt securities		5,894		(36	)		3,235		(22	)		9,129		(58	)
Certificates of deposit		999		(1	)		—		—			999		(1	)
Total	$	10,498	$	(65	)	$	6,492	$	(116	)	$	16,990	$	(181	)

	December 31, 2014		December 31, 2013
Losses and loss adjustment expense reserves	$	86,421	$	72,366
Unearned premium reserve		67,089		69,381
Total	$	153,510	$	141,747

	Gross			Ceded			Net Asset (Liability)
Ending balance at December 31, 2012	$	7,111		$	(7,013	)	$	98
Additions		38,156			(47,705	)		(9,549	)
Amortization		(32,680	)		34,587			1,907
Ending balance at December 31, 2013		12,587			(20,131	)		(7,544	)
Additions		58,940			(63,215	)		(4,275	)
Amortization		(56,959	)		64,564			7,605
Ending balance at December 31, 2014	$	14,568		$	(18,782	)	$	(4,214	)

	2014			2013
Computer software	$	50,565		$	50,448
Data processing equipment		9,250			9,056
Leasehold improvements		3,830			3,805
Furniture and office equipment		3,664			3,637
Automobiles		207			254
		67,516			67,200
Accumulated depreciation		(59,127	)		(53,222	)
Property and equipment, net	$	8,389		$	13,978

	2014										2013
	Cost		Impairment			Accumulated Amortization			Net		Cost		Impairment			Accumulated Amortization			Net
Amortizable intangible assets:
Agency and customer relationships	$	8,054	$	(1,689	)	$	(6,365	)	$	—	$	8,054	$	(1,689	)	$	(6,365	)	$	—
Non-amortizable intangible assets:
Trade names and licenses		3,144		(244	)		(1,400	)		1,500		3,144		(244	)		(1,400	)		1,500
Total	$	11,198	$	(1,933	)	$	(7,765	)	$	1,500	$	11,198	$	(1,933	)	$	(7,765	)	$	1,500

	2014		2013
Notes payable due 2035	$	30,928	$	30,928
Notes payable due 2035		25,774		25,774
Notes payable due 2035		20,113		20,126
Total notes payable		76,815		76,828
Senior secured credit facility effective September 2013, net of discount		28,135		33,523
Subordinated secured credit facility		16,566		13,650
Mortgage payable		1,825		3,562
Total long-term debt	$	123,341	$	127,563

	December 31, 2014			December 31, 2013
Computer software, software licenses and hardware	$	34,212		$	34,212
Accumulated depreciation		(28,263	)		(23,971	)
Computer software, software licenses and hardware, net	$	5,949		$	10,241

2015	$	3,407
Less: Amount representing interest		(63	)
Present value of future lease payments	$	3,344

	2014			2013
Continuing operations	$	11,420		$	(13,303	)
Changes in other comprehensive income		(41	)		230
	$	11,379		$	(13,073	)

2027	$	11,189
2028		4,886
2029		26,569
2030		82,417
2031		39,122
2032		31,217
2033	-
2034		33,289
	$	228,689

2015	$	1,371
2016		1,848
2017		1,807
2018		1,790
2019		1,764
Thereafter		4,542
Total estimated future lease payment		13,122
Less: Sublease rental arrangements		(2,174	)
Total	$	10,948

	2013			2012
Weighted-average grant date fair value	$	1.76		$	0.69
Weighted-average risk-free interest rate		1.71	%		1.15	%
Expected term of option in years		5.00			6.00
Weighted-average expected volatility		43	%		43	%
Dividend yield		—			—

Options Outstanding							Options Exercisable
Range of Exercise Prices	Number Outstanding		Weighted Average Exercise Price		Weighted Average Years of Remaining Contractual Life		Number Exercisable		Weighted Average Exercise Price
$0.69 to $1.75		275	$	0.69		7.15		183	$	0.69
$1.76 to $10.37		675		1.76		7.39		675		1.76
$10.38 to $15.00		47		11.42		2.54		47		11.42
$15.01 to $22.00		206		17.77		2.18		206		17.77
$22.01 to $30.00		60		25.28		2.06		60		25.28
$0.69 to $30.00		1,263		5.61		6.05		1,171		6.00

