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Affirmative Insurance Holdings Inc – IPO: ‘424B1’ on 7/9/04

On:  Friday, 7/9/04, at 9:59pm ET   ·   As of:  7/12/04   ·   Accession #:  1193125-4-116404   ·   File #:  333-113793

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 7/12/04  Affirmative Ins Holdings Inc      424B1       7/09/04    1:3.0M                                   RR Donnelley/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 424B1       Final Prospectus                                    HTML   2.32M 

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8,170,000 Shares

FILED PURSUANT TO

RULE 424 (b) (1)

REGISTRATION NO: 333-113793

Common Stock

$14.00 per share

This investment involves risk. See “ Risk Factors” beginning on page 10.

The underwriters have a 30-day option to purchase up to 663,000 additional shares of common stock from us and 562,500 additional shares of common stock from the selling stockholders to cover over-allotments, if any.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Piper Jaffray

William Blair & Company

Sandler O’Neill & Partners, L.P.

Raymond James

The date of this prospectus is July 9, 2004.

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SUMMARY

The items in the following summary are described in more detail later in this prospectus. This summary provides an overview of selected information and does not contain all of the information that you should consider. Therefore, you should also read the more detailed information set out in this prospectus and the consolidated financial statements and related notes included in this prospectus.

Business of Affirmative Insurance Holdings, Inc.

We are a growing producer and provider of non-standard automobile insurance policies to individual consumers in highly targeted geographic markets. Non-standard personal automobile insurance policies provide coverage to drivers who find it difficult to obtain insurance from standard insurance companies due to their lack of prior insurance, age, driving record, limited financial resources or other factors. These policies generally require higher premiums than standard policies for comparable coverage. We currently offer our products and services in 11 states, including Texas, Illinois and California. Based upon the most current industry data compiled by A.M. Best Company, Inc., the 11 states in which we operate collectively represent approximately 50.0% of the non-standard personal automobile insurance market, or approximately $15.8 billion in direct premiums written in 2002.

Our business is led by a group of seasoned insurance professionals with significant expertise and experience in acquiring, integrating, building and managing non-standard personal automobile insurance operations. Our chief executive officer, chief financial officer and treasurer have served as senior executives of publicly-traded insurance holding companies.

Between 2001 and 2003, our operations consisted of underwriting and retail agencies that produced non-standard personal automobile insurance policies for various insurance companies, including those of our ultimate parent, Vesta Insurance Group, Inc. During this period, our total agency revenues grew from $6.2 million to $147.1 million, and our total agency pretax income grew from a loss of $3.1 million to pretax income of $20.9 million. Substantially all of this growth was achieved through the acquisition of six regionally-branded underwriting agencies and/or retail agencies in 2001 and 2002, coupled with our post-acquisition implementation of disciplined underwriting, pricing and claims practices.

For periods prior to December 31, 2003, we also managed Vesta’s non-standard personal automobile insurance business, or the NSA Business, and Vesta reported the financial results of this business in a separate financial reporting segment. As of December 31, 2003, Vesta transferred to us two insurance companies and all future economic interest in the NSA Business. We discuss the contractual arrangements defining this future economic interest, as well as their effect, in “Our Separation from Vesta — Reinsurance Restructuring with Vesta” beginning on page 27. From 2001 to 2003, Vesta reported that the total revenues for the NSA Business grew from $14.6 million to $192.3 million, net premiums earned grew from $10.2 million to $167.4 million and pretax income grew from $3.9 million to $9.2 million.

We believe the keys to our past profitability and our long-term success are our ability to deploy and manage multiple distribution channels and our flexible operating model. Our operations are comprised of three distinct components:

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We own two insurance companies, four underwriting agencies and four branded retail agencies with 140 retail store locations as of March 31, 2004, serving Illinois, Texas, Missouri, Indiana and South Carolina. These three operating components often function as a vertically integrated unit, capturing all of the premiums, and associated risk, and commissions and fees generated from the sale of each insurance policy. There are many other instances, however, when one or more of our operations functions independently with third parties. For example, as of March 31, 2004, our insurance companies had relationships with five unaffiliated underwriting agencies that design, distribute and service our policies through their approximately 4,200 independent agencies, and our underwriting agencies distributed insurance policies through approximately 2,000 independent agencies in addition to our 140 retail stores. In addition, our retail stores sell non-standard personal automobile insurance policies and other complementary insurance products on behalf of unaffiliated insurance companies. We believe our ability to enter into a variety of business relationships with third parties allows us to maximize sales penetration while managing growth strategies through industry cycles better than if we employed a single, vertically integrated operating structure.

Our historical revenues consisted primarily of commissions and fees earned by our underwriting agencies for premiums they produced. Beginning January 1, 2004, our revenues also include net premiums earned by our insurance companies. We measure the total gross premiums written from which we derive either of these components of revenue as our Total Controlled Premium. The following table displays our Total Controlled Premium by distribution channel for the year ended December 31, 2003:

Of this Total Controlled Premium of $385.7 million, approximately $324.8 million, comprising 100% of the NSA Business, was written or reinsured by Vesta’s insurance companies, and approximately $60.9 million was written by Old American County Mutual Fire Insurance Company, an unaffiliated insurance company, and reinsured by unaffiliated reinsurers.

In addition to contributing to our Total Controlled Premium, our retail stores also sell non-standard personal automobile insurance policies, complementary insurance products and ancillary non-insurance products on behalf of third parties for which we receive commissions and fees. During 2003, our retail stores collected approximately $9.3 million from third parties for the sale of such policies and products.

Our retail stores are operated under four brand names — A-Affordable^®, Driver’s Choice^SM, InsureOne^®, and Yellow Key^® — each of which was developed over a significant period of time by its previous owners. In contrast to the traditional state-by-state marketing approach that is common practice in our industry, we have adopted a more targeted approach using the designated market area, or DMA^®, developed by Nielsen Media Research, Inc., as the fundamental marketing focus in our retail operation. A DMA^® is a geographically distinct region, often a city and its surrounding metropolitan area, that Nielsen defines based on its analysis of mutually exclusive television viewing areas. We believe that segmenting our geographic markets into DMAs^® facilitates the concentration of our advertising and brand support activities, allowing us to more cost-effectively manage and leverage each regional brand.

