Affirmative Insurance Announces 2006 Second Quarter Results

Affirmative Insurance Holdings, Inc. (Nasdaq: AFFM), a producer and provider of personal non-standard automobile insurance, today announced financial results for the quarter and the six months ended June 30, 2006. Key Financial Results for the Three and Six Month Periods Ended June 30, 2006Three months endedSix months endedJune 30,June 30,20062005 % Change20062005 % Change—— ——- ————– ——- ——–RestatedRestated(dollars in millions, except per share data) Gross premiums written$ 65.7$ 74.2-11.4% $154.5$179.3-13.8% Net premiums written$ 68.1$ 72.7-6.3% $155.2$176.8-12.2% Net premiums earned$ 73.8$ 77.4-4.8% $146.8$145.41.0% Total revenues$ 90.5$100.5-10.0% $182.7$190.7-4.2% Net income$ 4.9$ 5.9-16.8% $ 11.1$ 13.6-18.5% Net income per share – diluted $ 0.32$ 0.36-11.1% $ 0.72$ 0.81-11.1%

Second Quarter Financial Results

In the second quarter of 2006, we had net income of $4.9 million or $0.32 per diluted share, as compared to the net income of $5.9 million or $0.36 income per diluted share for the same period in 2005. Weighted average diluted shares outstanding for the second quarter were 15.4 million compared to 16.4 million for the year-ago period, largely as a result of our acquisition of 2.0 million shares of treasury stock in June 2005 and 302,400 shares in the second quarter of 2006.

Net premiums earned for the three months ended June 30, 2006 were $73.8 million, a decrease of $3.6 million or 4.8% compared to net premiums earned of $77.4 million for the three months ended June 30, 2005. The decrease was primarily due to our reduced levels of gross premiums written in both the current and previous periods. In the second quarter of 2006, our gross premiums written were down 11.4% as compared to the second quarter of 2005.

Net premiums written decreased 6.3% to $68.1 million due to the decline in our gross premiums written.

For the quarter ended June 30, 2006, our loss and loss adjustment expense ratio was 63.8% as compared to 66.1% in the second quarter of the prior year. This improvement reflects favorable loss development in the current period relative to the loss ratios estimated in previous periods.

Although our selling, general and administrative expenses decreased 9.8% to $34.2 million for the second quarter of 2006 from $37.9 million in the comparable period in 2005, our expense ratio increased to 28.1% from 22.2% in the prior year. This increase in our expense ratio reflects the effect of the widely used industry calculation method that offsets our operating expenses (selling, general and administrative expenses and depreciation and amortization) with our other revenues (commission income and fees) in the dividend, with the divisor consisting of only net premiums earned. The revenue from commission income and fees decreased to $14.6 million in the second quarter of 2006 from $21.7 million in the comparable period in 2005 in part as a result of the elimination entries related to our increased retention of business produced. In addition, revenue from commission income and fees has been adversely affected by both the decline in gross premiums written and the change in our corporate strategy during the second quarter that involved the reduction or elimination of the agency fee charged to a customer when a policy is written. This change allows us to offer the prospective customer a more affordable down payment, with the objective of gaining new customers, increasing premiums written and enhancing the economic value of our book of business.

Our combined ratio (the sum of the loss and loss adjustment expense ratio and the expense ratio) for the second quarter of 2006 was 91.9% as compared to 88.3% for the comparable quarter in 2005.

Year-to-date Financial Results

In the first six months of 2006, we had net income of $11.1 million or $0.72 per diluted share, as compared to the net income of $13.6 million or $0.81 income per diluted share for the same period in 2005. Weighted average diluted shares outstanding for the first six months were 15.4 million compared to 16.8 million for the year-ago period, largely as a result of our acquisition of 2.0 million shares of treasury stock in June 2005 and 302,400 shares in the second quarter of 2006.

Net premiums earned for the six months ended June 30, 2006 were $146.8 million, an increase of $1.4 million or 1.0% compared to net premiums earned of $145.4 million for the six months ended June 30, 2005. The increase was primarily due to our increased retention of gross premiums written in previous periods. In the first six months of 2006, our gross premiums written were down 13.8% as compared to the first six months of 2005.

