10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)
þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2006
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from          to

Commission file number 000-50795

AFFIRMATIVE INSURANCE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware	75-2770432
(State of other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
4450 Sojourn Drive, Suite 500 Addison, Texas	75001 (Zip Code)
(Address of principal executive offices)

(972) 728-6300

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

The NASDAQ Stock Market LLC

Common Stock, par value $0.01 per share

(Title of Class)

Securities registered pursuant to Section 12(g) of the Act:

None

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  þYes     o No

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one):

Large Accelerated Filer o     Accelerated Filer þ     Non-Accelerated Filer o

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of the most recently completed second fiscal quarter (June 30, 2006), based on the price at which the common equity was last sold on such date ($15.65): $113,892,171.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: the number of shares outstanding of the registrant’s common stock, $.01 par value, as of March 6, 2007 was 15,361,848.

Documents Incorporated By Reference

Certain information called for by Part III is incorporated by reference to certain sections of the Proxy Statement for the 2007 Annual Meeting of our stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days from December 31, 2006.

Affirmative Insurance Holdings, Inc.

Index to Annual Report

on Form 10-K

Part I		1
Item 1.	Business	1
Item 1A.	Risk Factors	32
Item 1B.	Unresolved Staff Comments	43
Item 2.	Properties	43
Item 3.	Legal Proceedings	43
Item 4.	Submission of Matters to a Vote of Security Holders	44
Part II		45
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	45
Item 6.	Selected Financial Data	47
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	49
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	74
Item 8.	Financial Statements and Supplementary Data	76
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	123
Item 9A.	Controls and Procedures	123
Item 9B.	Other Information	124
Part III		124
Item 10.	Directors, Executive Officers and Corporate Governance	124
Item 11.	Executive Compensation	124
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	124
Item 13.	Certain Relationships and Related Transactions, and Director Independence	124
Item 14.	Principal Accounting Fees and Services	124
Part IV		125
Item 15.	Exhibits and Financial Statement Schedules	125
$200,000,000 Credit Agreement
First Amendment to Credit Agreement
Consent to Assignment
Lease
Subsidiaries
Consent of KPMG LLP
Consent of PricewaterhouseCoopers LLP
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

Part I

Item 1.   Business

Affirmative Insurance Holdings, Inc., formerly known as Instant Insurance Holdings, Inc., was incorporated in Delaware on June 25, 1998 and completed an initial public offering of its common stock in July 2004. We are a distributor and producer of non-standard personal automobile insurance policies for individual consumers in targeted geographic markets. Non-standard personal automobile insurance policies provide coverage to drivers who find it difficult to obtain insurance from standard automobile insurance companies due to their lack of prior insurance, age, driving record, limited financial resources or other factors. Non-standard personal automobile insurance policies generally require higher premiums than standard automobile insurance policies for comparable coverage.

Our subsidiaries include three insurance companies, four underwriting agencies, five retail agencies with 158 owned stores (16 of which are located in leased space within supermarkets owned by a major supermarket chain under an agreement signed in late 2005) and 33 franchise store locations as of December 31, 2006. Our underwriting agencies utilize approximately 3,200 independent agencies to sell the policies that they administer. In addition, we have two unaffiliated underwriting agencies producing business for our insurance companies through approximately 4,200 independent agencies. We are currently active in offering insurance (both our own and insurance underwritten by other insurance carriers) directly to individual consumers through our owned retail stores in 8 states (Illinois, Texas, Missouri, Indiana, South Carolina, Florida, Kansas and Wisconsin) and distributing our own insurance policies through independent agents in 9 states (Illinois, Texas, Missouri, Indiana, South Carolina, Florida, California, Michigan and New Mexico). Today, the 11 states in which we operate collectively represent approximately 51% of the non-standard personal automobile insurance market. These combined states accounted for $14.6 billion in direct written premium in 2005, based on information from A.M. Best and our company analysis. We believe the states in which we operate are among the most attractive non-standard personal automobile insurance markets due to a number of factors, including size of market and existing regulatory and competitive environments.

On January 31, 2007, we completed the acquisition of USAgencies L.L.C. (“USAgencies”) in a fully-financed all cash transaction valued at approximately $200.0 million. USAgencies is a non-standard automobile insurance provider headquartered in Baton Rouge, Louisiana. It has 92 sales offices in Louisiana, Illinois and Alabama selling its products directly to consumers through its owned retail stores, virtual call centers and internet site. In 2006, USAgencies had gross written premium of approximately $177.1 million, an increase of 12.6% from 2005 gross written premiums of $157.3 million. The purchase of USAgencies was financed through $200.0 million in borrowings under a $220.0 million senior secured credit facility that was entered into concurrently with the completion of the acquisition. The acquisition gives us a leading market position in Louisiana, the 12th largest non-standard automobile insurance market. The transaction is effective as of January 1, 2007 for accounting purposes.

In May 2006, we received our insurance license for Affirmative Insurance Company of Michigan (“AIC — Michigan”) and we funded that company with an initial capital contribution of $9.0 million from Affirmative Insurance Company (“AIC”).

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 then largest stockholder, Vesta Insurance Group, Inc. (“VIG”). During this period, our total revenues grew from $6.2 million to $146.5 million, and our total 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 subsequent implementation of disciplined underwriting, pricing and claims practices.

For periods prior to December 31, 2003, we also managed VIG’s non-standard personal automobile insurance business and VIG reported the financial results of this business in a separate financial reporting segment. As discussed below, as of December 31, 2003, VIG transferred to us two insurance companies and all future economic interest in VIG’s non-standard personal automobile insurance business. From 2000 to 2003, VIG reported that the total revenues for their non-standard personal automobile insurance business grew from $14.6 million to

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$192.3 million, earned premium grew from $10.2 million to $167.4 million and pretax income grew from $3.9 million to $9.2 million.

Our historical revenues, prior to January 1, 2004, consisted primarily of commission income and fees earned by our agencies for premiums they produced. Beginning January 1, 2004, our revenues also included net premiums and investment income earned by our insurance companies resulting from the retention of the premiums produced by our underwriting agencies and other unaffiliated underwriting agencies that previously had been ceded to VIG. For the year ended December 31, 2006, our insurance companies recorded net premiums written of $284.8 million, or 99.5% of our gross premiums written, as compared to $315.5 million for the year ended December 31, 2005, representing 98.2% of gross premiums written in that year. Our insurance companies’ statutory surplus as of December 31, 2006 was $133.4 million as compared to $129.5 million as of December 31, 2005. Our increase in surplus was primarily due to statutory net income of $10.0 million and a decrease in nonadmitted assets of $5.3 million, offset by $11.5 million in dividends paid to us.

On June 14, 2005, VIG and Vesta Fire Insurance Corporation (“VFIC”) entered into a stock purchase agreement with New Affirmative LLC (“New Affirmative”), J.C. Flowers I LP and Delaware Street Capital Master Fund for the sale by VIG and VFIC of 5,218,228 shares of our common stock (“Stock Purchase Agreement”). New Affirmative was formed for the purpose of acquiring, holding, voting and disposing of the shares of our common stock acquired in connection with the Stock Purchase Agreement and any shares of our common stock that New Affirmative may acquire in the future. At the time of the agreement, New Affirmative was (i) 50% owned by DSC AFFM, LLC (“DSC AFFM”), an entity controlled by DSC AFFM Manager LLC (“DSC Manager”), the sole managing member of DSC AFFM, and Andrew G. Bluhm, the managing member of DSC Manager, and (ii) 50% owned by Affirmative Investment LLC (“Affirmative Investment”), an entity owned, in part, by the Enstar Group, Inc., and controlled by Affirmative Associates LLC (“Affirmative Associates”), the sole managing member of Affirmative Investment, and J. Christopher Flowers, the sole member and manager of Affirmative Associates. Simultaneously with the closing of the transactions contemplated by the Stock Purchase Agreement: (1) DSC AFFM contributed 1,459,699 shares of our common stock which were previously acquired in open market transactions by members of DSC AFFM and subsequently contributed to DSC AFFM, to New Affirmative and (2) Affirmative Investment contributed 1,183,000 shares of our common stock, previously acquired by it in open market transactions, to New Affirmative. VIG completed the sale to New Affirmative on August 30, 2005.

On August 31, 2006, DSC AFFM and Affirmative Investment consummated the transactions contemplated by a purchase agreement, dated August 4, 2006, pursuant to which DSC AFFM sold to Affirmative Investment all of the membership units of New Affirmative owned by DSM AFFM. As a result, Affirmative Investment now owns 100% of New Affirmative. As of December 31, 2006, New Affirmative owned 7,860,927 shares, or approximately 51.2% of our outstanding common stock.

Our Operating Structure

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

•  Insurance companies, which possess the regulatory authority and capital necessary to issue insurance policies;

•  Underwriting agencies, which supply centralized infrastructure and personnel required to design and service insurance policies that are distributed through retail agencies; and

•  Retail agencies, which provide multiple points of sale under established local brands with personnel licensed and trained to sell insurance policies and ancillary products to individual consumers.

As of December 31, 2006, our subsidiaries included three insurance companies licensed to write insurance policies in 36 states, four underwriting agencies and five retail agencies with 158 owned retail store locations and 33 franchised retail store locations serving 11 states. The acquisition of USAgencies, effective January 1, 2007, will increase our operations by two insurance companies, 92 additional owned retail stores and a premium finance company.

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Our three operating components often function as a vertically integrated unit, capturing the premium and associated risk and the commission income and fees generated from the sale of an insurance policy. There are other instances, however, when each of our operations functions with unaffiliated entities on an unbundled basis, either independently or with one or both of the other two operations. For example, our retail stores earn commission income and fees from sales of non-standard automobile insurance policies issued by third-party insurance carriers. Our owned underwriting agencies distributed our insurance policies through approximately 3,200 independent agencies in addition to our 158 owned and 33 franchised retail stores. In addition, as of December 31, 2006, our insurance companies had relationships with two unaffiliated underwriting agencies that design, distribute and service our policies through approximately 4,200 independent agencies.

We believe the ability to unbundle our operations and enter into a variety of business relationships with unaffiliated parties allows us to maximize sales penetration while managing growth strategies and industry cycles better than if we employed a single, vertically integrated operating structure.

Measurement of Performance

The Sales Process.  We are an insurance holding company engaged in the underwriting, servicing and distributing of personal non-standard automobile insurance policies and related products and services. We distribute insurance products through three distinct distribution channels: our owned retail stores, independent agents and unaffiliated underwriting agencies. We generate earned premiums and fees from policyholders through the sale of our insurance products. In addition, through our owned retail stores, we sell insurance policies of third-party insurers and thereby earn commission income from those third-party insurers and fees from the customers.

As part of our corporate strategy, we treat our owned retail stores as though they are independent agents, encouraging them to sell to their individual customers whatever products are most appropriate and affordable for those customers. We believe that this offers our retail customers the best combination of service and value, developing stronger customer loyalty and improving customer retention. In practice, this means that in our owned retail stores, the relative proportion of the sales of our own insurance products as compared to the sales of the third-party policies will vary depending upon the competitiveness of our own insurance products in the marketplace during the period. Recently, we have experienced a significant shift in this ratio towards third-party insurance carriers as we have enhanced our technology making it easier for our owned retail stores to sell third-party insurance products. Overall, applications for insurance provided by third-party carriers represented 41% of our retail applications for the year ended December 31, 2006 as compared to 30% in the prior year. This reflects our intention of maintaining the margins in our owned insurance carriers, even at the cost of business lost to other third-party carriers.

In response to the market conditions that have existed for the past several years, our owned insurance carriers have been developing and introducing new and better segmented products to serve our target markets, resulting in a slightly lower overall aggregate rate level and improving the competitiveness of our insurance products offered through our distribution channels. Management of our owned insurance carriers is responsible for developing and pricing our products, while maintaining and improving our insurance margins.

In the independent agency distribution channel and the unaffiliated underwriting agencies distribution channel, the effect of competitive conditions is the same as in our owned retail store distribution channel. As in our retail stores, independent agents (either working directly with us or through unaffiliated underwriting agencies) not only offer our products but also offer their customers a selection of products by third-party carriers. Therefore our insurance products must be competitive in pricing, features, commission rates and ease of sale or the independent agents will sell the products of those third-party insurance carriers instead of our products.

We believe that we are generally competitive in the markets we serve and we constantly evaluate our products relative to those of other carriers. As shown below, sales of our products through independent agencies have remained at the level of the prior year despite competitive market conditions largely due to the incremental business in Michigan during 2006 resulting from an acquisition in mid-2005.

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For our owned insurance carriers, one measurement of our performance is the overall level of gross premiums written and a second measurement is the relative proportion of premiums written through our three distribution channels. The following table displays our gross premiums written by distribution channel for the years ended December 31, 2006, 2005 and 2004 (dollars in thousands):

	Years Ended December 31,
	2006		2005		2004
Gross Premiums Written By:
Our underwriting agencies:
Our retail agencies	$	86,760	$	116,425	$	102,414
Independent agencies		158,790		159,823		96,409
Subtotal		245,550		276,248		198,823
Unaffiliated underwriting agencies		40,588		44,654		82,962
Other		42		302		(60	)
Total	$	286,180	$	321,204	$	281,725

Commission Income and Fees.  Another measurement of our performance is the relative level of production of commission income and fees. Commission income and fees consists of three principal types, including (a) the commission income and fees earned by our underwriting agencies on insurance business that is not written or retained by us, (b) policy and agency fees earned for business written or assumed by our insurance companies both through independent agents and our retail agencies and (c) the commission income earned on sales of unaffiliated (third-party) insurance companies’ products sold by our retail agencies. These various types of commission income and fees are impacted in different ways by the corporate decisions we make in pursuing our corporate strategy.

Commission income and fees earned by our underwriting agencies on business that is not written or retained by us.  We only earn this income when we reinsure a portion of our insurance business to other parties. Over the past several years we have substantially eliminated our reinsurance contracts and, as a result, this income source has been almost eliminated. Instead, we generate additional premium on the retained business, increasing our earned premiums. Had we continued to utilize reinsurance, our earned premiums would have been reduced but we would have earned greater commission income and fees for servicing the policies. In the future, we may choose to increase the use of reinsurance, which could result in an increase in this type of commission income and fees.

Policy, installment and agency fees earned for business written or assumed by our insurance companies both through independent agents and our retail agencies.  These policy, installment and agency fees are small fees charged to the customers in connection with their purchase of coverage from our insurance carriers. We can increase or decrease agency and installment fees at will, but policy fees must be approved by the applicable department of insurance. In the second quarter of 2006, we reduced or eliminated our agency fees in our retail stores to reduce the cost to the customer of purchasing coverage from us. This increased the overall level of sales and thereby increased our commission income (when the product sold is a third-party carrier’s coverage) and earned premiums (when the product sold is our own insurance carrier’s coverage). We believe that this change in our agency fee implementation reduced our near-term commission income and fees but increased our long-term profitability as those incremental commissions from third-party carriers and earned premiums at our own insurance carriers are earned into revenue over the service life of the incremental policies sold. In the fourth quarter of 2006, we reinstituted certain agency fees but at a moderate level as compared to the first half of the year.

The commissions earned on sales of unaffiliated (third-party) insurance companies’ products sold by our retail agencies.  As described above, in our owned retail stores, there has been a shift in the relative proportion of the sales of third-party insurance products as compared to sales of our own carriers’ products due to the relative competitiveness of our insurance products. This has resulted in an increase in our commission income and fees from non-affiliated third-party insurers. We negotiate commission rates with the various third-party carriers whose products we agree to sell in our retail stores. As a result, the level of third-party commission income will also vary depending upon the mix by carrier of third-party products that are sold.

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Losses and Loss Adjustment Expenses.  Since the single largest expense of an insurance company are the losses and loss adjustment expenses, another measurement of our insurance carriers’ performance is the level of such expense, specifically as a ratio to earned premiums. Our losses and loss adjustment expenses are a blend of the specific estimated and actual costs of providing the coverage contracted by the purchasers of our insurance policies. We maintain reserves to cover our estimated ultimate liability for losses and related loss adjustment expenses for both reported and unreported claims on the insurance policies issued by our insurance companies. The establishment of appropriate reserves is an inherently uncertain process, involving actuarial and statistical projections of what we expect to be the cost of the ultimate settlement and administration of claims based on historical claims information, estimates of future trends in claims severity and other variable factors such as inflation. Due to the inherent uncertainty of estimating reserves, reserve estimates can be expected to vary from period to period. To the extent that our reserves prove to be inadequate in the future, we would be required to increase our reserves for losses and loss adjustment expenses and incur a charge to earnings in the period during which such reserves are increased. We have a limited history in establishing reserves and the historic development of our reserves for losses and loss adjustment expenses is not necessarily indicative of future trends in the development of these amounts.

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

Overall, we continue to see favorable frequency trends and moderating severity trends on an aggregate basis. In a period of stable premium rates, these trends would have resulted in generally stable loss ratios (the ratio of losses and loss adjustment expenses to earned premiums). However, the current competitive environment has led management of our insurance carriers to selectively reduce rates in certain markets and on certain products. Such rate decreases constrict our insurance margins and increase our loss ratios.

Selling, General and Administrative Expenses.  Another measurement of performance that addresses the efficiency of the company is the level of selling, general and administrative expenses. We recognize that our customers are primarily motivated by low prices. As a result, we strive to keep our costs as low as possible to be able to keep our prices affordable and thus to maximize our sales while still maintaining profitability. Our selling, general and administrative expenses include not only the cost of acquiring the insurance policies through our insurance carriers (the amortization of the deferred acquisition costs) and managing our insurance carriers and the retail stores, but also the costs of the holding company. The largest component of selling, general and administrative expenses is personnel costs.

Deferred policy acquisition costs represent the deferral of expenses that we incur in acquiring new business or renewing existing business. Policy acquisition costs, consisting of primarily commission, premium taxes, underwriting and retail agency expenses, are initially deferred and then charged against income ratably over the terms of the related policies through amortization of the deferred policy acquisition costs. Thus, the amortization of deferred acquisition costs is correlated with earned premium and the ratio of amortization of deferred acquisition costs to earned premium in an accounting period is another measurement of performance.

Consolidation Process.  Our agencies sell non-standard automobile insurance policies that are issued by our own insurance carriers as well as third-party carriers. For the policies issued by our own insurance carriers, our insurance companies pay our agencies a commission. Our insurance companies recognize earned premium and related commission expense associated with these policies, while our agencies recognize commission income and fees. The amount of commission that our insurance companies pay our agencies is recorded as insurance — level commission expense that becomes part of the insurance companies’ deferred acquisition costs. In addition, the agencies record agency — level policy acquisition expenses such as independent agent commissions, workforce and operating expenses. Our agencies incur policy acquisition expenses because our underwriting operation is accounted for as a function of our agencies.