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Our Strengths

Our mission is to create and sustain superior returns for our stockholders throughout industry cycles. We believe we have developed certain strengths that help us achieve our mission, including:

Our Growth Strategy

Our growth strategy, which is driven by a strong commitment to organic growth complemented by acquisition activity, is comprised of the following:

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Our Challenges

We face a number of challenges in capitalizing on our strengths and implementing our strategies. For example:

For further discussion of these and other challenges we face, see “Risk Factors” beginning on page 10.

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Our Formation and Separation from Vesta Insurance Group, Inc.

We were incorporated in Delaware on June 25, 1998. From inception through 2000, former management pursued a business model of underwriting non-standard personal automobile insurance policies sold exclusively through a centralized call center sales force directly to consumers responding to radio, television and Internet advertising, as well as through the solicitation of customers of a national check cashing chain. Under this business model, we operated as a virtual insurance company with core business processes, including policy processing, underwriting, claims management and accounting, outsourced to third-party service providers. In November 2000, Thomas E. Mangold, our current Chief Executive Officer, was hired to wind down prior operations and implement our current strategy. In December 2000, Vesta acquired a controlling interest in us, and since then has increased its ownership in us to its current level of 98.1% of our issued and outstanding capital stock.

In preparation for this offering, we and Vesta engaged in several transactions to transfer the non-standard personal automobile insurance underwriting operations of Vesta to us. Effective December 31, 2003, we acquired 100% of the stock of our two insurance companies — Affirmative Insurance Company and Insura Property & Casualty Insurance Company — from Vesta in exchange for shares of our common stock. We accounted for our acquisition of our two insurance companies as a pooling of interests. Accordingly, our audited consolidated financial statements included in this prospectus reflect our historical results of operations and the results of Affirmative Insurance Company and Insura, on a combined basis, as if this transaction had been consummated prior to the periods presented. However, because these companies historically ceded 100% of their premiums, losses and loss adjustment expenses to Vesta’s lead insurer, Vesta Fire Insurance Corporation, our historical insurance company segment results of operations include only certain revenues, primarily policy fees, that were not ceded to Vesta Fire and do not include the historical underwriting results of operations related to the policies written by these insurance companies. As a result, we include supplemental information regarding Vesta’s non-standard underwriting segment in this prospectus beginning on page 54, which reflects the historical financial results of operations of the NSA Business for the years ended December 31, 2003, 2002 and 2001.

Also effective December 31, 2003, Vesta restructured its internal reinsurance arrangements relating to non-standard personal automobile insurance policies. This reinsurance restructuring effectively transferred to Affirmative Insurance Company and Insura all of the losses and loss adjustment expenses that occur after December 31, 2003, and all premiums earned after that date, on the NSA Business. Vesta Fire retained all loss and loss adjustment expense reserves as of December 31, 2003 related to the NSA Business and remains liable for any losses and allocated loss adjustment expenses associated with this business that occurred on or prior to December 31, 2003. At any time after the consummation of this offering, we will have the right to require Vesta Fire to provide a letter of credit or establish a trust account to collateralize the net amounts recoverable by us from Vesta Fire in certain circumstances, including in the event Vesta Fire is assigned an A.M. Best financial strength rating below “B+.” We anticipate that we will complete the process of transitioning the writing of all new and renewal non-standard personal automobile insurance business written by Vesta’s other insurance company subsidiaries to our insurance companies during 2004, after which time all new and renewal policies will be issued by our insurance companies.

Our audited consolidated balance sheet as of December 31, 2003 reflects the impact of this reinsurance restructuring. However, because we have determined that this restructuring of Vesta’s internal reinsurance does not constitute a business combination within the meaning of Statement of Financial Accounting Standards, or SFAS, No. 141, Business Combinations, our audited consolidated statements of operations included in this prospectus do not include any underwriting results of the NSA Business. The underwriting results of the NSA Business will be reflected in our audited consolidated statements of operations in future periods commencing January 1, 2004.

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Upon completion of this offering, Vesta will own approximately 47.8% of our outstanding common stock, or approximately 42.6% if the underwriters exercise their over-allotment option in full. Vesta has advised us that, subject to market conditions, it intends to divest all of its remaining shares of our common stock over a period of time. However, Vesta is not subject to any contractual obligation to sell any additional shares of our common stock and, subject to limited exceptions, may not sell or otherwise dispose of any shares for a period of 180 days after the date of this prospectus (subject to extension under certain circumstances) without the prior written consent of Piper Jaffray & Co. on behalf of the underwriters.

Office Location

Our principal executive office is located at 4450 Sojourn Drive, Suite 500, Addison, Texas 75001, and our telephone number is (972) 728-6300. Our website address is www.affirmativeholdings.com. The information found on our website is not, however, a part of this prospectus and any reference to our website is intended to be an inactive textual reference only and is not intended to create any hypertext link.

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The Offering

Common stock offered:

The number of shares of our common stock outstanding after this offering excludes:

Unless otherwise stated, all information in this prospectus:

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Summary Financial Information

The following table provides a summary of our historical consolidated financial and operating data as of the dates and for the periods indicated. We derived the summary historical data for the years ended December 31, 2003, 2002 and 2001 from our audited consolidated financial statements included in this prospectus. We derived the summary historical data as of March 31, 2004 and for the three months ended March 31, 2004 and 2003 from our unaudited consolidated financial statements, which include all adjustments, consisting of normal recurring accruals, that management considers necessary for a fair presentation of our financial position and results of operations as of the dates or for the periods presented. The results of operations for past accounting periods are not necessarily indicative of the results to be expected for any future accounting period. The following table also includes unaudited pro forma financial information about how the transfer to us by Vesta of all economic interests in the NSA Business beginning January 1, 2004 may have affected our net income if the results of the NSA Business had been combined for the year ended December 31, 2003. Such unaudited pro forma financial information does not necessarily reflect the results of operations that may have actually resulted had the transfer of the NSA Business to us occurred prior to the year ended December 31, 2003, and should not be taken as necessarily indicative of our future results of operations. In conjunction with this summary and in order to more fully understand this summary financial information, you should also read “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the accompanying notes included in this prospectus, as well as “Unaudited Pro Forma Financial Information.”

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RISK FACTORS

An investment in our common stock involves a number of risks. You should carefully consider the risks described below, together with the other information contained in this prospectus, before you decide to buy our common stock.

Risks Related to Affirmative Insurance Holdings, Inc.

Because of our significant concentration in non-standard personal automobile insurance, our profitability may be adversely affected by negative developments and cyclical changes in that industry.