	Year Ended December 31, 2014			Year Ended December 31, 2013
Beginning balance	$	(1,654	)	$	(998	)
Other comprehensive income (loss) before reclassifications		164			(607	)
Amounts reclassified from accumulated other comprehensive income (loss)		(46	)		(49	)
Net current period other comprehensive income (loss)		118			(656	)
Ending balance	$	(1,536	)	$	(1,654	)

Total reported statutory capital	$	24,265
Company action level		37,432
Regulatory action level		28,074
Authorized control level		18,716
Mandatory control level		13,101

	Total		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Treasury and government agencies	$	8,314	$	8,314	$	—	$	—
Mortgage-backed securities		3,313		—		3,313		—
States and political subdivisions		1,519		—		1,519		—
Corporate debt securities		17,372		—		17,372		—
Certificates of deposit		2,767		—		2,767		—
Total investment securities		33,285		8,314		24,971		—
Other invested assets		4,501		—		—		4,501
Total assets	$	37,786	$	8,314	$	24,971	$	4,501

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Other Invested Assets
Balance at January 1, 2014	$	4,085
Transfers into Level 3		—
Total gains included in earnings as net investment income		416
Settlements		—
Balance at December 31, 2014	$	4,501

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Other Invested Assets
Balance at January 1, 2013	$	3,390
Transfers into Level 3		—
Total gains included in earnings as net investment income		695
Settlements		—
Balance at December 31, 2013	$	4,085

AFFIRMATIVE INSURANCE HOLDINGS, INC.

By:		/s/ Michael J. MCCLURE
		Michael J. McClure
		Chief Executive Officer

Signature	Title	Date

/s/ Thomas C. Davis	Chairman	March 31, 2015
Thomas C. Davis

/s/ Michael J. McClure	Chief Executive Officer	March 31, 2015
Michael J. McClure

/s/ Earl R. Fonville	Executive Vice President and Chief	March 31, 2015
Earl R. Fonville	Financial Officer

/s/ Nimrod T. Frazer	Director	March 31, 2015
Nimrod T. Frazer

/s/ Mory Katz	Director	March 31, 2015
Mory Katz

/s/ David I. Schamis	Director	March 31, 2015
David I. Schamis

/s/ Robert T. Williams	Director	March 31, 2015
Robert T. Williams

/s/ Paul J. Zucconi	Director	March 31, 2015
Paul J. Zucconi

/s/ Eric Rahe	Director	March 31, 2015
Eric Rahe

Exhibit		Description

2.1		Stock and Asset Purchase Agreement by and among Affirmative Insurance Holdings, Inc., Affirmative Services, Inc., and USAgencies Management Services, Inc., as Sellers, and Confie Seguros Holding II Co. and Confie Insurance Group Holdings, Inc., as Buyer Parties, entered into September 16, 2013 (incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed with the SEC on September 16, 2013, File No. 000-50795).

3.1		Amended and Restated Certificate of Incorporation of Affirmative Insurance Holdings, Inc. (incorporated by reference to Exhibit 3.1 to our Registration Statement on Form S-1 filed with SEC on March 22, 2004, File No. 333-113793).

3.2		Amended and Restated Bylaws of Affirmative Insurance Holdings, Inc. (incorporated by reference to Exhibit 3.2 to our Current Report on Form 8-K filed with the SEC on November 24, 2008, File No. 000-50795).

4.1		Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to our Annual Report on Form 10-K filed with the SEC on March 17, 2008, File No. 000-50795).

4.2		Form of Registration Rights Agreement between Affirmative Insurance Holdings, Inc. and Vesta Insurance Group, Inc. (incorporated by reference to Exhibit 4.2 to Amendment No. 2 to our Registration Statement on Form S-1 filed with the SEC on May 27, 2004, File No. 333-113793).