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Since both the insurance companies and the agencies have recorded revenue and expenses related to selling our own insurance policies, we eliminate the internal commission income and fees and policy acquisition expenses recorded on our agencies.

Our Strengths

Our mission is to create and sustain superior returns for our stockholders through both soft and hard markets. We believe that we have developed certain strengths that may help us achieve our mission, including:

•  Flexible operating model.  We believe that our ability to deploy and manage multiple distribution channels and our relationships with unaffiliated third-parties will enable us to operate more profitably through both soft and hard markets. During hard markets, we believe our operating model of managing multiple distribution channels allows us to maximize the distribution of our own insurance companies’ policies at underwriting margins that we believe to be attractive. In soft markets, we believe our retail stores’ relationships with unaffiliated third-party insurance companies will allow us to generate increased commission income and fees from the increased sales of third-party policies. For example, for the year ended December 31, 2006, 36.2% of our retail stores’ commission income and fees, or $15.6 million, was generated through the sales of non-standard personal automobile insurance polices issued by unaffiliated third-party insurance companies as well as through the sales of certain other complementary insurance products and ancillary non-insurance products and services. For the year ended December 31, 2005, the comparable numbers were 29.1% of our retail stores’ commission income and fees or $14.2 million. In softer markets, the ratio between unaffiliated commissions to affiliated commissions will increase. We believe this flexible operating model is unique in the non-standard personal automobile insurance marketplace and differentiates us from our competitors.

•  Established retail network.  We have operated our owned retail stores in their respective market areas for a number of years, which we believe provides us with a competitive advantage in attracting and retaining customers. Our largest retail market areas are Illinois and Texas, which have been served by our retail stores for 18 years and 16 years, respectively. We have established the designated market area, or DMA, as the fundamental marketing focus in our retail operations. The DMA concept was developed by A.C. Nielsen & Co., to define groupings of mutually exclusive television marketing areas for advertising purposes. For the 2006-2007 season, Nielsen has recognized 210 DMAs in the United States, ranked in size according to estimated television households in each market. Managing our retail agencies on a DMA-by-DMA basis, in contrast to the traditional state-by-state marketing approach that is common practice in our industry, facilitates the concentration of our advertising and marketing support activities, giving us the opportunity to more cost-effectively leverage our marketing and management resources.

•  Underwriting discipline.  We are committed to pricing and underwriting standards at our insurance carriers that are designed to meet or exceed our targeted underwriting profit margins. We couple analysis of information from our databases with continuous competitive market review to respond appropriately with changes in our pricing, product structures and underwriting guidelines. We implemented 17 rate level or product changes in seven states during the year ended December 31, 2006. Our strategy utilizes focused adjustments to rate levels and underwriting guidelines that make our products more attractive to producers and customers in market segments where we desire growth. In addition, we employ proprietary pricing segmentation and product differentiation methods. For example, we successfully launched tiered, insurance-scored products in Texas in February 2006 and in Indiana and Florida in June 2006, which considerably increased our competitive position and production as compared to the periods prior to the credit product release. In May 2006, we introduced a driver record discount in Illinois to segment liability rates for customers with favorable risk profiles. We plan to continue the rollout of product enhancements in all states to improve segmentation of risk, rating factors, sales channel efficiencies, customer retention and payment and financing options throughout 2007.

•  Effective claims handling techniques.  We believe that a significant key to our success is the implementation of uniform “best practices” claims handling processes that are regularly measured, audited and upgraded. For example, all of our new claims employees are trained to handle claims according to our claims

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management process, regardless of prior claims experience or other qualifications. In addition, we have developed a claims system that flags potential fraudulent claims in the initial reporting process and these claims are automatically transferred to our special investigation unit for additional review. We believe our processes allow us to effectively pay valid claims and dispute fraudulent claims in a timely manner.

•  Acquisition expertise.  We believe our industry includes a large number of small-and medium-size companies, which presents an opportunity and potential for industry-wide consolidation. Our management team has significant expertise in identifying and acquiring non-standard personal automobile insurance retail and underwriting agency operations. Since 2001, we have acquired ten retail and/or underwriting agencies, including the acquisition of USAgencies that was completed in January 2007.

Our Growth Strategy

Our growth strategy, which includes a strong commitment to organic growth coupled with acquisition activity, is comprised of the following elements:

•  Increase sales through existing retail agencies.  We intend to expand market awareness and increase sales within our DMAs primarily through the extension of our advertising initiatives and grass roots marketing efforts. We believe that strengthening the market recognition of our retail network will result in increased prospect calls to and walk-in traffic in our retail stores, ultimately leading to sales growth. In the year ended December 31, 2006, our total media expenditures were $6.2 million, a decrease of 13.9% over our total media expenditures in 2005. We also intend to grow our sales volume by implementing targeted advertising initiatives based on the demographics of certain of our DMAs. In 2006, we intend to invest in marketing research and development to help us better understand, target and market to our key demographic groups. In the fourth quarter of 2006, we hired a chief marketing officer who will lead these initiatives, among others.

•  Open new retail stores.  Our management team monitors each of our DMAs to identify attractive locations to open new retail stores. In addition, we may seek to enter new DMAs by opening new retail stores. We regularly evaluate the profitability of individual retail stores and eliminate those locations that do not meet our profit expectations

•  Leverage and develop independent agency relationships.  We believe that by maintaining strong product positioning and service standards, our underwriting agencies have the ability to create significant independent agency loyalty, which results in increased sales by our existing independent agency force. Further, we are committed to building new relationships with other independent agencies in order to expand our overall distribution network in the most cost-effective manner. As of December 31, 2006, our underwriting agencies had distribution contracts with approximately 3,200 independent agencies, compared with approximately 3,000 independent agencies as of December 31, 2005 and approximately 2,500 independent agencies as of December 31, 2004. Additionally, with the significant network of independent agency relationships that we already have established, we are focused on achieving an increased level of production per producing agency.

•  Continue selected relationships with unaffiliated underwriting agencies.  We do not intend to cultivate new relationships with unaffiliated underwriting agencies that desire to distribute our non-standard personal automobile insurance products through their distributor relationships with independent agencies. However, although we do not consider it significant to our growth strategy, we may consider opportunities to increase our premium volume by establishing new relationships with unaffiliated underwriting agencies with established customer bases. We did not contract with any new unaffiliated underwriting agencies in 2006 and terminated two existing relationships.

•  Offer new complementary and ancillary products.  In order to generate additional revenues in our retail stores, we offer certain complementary third-party insurance and ancillary non-insurance products that appeal to our existing customers. Our retail managers monitor customer preferences and feedback within each of our DMAs in order to adjust or expand our complementary and ancillary product offerings.

•  Engage in acquisitions.  We will continue to identify and evaluate acquisition prospects in new DMAs or that help us cost-effectively strengthen our geographic presence or market awareness within our existing

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DMAs. In markets where we currently own a large retail network, we will look for opportunities to acquire and re-brand competing retail locations, as this may be a more efficient alternative to opening new retail stores.

Acquisition History

In January 2007, we completed the acquisition of USAgencies, effective as of January 1, 2007. USAgencies is a distributor and producer of non-standard automobile insurance, headquartered in Baton Rouge, Louisiana. It has 92 sales offices in Louisiana, Illinois and Alabama selling its products directly to consumers through its retail stores, virtual call centers and internet site. In 2006, USAgencies had gross written premium of approximately $177.1 million, an increase of 12.6% from 2005 gross written premiums of $157.3 million. The acquisition of USAgencies gives us a leading market position in Louisiana, the 12th largest non-standard automobile insurance market.

In 2001, 2002, 2004 and 2005 we acquired seven underwriting and/or retail agencies operating in eight states that we believed possessed the characteristics that enhanced our growth. We believe that it is important to manage the integration of the underwriting agency operations of each of these acquisitions, consolidating underwriting, policy administration, claims handling and related functions and systems. The sales strategy, operating policies, marketing initiatives and performance targets of each of our acquired retail operations are coordinated under the direction of our centralized retail management team. We manage our underwriting agencies and retail operations of acquired properties to facilitate this centralization and have imposed more disciplined underwriting, pricing and claims handling practices. In addition to the acquisition of seven underwriting and/or retail agencies, we acquired two insurance companies. The following describes each of these acquisitions:

•  Space Coast.  In October 2001, we purchased a 74.5% interest in Space Coast Holdings, Inc., the parent company of a Melbourne, Florida-based underwriting agency that underwrites and services non-standard personal automobile insurance policies sold by independent agencies located in Florida. In March 2006, we completed the acquisition of the minority ownership interest of Space Coast increasing our ownership interest in Space Coast to 100%.

•  A-Affordable.  In October 2001, we acquired substantially all of the assets of A-Affordable Insurance Agency, Inc. A-Affordable’s Dallas-based underwriting and retail agencies underwrite and service non-standard personal automobile insurance policies sold exclusively through branded retail stores located in the Dallas-Fort Worth, Houston and two smaller DMAs.

•  InsureOne.  In January 2002, VIG acquired substantially all of the assets of InsureOne Independent Insurance Agency, Inc. and certain related entities, which VIG transferred to us as of December 31, 2002. The Chicago-based InsureOne underwriting and retail agencies underwrite and service non-standard personal automobile insurance policies sold in Illinois, Missouri and Indiana by independent agencies as well as by its own branded retail stores. InsureOne’s retail business operates under the InsureOne retail brand in the Chicago, Kansas City, Indianapolis and Rockford DMAs, as well as in four smaller DMAs in Illinois, and under the Yellow Key^® retail brand in the St. Louis DMA.

•  American Agencies and Harbor.  In January 2002, we acquired American Agencies General Agency, Inc., as well as certain non-standard personal automobile insurance assets of Harbor Insurance Group, Inc. and certain of its subsidiaries. The assets of Harbor Insurance Group, Inc. were subsequently merged into American Agencies General Agency, Inc., now Affirmative Insurance Services — Texas (“AIS — Texas”). This combined operation is a Dallas-based underwriting agency that underwrites and services non-standard personal automobile insurance policies sold by independent agencies located in Texas and New Mexico.

•  Driver’s Choice.  In August 2002, we acquired Driver’s Choice Insurance Services, LLC, which owns underwriting and retail agencies that underwrite and service non-standard personal automobile policies sold in South Carolina by owned retail stores as well as by independent agencies in three DMAs.

•  Affirmative Insurance Company and Insura Property and Casualty Company.  Effective December 31, 2003, we acquired AIC and Insura Property and Casualty Company (“Insura”) from VIG. We accounted for our acquisition of the insurance companies at VIG’s historical carrying amounts as transfers of net assets

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between entities under common control in accordance with SFAS No. 141. The acquisitions were accounted for as a pooling of interests, and all historical financial statements presented reflect our results of operations on a combined basis with those of AIC and Insura.

•  Fed USA.  In December 2004, we acquired certain assets of Fed USA Retail, Inc., which owns retail agencies that produce and service non-standard personal automobile policies sold in Florida by owned retail stores in three DMAs. We also acquired certain assets of Fed USA Franchising, Inc., which produces and services policies sold in Florida through franchised retail stores in four DMAs.

•  IPA.  In July 2005, we acquired the assets of IPA, LLC, an underwriting agency, which underwrites and services non-standard personal automobile insurance policies sold by independent agencies located in Michigan.

Insurance Products

Our insurance company products.  We issue non-standard personal automobile insurance policies through AIC and Insura, our two Illinois-domiciled insurance company subsidiaries, and AIC — Michigan. Our insurance companies are licensed to write business in 36 states, although we are concentrating our business during 2007 in 9 states. During 2007, although we will continue to have earned premium in two additional states (Arizona and Utah), we are no longer writing new business in those states, other than renewal policies. Our insurance companies possess the certificates of authority and capital necessary to transact insurance business and issue policies, but they rely on both our underwriting agencies and unaffiliated underwriting agencies to design, distribute and service those policies.

Our non-standard personal automobile insurance policies, which generally are issued for the minimum limits of liability coverage mandated by state laws, provide coverage to drivers who find it difficult to obtain insurance from standard insurance companies due to a number of factors, including lack of prior coverage, failure to maintain continuous coverage, age, prior accidents, driving violations, type of vehicle or limited financial resources. We believe that the majority of customers who purchase our non-standard personal automobile insurance policies do not qualify for standard policies because of financial reasons, such as the failure to maintain continuous coverage or the lack of flexible payment options in the standard market. Over 70% of the drivers who purchased our policies in 2006 had no at-fault accidents, moving violations or tickets in the 36 months preceding the date of the quote. In general, customers in the non-standard market have higher average premiums for a comparable amount of coverage than customers who qualify for the standard market resulting from increased loss costs and transaction expenses, partially offset by the lower severity of losses resulting from lower limits of coverage.

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

•  Bodily injury liability coverage, which protects insureds if they are involved in accidents that cause bodily injury to others, and also provides them with a defense if others sue for covered damages; and

•  Property damage liability coverage, which protects insureds if they are involved in accidents that cause damage to another’s property.

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

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

•  Collision coverage, which pays for damage to the insured vehicle as a result of a collision with another vehicle or object, regardless of fault; and

•  Comprehensive coverage, which pays for damages to the insured vehicle as a result of causes other than collision, such as theft, hail and vandalism.

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

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

Third-party non-standard personal automobile insurance policies.  Our owned retail stores also sell non-standard personal automobile insurance policies issued by unaffiliated insurance companies, for which we receive commission income and fees. We do not bear insurance underwriting risk with respect to these policies. Our retail stores offer these insurance policies underwritten by unaffiliated third-party insurance companies in addition to our own insurance policies primarily to provide a range of products and pricing to meet our customers’ needs, which we believe increases our chances of making a sale. Additionally, should sales of our policies decline in favor of lower-priced non-standard personal automobile insurance products offered by the third-party insurance carriers, we believe that our ability to generate increased commission and fee revenue from sales of third-party insurance policies will help us preserve underwriting profitability and offset decreases in premium volume while maintaining control of our customers’ business until acceptable underwriting margins are again achievable.

Complementary insurance products.  Our retail stores also sell a small amount of standard and preferred personal automobile insurance and certain other personal lines insurance products underwritten by unaffiliated third-party insurance companies. Our complementary insurance products are designed to appeal to purchasers of our non-standard personal automobile insurance policies and currently include such products as motorcycle and recreational vehicle coverage, motor club memberships, vehicle protection, travel protection and hospital indemnity, as well as certain life, health and disability insurance policies. We offer these products to complement our core offering of non-standard personal automobile insurance policies and to take advantage of our largely fixed cost retail stores, which enables us to generate additional commission income and fees with minimal incremental cost. Unaffiliated insurance companies that underwrite these products bear the insurance risk associated with these policies.

Ancillary non-insurance products and services.  Our retail stores may offer non-insurance products and services designed to appeal to our customers, including prepaid cellular telephones and prepaid local telephone, long distance calling card services and income tax services. While commission and fee revenues from sales of these products and services have not been meaningful, we believe that these products and services will attract additional customers to our stores and will provide an additional means of generating commission income and fees with minimal incremental cost to us.

Distribution and Marketing

Most of the policies issued by our owned insurance carriers utilize the services of our underwriting agencies, which perform or supervise all of the administrative functions associated with the design, sale and subsequent servicing of a non-standard personal automobile insurance policy. Our underwriting agencies provide the following services, in part, in exchange for internal commission income and fees:

•  product design and management services, including the development, pricing and market positioning of non-standard personal automobile insurance policies;

•  distribution services, including marketing and distribution, independent agency development and support and policy issuance;

•  policy administration services, including premium billing and collection, endorsement processing, accounting and financial reporting;

•  claims handling services, including claims settlement, adjuster auditing and special investigations; and

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•  supervision of unaffiliated underwriting agencies, including oversight of each unaffiliated underwriting agency’s underwriting, policy administration, claims handling and related operations.

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

As of December 31, 2006, two unaffiliated underwriting agencies that distributed policies through an aggregate of approximately 4,200 independent agencies, produced business for our owned insurance carriers. In the year ended December 31, 2006, these two unaffiliated underwriting agencies produced $40.6 million of gross premiums written by our owned insurance carriers. This is significantly less than produced for us in the year ended December 31, 2005, when seven unaffiliated underwriting agencies produced $44.7 million of gross premiums written by our insurance companies or by VIG insurance companies and reinsured 100% by us. This reduction is primarily due to run-off of two of our programs in California and programs in Alabama, Georgia and Utah. In June 2005, the unaffiliated underwriting agencies we contracted with in Alabama, Georgia and Utah received regulatory approval for licensing of their insurance companies from these states and have been transitioning policies to their own insurance companies.

Our owned retail stores.  Our owned retail stores serve as direct sales and customer service outlets for insurance companies and other vendors. As of December 31, 2006, we employed approximately 290 licensed sales personnel who sell products and services directly to individual consumers through our 158 owned retail stores. In addition we distribute products through 33 franchised retail stores located in Florida. In contrast to the traditional state-by-state marketing approach that is a common practice in our industry, we have established the DMA as the fundamental marketing focus in our retail operations. As of December 31, 2006, our retail stores were located in 27 DMAs in eight states. The following charts list the geographic locations of our owned retail stores by DMA and by state as of December 31, 2006:

	Retail		Retail
DMA	Stores	State	Stores
Chicago	56	Illinois	57
Dallas/Fort Worth	22	Texas	52
Houston	15	Florida	19
Miami / Ft. Lauderdale	11	Missouri	9
Kansas City	6	Indiana	11
Orlando	6	South Carolina	7
St. Louis	5	Kansas	2
San Antonio	5	Wisconsin	1
Other	32	Total	158
Total	158

We operate our retail stores under five names — A-Affordable, Driver’s Choice, Fed USA^®, InsureOne and Yellow Key — that are well established in their respective DMAs. Previous owners of our retail stores invested significant time and resources creating and developing these brands. In addition, we continue to extend market awareness through yellow pages advertisements, television and radio advertising campaigns and print advertisements that emphasize our down payments, flexible payment plans, convenient neighborhood locations and customer service, all of which are designed to generate walk-in traffic in, or telephone inquiries to, our retail stores. Since our retail business is highly dependent on advertising, segmenting our geographic markets into DMAs allows us to more efficiently concentrate these advertising and marketing support activities.

We lease retail stores located in strip malls or other visible locations on major thoroughfares where we believe our customers drive or live. Our retail stores provide customer contact at the point of sale, and most policy

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applications are completed in the retail stores. After completion of the initial insurance transaction, our customers often revisit these stores to make premium payments. This direct contact gives us an opportunity to establish a personal relationship with our customers, who in our experience generally prefer face-to-face interaction, and helps us provide quality and efficient service and identify opportunities to provide additional products and services.