Substantially all of our gross premiums written and commission and fee income is 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 compared to more diversified companies. Examples of such negative developments are 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. In the late 1990s, many non-standard personal automobile insurers attempted to capture more business by reducing rates. We believe that these industry-wide rate reductions, combined with increased costs per claim during the period, contributed to the deterioration of industry loss ratios in the years 1999 through 2001. We believe that during 2002 and thereafter, the underwriting results in the non-standard personal automobile insurance business improved as a result of favorable pricing and competitive conditions that allowed for broad increases in rate levels by insurers, including us. These fluctuations in the non-standard personal automobile insurance business cycle may negatively impact our profitability.

Intense competition could adversely affect our profitability.

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. Our retail agencies and 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, given the current favorable pricing conditions, 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 profitability.

In addition, our underwriting agencies and retail stores offer and sell non-standard personal automobile insurance policies both for our insurance companies and for unaffiliated insurance companies. As a result, our insurance companies compete with these unaffiliated insurance companies for sales to the customers of our underwriting agencies and retail stores. If the competing insurance products offered by an unaffiliated insurance company are priced lower or have more attractive features than the insurance

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policies offered by our insurance companies, customers of our underwriting agencies and retail stores may decide not to purchase insurance policies from our insurance companies and may instead purchase policies from the unaffiliated insurance company. A loss of business by our insurance companies resulting from our agencies selling relatively more policies of unaffiliated insurance companies and fewer policies of our insurance companies could negatively affect our revenues and profitability.

Our success depends on our ability to price accurately the risks we underwrite.

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 underprice 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 gross loss and loss adjustment expense reserves, we will incur a charge to earnings.

We maintain reserves to cover our estimated ultimate liability for losses and 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 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.

Before Vesta transferred our insurance companies to us effective December 31, 2003, these insurance companies had ceded 100% of the business that they wrote to Vesta Fire Insurance Corporation, a wholly owned subsidiary of Vesta, as part of an intercompany reinsurance agreement. As a result, while our gross loss and loss adjustment expense reserves totaled approximately $58.5 million as of December 31, 2003, our net loss and loss adjustment expense reserves were zero as of that date. In connection with the acquisition of our insurance companies from Vesta, this intercompany reinsurance agreement was terminated as of December 31, 2003, and our insurance companies began accruing loss and loss adjustment expense reserves, subject only to third-party reinsurance arrangements, for reported and incurred but not reported losses for insurance policies issued or assumed by our insurance companies after December 31, 2003. Therefore, due to the termination of this 100% intercompany reinsurance agreement as of December 31, 2003, our insurance companies have recorded loss and loss adjustment expenses in their respective statements of operations beginning January 1, 2004. Although Vesta Fire remains liable for all of our losses and loss adjustment expenses occurring on or prior to December 31, 2003 on policies issued by our insurance companies, we are subject to primary liability with respect to these policies. Consequently, if Vesta Fire cannot satisfy its obligations to us, we must ultimately pay losses and loss adjustment expenses for which we have no corresponding reserves.

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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 loss adjustment expenses and incur a charge to earnings in the period during which such reserves are increased, which could have a material and adverse impact on our financial condition and results of operations. In addition, we have a limited history in establishing reserves, and the historic development of our reserves for losses and loss adjustment expenses may not necessarily reflect future trends in the development of these amounts.

We may be unable to reduce our risk and increase our underwriting capacity through reinsurance arrangements.

We use reinsurance to attempt to limit the risks associated with our insurance policies and increase the underwriting capacity of our insurance companies. Qualifying reinsurance increases the underwriting capacity of our insurance companies by decreasing their aggregate net liability on the reinsured policies for insurance regulatory purposes. The gross premiums written that were ceded to unaffiliated reinsurers on the NSA Business for the year ended December 31, 2003 were $145.2 million, or 44.7%, of the gross premiums written.

The availability, cost and structure of reinsurance protection is subject to prevailing market conditions, which are outside our control. Poor conditions in the reinsurance market could cause us to retain more risk than we would otherwise desire to retain or reduce our volume of business, either of which could impact our profitability.

In addition, in order for our reinsurance contracts to qualify for reinsurance accounting and thereby provide the additional underwriting capacity we desire, the reinsurer must, among other things, assume significant risk and have a reasonable possibility of a significant loss. If state insurance regulators deem that our existing or future reinsurance contracts do not meet these criteria, we would not receive credit for the reinsurance and would not be able to increase our ability to write business based on this reinsurance.

We may incur significant losses if our largest reinsurer, which currently has an A.M. Best financial strength rating of “B,” or any of our other reinsurers, does 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. As of March 31, 2004, we had a total of $114.1 million of receivables from reinsurers. Our largest receivable from a single reinsurer was $80.9 million from Vesta Fire. Vesta Fire currently maintains a financial strength rating of “B” (Fair) from A.M. Best, which is the seventh highest of 15 rating levels, and is under review by A.M. Best with negative implications. According to A.M. Best, “B” ratings are assigned to insurers that have a fair ability to meet their current obligations to policyholders, but are financially vulnerable to adverse changes in underwriting and economic conditions. 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 and results of operations.

Because we intend to reduce our use of quota share reinsurance, we will retain more risk, which could result in losses.

We currently 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.

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After the closing of this offering, we intend to reduce, but not eliminate, our use of quota share reinsurance. As a result, we will retain and earn more of the premiums we write, but we will also retain more of the related losses. We generally enter into quota share reinsurance agreements that cover business written through our underwriting agencies in specified states or regions. Effective January 1, 2004, we entered into two ceded quota share reinsurance agreements with unaffiliated reinsurers which will provide us with an option to cede less of the business produced by our underwriting agencies in five states to these reinsurers in the last two quarters of 2004. The amounts we cede under these agreements can decline from 60.0% to 20.0% with respect to premium written in the states of Illinois, Indiana and Missouri, and from 75.0% to 30.0% with respect to premium written in the states of New Mexico and South Carolina, for the second six months of 2004. In addition, effective January 1, 2004, we have entered into an assumed quota share reinsurance agreement under which we currently assume 25.0% of the gross premiums provided by our A-Affordable underwriting agency in Texas which is written directly by an unaffiliated insurance company, with an option to increase our participation to 70.0% for the second six months of 2004. For the three months ended March 31, 2004, we ceded $33.2 million of premiums to unaffiliated reinsurers, representing 64.4% of the direct premiums written by our insurance companies. Reducing our use of quota share reinsurance will increase our risk and exposure to such losses, which could have a material adverse effect on our business, financial condition and results of operations.