Net premiums written decreased 12.2% to $155.2 million due to the decline in our gross premiums written.

For the six months ended June 30, 2006, our loss and loss adjustment expense ratio was 64.5% as compared to 65.9% in the first six months of the prior year. This improvement reflects favorable loss development in the current period relative to the loss ratios estimated in previous periods.

For the six months ended June 30, 2006, our expense ratio was 25.1% as compared to 20.0% in the prior year. This increase in our expense ratio reflects the effect of the widely used industry calculation method that offsets our operating expenses (selling, general and administrative expenses and depreciation and amortization) with our other revenues (commission income and fees) in the dividend, with the divisor consisting of only net premiums earned. The revenue from commission income and fees included in our consolidated financial statements decreased to $32.1 million in the first six months of 2006 from $42.7 million in the comparable period in 2005 in part as a result of the elimination entries related to our increased retention of business produced. In addition, revenue from commission income and fees has been adversely affected by both the decline in gross premiums written and the change in our corporate strategy during the second quarter as described above.

Our combined ratio (the sum of the loss and loss adjustment expense ratio and the expense ratio) for the first six months of 2006 was 89.6% as compared to 85.9% for the comparable quarter in 2005.

Share Repurchase Program

As previously disclosed, on May 9, 2006, our board of directors approved a share repurchase program for up to $15.0 million of our common stock over the subsequent twelve months. In May and June 2006, we repurchased a total of 302,400 shares of our common stock at an average cost of $13.67 per share.