Our retail stores predominantly sell non-standard personal automobile insurance policies issued by our insurance companies. For the year ended December 31, 2006, the total commission income and fees earned by our retail agencies were $43.1 million, of which $15.6 million, or 36.2%, was generated through the sales of non-standard personal automobile policies issued by unaffiliated third-party insurance carriers as well as through the sales of certain other complementary insurance products and ancillary non-insurance products and services.

Independent agencies.  Our underwriting agencies also appoint independent retail agencies to sell our insurance policies to individual customers. We believe that selling our insurance policies through the independent agency distribution channel, in addition to selling through our owned retail stores, helps us to better leverage our resources to maximize sales of our insurance companies’ policies when underwriting conditions are favorable. In 2006, our underwriting agencies utilized approximately 3,200 independent agencies to sell the policies that they administer and these independent agencies were responsible for 70.9% of the gross written premiums produced by our underwriting agencies. In 2006, no one independent agency accounted for more than 3.1% of the gross premiums written by our underwriting agencies, and only two independent agencies accounted for more than 1.0% of the gross premiums written. The ability of our underwriting agencies to develop strong and mutually beneficial relationships with independent agencies is important to the success of our multiple distribution strategy. We believe that strong product positioning and high service standards are key to independent agency loyalty. We foster our independent agency relationships by providing them our agency interface software applications designed to strengthen and expand their sales and service capabilities for our products. These software applications provide independent agencies with the ability to service their customers’ accounts and access their own commission information. We maintain strict and high standards for call answering and abandonment rate service levels in our customer service call centers. We believe the level and array of services that we offer to independent agencies creates value in their businesses.

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

Pricing and Product Management

We believe that our insurance product management approach to risk analysis and segmentation is a driving factor in maximizing underwriting performance. We employ an insurance product management approach that requires the extensive involvement of product managers who are responsible for the profitability of a specific state or region, with the direct oversight of rate-level structure by our most senior managers. Our product managers are experienced insurance professionals with backgrounds in the major functional areas of the insurance business — accounting, actuarial, claims, information technology, operations, pricing, product development and underwriting. In addition to broad insurance industry knowledge, all our product managers have extensive experience in the non-standard personal automobile insurance market, enabling them to develop products to meet the distinctive needs of non-standard customers. On average our product managers have 23 years of experience in the insurance industry and 14 years of experience in the non-standard personal automobile insurance market.

Our product managers work with our actuaries who provide them with profitability and rate assessments. These actuarial evaluations are combined with economic and business modeling information and competitive intelligence monitored by our product managers to be proactive in making appropriate revisions and enhancements to our rate levels, product structures and underwriting guidelines. As part of our pricing and product management process, pricing and underwriting guidelines and policy attributes are developed by our product managers for each

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of the products that we administer and products underwritten by our insurance companies through underwriting agencies. These metrics are monitored on a weekly, monthly and quarterly basis to determine if there are deviations from expected results for each product. Based on the review of these metrics, our product managers make revisions and enhancements to products to assure that our underwriting profit targets are being attained.

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

Premium Finance

We believe that the amount of down payment and the availability of flexible payment plans are two of the primary factors that our customers consider when purchasing non-standard personal automobile insurance. Down payments and payment plans typically are offered by insurers and agents in the form of either installment billing or premium financing arrangements. Premium finance involves making a loan to the customer that is backed by the unearned portion of the insurance premiums being financed. We offer our customers a variety of payment plans that allow for low down payments. Insurers typically use installment billing arrangements to bill for the premium of a single policy. Independent agents, who may offer policies from multiple insurers, use premium financing to finance multiple policies through one premium finance agreement.

In periods prior to December 31, 2006, we elected to use installment billing arrangements rather than premium financing. Moreover, with the acquisition of USAgencies in 2007, we will continue their practice of using premium financing for their customers. In the second quarter of 2007, we intend to begin using premium financing whenever possible for all of our subsidiaries because we believe it offers several advantages, including:

•  the ability to finance multiple policies through a single premium finance agreement;

•  a greater flexibility of payment plan structure and down payment;

•  a more defined regulatory framework for financing premiums;

•  the ability to generate revenues in our non-insurance subsidiaries; and

•  returns comparable to or exceeding those of installment billing.

In a typical premium finance arrangement, the premium finance company lends the amount of the premium (minus the insured’s down payment) to the insured and pays it to the insurance company on behalf of the insured. The insured makes periodic payments to the premium finance company over the term of the finance agreement. Payment plans and down payments will be developed giving consideration to expected default rates and their timing and the amount of the unearned portion of the insurance premiums being financed, since that provides security for the loan.

If an insurance policy is cancelled before its term expires, the policyholder has a right to receive a return of the unearned premium. Under a premium finance agreement, however, the policyholder assigns this right to the premium finance company to secure his or her obligations under the loan. If the policyholder defaults on a payment and, after being notified of the default fails, to cure the default within the prescribed time period, the premium finance company has the right to order the insurance company to cancel the policy and pay to the premium finance company the amount of any unearned premium on the policy. If the amount of unearned premium exceeds the balance due on the loan plus any interest and applicable fees owed by the policyholder to the premium finance company, then the premium finance company returns the excess amount to the policyholder in accordance with applicable law.

The regulatory framework under which premium finance procedures are established is generally set forth in the premium finance statutes of the states in which we operate. Among other restrictions, the interest rate we may charge our customers for financing their premiums is limited by these state statutes. See “Regulatory

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Environment — Premium Finance Regulation” for additional information about state usury and other regulatory restrictions applicable to our premium finance operations.

We intend to mitigate the risk to us of potential losses from the insured’s default under the premium finance agreement by designing payment plans that give consideration to the principal amount of the loan that is outstanding and the unearned premium securing the loan (as noted above). In addition, whenever a policyholder fails to timely cure a default on his or her premium finance loan, we will act promptly to order the insurance company to cancel the insurance policy and return to us any unearned premium.

Claims Management

We believe that effective claims management is critical to our success. To this end, we have adopted a metrics-driven and customer-focused claims management process that we believe is cost efficient, delivers the appropriate claims service and produces superior claims results. Our claims management process is focused on controlling claims from their inception, accelerating communication to insureds and claimants, and compressing the cycle time of claims to control both loss costs and claims handling costs. We believe our process provides the appropriate level of customer service and results in the appropriate handling of claims, allowing us to cost-effectively pay valid claims and contest fraudulent claims.

As of December 31, 2006, our claims management operation consisted of a staff of 234 employees, including adjusters, appraisers, special investigators, auditors and claims administrative personnel. We conduct our claims management operations out of three major regional claims centers in Chicago, Illinois, Melbourne, Florida and Addison, Texas that are responsible for handling claims in their region. Our national claims practices group manages certain claims management functions, such as litigation management, total loss, salvage, subrogation and audit, on a national basis, which we believe produces greater efficiencies than can be achieved at the regional or local levels.

Claims are handled directly by our employees for the insurance policies we administer and our staff oversees the claims handling on the programs underwritten by our insurance companies through unaffiliated underwriting agencies. Whether through direct claims management or in standards established for claims management operations subject to our oversight, we are focused on implementing uniform “best practices” claims management processes that are regularly measured and audited.

Each claims center maintains a fully-staffed field operations team, which we believe allows us to control loss severity while improving customer service by shortening the time it takes to complete vehicle repairs. Through the utilization of well-trained field appraisal and reinspection personnel, we are able to maintain tighter control of the vehicle repair process, thereby reducing the amount we pay for repairs, storage costs and auto rental costs. In addition to field appraisals and reinspections, we audit vehicle damage appraisal through the use of industry-recognized vehicle damage appraisal software programs.

All of our claims employees have been trained to handle claims according to our metrics-driven and customer-focused claims management process, and all are subject to audit by our national quality assurance team as well as being measured against specific performance metric standards. We systematically conduct continuing education for our claims staff in the areas of best practices and claims metrics, fraud awareness, changes in legislation and litigation management. All our claims employees, whether or not they have prior claims experience or other qualifications, such as auto body or mechanical repair experience for field adjusters, are trained to handle claims according to our claims management processes.

Our national quality assurance team, a team of four full-time auditors reporting directly to our chief claims officer, continually reviews claims files, assessing each of our claims employees and particular units or teams against specific performance metric standards, evaluating the performance in investigations, file documentation, reasonableness of settlements and other relevant areas. This team, along with members of our senior claims management team, establishes standards for and audits the practices of the claims management operations of the unaffiliated underwriting agencies producing business for our insurance companies.

Our claims management process is designed to handle legitimate claims efficiently while defending against those without merit or that are fraudulent. Potentially fraudulent claims are identified through our fraud awareness

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program, which is designed to educate our claims employees and others throughout the organization of fraud indicators. Potentially fraudulent claims are referred to our special investigation unit, where suspicious claims are investigated and fraudulent claims are contested. As part of this strategy, we have aligned ourselves with a key industry vendor, who provides us with software that delivers data on injuries sustained in motor vehicle collisions. This tool is important in helping us identify potentially exaggerated injury claims and achieve what we believe are more appropriate settlements.

We maintain specialized liability teams that are responsible for overseeing all injury-related losses. The experienced adjusters on these teams focus on quality file handling, primarily through ongoing emphasis on proper investigations, evaluations and negotiating skills. In addition to maintaining highly trained staff, our management remains involved in the day-to-day handling of these files, providing appropriate settlement authority to adjusters, maintaining several key tracking reports and hosting a weekly claims committee meeting. In our claims committee meetings, the key managers of each regional office make presentations regarding potentially large-value cases, denials, coverage issues and other cases warranting review. In addition, claims, legal and underwriting personnel at the executive level attend these meetings in order to monitor these cases and provide input from their specific areas of expertise.

We will allow claims to go to litigation in matters such as value disputes and questionable liability and we will defend appropriate denials of coverage. We generally retain outside defense counsel to litigate such matters. We negotiate fee arrangements with retained defense counsel that are aimed at limiting our litigation costs. We have built a limited staff counsel operation for those areas in which there is a sufficient volume of claims to make staff counsel economical. Whether using outside defense counsel or staff counsel, our claims professionals manage the litigation process rather than ceding control to an attorney. Cases are constantly reviewed to adjust the litigation plan if necessary, and all cases going to trial are reviewed in committee to assess the value of trial or settlement.

Losses and Loss Adjustment Expenses

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

We record loss reserves to cover our estimated ultimate liability for reported and incurred but not reported losses under insurance policies that we write and for losses and loss adjustment expenses relating to the investigation and settlement of claims. We estimate liabilities for the cost of losses and loss adjustment expenses for both reported and unreported claims based on historical trends adjusted for changes in loss costs, underwriting standards, policy provisions and other factors. Estimating the liability for unpaid losses and loss adjustment expenses is inherently a matter of judgment and is influenced by factors that are subject to significant variation. We monitor items such as the effect of inflation on medical, hospitalization, material repair and replacement costs, general economic trends and the legal environment. While the ultimate liability may be higher or lower than recorded loss reserves, the loss reserves for personal auto coverage can be established with a greater degree of certainty in a shorter period of time than that associated with many other property and casualty coverages which, due to the nature of the coverage being provided, take a longer period of time to establish a similar level of certainty.

VIG transferred our Illinois domiciled insurance company subsidiaries to us on December 31, 2003. Before this time, these insurance companies had ceded 100% of the business that they wrote to VFIC as part of an intercompany reinsurance agreement. In connection with a reinsurance restructuring agreement, VFIC retained all liability with respect to any losses and allocated loss adjustment expenses occurring on or prior to December 31, 2003 on policies issued by our insurance companies, and retained all corresponding losses and loss adjustment expense reserves as of December 31, 2003. As a result, as of December 31, 2003, our insurance companies had no net losses or loss adjustment expense reserves. In connection with the acquisition of our insurance companies from VIG, this reinsurance agreement was terminated as of December 31, 2003, and our insurance companies began

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accruing losses and loss adjustment expenses, 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% reinsurance agreement as of December 31, 2003, our insurance companies have recorded losses and loss adjustment expenses in their respective statements of operations beginning January 1, 2004. Although VFIC remains liable as a reinsurer for all of our insurance companies’ losses and loss adjustment expenses associated with these policies occurring on or prior to December 31, 2003, we are subject to primary liability with respect to these policies. Consequently, we face exposure to credit risk with respect to VFIC’s ability to satisfy its obligations to us.

VFIC is currently rated “F” (In Liquidation) by A.M. Best. Under the reinsurance agreement with VFIC, AIC had the right, under certain circumstances, to require VFIC to provide a letter of credit or establish a trust account to collateralize the gross amount due AIC and Insura from VFIC under the reinsurance agreement. Accordingly, AIC, Insura and VFIC entered into a Security Fund Agreement effective September 1, 2004. On August 30, 2005 AIC received a letter from VFIC’s president that irrevocably confirmed VFIC’s duty and obligations under the Security Fund Agreement to provide security sufficient to satisfy VFIC’s gross obligations under the reinsurance agreement (the “VFIC Trust”). Currently the VFIC Trust holds $23.102 million to collateralize the $20.2 million gross recoverable from VFIC. In June 2006, the Texas Department of Insurance placed VFIC, along with several of its affiliates, into rehabilitation and subsequently into liquidation. Due to VFIC’s liquidation status, AIC is working through certain procedures to affect its right to withdraw funds from the VFIC Trust. AIC has been working with the Special Deputy Receiver (the “SDR”) and his staff on this matter since VFIC was placed into liquidation. To date, the SDR has not taken issue with the validity of the VFIC Trust; however, we currently are negotiating with the SDR the manner in which the funds will be withdrawn from the VFIC Trust, which must then be approved by the Special Master of the Receivership Court.

As of December 31, 2005, we separately included $7.2 million in other assets that was related to a receivable due from VIG as part of the transfer of the insurance companies to us at December 31, 2003. The $7.2 million was not included in the gross recoverable at December 31, 2005. We continue to believe that this receivable is due from VIG and have instituted appropriate legal proceedings to recover the full amount thereof. However, a loss for $7.2 million was included in selling, general and administrative expenses in the fourth quarter of 2006 when we set up a reserve equal to the full amount of the receivable. We established this reserve due to our uncertainty as to the collectibility of the receivable in light of the significant amount of claims made against VIG and VFIC as of December 31, 2006 in their bankruptcy and liquidation proceeding, respectively, and our creditor status in those proceedings.

At December 31, 2006, $18.4 million was included in reserves for losses and loss adjustment expenses that reflect the amounts owed from AIC and Insura under reinsurance agreements with the VIG affiliated companies, including Hawaiian Insurance and Guaranty Company, Ltd. (“Hawaiian”). AIC established a trust account to collateralize this payable, which currently holds $23.054 million in securities (the “AFIC Trust”). The AFIC Trust has not been drawn upon the SDR in Texas or the SDR in Hawaii. The SDRs will likely negotiate similar terms for withdrawal of funds from the AFIC trust as those agreed to in regards to the VFIC Trust.

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The following table provides a reconciliation of the beginning and ending reserves for unpaid losses and loss adjustment expenses, presented in conformity with generally accepted accounting principles, or GAAP, for the periods indicated:

	Years Ended December 31,
	2006			2005			2004
	(Dollars in thousands)
Balance at the beginning of the period	$	142,977		$	98,863		$	58,507
Less: Reinsurance recoverable		19,169			43,363			58,507
Less: Deposits		7,699			—			—
Net balance as of the beginning of the period		116,109			55,500			—
Incurred related to:
Current year		190,580			199,953			128,969
Prior years		(5,234	)		(8,745	)		—
Paid related to:
Current year		100,320			113,203			73,469
Prior years		62,714			17,396			—
Net balance as of the end of the period		138,421			116,109			55,500
Plus: Reinsurance recoverable		21,590			19,169			43,363
Plus: Deposits		2,558			7,699			—
Balance at the end of the period including deposits	$	162,569		$	142,977		$	98,863

In the fourth quarter of 2006, management determined that a reclassification would provide improved presentation for the liability for reserves for loss adjustment expenses that had previously been classified as deferred revenue liability. We reduced our consolidated deferred revenue liability for the year ended December 31, 2005 while increasing our reserve for losses, loss adjustment expenses and deposits. This reclassification resulted in an adjustment to our statements of cash flows for the years ended December 31, 2005 and 2004. However, the reclassification does not affect “net cash provided by operating activities” because the reclassification was between two components of “net cash provided by operating activities”. The reclassification as of December 31, 2005 and December 31, 2004 was $16.0 million and $5.8 million, respectively and has been reflected in the table above.

Our losses, loss adjustment expense reserves and deposit liabilities of $162.6 million on a gross basis and $138.4 million on a net basis are our best estimates as of December 31, 2006. The analysis provided by our independent opining actuaries indicated that their expected range for the ultimate liability for our losses and loss adjustment expense reserves, as of December 31, 2006, was between $139.1 million and $168.8 million on a gross basis and between $121.1 million and $145.9 million on a net basis.

The following table presents, on a GAAP basis, the development of reserves for unpaid losses and loss adjustment expenses from 1996 through 2006 for our insurance company subsidiaries, net of reinsurance recoveries or recoverables. The first line of the table presents the reserves at December 31 for each indicated year. This represents the estimated amounts of losses and loss adjustment expenses for claims arising in that year and all prior years that are unpaid at the balance sheet date, including losses incurred but not reported to us. The upper portion of the table presents the cumulative amounts subsequently paid as of successive years with respect to those claims. The lower portion of the table presents the reestimated amount of the previously recorded reserves based upon the experience as of the end of each succeeding year. The estimates are revised as more information becomes known about the payments, frequency and severity of claims for individual years. A redundancy (deficiency) exists when the reestimated reserves at each December 31 is less (greater) than the prior reserve estimate. The cumulative redundancy (deficiency) depicted in the table, for any particular calendar year, represents the aggregate change in the initial estimates over all subsequent calendar years.

Our historical net liabilities for losses and loss adjustment expenses are impacted by our 100% quota share reinsurance contract with VFIC. Beginning in 1997, our insurance companies reinsured 100% of the business they

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wrote to VFIC. During 1999 and 2000, one of our insurance companies retained a small book of business, but continued ceding a majority of its business to VFIC. For the years 2001, 2002 and 2003 we reinsured 100% of business written or assumed by our insurance companies to VFIC. The reclassification in 2004 and 2005 that is discussed above is reflected in the tables below.