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 Illinois, the state 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 policyowners 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.

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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 or desire 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 you 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 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.

For example, in 2003, legislation was passed in Texas that has been described as comprehensive insurance reform affecting the homeowners and automobile insurance business. With respect to non-standard personal automobile insurance, the most significant provisions provide for additional rate regulation and limitations on the use of credit scoring and territorial distinctions in underwriting and rating risks. In the fiscal year ended December 31, 2003, approximately 28.5% of our Total Controlled Premium was written on policies issued to customers in Texas. Currently, all of these policies are written by Old American, a Texas county mutual insurance company. We and many of our competitors contract with Texas county mutual insurance companies primarily because these entities historically have not been subject to state rate regulation applicable to other insurance companies. Although the new reforms

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are significant, the primary rate regulation provisions do not apply directly to our business in Texas due to an exemption that applies to certain county mutual insurance companies, including Old American. However, because the Texas Commissioner of Insurance has been given broader rulemaking authority under the new law, we cannot determine the ultimate impact this legislation will have on our business until certain rules are developed by the Commissioner. Any rule changes that would bring the regulation of county mutual insurance companies more closely in line with the regulation of other property and casualty insurance companies conducting business in Texas would likely increase our regulatory costs and reduce our rate flexibility, which could make our relationship with Old American less profitable and prompt us to change the way we underwrite risk in Texas.

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, Illinois. 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. 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.

Any failure by one of our insurance companies to meet the applicable risk-based capital or minimum statutory capital requirements imposed by the laws of Illinois or other states where we do business could subject it 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, which we may be unable to do. As of December 31, 2003, Affirmative Insurance Company and Insura had total adjusted capital of $36.7 and $8.4 million and exceeded their respective authorized control level risk-based capital by a multiple of 6.5 to 1 and 26.2 to 1, respectively.

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, undermine our reputation in the marketplace, impair our image 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 lose key personnel or are unable to recruit qualified personnel, our ability to implement our business strategies could be hindered.

Our success depends in part upon the continued services of our key executives, including Thomas E. Mangold, Chief Executive Officer, President and Chairman of the Board of Directors; M. Sean McPadden, Executive Vice President; Katherine C. Nolan, Executive Vice President; and Timothy A.

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Bienek, Executive Vice President and Chief Financial Officer. We have entered into employment agreements with Mr. Mangold, Mr. McPadden, Ms. Nolan and Mr. Bienek, as described in “Management — Employment Agreements with Executive Officers,” which we expect will become effective upon the closing of this offering. We do not have key person insurance on the lives of any of our executive officers. Our success will also depend on our ability to attract and retain additional executives and personnel. The loss of any of our officers or other key personnel or 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 may encounter difficulties in implementing our strategies of expanding into new markets and acquiring agencies.

Our growth strategy includes expanding into new geographic markets, introducing additional insurance and non-insurance products and acquiring the business and assets of underwriting and retail agencies. Our future growth will face risks, including risks associated with our ability to:

We may also encounter difficulties in connection with implementing our growth strategy, including unanticipated expenditures, damaged or lost relationships with customers and independent agencies and contractual, intellectual property or employment issues relating to companies we acquire. In addition, our growth strategy may require us to enter into a geographic or business market in which we have little or no prior experience.

Further, any potential agency acquisitions may require significant capital outlays, and if we issue equity or convertible debt securities to pay for an acquisition, these securities may have rights, preferences or privileges senior to those of our common stockholders or the issuance may be dilutive to our existing stockholders. Once agencies are acquired, we could suffer increased costs, disruption of our business and distraction of our management if we are unable to smoothly integrate the agencies into our operations. Our expansion will also continue to place significant demands on our management, operations, systems, accounting, internal controls and financial resources. Any failure by us to manage our growth and to respond to changes in our business could have a material adverse effect on our business and profitability and could cause the price of our common stock to decline.

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

Our business is concentrated in 11 states. As of December 31, 2003, approximately 28.5% of our Total Controlled Premium related to policies issued to customers in Texas, 21.8% to customers in Illinois and 16.4% to customers in California. 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.

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

For the year ended December 31, 2003, independent agencies were responsible for approximately 57.2% of the gross premiums written produced by our underwriting agencies. As a result, our business depends in part on the marketing efforts of independent agencies and on our ability to offer insurance products

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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.

If we are unable to establish and maintain relationships with unaffiliated insurance companies to sell their non-standard personal automobile policies through our underwriting agencies and retail stores, our sales volume and profitability may suffer.

Our underwriting agencies and retail stores sell non-standard personal automobile insurance policies for our insurance companies and also for unaffiliated insurance companies. Particularly in soft markets, our commitment to underwriting discipline may result in declining sales of our insurance companies’ policies in favor of lower-priced products from other insurance companies willing to accept less attractive underwriting margins. Consequently, part of our strategy in a soft market is to generate increased commission and fee revenue from sales of third-party policies through our underwriting agencies’ relationships with unaffiliated insurance companies and our retail stores’ relationships with unaffiliated underwriting agencies and insurance companies. If our underwriting agencies and retail stores are unable to establish and maintain these relationships, they would have a more limited selection of non-standard personal automobile insurance policies to sell. In such an event, our underwriting agencies and retail stores might experience a net decline in overall sales volume of non-standard personal automobile insurance policies, which would decrease our profitability.

Our largely fixed cost structure with respect to our retail stores would work to our disadvantage if our sales volume at our retail stores were to decline significantly.

We estimate that, for the year ended December 31, 2003, 73% of the costs related to our retail store operations were largely fixed, including the leasing costs for our retail space and employee compensation expenses for our sales personnel in the retail stores. If we are unable to maintain our sales volume of non-standard personal automobile policies at our retail stores, we may be forced to close some of our retail store locations or lay off store personnel to manage our fixed expenses. These actions in turn could harm our profitability and likely would detract from our future growth potential.

If our insurance companies, which currently have A.M. Best financial strength ratings of “B”, fail to maintain commercially acceptable financial strength ratings, our ability to implement our business strategies successfully could be significantly and negatively affected.