10.1+		Affirmative Insurance Holdings, Inc. Amended and Restated 2004 Stock Incentive Plan (incorporated by reference to our Information Statement on Form DEF 14-C filed with the SEC on December 30, 2005, File No. 000-50795).

10.2+		First Amendment to the Amended and Restated Affirmative Insurance Holdings, Inc. 2004 Stock Incentive Plan (incorporated by reference to Annex A to our Definitive Proxy Statement on Form DEF 14A filed with the SEC on April 28, 2006, File No. 000-50795).

10.3+		Form of Stock Option Agreement (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on March 1, 2005, File No. 000-50795).

10.4+		Form of 2011 Stock Option Award Agreement (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on February 28, 2012, File No. 000-50795).

10.5+		Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed with the SEC on March 1, 2005, File No. 000-50795).

10.6+		Form of Restricted Stock Award Agreement (reflecting restricted stock awards issued to named executive officers in February 2011) (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on March 21, 2011, File No. 000-50795).

10.7+		Form of Restricted Stock Award Agreement (reflecting restricted stock awards issued to named executive officers in February 2014) (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on February 19, 2014, File No. 000-50795).

10.8+		Affirmative Insurance Holdings, Inc. Performance-Based Annual Incentive Plan, effective January 1, 2007 (incorporated by reference to Appendix A to our Definitive Proxy Statement on Form DEF 14A filed with the SEC on April 5, 2007, File No. 000-50795).

10.9+*		Description of Non-Employee Director Compensation.

10.10+		Second Amended and Restated Executive Employment Agreement, dated December 31, 2013 (effective December 1, 2013), between Affirmative Insurance Holdings, Inc. and Michael J. McClure (incorporated by reference to Exhibit 10.12 to our Annual Report on Form 10-K filed with the SEC on March 31, 2014, File No. 000-50795).

10.11+		Third Amended and Restated Executive Employment Agreement, dated December 31, 2013 (effective November 1, 2013), between Affirmative Insurance Holdings, Inc. and Joseph G. Fisher (incorporated by reference to Exhibit 10.14 to our Annual Report on Form 10-K filed with the SEC on March 31, 2014, File No. 000-50795).

10.12+		Executive Employment Agreement, dated December 31, 2013 (effective December 1, 2013), between Affirmative Insurance Holdings, Inc. and Earl R. Fonville ((incorporated by reference to Exhibit 10.15 to our Annual Report on Form 10-K filed with the SEC on March 31, 2014, File No. 000-50795).

Exhibit		Description

10.13		Automobile Quota Share Reinsurance Contract between Swiss Reinsurance America Corporation and Affirmative Insurance Company, dated as of December 28, 2010, for the period October 1, 2010 to December 31, 2010 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K/A filed with the SEC on January 10, 2011, File No. 000-50795).

10.14		Automobile Quota Share Reinsurance Contract between Swiss Reinsurance America Corporation and Affirmative Insurance Company, dated as of December 29, 2010, for the period January 1, 2011 to December 31, 2011(incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K/A filed with the SEC on January 10, 2011, File No. 000-50795).

10.15		Automobile Quota Share Reinsurance Contract between Greenlight Reinsurance, Ltd. and Affirmative Insurance Company, dated as of September 1, 2011, for the period September 1, 2011 through December 31, 2012 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on November 15, 2011, File No. 000-50795).

10.16		Addendum No. 1 (effective September 1, 2011) to the Interests and Liabilities Agreement of Greenlight Reinsurance, Ltd. with respect to the Automobile Quota Share Reinsurance Contract between Greenlight Reinsurance, Ltd. and Affirmative Insurance Company, dated as of September 1, 2011, for the period September 1, 2011 through December 31, 2012 (incorporated by reference to Exhibit 10.15 to our Annual Report on Form 10-K filed with the SEC on April 1, 2013, File No. 000-50795).