	1996		1997		1998		1999			2000		2001		2002		2003		2004		2005		2006
	(Dollars in thousands)
Net liability for unpaid losses and LAE:
Originally estimated	$	28,350	$	—	$	—	$	1,215		$	3,493	$	—	$	—	$	—	$	55,500	$	116,109	$	138,421
Cumulative paid as of December 31,
One year later		25,385		—		—		1,210			3,493		—		—		—		17,396		62,714
Two years later		25,239		—		—		1,339			3,493		—		—		—		31,193
Three years later		25,239		—		—		1,339			3,493		—		—		—
Four years later		25,239		—		—		1,339			3,493		—		—
Five years later		25,239		—		—		1,339			3,493		—
Six years later		25,239		—		—		1,339			3,493
Seven years later		25,239		—		—		1,339
Eight years later		25,239		—		—
Nine years later		25,239		—
Ten years later		25,239
Liability reestimated as of December 31,
One year later		25,385		—		—		1,339			3,493		—		—		—		46,948		110,875		N/A
Two years later		25,239		—		—		1,339			3,493		—		—		—		47,417
Three years later		25,239		—		—		1,339			3,493		—		—		—
Four years later		25,239		—		—		1,339			3,493		—		—
Five years later		25,239		—		—		1,339			3,493		—
Six years later		25,239		—		—		1,339			3,493
Seven years later		25,239		—		—		1,339
Eight years later		25,239		—		—
Nine years later		25,239		—
Ten years later		25,239
Net cumulative redundancy/ (deficiency)	$	3,111	$	—	$	—	$	(124	)	$	—	$	—	$	—	$	—	$	8,083	$	5,234		N/A

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

	1996			1997		1998		1999		2000			2001			2002			2003		2004		2005		2006
	(Dollars in thousands)
As originally estimated:
Net liability shown above	$	28,350		$	—	$	—	$	1,215	$	3,493		$	—		$	—		$	—	$	55,500	$	116,109	$	138,421
Add reinsurance recoverable		3,854			73,674		71,338		65,693		46,818			43,345			64,677			58,507		43,363		19,169		21,590
Gross liability		32,204			73,674		71,338		66,908		50,311			43,345			64,677			58,507		98,863		135,278		160,011
As re-estimated as of December 31, 2006
Net liability shown above		25,239			—		—		1,339		3,493			—			—			—		47,417		110,875
Add reinsurance recoverable		(256	)		59,217		62,185		62,036		55,661			49,942			71,269			55,322		43,654		18,630
Gross liability		24,983			59,217		62,185		63,375		59,154			49,942			71,269			55,322		91,071		129,505
Gross cumulative redundancy/(deficiency)	$	7,221		$	14,457	$	9,153	$	3,533	$	(8,843	)	$	(6,597	)	$	(6,592	)	$	3,185	$	7,792	$	5,773

As a result of the 100% quota share reinsurance contract with VFIC, all losses and loss adjustment expense reserves of our insurance companies as of December 31, 2003 were reinsured by VFIC. In addition, VFIC remains liable for all losses and loss adjustment expenses for losses occurring on or prior to December 31, 2003.

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Investments

As of December 31, 2006, we had total invested assets of $221.8 million, which are summarized in the following table:

			% of Total
	Fair Value		at Fair Value
	(Dollars in millions)
Fixed Maturities, available for sale	$	220.0		99.2	%
Short term investments		1.8		0.8	%
Total	$	221.8		100.0	%

As of December 31, 2006, our fixed income investments were invested in the following: U.S. Treasury securities — 2.6%, corporate bonds — 4.1% and municipal securities — 93.3%. As of December 31, 2006, all of our fixed income securities were rated “A” or better by nationally recognized statistical rating organizations. We attempt to mitigate interest rate risk by managing the duration of our fixed income portfolio to a target range of less than three years. As of December 31, 2006, the effective duration of our fixed income investment portfolio was 1.01 years.

Our investment strategy is to conservatively manage our investment portfolio by investing in readily marketable, investment grade fixed income securities. We currently do not invest in common equity securities or mortgage-backed securities and we have no exposure to foreign currency risk. At December 31, 2006, our investment portfolio was managed by UBS Financial Services. The investment committee of our board of directors has established investment guidelines and periodically reviews portfolio performance for compliance with our guidelines.

In December 2005, our investment committee reviewed our investment portfolio and decided to realign a portion of our investment portfolio in order to better match our portfolio with our historical claims life. We determined that the identified securities would not fully recover prior to the expected sale date, therefore the securities were deemed other-than-temporarily impaired in December 2005 when the decision to sell was made. The identified securities were in compliance with our investment guidelines prior to the review by the investment committee. As of December 31, 2005, the $210.3 million in fixed maturities included $135.2 million in securities that had been identified by the investment committee of the board of directors as securities to be sold. The $135.2 million reflected the fair market value of such securities after the $1.7 million in losses recognized in December 2005.

Reinsurance

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

As of December 31, 2006, AIC had one quota share reinsurance agreement in place in Georgia where AIC serves as direct front for an unaffiliated underwriting agency under a contract that provides that 100% of the business is ceded to their insurance company.

Although our reinsurers are liable for loss to the extent of the coverage they assume, our reinsurance contracts do not discharge our insurance company subsidiaries from primary liability for the full amount of policies issued. In order to mitigate the credit risk of reinsurance companies, we select financially strong reinsurers with an A.M. Best rating of “A−” or better and continue to evaluate their financial condition.

VIG’s Non-Standard Automobile Insurance Business.  Prior to December 31, 2003, all of VIG’s direct and assumed non-standard personal automobile insurance policies were issued by various insurance company

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subsidiaries of VIG and by Old American County Mutual Fire Insurance Company (“Old American”) and were reinsured by VFIC pursuant to 100% quota share reinsurance contracts. As a result of this reinsurance, the historical financial statements prior to January 1, 2004 of AIC and Insura include only certain revenues, primarily policy fees that were not ceded to VFIC.

Effective December 31, 2003, our Illinois-domiciled insurance company subsidiaries, AIC and Insura, entered into a series of reinsurance transactions with the insurance company subsidiaries of VIG that effectively transferred to us all future economic interest in VIG’s non-standard automobile insurance business. VIG restructured its internal reinsurance to effectively cede to AIC and Insura all of the premiums, losses and loss adjustment expenses earned or incurred after December 31, 2003 on VIG’s non-standard personal automobile insurance policies previously reinsured by VFIC. With respect to policies that were originally issued by AIC or Insura, representing approximately $108.8 million of gross premiums written in 2003, this involved a termination of the internal reinsurance on a cut-off basis, meaning that VFIC as reinsurer retained its losses and loss adjustment expense reserves as of December 31, 2003 and remains liable for any losses incurred on or prior to December 31, 2003 on policies issued by AIC and Insura as well as any subsequent development of loss and loss adjustment reserves related to those losses. The unearned premium liability related to the in-force policies originally issued on AIC and Insura as of December 31, 2003 was transferred back to AIC and Insura and a ceding commission refund was paid to VFIC in the form of 812,404 shares of our common stock.

With respect to non-standard personal automobile policies issued by other insurance company subsidiaries of VIG and reinsured by VFIC, representing the remaining $216.0 million of gross premiums written in 2003, the transaction involved the termination of the internal reinsurance with VFIC on a cut-off basis, meaning that VFIC as reinsurer retained its losses and loss adjustment expense reserves as of December 31, 2003 and remains liable for any losses incurred on or prior to December 31, 2003 on policies issued by the other VIG affiliated insurance companies as well as any subsequent development of loss and loss adjustment reserves related to those losses. The unearned premium liability related to the in-force policies originally issued on the other insurance company subsidiaries of VIG as of December 31, 2003 was transferred back to those companies and a ceding commission refund was paid to VFIC. The other insurance company subsidiaries of VIG entered into reinsurance agreements with AIC to cede to AIC the unearned premium liability related to their in-force non-standard personal automobile policies as of December 31, 2003 and AIC paid a ceding commission to the other insurance company subsidiaries of VIG in the form of 659,580 shares of our common stock.

The following table reflects the premiums ceded and assumed under reinsurance agreements in our consolidated financial statements:

	Year Ended December 31,
	2006			2005			2004
	(Dollars in thousands)
Direct premiums written	$	201,132		$	173,776		$	182,562
Assumed premiums		85,048			147,428			99,163
Gross premiums written		286,180			321,204			281,725
Ceded premiums written		(1,373	)		(5,706	)		(66,469	)
Net premiums written	$	284,807		$	315,498		$	215,256

The amounts included in our balance sheets for the unpaid losses and loss adjustment expenses and unearned premium we would remain liable for in the event our reinsurers are unable to meet their obligations are as follows:

	Year Ended December 31,
	2006		2005
	(Dollars in thousands)
Loss and loss adjustment expense	$	21,590	$	19,169
Unearned premiums		1,221		3,137
Total	$	22,811	$	22,306

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For the year ended December 31, 2006, we have ceded $5.9 million of paid losses and $6.8 million of incurred losses and loss adjustment expenses to various reinsurers. For the year ended December 31, 2005, we ceded $29.2 million of paid losses and $6.1 million of incurred losses and loss adjustment expenses to various reinsurers. These amounts are included as loss and loss adjustment expenses in our statements of operations for the years ended December 31, 2006 and 2005.

2006 Reinsurance Program.  Effective May 1, 2006, our quota-share reinsurance agreement with FolksAmerica where we ceded 25% of business produced by our Florida underwriting agency (Affirmative Insurance of Florida, formerly known as Space Coast) was terminated.

We have ceded premium to the Michigan Catastrophic Claims Association (“MCCA”), a mandatory facility in that state. In 2006, we ceded $1.8 million in written premiums and $735,000 in earned premium to MCCA.

Effective August 1, 2005, we entered into novation agreements with several unaffiliated reinsurers who participated in a quota share reinsurance agreement in which we also participated. Pursuant to these agreements, we were substituted in place of these reinsurers assuming all rights, interests, liabilities and obligations related to the original quota share reinsurance agreement. As a result of these novation agreements, our participation in the original reinsurance agreement increased from 5% to 100%. In consideration for our assumption of their liabilities, these reinsurers agreed to pay us an amount equal to their share of the liabilities of the original quota share agreement as of July 31, 2005. We received cash in the amount of $14.2 million in relation to this novation. The terms of this reinsurance agreement did not meet the risk transfer requirements according to FAS 113, therefore, this contract was accounted for using deposit accounting according to the guidelines of SOP 98-7, “Deposit Accounting for Insurance and Reinsurance Contracts that do not Transfer Insurance Risk”. Under deposit accounting, the deposit liability should be adjusted based on the adjusted amount and timing of the cash flows. Changes in the carrying amount of the deposit liability should be reported as income or expense as appropriate. For the years ended December 31, 2006 and 2005, we recognized $683,000 and $477,000, respectively in our insurance companies related to this novation. As of December 31, 2006, $635,000 is included in deferred revenue.

Effective August 1, 2005, we entered into novation agreements with several unaffiliated reinsurers related to an assumed aggregate excess of loss reinsurance agreement for business produced in Texas by one of our underwriting agencies, written by Old American and ceded to the reinsurers. During 2005, we had executed letters of credit under our credit facility of approximately $2.3 million with these reinsurers, all of which were released on December 1, 2005 (See Note 6 to our consolidated financial statements contained elsewhere in this report).

Quota share reinsurance for business produced through unaffiliated underwriting agencies is specific to each unaffiliated underwriting agency. We maintain control on the selection of reinsurers and the terms and conditions of reinsurance contracts.

Historically, all of our initial quota share reinsurance agreements contained provisions for sliding scale commissions, under which the commission paid to us varies with the loss ratio results under each contract. The effect of this feature in the quota share reinsurance agreements is to limit the reinsurers’ aggregate exposure to loss and thereby reduce the ultimate cost to us as the ceding company. These features also have the effect of reducing the amount of protection relative to the quota share amount of premiums ceded by us. Before entering into these reinsurance agreements, and based on our prior operating history, we concluded that each agreement met the risk transfer test of SFAS No. 113 as the reinsurers assume significant risk and have a reasonable possibility of a significant loss.

AIC is a party to a 100% quota share reinsurance agreement with Hawaiian, which is ultimately a wholly-owned subsidiary of VIG. On November 4, 2004, Hawaiian was named among a group of four other named defendants and twenty unnamed defendants in a complaint filed in the Superior Court of the State of California for the County of Los Angeles alleging causes of action as follows: enforcement of coverage under Hawaiian’s policy of an underlying default judgment plaintiff obtained against Hawaiian’s former insured, who was denied a defense in the underlying lawsuit due to his failure to timely pay the Hawaiian policy premium; ratification and waiver of policy lapse and declaratory relief against Hawaiian; breach of implied covenant of good faith and fair dealing against Hawaiian with the plaintiff as the assignee of the insured; intentional misconduct as to the defendant SCJ Insurance Services (“SCJ”); and professional negligence as to the defendants Prompt Insurance Services, Paul

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Ruelas, and Anthony David Medina. SCJ, Prompt Insurance Services, Paul Ruelas, and Anthony David Medina are not affiliated with AIC. The plaintiff sought to enforce an underlying default judgment obtained against Hawaiian’s insured on September 24, 2004 in the amount of $35,000,643 and additional bad faith damages including punitive damages in the amount of $35,000,000. AIC, as a party to a 100% quota share reinsurance agreement, is sharing in the defense of this matter.

On August 8, 2005, we were served a copy of plaintiff’s Second Amended Complaint, which added a cause of action for fraud and deceit against all defendants, and a cause of action for negligent misrepresentation against Hawaiian and SCJ.

On January 31, 2006, Judge Bigelow absolved Hawaiian and SCJ of all counts plaintiff filed against them in this litigation on the trial court level by virtue of court order on motions for summary judgment that were submitted by both Hawaiian and SCJ. A partial dismissal without prejudice was entered as to defendant Paul Ruelas. Plaintiff filed a notice of appeal on April 18, 2006. On September 22, 2006, Hawaiian moved to stay appellate proceedings pursuant to an Order of Liquidation entered on August 21, 2006, in the Circuit Court for the State of Hawaii. Hawaiian and the other defendants thereto believe plaintiff’s allegations in this lawsuit are without merit and will continue to vigorously contest the claims brought by the plaintiff, and intend to exercise all available rights and remedies against them; however, the ultimate outcome of this matter is uncertain.

On October 2, 2006, The Court of Appeal of the State of California, Second Appellate District, Division Five, granted the stay order requested by Hawaiian, which effectively stayed the entire litigation proceeding. On December 11, 2006, the court modified its October 2, 2006 stay order by lifting it as to SCJ, causing the suit to proceed with SCJ as the sole defendant. Hawaiian filed a status update with the court on March 7, 2007 indicating that the liquidation proceeding for Hawaiian remains pending and that the August 21, 2006 Order of Liquidation entered by the Circuit Court of the State of Hawaii remains in full force and effect.

Information Technology

We have grown through acquisitions of significant, branded non-standard retail agencies and underwriting agency operations, and in doing so have inherited a number of disparate legacy policy and claim systems. In 2003, we retired one policy and claim system by successfully migrating that book of business to our most fully integrated functional system. We now operate six policy and three claims systems with the bulk of our business written on two core systems.

For the long term, we believe that an enterprise platform for policy and claims administration would allow us to operate more efficiently while at the same time effectively absorbing the business of potential new acquisitions. However, in the shorter-term, our current technology, which is spread across various platforms, does support and enable our business model by providing sharing of information between our retail stores, independent agents, underwriting, back-office operations and claims. Examples of our current proprietary systems are as follows:

•  Claims administration.  ACT II is our primary claims administration system. This system was internally developed with significant user input into the design. The system offers integrated imaging for workflow, data storage and retrieval purposes. ACT II allows us to offer real time claims handling at each desktop and enables us to investigate and promptly resolve all valid claims. This claims system is integrated with the policy system providing coverage verification and policy status. The system maintains all notes, diaries and provides automated on-line management reports on claims features and service levels. In September 2005, we began the migration of four of our existing claims systems to ACT II. The conversions and transitions were successfully completed in November 2005. We believe that the integration of all of our claims systems to ACT II will enable us to improve efficiencies, consolidate claims functions and ease our transition to one enterprise system. Over time, we hope to replace this system with an enterprise platform for policy and claims administration to be developed or acquired.

•  Sales office automation.  All of our retail agencies have desktop systems that provide point of sale quoting and application generation. When a policy is written with one of our insurance companies, our policyholders leave our retail agencies with a completed application, declarations page and insurance identification card

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along with their policy. We believe this “once and done” point of sale process allows us to provide enhanced service to our customers.

•  Payment processing.  Since our retail stores are located in convenient neighborhood locations, many of our customers will stop at their local store to make their premium payments. To streamline this process we internally developed a proprietary system, Maestro, that is tied in with our policy system that receipts and tracks payments taken in our retail stores, effectively streamlining cash handling. Maestro also offers real-time reporting from the retail store locations.

•  AffirmativeInsurance.com.  This Web site was internally developed for our independent agent partners to provide them with an efficient way to quote, generate and upload applications, upload payments and view policy status online. We believe this tool allows our independent agencies to better service our insurance customers in real time and provides them with the ability to better manage their business written with us.

During 2006, we made significant forward progress in our information technology (“IT”) agenda. In July 2006, we brought in a new chief information officer with extensive industry experience. Prior to joining Affirmative, our new chief information officer was a partner at Accenture LLC (“Accenture”), a global management consulting, technology services and outsourcing company, where he spent 13 years assisting insurance companies in achieving greater performance through transformation of their technology and business operations.

Sarbanes-Oxley Remediation.  Our IT systems are decentralized with many diverse applications throughout the Company. This decentralization has historically created challenges in creating and maintaining a consistent and effective IT control environment. During our evaluation of our IT systems’ operational and financial applications as part of management’s assessment of our internal control over financial reporting as of December 31, 2005, as required by Section 404 of the Sarbanes-Oxley Act of 2002, we identified control deficiencies that represented a material weakness in our internal control over financial reporting. Specifically, the deficiencies included (i) the inadequate design, documentation and enforcement of internal access security policies and procedures, and (ii) ineffective change management controls designed to prevent errors and irregularities with our primary operational applications. Access was not adequately restricted to ensure that unauthorized individuals would not have access to add, change or delete the underlying premiums, claims, or accounting data. To remediate this material weakness, we have implemented new policies and procedures to ensure that proper access controls are maintained and monitored. We have increased the supervisory control over access controls, centralizing it for more direct monitoring. In some instances, we have adjusted system configurations and incorporated software tools where appropriate to limit and restrict the ability of system users to enter, change and view data and that to provide a detailed history of changes to key elements of the data. We have also implemented more stringent change management processes and established accountabilities for system testing, migration and monitoring. As a result of our IT remediation efforts, our assessment of our internal control over financial reporting as of December 31, 2006 has concluded that no material weaknesses remain in our IT internal control.

Outsourcing Initiative.  On October 16, 2006, we entered into a 10-year outsourcing agreement with Accenture under which we will outsource substantially all of our IT operations to Accenture, including our data center, field support and application management. With Accenture as our IT outsourcing partner, we expect to achieve over time our goals of creating a technology platform to improve support of our business, consolidation of our data centers, and improvement in our overall IT infrastructure.