Restatement

As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2005, we restated certain of our previously issued financial statements to correct consolidating elimination entries made in prior periods that were not in conformity with generally accepted accounting principles, and to correct the allocation of commission income and fees among the first three quarters of 2005. The erroneous elimination entries had no effect on reported net income, earnings per share, cash, invested assets or stockholders’ equity, but did have the effect of materially understating gross revenues and expenses and misstating certain assets and liabilities. The restatement of the misallocation of commission income and fees among the first three quarters of 2005 reduced commission and fee income by $138,000 ($89,000 after income taxes) for the second quarter of 2005 and $483,000 before income taxes ($312,000 after income taxes) for the six months ending June 30, 2005. The $483,000 before income taxes ($312,000 after income taxes) is reported as commission income and fees in the third quarter of 2005. The previously issued unaudited interim consolidated financial statements for the quarter ended June 30, 2005 have been restated. All financial information in this announcement gives effect to the restatement.Affirmative Insurance Holdings, Inc.Consolidated Statements of Operations – Unaudited(dollars in thousands, except per share data)Three months ended June 30,———————————–20062005% Change———– ———– ———Restated Revenues Net premiums earned$73,753 $77,441-4.8% Commission income and fees14,55221,707-33.0% Net investment income2,1541,35359.2% Realized gains (losses)13NM———– ———–Total revenues90,460100,504-10.0%———– ———– Expenses Losses and loss adjustmentexpenses47,08151,217-8.1% Selling, general andadministrative expenses34,19437,896-9.8% Depreciation and amortization1,0599936.6% Interest expense1,08679636.4%———– ———–Total expenses83,42090,902-8.2%———– ———–Net income before income taxes,minority interest and equityinterest in unconsolidatedsubsidiaries7,0409,602-26.7% Income tax expense2,1563,403-36.6% Minority interest, net of incometaxes-326NM———– ———–Net income$4,884 $5,873-16.8%=========== ===========Net income per commonshare – Basic$0.32 $0.36-11.1%=========== ===========Net income per commonshare – Diluted$0.32 $0.36-11.1%=========== ===========Weighted average sharesoutstanding – Basic15,321,77116,218,769-5.5%Weighted average sharesoutstanding – Diluted15,359,00416,434,411-6.5%Operational Information Gross premiums written$65,731 $74,201-11.4% Net premiums written$68,120 $72,689-6.3%Percentage retained103.6%98.0%Loss Ratio63.8%66.1% Expense Ratio28.1%22.2%———– ———–Combined Ratio91.9%88.3%=========== ===========Six months ended June 30,———————————–20062005% Change———– ———– ———Restated Revenues Net premiums earned$146,791 $145,3771.0% Commission income and fees32,05142,702-24.9% Net investment income4,2142,61061.5% Realized gains (losses)(366)6NM———– ———–Total revenues182,690190,695-4.2%———– ———– Expenses Losses and loss adjustmentexpenses94,73395,784-1.1% Selling, general andadministrative expenses66,79569,822-4.3% Depreciation and amortization2,1192,0224.8% Interest expense2,1711,37557.9%———– ———–Total expenses165,818169,003-1.9%———– ———–Net income before income taxes,minority interest and equityinterest in unconsolidatedsubsidiaries16,87221,692-22.2% Income tax expense5,6767,687-26.2% Minority interest, net of incometaxes81359-77.4%———– ———–Net income$11,115 $13,646-18.5%=========== ===========Net income per commonshare – Basic$0.72 $0.83-13.3%=========== ===========Net income per commonshare – Diluted$0.72 $0.81-11.1%=========== ===========Weighted average sharesoutstanding – Basic15,376,85816,530,619-7.0%Weighted average sharesoutstanding – Diluted15,414,73316,774,473-8.1%Operational Information Gross premiums written$154,480 $179,303-13.8% Net premiums written$155,178 $176,799-12.2%Percentage retained100.5%98.6%Loss Ratio64.5%65.9% Expense Ratio25.1%20.0%———– ———–Combined Ratio89.6%85.9%=========== ===========Affirmative Insurance Holdings, Inc.Condensed Consolidated Balance Sheets(dollars in thousands, except share and per share data)June 30,December 31, Assets20062005 ——————————— Fixed maturities – available for sale$233,493$210,273 Short-term investments251477———————- Total invested assets233,744210,750 Cash and cash equivalents25,09548,037 Fiduciary and restricted cash32,95529,689 Premiums and fees receivable85,59781,680 Commissions receivable5,1472,144 Receivable from reinsurers24,31228,137 Deferred acquisition costs26,94424,453 Deferred tax asset, net13,69514,866 Goodwill and other intangible assets, net83,69480,616 Other assets24,13023,753———————-Total assets$555,313$544,125====================== Liabilities and Stockholders’ Equity —————————————- Liabilities Reserves for losses and loss adjustmentexpenses136,417126,940 Unearned premium102,76697,344 Amounts due reinsurers3598,715 Deferred revenue27,12027,101 Notes payable56,70256,702 Other liabilities25,47227,361———————-Total liabilities348,836344,163———————- Stockholders’ equity Common stock175175 Additional paid-in capital159,318158,904 Treasury stock, at cost(32,880)(28,746) Accumulated other comprehensive income(loss)(797)(529) Retained earnings80,66170,158———————-Total stockholders’ equity206,477199,962———————-Total liabilities andstockholders’ equity$555,313$544,125======================Notes payable as % of capitalization21.5%22.1% Actual shares outstanding15,138,38215,432,557 Book value per share$13.64$12.96

Forward-Looking Statements Disclosure

Certain information in this news release and other statements or materials are not historical facts but are forward-looking statements relating to such matters as future results of our business, financial condition, liquidity, results of operations, plans, and objectives. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we provide the following cautionary remarks regarding important factors that, among others, could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. The risks and uncertainties that may affect the operations, performance, results of our business, and the other matters referred to above include, but are not limited to: general volatility of the non-standard personal automobile and reinsurance markets; the market price of our common stock; changes in business strategy; severe weather conditions; availability, terms and deployment of capital; the degree and nature of competitor product and pricing activity; changes in the non-standard personal automobile insurance industry, interest rates or the general economy; identification and integration of potential acquisitions; claims experience; and availability of qualified personnel.

About Affirmative Insurance Holdings, Inc.

Headquartered in Addison, Texas, Affirmative Insurance Holdings, Inc. is a producer and provider of personal non-standard automobile insurance policies to individual consumers in highly targeted geographic markets. We currently offer products and services in 12 states, including Texas, Illinois, California and Florida.