10.17		Addendum No. 2 (effective September 1, 2011) to the Interests and Liabilities Agreement of Greenlight Reinsurance, Ltd. with respect to the Automobile Quota Share Reinsurance Contract between Greenlight Reinsurance, Ltd. and Affirmative Insurance Company, dated as of September 1, 2011, for the period September 1, 2011 through December 31, 2012 (incorporated by reference to Exhibit 10.16 to our Annual Report on Form 10-K filed with the SEC on April 1, 2013, File No. 000-50795).

10.18		Addendum No. 3 (effective February 28, 2012) to the Interests and Liabilities Agreement of Greenlight Reinsurance, Ltd. with respect to the Automobile Quota Share Reinsurance Contract between Greenlight Reinsurance, Ltd. and Affirmative Insurance Company, dated as of September 1, 2011, for the period September 1, 2011 through December 31, 2012 (incorporated by reference to Exhibit 10.17 to our Annual Report on Form 10-K filed with the SEC on April 1, 2013, File No. 000-50795).

10.19		Addendum No. 4 (effective December 31, 2012) to the Interests and Liabilities Agreement of Greenlight Reinsurance, Ltd. with respect to the Automobile Quota Share Reinsurance Contract between Greenlight Reinsurance, Ltd. and Affirmative Insurance Company, dated as of September 1, 2011, for the period September 1, 2011 through March 31, 2013 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on January 4, 2013, File No. 000-50795).

10.20		Automobile Quota Share Reinsurance Contract between Greenlight Reinsurance, Ltd. and Affirmative Insurance Company, effective March 31, 2013 (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed with the SEC on April 3, 2013, File No. 000-50795).

10.21		Addendum No. 1 (effective March 31, 2013) to Interests and Liabilities Agreement of Greenlight Reinsurance, Ltd. with respect to the Automobile Quota Share Reinsurance Contract between Greenlight Reinsurance, Ltd. and Affirmative Insurance Company, effective March 31, 2013 (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed with the SEC on April 3, 2013, File No. 000-50795).

10.22		Addendum No. 2 (effective June 30, 2013) to the Interests and Liabilities Agreement of Greenlight Reinsurance, Ltd. with respect to the Automobile Quota Share Reinsurance Contract between Greenlight Reinsurance, Ltd. and Affirmative Insurance Company, effective March 31, 2013 (incorporated by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q filed with the SEC on August 14, 2013, File No. 000-50795).

10.23		Addendum No. 3 (effective October 1, 2013) to the Interests and Liabilities Agreement of Greenlight Reinsurance, Ltd. with respect to the Automobile Quota Share Reinsurance Contract between Greenlight Reinsurance, Ltd. and Affirmative Insurance Company, effective March 31, 2013 (incorporated by reference to Exhibit 10.26 to our Annual Report on Form 10-K filed with the SEC on March 31, 2014, File No. 000-50795).

10.24		Addendum No. 4 (effective June 30, 2013) to the Interests and Liabilities Agreement of Greenlight Reinsurance, Ltd. with respect to the Automobile Quota Share Reinsurance Contract between Greenlight Reinsurance, Ltd. and Affirmative Insurance Company, effective March 31, 2013((incorporated by reference to Exhibit 10.27 to our Annual Report on Form 10-K filed with the SEC on March 31, 2014, File No. 000-50795).

Exhibit		Description
10.25*		Commutation Agreement effective March 24, 2015, between Affirmative Insurance Company and Greenlight Reinsurance Ltd. with respect to the Automobile Quota Share Reinsurance Contract between Affirmative Insurance Company and Greenlight Reinsurance Ltd., effective September 1, 2011.

10.26		Automobile Quota Share Reinsurance Contract between Affirmative Insurance Company and ACE American Insurance Company, Third Point Reinsurance Company Ltd., Tokio Millenium Re AG, and SCOR Reinsurance Co., effective December 31, 2013 (incorporated by reference to Exhibit 10.28 to our Annual Report on Form 10-K filed with the SEC on March 31, 2014, File No. 000-50795).