Data Center Consolidation.  In connection with our outsourcing transition to Accenture, in the fourth quarter of 2006, we migrated our largest IT data center from Bedford Park, Illinois to the Accenture managed data center in Omaha, Nebraska. As part of our data center migrations, we are upgrading substantially all of our IT server infrastructure to new standardized and more capable hardware with up-to-date versions of system software. This upgrade has resulted in significant improvements in the reliability and performance of our IT systems. In the first quarter of 2007, we migrated our second largest IT data center from Addison, Texas to the Accenture managed data center in Omaha, Nebraska. As with the first data center migration, this has also resulted in improvements in the reliability and performance of our IT systems that were previously maintained in our Texas data center. In 2007, we expect to migrate our last remaining IT data center (excluding our most recent acquisition, USAgencies) from Melbourne, Florida to the data center in Omaha.

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Network and Telephony Upgrade.  To improve the performance of our network and telephony infrastructure and provide enhanced capabilities to our business, we developed an implementation plan to upgrade our networks and deploy a company-wide Voice-over-Internet-Protocol (“VoIP”) phone system. Our new MPLS-based network will provide us with enhanced flexibility, resiliency and performance of our network. This network also positions us to support future technologies that require Quality-of-Service (“QoS”) network management, such as our new VoIP phone system. In 2006, we upgraded our Wide Area Network (“WAN”) between our primary corporate centers in Illinois and Texas, and our new data center in Omaha to our new network architecture. Throughout 2007, we plan to upgrade the rest of our WAN, including all retail locations, to this new network. This will enable us to deploy our VoIP phone system across all locations during 2007. Our new phone system, once deployed across all company locations, will provide us with enhanced capabilities that we believe will lead to a competitive advantage. Specifically, we will be positioned to perform skills-based routing in our claims, underwriting and retail support operations, as well as to implement a virtual call center across all of our retail locations, which will enhance our telephone-based sales and service capabilities. In late 2006, we successfully deployed our new VoIP phone system to our corporate, claims, underwriting and retail operations in our Chicago facility.

Strategic Systems Consolidation and Transformation.  During 2006, we developed a comprehensive implementation plan and supporting business case to consolidate and transform our primary business applications onto a new strategic platform. This plan encompasses consolidating and migrating our multiple claims, point-of-sale and policy administration systems onto single strategic platforms, as well as deploying new premium finance, reporting and business analytics capabilities. With the reporting and business analytics capabilities, we will equip our business managers with electronic dashboards showing the key performance metrics of their respective business units. This component of our plan will also provide us enhanced information reporting and data analysis capabilities to better understand and manage the performance of our business.

For all five components of this systems transformation plan, we have or are in the process of selecting a software package that we will configure and integrate to meet our unique needs. We believe this systems transformation will position us to realize significant strategic benefits including: systemic pricing advantage in our marketplace via consolidated and streamlined systems and operations; faster product time to market; additional retail revenue via premium financing; improved claims and underwriting performance via increased automated application of best practice processing rules; a platform to simplify and hasten post-merger and acquisition integration — reducing integration costs and accelerating synergies realization; and improved customer focus and retention. In November 2006, we received approval from our board of directors to commence with the first phase of this transformation, the implementation of premium finance. We plan to implement a wholly-owned premium finance company and supporting technology early in the second quarter of 2007. In addition, during 2007, with board of director’s approval, we plan to commence the remaining phases of the systems transformation.

Competition

The non-standard personal automobile insurance business is highly competitive and, except for regulatory considerations, there are relatively few barriers to entry. We compete based on factors such as the convenience of retail store locations, price, coverages offered, availability of flexible down payment arrangements and billing plans, customer service, claims handling and agent commission. We compete with other insurance companies that sell non-standard personal automobile insurance policies through independent agencies as well as with insurance companies that sell such policies directly to their customers. Our retail agencies and the independent agencies that sell our insurance products compete both with these direct writers and with other independent agencies. Therefore, our competitors are not only large national insurance companies, such as The Progressive Corporation, The Allstate Corporation, State Farm Mutual Automobile Insurance Company, GEICO, Farmers Insurance Group and American International Group, Inc. but also smaller regional insurance companies and independent agencies, such as Infinity Property & Casualty Corporation, Direct General Corporation, First Acceptance Corporation and Bristol West Holdings, Inc., that operate in a specific region or single state in which we operate. Based upon data compiled from A.M. Best, we believe that, as of December 31, 2005, the top ten insurance groups accounted for approximately 66% of the approximate $29.3 billion non-standard market segment, measured in annual direct premiums written.

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

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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 in 2002 through 2004, 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. In late 2004, and continuing through 2006, increased price competition and excess underwriting capacity produced a softening market. These fluctuations in the non-standard personal automobile insurance business cycle may negatively impact our profitability.

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

In addition to selling policies for our own insurance companies, our retail stores offer and sell non-standard personal automobile insurance policies for unaffiliated insurance companies. As a result, our insurance companies compete with these unaffiliated insurance companies for sales to the customers of our retail stores. If the competing insurance products offered by an unaffiliated insurance company are priced lower or have more attractive features than the insurance policies offered by our insurance companies, customers of our owned 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 retail stores selling relatively more policies of unaffiliated insurance companies and fewer policies of our insurance companies would negatively affect our earned premiums. However, instead we would earn commission income and fees from the unaffiliated insurance companies.

Ratings

The A.M. Best Company rates insurance companies based on factors of concern to policyholders, including a company’s financial strength and ability to meet its obligations to policyholders. A.M. Best has currently assigned our insurance company subsidiaries ratings of “B” (Fair), which is the seventh highest of the fifteen rating categories ranging from “A++” (Superior) to “F” (In Liquidation). Publications of A.M. Best indicate that the “B” rating is assigned to those companies that in A.M. Best’s opinion have a fair ability to meet their current obligations to policyholders but are financially vulnerable to adverse changes in underwriting or economic conditions. This rating reflects A.M. Best’s opinion of our ability to pay claims and is not an evaluation directed to investors regarding an investment in our common stock. In evaluating an insurance company’s financial and operating performance, A.M. Best reviews its profitability, leverage and liquidity, as well as its book of business, the adequacy and soundness of its reinsurance, the quality and estimated market value of its assets, the adequacy of its loss reserves, the adequacy of its surplus, its capital structure, the experience and competence of its management and its market presence. In addition, A.M. Best evaluates the insurance company’s ownership and the capital structure of the parent company. 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.

Following the completion of our acquisition of USAgencies on January 31, 2007, A.M. Best downgraded our rating from “B+” (Good) to “B” (Fair) due, in part, to our high tangible financial leverage resulting from the additional $200.0 million in debt that was utilized to finance the acquisition and to certain execution risks that A.M. Best believes exists relative to the overall infrastructure resulting from the combination of the two companies.

Regulatory Environment

We are subject to comprehensive regulation and supervision by government agencies in Illinois, the state in which two of our insurance company subsidiaries are domiciled, and Michigan, the state in which one of our

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insurance companies is domiciled, as well as in the states where our subsidiaries sell insurance products, issue policies and handle claims. In 2007, we will become subject to the regulations and supervision of government agencies in Louisiana and New York, where the insurance subsidiaries of USAgencies are domiciled. State insurance laws and regulations are complex, and each jurisdiction’s requirements are different. Certain states impose restrictions or require prior regulatory approval of certain corporate actions. 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.

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

Transactions between insurance companies and their affiliates.  We are a holding company and are subject to regulation in the jurisdictions in which our insurance company subsidiaries conduct business. Our insurance company subsidiaries are organized and domiciled under the insurance statutes of Illinois, Michigan, Louisiana and New York. The insurance laws in those states provide that all transactions among members of an insurance holding company system must be fair and reasonable. Transactions between our insurance company subsidiaries and their affiliates generally must be disclosed to state regulators, and prior regulatory approval generally is required before any material or extraordinary transaction may be consummated or any management agreement, services agreement, expense sharing arrangement or other contract providing for the rendering of services on a regular, systematic basis is entered into. State regulators may refuse to approve or delay approval of such a transaction, which may impact our ability to innovate or operate efficiently.

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

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

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

Capital requirements.  Our insurance company subsidiaries are subject to risk-based capital standards and other minimum capital and surplus requirements imposed under applicable state laws, including the laws of their state of domicile. The risk-based capital standards, based upon the Risk-Based Capital Model Act, adopted by the NAIC, require our insurance company subsidiaries to report their results of risk-based capital calculations to state departments of insurance and the NAIC. Failure to meet applicable risk-based capital requirements or minimum statutory capital requirements could subject us to further examination or corrective action imposed by state regulators, including limitations on our writing of additional business, state supervision or liquidation. Any changes in existing risk-based capital requirements or minimum statutory capital requirements may require us to increase our statutory capital levels. At December 31, 2006, each of our insurance subsidiaries maintained an RBC level that is in excess of an amount that would require any corrective actions on our part. As of December 31, 2006, our

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insurance companies had total adjusted capital of $133.4 (AIC), $24.6 (Insura) and $9.2 million (AIC — Michigan) and exceeded their respective authorized control level risk-based capital by a multiple of 3.5 to 1 (AIC), 37.3 to 1 (Insura) and 52.6 to 1 (AIC — Michigan), respectively. Since Insura and AIC — Michigan are wholly owned subsidiaries of AIC, their total adjusted capital is included in AIC’s total adjusted capital of $133.4 million.

IRIS Ratios.  The NAIC Insurance Regulatory Information System or IRIS is part of a collection of analytical tools designed to provide state insurance regulators with an integrated approach to screening and analyzing the financial condition of insurance companies operating in their respective states. IRIS is intended to assist state insurance regulators in targeting resources to those insurers in greatest need of regulatory attention. IRIS consists of two phases: statistical and analytical. In the statistical phase, the NAIC database generates key financial ratio results based on financial information obtained from insurers’ annual statutory statements. The analytical phase is a review of the annual statements, financial ratios and other automated solvency tools. The primary goal of the analytical phase is to identify companies that appear to require immediate regulatory attention. A ratio result falling outside the usual range of IRIS ratios is not considered a failing result; rather, unusual values are viewed as part of the regulatory early monitoring system. Furthermore, in some years, it may not be unusual for financially sound companies to have several ratios with results outside the usual ranges. An insurance company may fall outside of the usual range for one or more ratios because of specific transactions that are in themselves immaterial. As of December 31, 2006, AIC — Michigan, newly formed in 2006, had three IRIS ratios outside of the usual range. Two of these unusual ratios were primarily due to changes in policyholders’ surplus resulting from the capitalization of this newly formed insurance company. AIC had two IRIS ratios outside of the usual range and Insura had one IRIS ratio outside of the usual range. Each of our three insurance companies had the same IRIS ratio (“gross agents’ balances to policyholders’ surplus”) that was outside of the usual range. Because our insurance companies write exclusively non-standard personal automobile insurance policies, they maintain a higher than usual balance of premiums receivable compared to the overall industry. Non-standard personal automobile insurance customers often have limited financial resources and pay their premiums on monthly installments significantly more often than customers reported by the broader industry index, which includes all personal and commercial insurance customers who more often elect or are required to pay premiums up front when their policies are issued.

Regulation of dividends.  We are a holding company with no business operations of our own. Consequently, our ability to pay dividends to stockholders and meet our debt payment obligations is largely dependent on dividends or other payments from our operating subsidiaries, which include our agency subsidiaries and our insurance company subsidiaries. State insurance laws restrict the ability of our insurance company subsidiaries to declare stockholder dividends. Our insurance companies may not make an “extraordinary dividend” until 30 days after the applicable commissioner of insurance has received notice of the intended dividend and has not objected in such time or the commissioner has approved the payment of the extraordinary dividend within the 30-day period. In most states, an extraordinary dividend is defined as any dividend or distribution that, together with other distributions made within the preceding 12 months, exceeds the greater of 10% of the insurance company’s surplus as of the preceding December 31, or the insurance company’s net income for the 12-month period ending the preceding December 31, in each case determined in accordance with statutory accounting practices. In addition, an insurance company’s remaining surplus after payment of a cash dividend to stockholder affiliates must be both reasonable in relation to its outstanding liabilities and adequate to its financial needs.

Generally, the net admitted assets of insurance companies that, subject to other applicable insurance laws and regulations, are available for transfer to the parent company cannot include the net admitted assets required to meet the minimum statutory surplus requirements of the states where the companies are licensed. Our insurance companies paid $11.5 million in dividends during 2006. Without regulatory approval, the aggregate maximum amount of dividends that can be paid in 2007 to us by our insurance company subsidiaries is approximately $11.1 million. However, due to the dividend payment of $11.5 million in December 2006, our maximum dividend capacity of $11.1 million is not immediately available to us in 2007.

Acquisitions of control.  The acquisition of control of our insurance company subsidiaries requires the prior approval of their applicable insurance regulators. Generally, any person who directly or indirectly through one or more affiliates acquires 10% or more of the outstanding securities of an insurance company or its parent company is presumed to have acquired control of the insurance company. In addition, certain state insurance laws contain provisions that require pre-acquisition notification to state agencies of a change in control with respect to a non-

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domestic insurance company licensed to do business in that state. While such pre-acquisition notification statutes do not authorize the state agency to disapprove the change of control, such statutes do authorize certain remedies, including the issuance of a cease and desist order with respect to the non-domestic insurer if certain conditions exist, such as undue market concentration. Such approval requirements may deter, delay or prevent certain transactions affecting the ownership of our common stock.

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

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

Premium finance regulation.  As part of the acquisition of USAgencies, we acquired the premium finance company that finances USAgencies’ policyholders. We are in the initial stages of forming a second premium finance company to finance the sales of insurance policies sold through our owned retail stores. Our premium finance subsidiaries will be regulated by governmental agencies in states in which they conduct business. The agency responsible for such regulation varies by state, but generally is the banking department or the insurance department of the applicable state. These regulations, which generally are designed to protect the interests of policyholders who elect to finance their insurance premiums, vary by jurisdiction, but, among other matters, usually involve:

•  requiring our premium finance companies to qualify for and obtain a license and to renew the license each year;

•  regulating the interest rates, fees and service charges we may charge our customers;

•  establishing standards for filing annual financial reports of our premium finance companies;

•  imposing minimum capital requirements for our premium finance subsidiaries or requiring surety bonds in addition to or as an alternative to such capital requirements;

•  prescribing minimum notice and cure periods before we may cancel a customer’s policy for non-payment under the terms of the financing agreement;

•  governing the form and content of our financing agreements;

•  prescribing timing and notice procedures for collecting unearned premium from the insurance company, applying the unearned premium to our customer’s premium finance account, and, if applicable, returning any refund due to our customer;

•  conducting periodic financial and market conduct examinations and investigations of our premium finance companies and its operations; and

•  requiring prior notice to the regulating agency of any change of control of our premium finance companies.

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The following table sets forth the maximum permissible interest rate in the states listed below:

	Permissible
State	Interest Rate
Florida		12.0	%(1)
Illinois		10.0	%(1)
Indiana		21.0	%(3)
Louisiana		36.0	%(2)
Missouri		15.0	%(1)
South Carolina		12.0	%(1)
Texas		18.0	%(1)

(1)	In these states, the maximum permissible interest rate is calculated on an “add-on” basis, meaning that the annual interest rate is applied to the initial amount financed.
(2)	In this state, the maximum permissible interest rate is calculated on an “actuarial” basis, meaning that the interest is calculated to apply to the average of balances outstanding throughout the period of indebtedness.
(3)	In this state, the maximum permissible interest rate, calculated using the actuarial method, is not to exceed 21% per year on the unpaid balances of the principal. However, the applicable regulation does not limit or restrict the manner of contracting for the loan finance charge, whether by way of add-on, discount or otherwise, so long as the rate of the loan finance charge does not exceed that permitted.

Some of these states may require our premium finance subsidiaries to maintain a specified minimum net worth, post a surety bond or deposit securities with the state regulator.

In addition, our premium finance business will be subject to the federal Truth-in-Lending Act (“TILA”) and Regulation Z promulgated pursuant to the TILA and similar state statutes.

Privacy Regulations.  In 1999, the United States Congress enacted the Gramm-Leach-Bliley Act, which protects consumers from the unauthorized dissemination of certain personal information. Subsequently, the majority of states have implemented additional regulations to address privacy issues. These laws and regulations apply to all financial institutions, including insurance and finance companies, and require us to maintain appropriate procedures for managing and protecting certain personal information of our customers and to fully disclose our privacy practices to our customers. We may also be exposed to future privacy laws and regulations, which could impose additional costs and impact our results of operations or financial condition.

Regulation of Our Ancillary Product Vendors.  The vendors of the ancillary products and services we offer to our customers are also subject to various federal and state laws and regulations. The failure of any vendor to comply with such laws and regulations could affect our ability to sell the ancillary products or services of that particular vendor. However, we believe that there are adequate alternative vendors of all the material ancillary products and services sold by us.

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

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

•  misrepresenting pertinent facts or insurance policy provisions relating to coverages at issue;

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•  failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies;

•  failing to adopt and implement reasonable standards for the prompt investigation and settlement of claims arising under its policies;

•  failing to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed;

•  attempting to settle a claim for less than the amount to which a reasonable person would have believed such person was entitled;

•  attempting to settle claims on the basis of an application that was altered without notice to or knowledge or consent of the insured;

•  compelling insureds to institute suits to recover amounts due under policies by offering substantially less than the amounts ultimately recovered in suits brought by them;

•  refusing to pay claims without conducting a reasonable investigation;

•  making claim payments to an insured without indicating the coverage under which each payment is being made;

•  delaying the investigation or payment of claims by requiring an insured, claimant or the physician of either to submit a preliminary claim report and then requiring the subsequent submission of formal proof of loss forms, both of which submissions contains substantially the same information;

•  failing, in the case of claim denials or offers of compromise or settlement, to promptly provide a reasonable and accurate explanation of the basis for such actions; and

•  not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear.

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

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

Financial reporting.  We are required to file quarterly and annual financial reports with states using statutory accounting practices that are different from generally accepted accounting principles, which reflect our insurance company subsidiaries on a going concern basis. The statutory accounting practices used by state regulators, in keeping with the intent to assure policyholder protection, are generally based on a liquidation concept. For a summary of significant differences for our insurance companies between statutory accounting practices and GAAP, see Note 2 to our consolidated financial statements included in this report.