Financial strength ratings are important in establishing the competitive position of insurance companies and could have an effect on an insurance company’s sales. A.M. Best, generally considered to be a leading authority on insurance company ratings and information, has currently assigned our insurance companies ratings of “B” (Fair). The “B” rating is the seventh highest of 15 rating categories that A.M. Best assigns to insurance companies, ranging from “A++” (Superior) to “F” (In Liquidation). According to A.M. Best, “B” ratings are assigned to insurers that have a fair ability to meet their current obligations to policyholders, but are financially vulnerable to adverse changes in underwriting and economic conditions. A.M. Best’s ratings reflect its opinion of an insurance company’s financial strength, operating performance and ability to meet its obligations to policyholders and are not evaluations directed to potential or current investors in our common stock or recommendations to buy, sell or hold our common stock. The “B” ratings currently assigned to our insurance companies are the same ratings assigned to Vesta’s insurance companies. In March 2004, A.M. Best placed these ratings under review with negative implications. Our insurance companies’ ratings are subject to change at any time and may be revised downward or revoked at the sole discretion of A.M. Best. We believe that A.M. Best will, in connection with this offering, re-evaluate our insurance companies’ ratings on a stand-alone basis, and the ratings assigned as a result of this expected re-evaluation may be lower than our insurance companies’ current ratings.

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Because lenders and reinsurers will use our A.M. Best ratings as a factor in deciding whether to transact business with us, the current ratings of our insurance companies or their failure to maintain the current ratings may dissuade a financial institution or reinsurance company from conducting any business with us or may increase our interest or reinsurance costs.

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

We are named as a defendant in a number of lawsuits, including a purported class action lawsuit. These lawsuits are described more fully in “Business — Legal Proceedings.” 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. Recent examples of some emerging issues include a growing trend of plaintiffs targeting automobile insurers in purported class action litigation relating to claims handling practices such as total loss evaluation methodology and the alleged diminution in value to insureds’ vehicles involved in accidents and the relatively new trend of plaintiffs targeting insurers, including automobile insurers, in purported class action litigation which seeks to recharacterize installment fees and other allowed chargers related to insurers’ installment billing programs as interest that violates state usury laws or other interest rate restrictions. The effects of these and other unforeseen emerging claims, coverage and business practice issues could negatively impact our revenues 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 March 31, 2004, $42.1 million of our investment portfolio was 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 $1.6 million. The change in fair value was determined using duration modeling assuming no prepayments.

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 information technology and telecommunications systems. 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.

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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 and pay future dividends.

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. We cannot pay dividends to our stockholders and meet our other obligations unless we receive dividends and other payments from our operating subsidiaries, including our insurance company subsidiaries.

State insurance laws limit the ability of our insurance company subsidiaries to pay dividends and require our insurance company subsidiaries to maintain specified minimum levels of statutory capital and surplus. In addition, for competitive reasons, our insurance companies need to maintain financial strength ratings which require us to maintain certain levels of capital and surplus in those subsidiaries. The need to maintain these capital and surplus levels may affect the ability of our insurance company subsidiaries to pay dividends to us. Without regulatory approval, the aggregate maximum amount of dividends that can be paid in 2004 to us by our insurance company subsidiaries is approximately $3.7 million. The aggregate maximum amount of dividends permitted by law to be paid by an insurance company does not necessarily indicate an insurance company’s actual ability to pay dividends. The actual ability to pay dividends may be further constrained by business and regulatory considerations, such as the impact of dividends on surplus, which could affect an insurance company’s ratings, competitive position, amount of premiums that can be written, and ability to pay future dividends. State insurance regulators have broad discretion to limit the payment of dividends by insurance companies and our rights to participate in any distribution of assets of our insurance company subsidiaries are subject to prior claims of policyholders and creditors, except to the extent that our rights, if any, as a creditor are recognized. As a result, a prolonged, significant decline in the profits of our insurance company subsidiaries or regulatory action limiting dividends could subject us to shortages of cash because our insurance company subsidiaries would not be able to pay us dividends.

We have no operating history as a stand-alone entity and may experience difficulty in transitioning to an independent public company.

We have no operating history as an independent company. Prior to this offering, we operated our business as a subsidiary of Vesta and we relied on Vesta for assistance with certain financial, administrative, managerial and other matters. Following the offering, we will have our own credit, banking and reinsurance relationships and will perform our own financial, reporting, regulatory compliance and investor relations functions. In order to operate successfully as an independent public company, we must establish the internal systems and capabilities, and hire or train the personnel, necessary to maintain these relationships and perform these functions effectively. We may not be successful in developing these systems and capabilities or in hiring new employees or training existing employees to carry out these new responsibilities. Even if successful, the development of such systems, capabilities and personnel may require a substantial amount of time and resources and divert our management’s attention away from our business.

In addition, upon completion of this offering, we will become a publicly traded company and we will be independently responsible for complying with the various regulatory requirements applicable to public

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companies. We will incur increased costs as a result of being a public company, particularly in light of recently enacted and proposed changes in laws, regulations and listing requirements. Our business and financial condition may be adversely affected if we are unable to effectively manage these increased costs and public company regulatory requirements.

Risks Related to Our Common Stock and This Offering

Our historical consolidated and unaudited pro forma financial information is not necessarily representative of the results we would have achieved as a stand-alone company and may not be a reliable indicator of our future results.

The historical consolidated and unaudited pro forma financial information included in this prospectus does not necessarily reflect the financial condition, results of operations or cash flows we would have achieved as a stand-alone company during the periods presented or those we will achieve in the future. This is primarily a result of the following factors:

Vesta has the ability to exert significant influence over our affairs and may have interests that differ from those of our other stockholders.

After the offering, Vesta will own approximately 47.8% of our common stock, 42.6% assuming the underwriters’ over-allotment option is exercised in full, and may have the ability to exert substantial influence over our policies and affairs. Vesta may continue to have the power to affect significantly the election of our board of directors and the approval of any action requiring stockholder approval, including amendments to our charter or bylaws and mergers or sales of substantially all of our assets. Vesta has advised us that it currently does not plan to take any such actions. The interests of Vesta may differ from the interests of our other stockholders in some respects.

Future sales of shares of our common stock by existing stockholders in the public market, including Vesta, or the possibility or perception of such sales, could adversely affect the market price of our stock.