10.27		Addendum No. 1 (effective December 31, 2013) to the Interests and Liabilities Agreement of ACE American Insurance Company, Third Point Reinsurance Company Ltd., Tokio Millennium Re AG, and SCOR Reinsurance Company with respect to the Automobile Quota Share Reinsurance Contract between Affirmative Insurance Company and ACE American Insurance Company, Third Point Reinsurance Company Ltd., Tokio Millenium Re AG, and SCOR Reinsurance Co., effective December 31, 2013 (incorporated by reference to Exhibit 10.29 to our Annual Report on Form 10-K filed with the SEC on March 31, 2014, File No. 000-50795).

10.28*		Commutation Endorsement effective March 31, 2015, between Affirmative Insurance Company and ACE American Insurance Company with respect to the Automobile Quota Share Reinsurance Contract between Affirmative Insurance Company and ACE American Insurance Company, effective December 31, 2013 through June 30, 2014.

10.29		Addendum No. 2 (effective December 31, 2013) to the Interests and Liabilities Agreement of ACE American Insurance Company, Third Point Reinsurance Company Ltd., Tokio Millennium Re AG, and SCOR Reinsurance Company with respect to the Automobile Quota Share Reinsurance Contract between Affirmative Insurance Company and ACE American Insurance Company, Third Point Reinsurance Company Ltd., Tokio Millennium Re AG, and SCOR Reinsurance Company, effective December 31, 2013 (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed with the SEC on August 14, 2014, File No. 000-50795).

10.30		Termination Addendum to the Automobile Quota Share Reinsurance Contract between Affirmative Insurance Company and ACE American Insurance Company, Third Point Reinsurance Company Ltd., Tokio Millennium Re AG, and SCOR Reinsurance Company, effective December 31, 2013 (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q filed with the SEC on August 14, 2014, File No. 000-50795).

10.31		Automobile Quota Share Reinsurance Contract issued to Affirmative Insurance Company, effective June 30, 2014 (incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q filed with the SEC on August 14, 2014, File No. 000-50795).

10.32*		Commutation and Release Agreement effective January 1, 2015, between Affirmative Insurance Company and Third Point Reinsurance Company Ltd. with respect to the Automobile Quota Share Reinsurance Contracts between Affirmative Insurance Company and Third Point Reinsurance Company Ltd., effective December 31, 2013 and June 30, 2014.

10.33		Master Services Agreement, dated as of October 16, 2006, between Affirmative Insurance Holdings, Inc. and Accenture LLP (incorporated by reference to Exhibit 10.27 to our Current Report on Form 8-K filed with the SEC on October 20, 2006, File No. 000-50795).

10.34		Amendment No. 19 to Services Agreement No. 1, effective September 1, 2012, between Affirmative Insurance Holdings, Inc. and Accenture LLP (incorporate by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on October 22, 2012, File No. 000-50795).

10.35		Amendment No. 21 to Services Agreement No. 1, effective May 15, 2013, between Affirmative Insurance Holdings, Inc. and Accenture LLP (incorporated by reference to Exhibit 10.1 to our Current Report on form 8-K filed with the SEC on August 23, 2013, File No. 000-50795).

10.36		$220,000,000 Credit Agreement dated as of January 31, 2007, among Affirmative Insurance Holdings, Inc. as Borrower, the Lenders party thereto, Credit Suisse, Cayman Islands Branch as Administrative Agent and Collateral Agent and Credit Suisse Securities (USA) LLC, as Sole Bookrunner and Sole Lead Arranger (incorporated by reference to Exhibit 10.32 to our Annual Report on Form 10-K filed with the SEC on March 16, 2007, File No. 000-50795).

10.37		First Amendment to Credit Agreement and Guarantee and Collateral Agreement, dated as of March 8, 2007, among Affirmative Insurance Holdings, Inc. as Borrower, the lenders party thereto, Credit Suisse, Cayman Islands Branch, as Administrative Agent, Collateral Agent, Outgoing Issuing Bank and Outgoing Swingline Lender and The Frost National Bank as Incoming Issuing Bank and Incoming Swingline Lender (incorporated by reference to Exhibit 10.32 to our Annual Report on Form 10-K filed with the SEC on March 16, 2007, File No. 000-50795).