Periodic financial and market conduct examinations.  The state insurance departments that have jurisdiction over our insurance company subsidiaries may conduct on-site visits and examinations of the insurance companies’ affairs, especially as to their financial condition, ability to fulfill their obligations to policyholders, market conduct, claims practices and compliance with other laws and applicable regulations. Typically, these examinations are conducted every three to five years. In addition, if circumstances dictate, regulators are authorized to conduct special or target examinations of insurance companies to address particular concerns or issues. The results of these examinations can give rise to regulatory orders requiring remedial, injunctive or other corrective action on the part of the company that is the subject of the examination or assessing fines or other penalties against that company. In 2006, two of our insurance subsidiaries completed a routine financial examination by the Illinois Department of

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Insurance. The examination findings were based on financial statements for the year ended December 31, 2004. We have taken all corrective action indicated by the examination findings and all necessary adjustments were recorded in 2006.

Recent regulatory developments.  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, 2006, approximately 27.6% of our gross premiums written from non-standard personal automobile insurance policies produced on behalf of our insurance companies and other unaffiliated insurance companies we represent were issued to customers in Texas. Currently, 83% of these policies were written by Old American, an unaffiliated insurance company, and 100% assumed by our insurance companies. The remaining 17% were written directly by our insurance companies. We and many of our competitors contract with Texas county mutual insurance companies such as Old American primarily because these entities are allowed the flexibility of multiple rate plans. Even though the Texas Commissioner of Insurance has been given broader rulemaking authority under the 2003 law, to date we have experienced little impact in the design and pricing flexibility of our products. The county mutual system remains flexible and continues to meet our needs.

Employees

As of December 31, 2006, we employed 942 employees. Our employees are not covered by any collective bargaining agreements. Of the 942 total employees, 392 were directly engaged in our retail distribution channel.

Special Note Regarding Forward-Looking Statements

Any statement contained in this report that is not a historical fact, or that might otherwise be considered an opinion or projection concerning the Company or its business, whether express or implied, is meant as and should be considered a forward-looking statement as that term is defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on assumptions and opinions concerning a variety of known and unknown risks, including but not necessarily limited to changes in market conditions, natural disasters and other catastrophic events, increased competition, changes in availability and cost of reinsurance, changes in governmental regulations, and general economic conditions, as well as other risks more completely described in our filings with the Securities and Exchange Commission. If any of these assumptions or opinions prove incorrect, any forward-

looking statements made on the basis of such assumptions or opinions may also prove materially incorrect in one or more respects.

Where You May Find More Information

We are required to file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read any materials we file with the SEC free of charge at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Copies of all or any part of these documents may be obtained from such office upon the payment of the fees prescribed by the SEC. The public may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the site is www.sec.gov. This Form 10-K, including all exhibits thereto and amendments thereof, has been filed electronically with the SEC. Our Web site is www.affirmativeholdings.com. No information from this Web site is incorporated by reference herein. You may also obtain copies of our annual, quarterly and current reports, proxy and information statements and certain other information filed with the SEC, as well as amendments thereto, free of charge from our Web site. These documents are posted to our Web site as soon as reasonably practicable after we have filed or furnished these documents with the SEC. We post our audit committee charter, compensation committee charter and nominating and corporate governance committee charter as well as our corporate governance guidelines and code of business conduct and ethics on our Web site. These documents are available free of charge to any stockholder upon request.

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Item 1A.   Risk Factors

We face risks in connection with any material weakness resulting from our Sarbanes-Oxley Section 404 management report and any related remedial measures that we undertake.

In conjunction with (i) our ongoing reporting obligations as a public company and (ii) the requirements of Section 404 of the Sarbanes-Oxley Act that management report as of December 31, 2006 on the effectiveness of our internal control over financial reporting and identify any material weaknesses in our internal control over financial reporting, we engaged in a process to document, evaluate and test our internal controls and procedures, including corrections to existing controls and additional controls and procedures that we may implement. As a result of this evaluation and testing process, our management concluded that, as of December 31, 2006, we maintained effective internal control over financial reporting. See Item 9A. “Controls and Procedures” for additional disclosure about management’s assessment of the effectiveness of our internal control over financial reporting.

In response to the material weaknesses in our internal control over financial reporting identified as a result of our assessment of our internal control over financial reporting as of the end of the prior fiscal year, December 31, 2005, we have implemented additional controls and procedures, including modifying many of our controls and financial reporting processes, and standardizing our IT policies and procedures. These efforts have increased cost and diverted management attention away from operating our business.

In future periods, if the process required by Section 404 of the Sarbanes-Oxley Act reveals material weaknesses or significant deficiencies, the correction of any such material weaknesses or significant deficiencies could require remedial measures that could be costly and time-consuming. In addition, the discovery of material weaknesses could also require the restatement of prior period operating results. If a material weakness exists as of a future period year-end (including a material weakness identified prior to year-end for which there is an insufficient period of time to evaluate and confirm the effectiveness of the corrections or related new procedures), our management will be unable to report favorably as of such future period year-end as to the effectiveness of our control over financial reporting. If we are unable to assert that our internal control over financial reporting is effective in any future period (or if our independent auditors are unable to express an opinion on the effectiveness of our internal controls), or if we experience material weaknesses in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, which would have an adverse effect on our stock price and potentially subject us to litigation.

If we fail to effectively upgrade our information technology system, we may not be able to accurately report our financial results or prevent fraud.

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

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

New Affirmative beneficially owns approximately 51.2% of our outstanding common stock. As a result, New Affirmative exercises significant influence over matters requiring stockholder approval, including the election of directors, changes to our charter documents and significant corporate transactions. This concentration of ownership makes it unlikely that any other holder or group of holders of our common stock will be able to affect the way we are managed or the direction of our business. The interests of New Affirmative with respect to matters potentially or actually involving or affecting us, such as future acquisitions, financings and other corporate opportunities and attempts to acquire us, may conflict with the interests of our other stockholders. New Affirmative’s continued

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concentrated ownership may have the effect of delaying or preventing a change of control of us, including transactions in which stockholders might otherwise receive a premium for their shares over then current market prices.

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

As of the date of this filing, we had an aggregate of 54,292,062 shares of our common stock authorized but unissued and not reserved for specific purposes. In general, we may issue all of these shares without any action or approval by our stockholders. We have reserved 3,000,000 shares of our common stock for issuance under our equity incentive plan, of which 1,936,080 shares are issuable upon vesting and exercise of options granted as of the date of this filing, including options to purchase approximately 473,793 shares exercisable as of December 31, 2006. In addition, we may pursue acquisitions of competitors and related businesses and may issue shares of our common stock in connection with these acquisitions. Sales or issuances of a substantial number of shares of common stock, or the perception that such sales could occur, could adversely affect prevailing market prices of our common stock, and any sale or issuance of our common stock will dilute the percentage ownership held by our stockholders.

New Affirmative, our largest stockholder, beneficially owns approximately 51.2% of our common stock. New Affirmative has certain demand and piggyback registration rights with respect to the shares of our common stock it beneficially owns. Sales of a substantial number of shares of common stock by our largest stockholder, New Affirmative, or the perception that such sales could occur, could adversely affect prevailing market prices of our common stock.

Our inability to refinance our lines of credit or obtain additional financing could have an adverse effect on our premium finance revenue.

Through the premium finance subsidiary that we are in the process of forming, we will finance many of the insurance policies we sell. Our working capital needs will be substantially dependent on bank lines of credit that include covenants requiring us to pass specified financial tests and to refrain from certain kinds of actions. Such actions include incurring or guaranteeing additional indebtedness; granting mortgages or liens on our and certain of our subsidiaries’ assets; selling our premium finance subsidiary receivables; merging into, consolidating with, or acquiring the assets of another business corporation outside defined limitations; disposing of all or a substantial portion of our assets; making loans or investments other than to our subsidiaries; or entering into a new line of business not related to insurance, financial and related services. In the event we fail to meet our covenants or are unable to refinance, replace or increase our bank line of credit on economically feasible terms, our income and the marketability of our insurance products could be adversely affected. An alternative to financing our policies through our premium finance subsidiary would be to finance or installment bill the policies through our insurance subsidiaries as we have done historically, which would eliminate the requirement for outside working capital.

Since we are a “controlled company” for purposes of The NASDAQ Global Select Market’s corporate governance requirements, our stockholders will not have, and may never have, the protections that these corporate governance requirements are intended to provide.

Since we are a “controlled company” for purposes of The NASDAQ Global Select Market’s corporate governance requirements, we are not required to comply with the provisions requiring that a majority of our directors be independent, the compensation of our executives be determined by independent directors or nominees for election to our board of directors be selected by independent directors. As a result, our stockholders will not have, and may never have, the protections that these rules are intended to provide. The board of directors has determined that Paul J. Zucconi, Suzanne T. Porter, Thomas C. Davis and Nimrod T. Frazer are independent under The NASDAQ Global Select Market’s listing standards.

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

Substantially all of our gross premiums written and our commission income and fees 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 as compared to more diversified companies. Examples of such negative developments would be increasing trends in automobile repair costs, automobile parts costs, used car prices and medical care expenses, increased regulation, as well as increased litigation of claims and higher levels of fraudulent claims. All of these events can result in reduced profitability.

In addition, the non-standard personal automobile insurance industry historically has been cyclical in nature, characterized by periods of severe price competition and excess underwriting capacity followed by periods of high premium rates and shortages of underwriting capacity. 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 in 2002 through 2004, 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. In late 2004, and continuing through 2006, increased price competition and excess underwriting capacity produced a softening market. 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 the independent agencies that sell our insurance products compete both with these direct writers and with other independent agencies. Therefore, our competitors are not only large national insurance companies, but also smaller regional insurance companies and independent agencies. Some of our competitors have substantially greater financial and other resources than we have and may offer a broader range of products or competing products at lower prices. In addition, existing competitors may attempt to increase market share by lowering rates and new competitors may enter this market, particularly larger insurance companies that do not presently write non-standard personal automobile insurance. In this environment, we may experience a reduction in our underwriting margins or sales of our insurance policies may decrease as individuals purchase lower-priced products from other insurance companies. A loss of business to competitors offering similar insurance products at lower prices or having other competitive advantages could negatively affect our revenues and net income.

In addition to selling policies for our own insurance companies, our retail stores offer and sell non-standard personal automobile insurance policies for unaffiliated insurance companies. As a result, our insurance companies compete with these unaffiliated insurance companies for sales to the customers of our owned retail stores. If the competing insurance products offered by an unaffiliated insurance company are priced lower or have more attractive features than the insurance policies offered by our insurance companies, customers of our 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 retail stores selling relatively more policies of unaffiliated insurance companies and fewer policies of our insurance companies could negatively affect our revenues and profitability. Our retail stores would, however, earn commission income and fees from the unaffiliated insurance companies for the sales of their policies.

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

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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:

•  the availability of sufficient reliable data and our ability to properly analyze available data;

•  the uncertainties that inherently characterize estimates and assumptions;

•  our selection and application of appropriate rating and pricing techniques; and

•  changes in legal standards, claim settlement practices, medical care expenses and automobile repair costs.

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 loss and loss adjustment expense reserves, we will incur additional charges to earnings.

We maintain reserves to cover our estimated ultimate liability for losses and the related loss adjustment expenses for both reported and unreported claims on insurance policies issued by our insurance companies. The establishment of appropriate reserves is an inherently uncertain process, involving actuarial and statistical projections of what we expect to be the cost of the ultimate settlement and administration of claims based on historical claims information, estimates of future trends in claims severity and other variable factors such as inflation. Due to the inherent uncertainty of estimating reserves, it has been necessary, and will continue to be necessary, to revise estimated future liabilities as reflected in our reserves for claims and related expenses.

We cannot be sure that our ultimate losses and loss adjustment expenses will not materially exceed our reserves. To the extent that our reserves prove to be inadequate in the future, we would be required to increase our reserves for losses and the related loss adjustment expenses and incur a charge to earnings in the subsequent period during which such reserves are increased, which could have a material and adverse impact on our financial condition and results of operations in the subsequent period. In addition, we have a limited history in establishing reserves, 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 not be successful in reducing our risk and increasing our underwriting capacity through reinsurance arrangements, which could adversely affect our business, financial condition and results of operations.

In order to reduce our underwriting risk and increase our underwriting capacity, we may choose to transfer portions of our insurance risk to other insurers through reinsurance contracts. Historically, we have ceded a portion of our non-standard automobile insurance premiums and losses to unaffiliated reinsurers in accordance with these contracts. The availability, cost and structure of reinsurance protection is subject to changing market conditions that are outside of our control. In order for these contracts to qualify for reinsurance accounting and thereby provide the additional underwriting capacity that we might need, the reinsurer generally must assume significant risk and have a reasonable possibility of a significant loss.

Although the reinsurer is liable to us to the extent we transfer, or “cede,” risk to the reinsurer, we remain ultimately liable to the policyholder on all risks reinsured. As a result, ceded reinsurance arrangements do not limit our ultimate obligations to policyholders to pay claims. We are subject to credit risks with respect to the financial strength of our reinsurers. We are also subject to the risk that our reinsurers may dispute their obligations to pay our claims. As a result, we may not recover claims made to our reinsurers in a timely manner, if at all. In addition, if insurance departments deem that under our existing or future reinsurance contracts the reinsurer does not assume significant risk and has a reasonable possibility of significant loss, we may not be able to increase our ability to write

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business based on this reinsurance. Any of these events could have a material adverse effect on our business, financial condition and results of operations.

We may incur significant losses if VFIC, which currently has an A.M. Best financial strength rating of “F” (In Liquidation) or any of our other reinsurers, do not pay our claims in a timely manner.

Although our reinsurers are liable to us to the extent we transfer risk to the reinsurers, we remain ultimately liable to our policyholders on all risks reinsured. Consequently, if any of our reinsurers cannot pay their reinsurance obligations, or dispute these obligations, we remain liable to pay the claims of our policyholders. In addition, our reinsurance agreements are subject to specified contractual limits on the amounts and types of losses covered, and we do not have reinsurance coverage to the extent our losses exceed those limits or are not of the type reinsured. As of December 31, 2006, we had a total of $24.8 million of receivables from reinsurers, including $20.2 million gross recoverable from VFIC. We have $23.1 million currently in a trust account to collateralize the $20.2 million gross recoverable from VFIC. VFIC currently has been assigned a financial strength rating of “F” (In Liquidation) from A.M. Best. According to A.M. Best, “F” ratings are assigned to companies that have been placed under an order or liquidation by a court of law or whose owners have voluntarily agreed to liquidate the company. 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 have reduced our use of quota share reinsurance, we have retained more risk, which could result in losses.

We have historically used 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.

We have reduced our use of quota share reinsurance. As a result, we retain and earn more of the premiums we write, but we 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. Reducing our use of quota share reinsurance increases 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 the states in which our insurance company subsidiaries are domiciled, as well as in the states where our subsidiaries sell insurance products, issue policies and handle claims. Certain states impose restrictions or require prior regulatory approval of certain corporate actions, which may adversely affect our ability to operate, innovate, obtain necessary rate adjustments in a timely manner or grow our business profitably. These regulations provide safeguards for policy owners and are not intended to protect the interests of stockholders. Our ability to comply with these laws and regulations and to obtain necessary regulatory action in a timely manner is and will continue to be critical to our success.

•  Required licensing.  We operate under licenses issued by various state insurance authorities. If a regulatory authority denies or delays granting a new license, our ability to enter that market quickly or offer new insurance products in that market might be substantially impaired.

•  Transactions between insurance companies and their affiliates.  Transactions between our insurance companies and their affiliates generally must be disclosed to state regulators, and prior approval of the applicable regulator generally is required before any material or extraordinary transaction may be consummated. State regulators may refuse to approve or delay approval of such a transaction, which may impact our ability to innovate or operate efficiently.

•  Restrictions on cancellation, non-renewal or withdrawal.  Many states have laws and regulations that limit an insurance company’s ability to exit a market. For example, certain states limit an automobile insurance

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company’s ability to cancel or not renew policies. Some states prohibit an insurance company from withdrawing from one or more lines of business in the state, except pursuant to a plan approved by the state insurance department. In some states, this applies to significant reductions in the amount of insurance written, not just to a complete withdrawal. These laws and regulations could limit our ability to exit or reduce our writings in unprofitable markets or discontinue unprofitable products in the future.

•  Other regulations.  We must also comply with state and federal regulations involving, among other things:

—  the use of non-public consumer information and related privacy issues;

—  the use of credit history in underwriting and rating;

—  limitations on the ability to charge policy fees;

—  limitations on types and amounts of investments;

—  the payment of dividends;

—  the acquisition or disposition of an insurance company or of any company controlling an insurance company;

—  involuntary assignments of high-risk policies, participation in reinsurance facilities and underwriting associations, assessments and other governmental charges;

—  the Sarbanes-Oxley Act of 2002;

—  SEC reporting;

—  reporting with respect to financial condition; and

—  periodic financial and market conduct examinations performed by state insurance department examiners.

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, 2006, approximately 27.6% of our gross premiums written from non-standard personal automobile policies produced on behalf of our insurance companies were from policies issued to customers in Texas. Currently, 83% of these policies are written by Old American, a Texas county mutual insurance company and 100% assumed by our insurance companies. The remaining 17% were written directly by our insurance companies. We and many of our competitors contract with Texas county mutual insurance companies primarily because these entities

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historically have not been subject to state rate regulation applicable to other insurance companies. Although the new reforms 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.

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

As automobile insurance industry practices and regulatory, judicial and consumer conditions change, unexpected and unintended issues related to claims, coverages, business practices and premium financing plans may emerge. These issues can have an adverse effect on our business by changing the way we price our products, by extending coverage beyond our underwriting intent, or by increasing the size of claims. Recent examples of some emerging issues include:

•  concerns over the use of an applicant’s credit score and zip code as a factor in making risk selections and pricing decisions;

•  a growing trend of plaintiffs targeting automobile insurers, including us, in purported class action litigation relating to claims-handling practices, such as the permitted use of aftermarket (non-original equipment manufacturer) parts, total loss evaluation methodology and the alleged diminution in value to insureds’ vehicles involved in accidents;

•  a relatively new trend of plaintiffs targeting insurers, including automobile insurers, in purported class action litigation which seek to recharacterize installment fees and other allowed charges related to insurers’ installment billing programs as interest that violates state usury laws or other interest rate restrictions; and

•  attempts by plaintiffs to initiate purported class action litigation targeting premium finance operations relating to unearned interest rebates and the collection of service and finance charges.

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

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

Our insurance companies are subject to risk-based capital standards and other minimum capital and surplus requirements imposed under applicable state laws, including the laws of their state of domicile. The risk-based capital standards, based upon the Risk-Based Capital Model Act adopted by the National Association of Insurance Commissioners, or NAIC, require our insurance companies to report their results of risk-based capital calculations to state departments of insurance and the NAIC. These risk-based capital standards provide for different levels of regulatory attention depending upon the ratio of an insurance company’s total adjusted capital, as calculated in accordance with NAIC guidelines, to its authorized control level risk-based capital. Authorized control level risk-based capital is the number determined by applying the NAIC’s risk-based capital formula, which measures the minimum amount of capital that an insurance company needs to support its overall business operations.