After giving effect to this offering, our existing stockholders will beneficially own approximately 51.0% of our outstanding shares of common stock, 45.8% assuming the underwriters’ over-allotment option is exercised in full. In addition, we have entered into an agreement with Vesta whereby we are obligated to register the shares of common stock that Vesta will own after this offering under the Securities Act of 1933, as amended, for sale into the public market. Some of these shares have been pledged to Vesta’s credit facility lender and will remain subject to this pledge after this offering. Under the terms of the pledge,

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Vesta’s lender has the right to sell the pledged shares in the event that Vesta defaults under its credit facility agreement. Vesta and all of our executive officers and directors have entered into 180-day lock-up agreements covering an aggregate of 8,314,673 shares of our common stock, including options to purchase 568,819 shares, as described in “Registration Rights and Lock-Up Agreements.” These lock-up agreements are subject to certain exceptions and the shares covered thereunder may be released for resale by approval of Piper Jaffray on behalf of the underwriters. Although it has no contractual obligation to do so, Vesta has informed us that, subject to market conditions, it intends to divest its remaining shares of our common stock over a period of time following the expiration of the lock-up agreements described above, and that it may do so through one or more additional public offerings of our common stock. Sales of substantial amounts of our common stock in the public market by Vesta, its lender or any of our other stockholders, or the possibility or perception that such sales could occur, could cause market prices for our common stock to fall. If such sales or the perception of such sales causes a decline in the market price for our common stock, it may be more difficult for us to raise additional capital in the equity markets.

There is no existing public market for our common stock and an active trading market may never develop.

The initial public offering price for our common stock will be determined through our negotiations with the underwriters and may not bear any relationship to the market price at which it will trade after this offering. Before this offering there was no public trading market for our common stock and one may never develop or be sustained after this offering. If a market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at an attractive price or at all. We cannot predict the prices at which our common stock will trade. It is possible that in some future quarter our operating results may be below the expectations of financial market analysts and investors and, as a result of these and other factors, the price of our common stock may decline.

The price of our common stock may be volatile.

The trading price of our common stock following the offering may fluctuate substantially. The price of our common stock after this offering may be higher or lower than the price you pay, depending on many factors, some of which are beyond our control and may not be related to our operating performance. These fluctuations could be significant and could cause you to lose part or all of your investment in our shares of common stock. Factors that could cause fluctuations include, but are not limited to, the following:

You will experience immediate and substantial dilution upon your purchase of our common stock in this offering.

If all 4,420,000 shares of common stock offered by us in this offering are sold at an initial offering price of $14.00 per share, then investors who purchase such shares in this offering:

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In the event that we issue additional common stock in the future, including shares that may be issued upon the award of restricted stock or the exercise of options and other rights granted under our employee benefit plans, purchasers of our common stock in this offering may experience additional future dilution.

Certain provisions of our organizational documents, as well as applicable insurance laws and Delaware corporate law, could impede an attempt to replace or remove our management, prevent the sale of our company or prevent or frustrate any attempt by stockholders to change the direction of our company, each of which could diminish the value of our common stock.

Our charter and bylaws, as well as applicable insurance laws and Delaware corporate law, contain provisions that could impede an attempt to replace or remove our management or prevent the sale of our company, that, in either case, stockholders might consider to be in their best interests. For example, our bylaws prevent stockholders from calling special meetings of the stockholders and establish certain advance notice procedures for nomination of candidates for election as directors and for stockholder proposals to be considered at stockholders’ meetings. Our charter also authorizes our board of directors to determine the rights, preferences and restrictions of unissued series of preferred stock, without any vote or action by our stockholders. We could issue a series of preferred stock that could impede the completion of a merger, tender offer or other takeover attempt. Further, the insurance laws of the states in which our insurance companies are domiciled prohibit any person from acquiring control of us, and thus indirect control of our insurance companies, without the prior written approval of state regulators. Also, certain anti-takeover provisions of the Delaware General Corporation Law could make it more difficult for a third party to acquire us.

These provisions of our charter and bylaws and these laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of our company, including through transactions, and in particular unsolicited transactions, that some or all of our stockholders might consider to be desirable. As a result, efforts by our stockholders to change the direction or management of our company may be unsuccessful and the existence of such provisions may adversely affect prevailing market prices for our common stock if they are viewed as discouraging takeover attempts in the future.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We make forward-looking statements in this prospectus that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. Statements regarding the following subjects are forward-looking by their nature:

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. We will update this prospectus only to the extent required under applicable securities laws. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully consider these risks before you decide to invest in our common stock:

When we use the words “believe,” “expect,” “anticipate,” “estimate” or similar expressions, we intend to identify forward-looking statements. You should not place undue reliance on these forward-looking statements.

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately $56.7 million, or $65.3 million if the underwriters’ over-allotment option is exercised in full, based on an initial public offering price of $14.00 per share and after deducting the underwriting discount and our pro rata share of the estimated offering expenses. We intend to contribute $55.7 million of the net proceeds that we receive from this offering to our insurance companies, which would increase their statutory surplus. Our insurance companies will purchase high quality marketable securities consistent with our investment policies with the cash received. This additional capital will permit us to reduce our reinsurance purchases and retain more gross premiums written over time. We intend to use the remainder of the net proceeds that we receive of $1.0 million for general corporate purposes, including the funding of working capital needs and the payment of company expenses and stockholder dividends. Pending the uses described above, we intend to invest the net proceeds of this offering in investment-grade, interest-bearing securities.

We will not receive any of the proceeds from the sale of shares of our common stock by selling stockholders. The selling stockholders will receive all of the net proceeds from the sales of common stock offered by them under this prospectus.

DIVIDEND POLICY

We currently intend to declare and pay a quarterly dividend of $0.02 per share of our common stock. The declaration and payment of dividends is subject to the discretion of our board of directors and will depend on, among other things, 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. We may enter into new agreements or incur additional indebtedness in the future, including our proposed credit facility, which may further prohibit or restrict the payment of dividends. There is no requirement that we must, and we cannot assure you that we will, declare and pay any dividends in the future. Our board of directors may determine to retain such capital for general corporate or other purposes. As of March 31, 2004, we had $18.9 million of unrestricted funds available for the payment of dividends to our stockholders. For a discussion of our cash resources and needs, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

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, our principal sources of funds are dividends and other payments from our operating subsidiaries, which include our agency subsidiaries and our insurance company subsidiaries. State insurance laws limit the ability of our insurance company subsidiaries to pay dividends to us. See “Business — Regulatory Environment.”