Failure to meet applicable risk-based capital requirements or minimum statutory capital requirements could subject us to further examination or corrective action imposed by state regulators, including limitations on our writing of additional business, state supervision or liquidation. Any changes in existing risk-based capital requirements or minimum statutory capital requirements may require us to increase our statutory capital levels. At December 31, 2006, each of our insurance subsidiaries maintained an RBC level that is in excess of an amount that would require any corrective actions on our part. As of December 31, 2006, our insurance companies had total adjusted capital of $133.4 (AIC), $24.6 (Insura) and $9.2 million (AIC — Michigan) and exceeded their respective authorized control level risk-based capital by a multiple of 3.5 to 1 (AIC), 37.3 to 1 (Insura) and 52.6 to 1 (AIC —

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Michigan), respectively. Since Insura and AIC — Michigan are wholly owned subsidiaries of AIC, their total adjusted capital is included in AIC’s total adjusted capital of $133.4 million.

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

Our success depends in part on our ability to attract and retain qualified personnel. Our inability to recruit and retain qualified personnel could prevent us from fully implementing our business strategies and could materially and adversely affect our business, growth and profitability. We do not have key person insurance on the lives of any of our executive officers.

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:

•  obtain necessary licenses;

•  properly design and price our products;

•  identify, hire and train new claims and sales employees;

•  identify agency acquisition candidates; and

•  assimilate and integrate the operations, personnel, technologies, products and information systems of the acquired companies.

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.

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

Our business is concentrated in a limited number of states. For the year ended December 31, 2006, approximately 27.6% of our gross premiums written related to policies issued to customers in Texas, 23.4% to customers in Illinois and 13.3% 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, 2006, independent agencies were responsible for approximately 64.7% of the gross premiums 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 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 owned retail stores, our sales volume and profitability may suffer.

Our owned 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 income and fees from sales of third-party policies through our retail stores’ relationships with unaffiliated underwriting agencies and insurance companies. If our 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 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 owned 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, 2006, 77.6% 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

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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 or economic conditions. This rating reflects A.M. Best’s opinion of our ability to pay claims and is not an evaluation directed to investors regarding an investment in our common stock. In evaluating an insurance company’s financial and operating performance, A.M. Best reviews its profitability, leverage and liquidity, as well as its book of business, the adequacy and soundness of its reinsurance, the quality and estimated market value of its assets, the adequacy of its loss reserves, the adequacy of its surplus, its capital structure, the experience and competence of its management and its market presence. In addition, A.M. Best evaluated the insurance company’s ownership and the capital structure of any parent company. 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.

Following the completion of our acquisition of USAgencies on January 31, 2007, A.M. Best downgraded our financial strength rating (“FSR”) from “B+” (Very Good) to “B” (Fair). While our combined entities maintain favorable risk-adjusted capitalization and operating performance relative to our previous rating level, A.M. Best determined that the high intangible financial leverage position resulting from the additional $200.0 million in debt that was utilized to finance the acquisition of USAgencies merited a reduced FSR. This, along with certain risks that A.M. Best believes exists relative to the overall infrastructure resulting from the combination of the two companies, led to this downgrade.

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. 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.

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

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

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

Our results of operations depend in part on the performance of our invested assets. As of December 31, 2006, $221.8 million, or 100%, 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

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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 $2.2 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 current information technology and telecommunications systems as well as our future integrated policy and claims system. We rely on these systems to process new and renewal business, provide customer service, make claims payments and facilitate collections and cancellations, as well as to perform actuarial and other analytical functions necessary for pricing and product development. As a result, the failure of these systems could interrupt our operations and adversely affect our financial results. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such service exceeds capacity or such third-party systems fail or experience interruptions. If sustained or repeated, a system failure or service denial could result in a deterioration of our ability to write and process new and renewal business and provide customer service or compromise our ability to pay claims in a timely manner. This could result in a material adverse effect on our business.

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. Under state insurance laws, dividends from our insurance companies, which must be paid from earned surplus, are subject to restrictions relating to statutory surplus and earnings. Prior approval from state insurance regulatory authorities is generally required in order for our insurance companies to declare and pay extraordinary dividends. In most states, an

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extraordinary dividend is defined as any dividend or distribution that, together with other distributions made within the preceding 12 months, exceeds the greater of 10% of the insurance company’s statutory surplus as of the preceding December 31, or the insurance company’s statutory net income for the 12-month period ending the preceding December 31. Without regulatory approval, the aggregate maximum amount of dividends that can be paid in 2007 to us by our insurance company subsidiaries is approximately $11.1 million. In December 2006, our insurance company subsidiaries paid a dividend of $11.5 million and as a result, the maximum dividend capacity of $11.1 million is not immediately available. 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.

Item 1B.   Unresolved Staff Comments

None.

Item 2.   Properties

As of the year ended December 31, 2006, we leased an aggregate of approximately 543,851 square feet of office space for our agencies, insurance companies and retail stores in various locations throughout the United States.

The office space of approximately 543,851 square feet includes a new lease that was entered into in 2006 for approximately 56,875 square feet of office space in Burr Ridge, Illinois. We officially occupied the office space on January 1, 2007, while simultaneously moving from our Bedford Park, Illinois location, where we leased approximately 96,722 square feet of office space. The Burr Ridge lease has a term of 10 years and provides for escalating rents during the lease term. The lease for the office space in Bedford Park was terminated on January 1, 2007. We continue to lease approximately 56,888 square feet of office space in Addison, Texas with three years remaining in the lease term.

Item 3.   Legal Proceedings

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

In December 2003, InsureOne Independent Agency, LLC (“InsureOne”), American Agencies General Agency, Inc. and Affirmative Insurance Holdings, Inc. (collectively “Affirmative”) brought action in the Circuit Court of Cook County, Illinois to enforce non-compete and non-solicitation agreements entered into with James Hallberg, the former president of InsureOne, a wholly-owned subsidiary, and eight former employees of InsureOne and two of Hallberg’s family trusts. The court entered interim orders prohibiting all defendants, including Hallberg, from hiring any employees of InsureOne or of plaintiffs’ other underwriting agencies. On November 9, 2005 upon the close of Affirmative’s case, the court ruled that the following counts from our 5th Amended Verified Complaint would remain in the case to be considered until the close of trial: 1) breach of contract by James P. Hallberg; 2) breach of contract by James P. Hallberg Gift Trust and Patricia L. Hallberg Gift Trust; and 3) breach of contract by William Hallberg. James Hallberg’s currently pending counterclaims include breach of contract, fraud, and breach of fiduciary duty. The Hallberg family gift trusts have also asserted a single counterclaim that alleges fraud and breach of fiduciary duty in relation to the purchase of that same 20% minority interest in InsureOne in 2003. We are

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seeking between $15 and $23 million in damages for lost profits and diminution in value. James Hallberg and the Hallberg family gift trust are seeking combined damages of at least $4,530,482. The trial and post-trial briefing of this matter are complete. The court is expected to render judgment in the case in the first half of 2007.

Affirmative Insurance Holdings, Inc. and Affirmative Property Holdings, Inc. brought action against Business Risk Technology, Inc. and Steven M. Repetti (“BRT”) in the Circuit Court of the 17th Judicial Circuit, Broward County, Florida on January 6, 2006 for fraudulent inducement, breach of contract, breach of the covenant of good faith and fair dealing, and for declaratory and supplemental relief arising from the defendant’s wrongful conduct and contractual breaches. The details of such allegations are set forth in the petition. This action involves our enforcement of certain rights under a software license agreement we entered with BRT wherein BRT agreed to develop and provide us with a complete, turnkey software system for use by our various affiliates. Among the requested relief, we are seeking declaratory relief, a return of confidential and proprietary information, monetary damages, attorneys’ fees, reasonable pre-judgment and post-judgment interest, and any other relief the court deems just. On April 27, 2006, BRT counterclaimed for breach of contract, unjust enrichment, fraud, unfair and deceptive trade practices and libel. Subsequently, the court dismissed the unfair and deceptive trade practices and libel claims without prejudice and provided BRT with leave to amend its complaint in ten (10) days; however, BRT did not amend. The case is in discovery at this time. We are vigorously prosecuting the claims against the defendants and are exercising all available rights and remedies against them.

One of our insurance subsidiaries, AIC, was the subject of a purported class action in the Circuit Court of the 3rd Judicial Circuit, Madison County, Illinois in a second-amended complaint wherein Plaintiff alleged that AIC committed fraud and misrepresentation by 1) falsely stating “it would pay only a stated fee for a rental car when, in fact, it would pay more than the stated fee;” 2) falsely stating “that a car could be rented for this stated fee when, in fact, a car was not available for rental at this amount;” 3) falsely stating “the facts of the obligation of it and its insureds when one of its insureds was involved in an accident with a third-party such as plaintiff and the members of the Class in that it stated that its obligation with respect to a rental car was limited to the stated fee per day it said it would pay when, in fact, its insured might be liable for a greater amount;” and 4) falsely stating “that it would not pay an amount for rental that would allow Illinois consumers to rent a car of the same or similar kind and quality as that which was damaged, when, in fact, it sometimes did pay such an amount.” The plaintiff sought declaratory relief as to the underlying action, specific relief concerning the class action in the form of various court orders; reasonable attorneys’ fees, compensatory damages in an amount less than $75,000 per class member, and pre-judgment and post-judgment interest. The case concluded on December 18, 2006 when AIC obtained a motion for summary judgment in its favor on the grounds of mootness. Plaintiff did not appeal.

Affirmative Insurance Holdings, Inc. and Affirmative Insurance Company v. Nance, Meadows, Saeger, Wright and Does 1-10: Affirmative Insurance Holdings, Inc. and Affirmative Insurance Company (referred to herein collectively as “Affirmative”) brought action against certain officers and directors of Vesta Fire Insurance Corporation and its parents and/or subsidiaries, including, Hopson B. Nance, E. Murray Meadows, Paul H. Saeger, Jr., Fred H. Wright, and Does 1-10 in the United States District Court of the Northern District of Alabama, Southern Division, on December 28, 2006 for negligent misrepresentation, fraud, tortuous interference with contractual relations, breach of fiduciary duty, negligence and conversion. The details of such allegations are set forth in the petition. The case involves an action by Affirmative to recover $7.2 million of Affirmative’s funds used improperly by Defendants to satisfy a debt of one of Vesta Insurance Group, Inc.’s subsidiaries. Among the requested relief, Affirmative seeks judgment against the Defendants for $7.2 million, plus prejudgment interest and punitive damages. This matter subsequently was transferred to the U.S. Bankruptcy Court for the Northern District of Alabama for pre-trial proceedings in connection with the bankruptcy proceeding of Vesta Insurance Group, Inc. We are vigorously prosecuting the claims against the defendants and are exercising all available rights and remedies against them.

Item 4.   Submission of Matters to a Vote of Security Holders

None.

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Part II

Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock has been traded on the NASDAQ Global Select Market (formerly known as the NASDAQ National Market) under the symbol “AFFM” since our initial public offering on July 9, 2004. The following table sets forth, for the periods indicated, the high, low and closing sales prices for our common stock as reported on the NASDAQ Global Select Market:

							Dividends
							Declared
							and Paid
	High		Low		Close		Per Share
For the quarter ended:
March 31, 2005		16.95		13.98		14.75		0.02
June 30, 2005		16.28		12.07		15.85		0.02
September 30, 2005		17.68		14.08		14.56		0.02
December 31, 2005		15.39		12.89		14.59		0.02
March 31, 2006		14.75		12.87		13.21		0.02
June 30, 2006		15.86		11.28		15.65		0.02
September 30, 2006		17.03		14.10		14.65		0.02
December 31, 2006		17.15		14.40		16.27		0.02

Holders

On March 9, 2007, the last quoted sales price of our common stock as reported by the NASDAQ Global Select Market was $17.52 per share, there were 15,361,848 shares of our common stock issued and outstanding and there were 10 known holders of record of our common stock and approximately 1,250 beneficial owners.

Dividends

We declared and paid quarterly dividends of $0.02 per common share to stockholders of record for each quarter of 2006 and 2005. We declared a quarterly dividend of $0.02 per common share on March 6, 2007 for stockholders of record on March 23, 2007 and the dividend will be paid on March 30, 2007. We presently anticipate continuing the payment of quarterly cash dividends.

The declaration and payment of dividends is subject to the discretion of our board of directors and will depend on our financial condition, results of operations, cash requirements, future prospects, regulatory and contractual restrictions on the payment of dividends by our subsidiaries, and other factors deemed relevant by our board of directors. Further, we may enter into new agreements or incur additional indebtedness in the future 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 repayment of indebtedness, general corporate or other purposes. For a discussion of our cash resources and needs, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Liquidity and Capital Resources”.

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

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Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth information as of December 31, 2006 about all of our equity compensation plans. All plans have been approved by our stockholders.

					Number of Securities
	Number of Securities				Remaining Available for
	to be Issued Upon		Weighted-Average		Future Issuance Under
	Exercise of		Exercise Price of		Equity Compensation Plan
	Outstanding Options,		Outstanding Options,		(Excluding Securities
	Warrants and Rights		Warrants and Rights		Reflected in Column (a))
Plan Category	(a)		(b)		(c)
Equity compensation plans approved by security holders:
1998 Omnibus Incentive Plan		58,461	$	7.59		—
2004 Stock Incentive Plan		1,936,080	$	19.01		990,716
Total		1,994,541	$	18.67		990,716

During the fourth quarter of 2006, there were no repurchases of our common stock.

Performance Graph

The following graph shows the percentage change in our cumulative total stockholder return on our common stock since our initial public offering measured by dividing the sum of (A) the cumulative amount of dividends, assuming dividend reinvestment during the periods presented and (B) the difference between our share price at the end and the beginning of the periods presented; by the share price at the beginning of the periods presented. The graph demonstrates cumulative total returns for us, NASDAQ and the NASDAQ Insurance Index from the date of our initial public offering, July 9, 2004, through December 31, 2006.

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Item 6.   Selected Financial Data

The following tables provide selected historical consolidated financial and operating data of Affirmative Insurance Holdings, Inc. 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 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 report. We derived our selected financial data as of December 31, 2006, 2005, 2004, 2003 and 2002 and for the years then ended from our audited consolidated financial statements. The results for past accounting periods are not necessarily indicative of the results to be expected for any future accounting period.

	Year Ended December 31,
	2006			2005			2004			2003		2002
	(In thousands, except share and per share data)
Statement of Operations Data:(1)
Premiums earned	$	288,110		$	297,799		$	194,341		$	—	$	—
Commission income and fees		60,995			79,615			126,679			103,344		84,907
Net investment income		8,829			5,730			2,327			189		484
Realized gains (losses)		(822	)		(1,665	)		(8	)		451		—
Total revenues		357,112			381,479			323,339			103,984		85,391
Losses and loss adjustment expenses		185,346			191,208			128,969			—		—
Selling, general and administrative expenses		150,540			153,805			148,095			68,755		58,991
Depreciation and amortization		4,398			4,207			4,218			3,575		2,360
Interest expense		4,342			3,515			588			821		1,012
Total expenses		344,626			352,735			281,870			73,151		62,363
Net income before income taxes, minority interest and equity interest in unconsolidated subsidiaries		12,486			28,744			41,469			30,833		23,028
Income tax expense		2,661			9,767			15,319			11,025		8,610
Minority interest, net of income taxes		81			672			804			403		703
Equity interest in unconsolidated subsidiaries, net of income taxes		—			—			913			348		—
Net income	$	9,744		$	18,305		$	24,433		$	19,057	$	13,715
Operating Data:
Gross premiums written	$	286,180		$	321,204		$	281,725		$	150,895	$	175,294
Net premiums written		284,807			315,498			215,256			55,595		—
Balance Sheet Data:
Cash, cash equivalents and total investments	$	274,254		$	258,787		$	183,757		$	22,896	$	9,039
Total assets		557,267			544,125			521,622			315,208		297,664
Total liabilities		350,874			344,163			316,316			201,831		219,317
Total stockholders’ equity		206,393			199,962			205,306			113,377		78,347

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	Year Ended December 31,
	2006		2005		2004		2003		2002
	(In thousands, except share and per share data)
Per Share Data:
Earnings per common share:
Basic	$	0.64	$	1.16	$	1.74	$	1.89	$	3.87
Diluted		0.63		1.14		1.72		1.88		2.09
Book value per common share		13.44		12.96		12.19		9.81		7.81
Weighted average shares outstanding
Basic		15,295,022		15,774,387		14,018,530		10,082,794		3,543,928
Diluted		15,344,984		15,993,073		14,213,682		10,112,585		6,565,535
Common Shares outstanding		15,354,575		15,432,557		16,838,519		11,557,214		10,031,615

(1) Prior to acquiring our insurance companies effective December 31, 2003, our operations were comprised of our non-standard personal automobile insurance underwriting and retail agency operations. The business written by the insurance companies we acquired from VIG was 100% reinsured by VFIC in accordance with a quota share reinsurance agreement. As a result of this internal reinsurance, the historical financial statements of AIC and Insura included only certain revenues, primarily policy fees that were not ceded to VFIC, and excluded the underwriting results of the business ceded.

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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Affirmative Insurance Holdings, Inc. was incorporated in 1998 and completed an initial public offering of its common stock in July 2004. We are a distributor and producer of non-standard personal automobile insurance policies for individual consumers in targeted geographic markets. Non-standard personal automobile insurance policies provide coverage to drivers who find it difficult to obtain insurance from standard insurance companies due to their lack of prior insurance, age, driving record, limited financial resources or other factors. Non-standard personal automobile insurance policies generally require higher premiums than standard automobile insurance policies for comparable coverage.

We are currently active in offering insurance directly to individual consumers through retail stores in 8 states, (Illinois, Texas, Missouri, Indiana, South Carolina, Florida, Kansas and Wisconsin) and distributing our own insurance policies through independent agents in 9 states (Illinois, Texas, Missouri, Indiana, South Carolina, Florida, California, Michigan and New Mexico). Today, the 11 states in which we operate collectively represent approximately 51% of the non-standard personal automobile insurance market. These combined states accounted for $14.6 billion in direct written premium in 2005, based on information from A. M. Best and our company analysis. We believe the states in which we operate are among the most attractive non-standard personal automobile insurance markets due to a number of factors, including size of market and existing regulatory and competitive environments.