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CAPITALIZATION

The following table sets forth our capitalization as of March 31, 2004, on an actual basis and as adjusted to give effect to the sale by us of 4,420,000 shares of common stock in this offering at an initial public offering price of $14.00 per share, after deducting the estimated underwriting discount and our pro rata share of the estimated offering expenses.

You should read this table in conjunction with our consolidated financial statements and related notes contained in this prospectus as well as the sections of this prospectus entitled “Our Separation from Vesta,” “Use of Proceeds,” “Selected Historical Consolidated Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The outstanding share information in the table above is based on the number of shares of our common stock outstanding as of March 31, 2004. This table excludes:

Shortly after the consummation of this offering, we expect to enter into a new senior secured credit facility with The Frost National Bank. Under this new credit facility, we expect that the maximum amount available to us from time to time will be $15.0 million, consisting of revolving loans, term loans and stand-by letters of credit. We anticipate that our obligations under the new credit facility will be guaranteed by our material non-insurance company subsidiaries and will be secured by all of our assets and those of our material non-insurance company subsidiaries. We expect that the proceeds of the new credit facility will be available to issue letters of credit securing our obligations under reinsurance agreements, to fund general working capital for our retail and underwriting agencies and capital surplus for our insurance companies, to finance certain acquisitions and for other general corporate purposes.

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DILUTION

If you invest in our common stock, you will be diluted immediately to the extent of the difference between the initial public offering price per share of our common stock and the net tangible book value per share of our common stock immediately after completion of this offering. Net tangible book value per share is equal to the amount of our total tangible assets, or total assets less intangible assets, less total liabilities, divided by the number of shares of our common stock outstanding. Our net tangible book value as of March 31, 2004 was approximately $42.3 million, or approximately $3.62 per share. After giving effect to the sale of 4,420,000 shares of common stock offered by us at an initial public offering price of $14.00 per share, and after deducting the estimated underwriting discount and our pro rata share of the estimated offering expenses, our adjusted net tangible book value as of March 31, 2004 would have been approximately $99.0 million, or approximately $6.15 per share. This represents an immediate increase in net tangible book value of $2.53 per share to existing stockholders and an immediate dilution in net tangible book value of $7.85 per share to new investors.

The following table illustrates this dilution on a per share basis:

If the underwriters exercise their option to purchase additional shares in this offering, our adjusted net tangible book value at March 31, 2004 would have been approximately $107.6 million, or $6.42 per share, representing an immediate increase in net tangible book value to our existing stockholders of $2.80 per share and an immediate dilution to new investors of $7.58 per share.

The following table summarizes, on an adjusted basis as of March 31, 2004, the total number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by existing stockholders and by new investors purchasing shares in this offering. The table is based on an initial offering price of $14.00 per share, and we have not deducted the estimated underwriting discount and our pro rata share of the estimated offering expenses in our calculations.

The foregoing discussion and tables do not take into account 803,169 shares of our common stock issuable upon exercise of outstanding options at a weighted average exercise price of $7.89 per share, as noted above in the section titled “Capitalization,” or 545,250 shares of our common stock issuable upon exercise of options granted in connection with this offering. If any of these options are exercised, there will be further dilution to new investors.

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OUR SEPARATION FROM VESTA

History

We were incorporated in Delaware on June 25, 1998. From our inception through 2000, former management pursued a business model of underwriting non-standard personal automobile insurance policies sold exclusively through a centralized call center sales force directly to consumers responding to radio, television and Internet advertising, as well as through the solicitation of customers of a national check cashing chain. Under the former business model, we operated an agency and an insurance company on an integrated basis as a virtual insurance company, with core business processes, including policy processing, underwriting, claims management and accounting, outsourced to third party service providers. The insurance company underwrote business that was produced through the agency and absorbed all the costs related to producing the business, in addition to loss and loss adjustment expenses and other general operating expenses. During 1999 and 2000, the insurance company suffered considerable underwriting losses as a result of unfavorable loss experience and high underwriting expenses, primarily driven by the high cost of acquiring policies through direct response marketing. The ratio of underwriting expenses to earned premium was 319.7% and 124.1% in the years ended 1999 and 2000, respectively.

In November 2000, Thomas E. Mangold, our current Chief Executive Officer, was hired to wind down the operations of the insurance company and to focus on developing a strategy of acquiring underwriting and retail agencies, and in December 2000, Vesta acquired a controlling interest in us. Subsequently, we terminated the outsourcing of core business processes and pursued a more traditional business model of selling non-standard personal automobile insurance policies, primarily written by Vesta’s insurance company subsidiaries, to consumers through our own retail stores and through independent agencies. Currently, Vesta owns 98.1% of our issued and outstanding capital stock.

Prior to December 31, 2003, all of Vesta’s non-standard personal automobile insurance policies, representing approximately $324.8 million of gross premiums written in 2003, were issued by various insurance company subsidiaries of Vesta and reinsured by Vesta Fire pursuant to an internal 100.0% quota share reinsurance contract. As a result of this internal reinsurance, the historical financial statements of various insurance company subsidiaries of Vesta included only certain revenues, primarily policy fees that were not ceded to Vesta Fire.

Acquisition of Insurance Companies

Effective December 31, 2003, Vesta transferred to us 100% of the stock of two insurance company subsidiaries — Affirmative Insurance Company and its wholly owned subsidiary Insura Property & Casualty Insurance Company — in exchange for 3,408,382 shares of our common stock. We accounted for our acquisition of these insurance companies at Vesta’s historical carrying amounts as transfers of net assets between entities under common control in accordance with SFAS No. 141.

We have accounted for the acquisition of these insurance companies as a pooling of interests. Pursuant to pooling of interests accounting treatment, our historical consolidated financial statements have been presented to reflect our historical results of operations and the historical results of operations of Affirmative Insurance Company and Insura on a combined basis. Accordingly, our audited consolidated financial statements included in this prospectus reflect the results of Affirmative Insurance Company and Insura as if this transaction had been consummated prior to the periods presented.

Reinsurance Restructuring with Vesta

Also effective December 31, 2003, Vesta restructured its internal reinsurance to effectively transfer all future economic interest in the NSA Business to Affirmative Insurance Company and Insura. Specifically, effective December 31, 2003, Vesta transferred to Affirmative Insurance Company and Insura all of the premiums, losses and loss adjustment expenses earned or incurred after December 31, 2003 on Vesta’s non-standard personal automobile insurance policies written or reinsured and in force as of December 31, 2003

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as well as any new and renewal non-standard personal automobile insurance policies issued by Vesta’s insurance company subsidiaries and produced by our underwriting agencies on or subsequent to December 31, 2003. Vesta Fire retained all loss and loss adjustment expense reserves as of December 31, 2003 related to these non-standard personal automobile policies, and remains liable for any losses and allocated loss adjustment expenses associated with these policies that occurred on or prior to December 31, 2003. At any time after the consummation of this offering, we will have the right to require Vesta Fire to provide a letter of credit or establish a trust account to collateralize net amounts recoverable by us in certain circumstances, including in the event Vesta Fire is assigned an A.M. Best financial strength rating below “B+.”

With respect to non-standard personal automobile insurance policies that were originally issued by Affirmative Insurance Company or Insura, representing approximately $108.8 million of gross premiums written in 2003, this restructuring involved a termination of the internal reinsurance on a cut-off basis, meaning that Vesta Fire as reinsurer retained its loss and loss adjustment expense reserves as of December 31, 2003 and remains liable for any losses occurring on or prior to December 31, 2003 on policies issued by Affirmative Insurance Company and Insura. In connection with this termination, Vesta Fire returned to Affirmative Insurance Company and Insura all of their non-standard personal automobile unearned premium liability related to the in-force policies originally issued by Affirmative Insurance Company and Insura as of December 31, 2003, and these companies paid a ceding commission refund to Vesta Fire in the form of 812,404 shares of our common stock.

With respect to non-standard personal automobile insurance policies issued by other insurance company subsidiaries of Vesta and reinsured by Vesta Fire, representing approximately $216.0 million of gross premiums written in 2003, this restructuring involved a termination of the internal reinsurance with Vesta Fire on a cut-off basis, followed by the other insurance company subsidiaries of Vesta entering into reinsurance agreements with Affirmative Insurance Company to cede to Affirmative Insurance Company all of their unearned premium liability related to the in-force non-standard personal automobile insurance policies as of December 31, 2003. In connection with these new reinsurance agreements, Affirmative Insurance Company paid an aggregate ceding commission to the other insurance company subsidiaries of Vesta in the form of 659,580 shares of our common stock.

We anticipate that we will complete the process of transitioning the non-standard personal automobile insurance business written by Vesta’s other insurance company subsidiaries to Affirmative Insurance Company and Insura during 2004. During this transitional period Affirmative Insurance Company will reinsure the new and renewal policies written by the other Vesta insurance company subsidiaries pursuant to a 100% quota share reinsurance agreement, whereby Affirmative Insurance Company will assume 100% of the underwriting results of the Vesta insurance company subsidiaries related to non-standard personal automobile insurance policies produced by our underwriting agencies on or after December 31, 2003.

Impact on Audited Financial Statements Included in This Prospectus

Our audited consolidated balance sheet as of December 31, 2003 contained in this prospectus on page F-4 reflects the impact of this internal reinsurance restructuring, including our recording of unearned premium liabilities and deferred acquisition costs and our issuance of additional shares of our common stock in payment of associated ceding commission refunds and ceding commissions. However, we have determined that this restructuring of Vesta’s internal reinsurance does not constitute a business combination, and, accordingly, our audited consolidated statements of operations contained in this prospectus on page F-5 do not reflect any underwriting results on these policies during the periods presented. The underwriting results of these policies will be reflected in our statements of operations in future periods commencing January 1, 2004.

The historical financial results of the NSA Business for the years ended December 31, 2003, 2002 and 2001 have been included in footnotes to Vesta’s audited financial statements not included in this prospectus. We have included supplemental information derived from these footnotes regarding Vesta’s

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non-standard underwriting segment at page 54 of this prospectus. Because our historical results do not reflect the underwriting results of the NSA Business, we have included this supplemental information to illustrate the scope of the change in our financial position and results of operations that could result from the transfer of the NSA Business to us. While the historical results of the NSA Business may differ from the results we will experience beginning on January 1, 2004, we believe that this information may be useful and material to investors in analyzing our future prospects.

Vesta’s Ownership After the Offering

Upon completion of this offering, Vesta will own approximately 47.8% of our outstanding common stock, or approximately 42.6% if the underwriters exercise their over-allotment option in full. Vesta has advised us that, subject to market conditions, it intends to divest all of its shares of our common stock over a period of time. However, Vesta is not subject to any contractual obligation to sell any additional shares of our common stock and, subject to limited exceptions, may not sell or otherwise dispose of any shares for a period of 180 days after the date of this prospectus (subject to extension under certain circumstances) without the prior written consent of Piper Jaffray on behalf of the underwriters. See “Registration Rights and Lock-Up Agreements,” “Shares Eligible For Future Sale” and “Underwriting.”

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION

The following tables provide selected historical consolidated financial information of Affirmative as of the dates and for the periods indicated. In conjunction with the data provided in the following tables and in order to more fully understand our historical consolidated financial and operating data, you should read “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the accompanying notes included in this prospectus.

Effective December 31, 2003, we acquired 100% of the capital stock of two insurance subsidiaries of Vesta in exchange for shares of our common stock. We accounted for our acquisition of these insurance companies at Vesta’s historical carrying value amounts as transfers of net assets between entities under common control in accordance with SFAS No. 141, and have accounted for the acquisition of these insurance companies as a pooling of interests. Pursuant to pooling of interests accounting treatment, our historical financial statements have been presented to reflect our historical results of operations and the historical results of operations of the two insurance companies on a combined basis.

We derived our selected historical consolidated financial data as of December 31, 2003 and 2002 and for the years ended December 31, 2003, 2002 and 2001 from our audited consolidated financial statements included in this prospectus. We derived our selected historical consolidated financial data as of December 31, 2001 from audited consolidated financial statements not included in this prospectus. We derived our selected historical consolidated financial data as of December 31, 2000 and 1999 and for the years ended December 31, 2000 and 1999 from our unaudited consolidated statements of operations and balance sheets not included in this prospectus. We derived our selected historical consolidated financial data as of March 31, 2004 and for the three months ended March 31, 2004 and 2003 from our unaudited consolidated financial statements, which include all adjustments, consisting of normal recurring accruals, that management considers necessary for a fair presentation of our financial position and results of operations as of the dates or for the periods presented. The results of operations for past accounting periods are not necessarily indicative of the results to be expected for any future accounting period.

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