On January 31, 2007, we completed the acquisition of USAgencies in a fully-financed all cash transaction valued at approximately $200.0 million. USAgencies is a non-standard automobile insurance provider headquartered in Baton Rouge, Louisiana. It has 92 sales offices in Louisiana, Illinois and Alabama selling its products directly to consumers through its own retail stores, virtual call centers and internet site. In 2006, USAgencies had gross written premium of approximately $177.1 million, an increase of 12.6% from 2005 gross written premiums of $157.3 million. The purchase of USAgencies was financed through $200.0 million in borrowings under a $220.0 million senior secured credit facility that was entered into concurrently with the completion of the acquisition.

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

•  Insurance companies, which possess the regularity authority and capital necessary to issue insurance policies;

•  Underwriting agencies, which supply centralized infrastructure and personnel required to design and service insurance policies that are distributed through retail agencies; and

•  Retail agencies, which provide multiple points of sale under established local brands with personnel licensed and trained to sell insurance policies and ancillary products to individual consumers.

As of December 31, 2006, our subsidiaries included three insurance companies licensed to write insurance policies in 36 states, four underwriting agencies and five retail agencies with 158 owned retail stores (16 of which are located in leased space within supermarkets owned by a major supermarket chain under an agreement signed in late 2005) and 33 franchised retail store locations serving 11 states. The acquisition of USAgencies, effective January 1, 2007, will increase our operations by two insurance companies and 92 additional owned retail stores.

Our three operating components often function as a vertically integrated unit, capturing the premium and associated risk and commission income and fees generated from the sale of an insurance policy. There are other instances, however, when each of our operations functions with unaffiliated entities on an unbundled basis, either independently or with one or both of the other two operations. For example, as of December 31, 2006, our insurance companies had relationships with two 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 3,200 independent agencies in addition to our 158 owned and 33 franchised retail stores. In addition, our retail stores earn commission income and fees from sales of third-party policies.

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We believe that our ability to enter into a variety of business relationships with third-parties allows us to maximize sales penetration and profitability through industry cycles better than if we employed a single, vertically integrated operating structure.

Segments

In November 2005, with a change in controlling ownership, we changed our board of directors and, subsequently, some members of senior management including the chief executive officer and the chief financial officer. The former senior management, with extensive experience in managing underwriting agencies and retail agencies, monitored the business on the basis of several segments consisting of an “agency” segment that was comprised of our underwriting and retail agencies, an “insurance” segment for the insurance companies and a “corporate” segment. The current senior management determined that with the significantly increased retention by the insurance companies of the business produced by the underwriting agencies, the company should be analyzed as an integrated insurance company beginning January 1, 2006. Given the homogeneity of our products, the regulatory environments in which we operate, the nature of our customers and our distribution channels, we now monitor, control and manage our business lines as an integrated entity offering non-standard personal automobile insurance products through multiple distribution channels. Accordingly, the segment information previously viewed by the former management is no longer used to monitor the company and we have no segment information to disclose. Our previously reported historical consolidated financial results represent the integrated entity currently analyzed by management, so no additional or adjusted historical disclosures are required in order to reflect this change in management’s business analysis.

Measurement of Performance

The Sales Process.  We are an insurance holding company engaged in the underwriting, servicing and distributing of personal non-standard automobile insurance policies and related products and services. We distribute our products through three distinct distribution channels: our owned retail stores, independent agents and unaffiliated managing general agencies. We generate earned premiums and fees from policyholders through the sale of our insurance products. In addition, through our owned retail stores, we sell insurance policies of third-party insurers and thereby earn commission income from those third-party insurers and fees from the customers.

As part of our corporate strategy, we treat our owned retail stores as though they are independent agents, encouraging them to sell to their individual customers whatever products are most appropriate and affordable for those customers. We believe that this offers our retail customers the best combination of service and value, developing stronger customer loyalty and improving customer retention. In practice, this means that in our owned retail stores, the relative proportion of the sales of our own insurance products as compared to the sales of the third-party policies will vary depending upon the competitiveness of our insurance products in the marketplace during the period. Recently, we have experienced a significant shift in this ratio towards third-party insurance carriers as we have enhanced our technology making it easier for our owned retail stores to sell third-party products. Overall, applications for third-party carriers represented 41% of our retail applications for the year ended December 31, 2006 as compared to 30% for the prior year. This reflects our intention of maintaining the margins in our owned insurance carriers, even at the cost of business lost to other third-party carriers.

In response to the market conditions that have existed for the past several years, our owned insurance carriers have been developing and introducing new and better segmented products to serve our target markets, resulting in a slightly lower overall aggregate rate level and improving the competitiveness of our insurance products offered through our distribution channels. Management of our insurance carriers is responsible for developing and pricing our products, while maintaining and improving our insurance margins.

In the independent agency distribution channel and the unaffiliated underwriting agencies distribution channel, the effect of competitive conditions is the same as in our owned retail store distribution channel. As in our retail stores, independent agents (either working directly with us or through unaffiliated underwriting agencies) not only offer our products but also offer their customers a selection of products by third-party carriers. Therefore our insurance products must be competitive in pricing, features, commission rates and ease of sale or the independent agents will sell the products of those third-party insurance carriers instead of our products. We believe

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that we are generally competitive in the markets we serve and we constantly evaluate our products relative to those of other carriers. As shown below, sales of our products through independent agencies have remained at about the level of the prior year despite competitive market conditions largely due to the incremental business in Michigan during 2006 resulting from an acquisition in mid-2005.

For our owned insurance carriers, one measurement of our performance is the level of gross premiums written and a second measurement is the relative proportion of premiums written through our three distribution channels. The following table displays our gross premiums written by distribution channel for the years ended December 31, 2006, 2005, and 2004 (dollars in thousands):

	Years Ended December 31,
	2006		2005		2004
Gross Premiums Written By:
Our underwriting agencies:
Our retail agencies	$	86,760	$	116,425	$	102,414
Independent agencies		158,790		159,823		96,409
Subtotal		245,550		276,248		198,823
Unaffiliated underwriting agencies		40,588		44,654		82,962
Other		42		302		(60	)
Total	$	286,180	$	321,204	$	281,725

Total gross premiums written for the year ended December 31, 2006 were $286.2 million, a decrease of $35.0 million, or 10.9% as compared to $321.2 million for the same period in 2005. In our retail distribution channel, gross premiums written consist of premiums written for our affiliated insurance carriers’ products only and do not include premiums written for third-party insurance carriers. We only earn commission income and fees in our retail distribution channel for sales of third-party insurance policies. Gross premiums written in our retail distribution channel were $86.8 million, a decrease of $29.7 million, or 25.5%, as compared to $116.4 million in the prior year, primarily due to the decrease in premiums written for our affiliated insurance carriers’ products relative to policies written for unaffiliated insurance companies. Our retail strategy is to operate our owned stores as an independent agency, allowing us to provide customers with the choice of the best combination of pricing and features from among both our own insurance products and those of third-party insurers. Under current market conditions, gross premiums written by our insurance companies through our retail channel have decreased while policies written through third-parties have increased. The impact can be seen in the increase in our third-party commission income as discussed below.

In our independent agency distribution channel, gross premiums written were $158.8 million, a decrease of $1.0 million, or 0.6%, as compared to $159.8 million for the same period in 2005, principally due to decreased production in our Texas underwriting agencies offset by an increase in production in Michigan.

Gross premiums written for our unaffiliated agencies were $40.6 million, a decrease of $4.1 million, or 9.1%, as compared to $44.7 million in the prior year. The change was primarily due to $14.1 million of gross premiums written on new programs in California and Arizona, offset by run-off of two of our programs in California, and programs in Utah, Alabama and Georgia.

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The following table displays our gross premiums written by state for the years ended December 31, 2006 and December 31, 2005 (dollars in thousands):

	Year Ended December 31,
	2006		2005
Texas	$	79,084	$	101,106
Illinois		66,826		80,654
California		37,996		38,259
Florida		21,150		25,598
Michigan		19,689		8,824
South Carolina		19,000		20,367
Indiana		18,027		22,710
Missouri		12,184		4,265
New Mexico		9,590		12,724
Arizona		1,594		4
Georgia		551		923
Utah		449		7,153
Alabama		—		(1,685	)
Other		40		302
Total	$	286,180	$	321,204

Commission Income and Fees.  Another measurement of our performance is the relative level of production of commission income and fees. Commission income and fees consists of three principal types, including (a) the commission income and fees earned by our underwriting agencies on insurance business that is not written or retained by us, (b) policy, installment and agency fees earned for business written or assumed by our insurance companies both through independent agents and our retail agencies and (c) the commission income earned on sales of unaffiliated (third-party) insurance companies’ products sold by our retail agencies. These various types of commission income and fees are impacted in different ways by the corporate decisions we make in pursuing our corporate strategy.

Commission income and fees earned by our underwriting agencies on business that is not written or retained by us.  We only earn this income when we reinsure a portion of our insurance business to other parties. Over the past several years we have substantially eliminated our reinsurance contracts and, as a result, this income source has been almost eliminated. Instead, we generate additional premium on the retained business, increasing our earned premiums. Had we continued to utilize reinsurance, our earned premiums would have been reduced but we would have earned greater commission income and fees for servicing the policies. In the future, we may choose to increase the use of reinsurance, which could result in an increase in this type of commission income and fees.

Policy, installment, and agency fees earned for business written or assumed by our insurance companies both through independent agents and our retail agencies.  These policy, installment and agency fees are fees charged to the customers in connection with their purchase of coverage from our insurance carriers. We can increase or decrease agency and installment fees at will, but policy fees must be approved by the applicable department of insurance. In the second quarter of 2006, we reduced or eliminated our agency fees in our retail stores to reduce the cost to the customer of purchasing coverage from us. This increased the overall level of sales and thereby increased our commission income (when the product sold is a third-party carrier’s coverage) and earned premiums (when the product sold is our own insurance carrier’s coverage). We believe that this change in our agency fee implementation reduced our near-term commission income and fees but increased our long-term profitability as those incremental commissions from third-party carriers and earned premiums at our own insurance carriers are earned into revenue over the service life of the incremental policies sold. In the fourth quarter of 2006, we reinstituted certain agency fees but at a moderate level as compared to the first half of the year.

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The commissions earned on sales of unaffiliated (third-party) insurance companies’ products sold by our retail agencies.  As described above, in our owned retail stores, there has been a shift in the relative proportion of the sales of third-party insurance products as compared to sales of our own carriers’ products due to the relative competitiveness of our insurance products. This has resulted in an increase in our commission income and fees from non-affiliated third-party insurers. We negotiate commission rates with the various third-party carriers whose products we agree to sell in our retail stores. As a result, the level of third-party commission income will also vary depending upon the mix by carrier of third-party products that are sold.

Losses and Loss Adjustment Expenses.  Since the single largest expense of an insurance company are the losses and loss adjustment expenses, another measurement of our insurance carriers’ performance is the level of such expense, specifically as a ratio to earned premiums. Our losses and loss adjustment expenses are a blend of the specific estimated and actual costs of providing the coverage contracted by the purchasers of our insurance policies. We maintain reserves to cover our estimated ultimate liability for losses and related loss adjustment expenses for both reported and unreported claims on the insurance policies issued by our insurance companies. The establishment of appropriate reserves is an inherently uncertain process, involving actuarial and statistical projections of what we expect to be the cost of the ultimate settlement and administration of claims based on historical claims information, estimates of future trends in claims severity and other variable factors such as inflation. Due to the inherent uncertainty of estimating reserves, reserve estimates can be expected to vary from period to period. To the extent that our reserves prove to be inadequate in the future, we would be required to increase our reserves for losses and loss adjustment expenses and incur a charge to earnings in the period during which such reserves are increased. We have a limited history in establishing reserves and the historic development of our reserves for losses and loss adjustment expenses is not necessarily indicative of future trends in the development of these amounts.

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

Overall, we continue to see favorable frequency trends and moderating severity trends on an aggregate basis. In a period of stable premium rates, these trends would have resulted in generally stable loss ratios (the ratio of losses and loss adjustment expenses to earned premiums). However, the current competitive environment has led management of our insurance carriers to selectively reduce rates in certain markets and on certain products. Such rate decreases constrict our insurance margins and increase our loss ratios.

Selling, General and Administrative Expenses.  Another measurement of performance that addresses the efficiency of the company is the level of selling, general and administrative expenses. We recognize that our customers are primarily motivated by low prices. As a result, we strive to keep our costs as low as possible to be able to keep our prices affordable and thus to maximize our sales while still maintaining profitability. Our selling, general and administrative expenses include not only the cost of acquiring the insurance policies through our insurance carriers (the amortization of the deferred acquisition costs) and managing our insurance carriers and the retail stores, but also the costs of the holding company. The largest component of selling, general and administrative expenses is personnel costs.

Deferred policy acquisition costs represent the deferral of expenses that we incur in acquiring new business or renewing existing business. Policy acquisition costs, consisting of primarily commission, premium taxes, underwriting and retail agency expenses, are initially deferred and then charged against income ratably over the terms of the related policies through amortization of the deferred policy acquisition costs. Thus, the amortization of deferred acquisition costs is correlated with earned premium and the ratio of amortization of deferred acquisition costs to earned premium in an accounting period is another measurement of performance.

Consolidation Process.  Our agencies sell non-standard automobile insurance policies that are issued by our own insurance carriers as well as third-party carriers. For the policies issued by our own insurance carriers, our insurance companies pay our agencies a commission. Our insurance companies recognize earned premium and

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related commission expense associated with these policies, while our agencies recognize commission income and fees. The amount of commission that our insurance companies pay our agencies is recorded as insurance — level commission expense that becomes part of the insurance companies’ deferred acquisition costs. In addition, the agencies record agency — level policy acquisition expenses such as independent agent commissions, workforce and operating expenses. Our agencies incur policy acquisition expenses because our underwriting operation is accounted for as a function of our agencies.

Since both the insurance companies and the agencies have recorded revenue and expenses related to selling our own insurance policies, we eliminate the internal commission income and fees and policy acquisition expenses recorded on our agencies.

Note on Insurance Companies

Effective December 31, 2003, VIG sold to us two insurance companies — AIC and Insura — and also transferred to us all future economic interest in VIG’s non-standard personal automobile insurance business through a series of reinsurance transactions. We accounted for our acquisition of these insurance companies at their underlying carrying amounts in a manner similar to a pooling of interests in accordance with SFAS No. 141, and our historical consolidated financial statements have been presented to reflect our historical results of operations and the historical results of AIC and Insura on a combined basis. Prior to December 31, 2003, our insurance companies ceded 100% of their premiums, losses and loss adjustment expenses to VFIC. Accordingly, our insurance companies’ historical statements of operations prior to January 1, 2004 do not include any of the premiums, losses or loss adjustment expenses on policies written by our insurance companies.

The historical financial results of VIG’s non-standard personal automobile insurance business for the years ended December 31, 2003 have been included in footnotes to VIG’s audited financial statements, which are not included in this report.

In May 2006, we received our insurance license for AIC — Michigan and we funded that company with an initial capital contribution of $9.0 million from AIC.

Significant Events Impacting Financial Statement Comparability

Change in Management.  In the fourth quarter of 2006, we completed a separation and non-competition agreement with a former executive that resulted in severance expense of $739,000. Also in 2006, we expensed $885,000 in amortization on non-competition agreements completed in 2005 and $133,000 as the final installment on a retained executive search contract initiated in 2005. In the fourth quarter of 2005, we completed separation and non-competition agreements with three former executives that resulted in expenses incurred in 2005 of $3.0 million, including $2.7 million in severance, $122,000 in amortization related to non-competition agreements, and $200,000 incurred for a retained search for a replacement executive.

IT issues and initiatives.  On October 16, 2006, we entered into a master services agreement with Accenture under which we will outsource substantially all of our IT operations to Accenture, including our data center, field support and application management. The initial term of the agreement is ten years, although it may be terminated for convenience by us at any time upon six months’ notice after the first two years, subject to the payment of certain stranded costs and other termination fees. We believe that over time this arrangement will create a stronger technology platform to support our business by consolidating our data centers into one professionally managed location and improving our overall IT infrastructure.

Fees for Accenture’s services include a fixed component and a smaller variable component. The fixed component is expected to, at its maximum amount, reach approximately $12.0 million per annum and ultimately decrease to $4.5 million per annum by 2016, based on the parties’ current expectations of service usage. The variable component will be charged on an hourly basis depending on the skill level and location of the resource. The fees are subject to adjustments for discounts based on usage in previous years, cost of living increases, currency fluctuations for off-shore resources, and for service level failures or improvements customary in the IT outsourcing industry. Through the first half of 2007, the cost of our IT operations has been and will be borne by Affirmative through internal staffing and contractors. We believe that within a few quarters this arrangement with Accenture

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will be less expensive than managing our own IT department would have been. However, the initial costs of implementing this arrangement are significantly higher than our cost of IT would normally be — particularly in the fourth quarter of 2006 and the first quarter of 2007 when we will have both our usual costs as well as the costs associated with the transition and implementation of the arrangement. In the fourth quarter of 2006, we expensed $6.5 million of transition expenses related to the Accenture outsourcing contract and the cost of incomplete IT projects eliminated by outsourcing.

During 2006, we expensed $378,000 in severance for internal IT employees that were terminated due to our outsourcing agreement with Accenture.

During the fourth quarter of 2005, we determined that the outside vendor used to develop our new enterprise system had not met the terms of the development and license agreement and had breached the contract. We also determined that we would not be able to obtain any benefit from our investment in this project. We have since initiated litigation and are seeking relief to the full extent possible (See “Legal Proceedings” contained elsewhere in this report). As a result, the $2.4 million invested in this project was written down to zero in 2005.

Receivable from VIG.  In the fourth quarter of 2006, we determined that the recovery of the $7.2 million in other assets, reflecting an uncollateralized receivable from VFIC, was uncertain due to, among other things, the regulatory liquidation of VFIC, the recently disclosed financial condition of VFIC and related entities and our creditor status in the liquidation proceedings. We increased our reserve for doubtful accounts by $7.2 million to recognize the current uncertain status of the recovery.

Relocation to new Chicago-area offices.  During 2006, we entered into a ten-year operating lease for new corporate office facilities in Burr Ridge, Illinois that replaced the existing lease for office space in Bedford Park, Illinois, which lease terminated effective December 31, 2006. We began the relocation effort on December 31, 2006. The Burr Ridge property was first occupied and in use in the first week of January 2007. During the construction of the leasehold improvements, which began in September 2006, we expensed a monthly lease expense as required by GAAP even though no cash payments were required until December 2006. This resulted in lease expense that was in excess of historical and future lease expense levels because we continued to incur simultaneous lease expense for the Bedford Park facility for the period of September through December 2006. In addition, the relocation resulted in the incurrence of moving costs, expenditure for the repair and clean-up of the vacated Bedford Park building and the write-off of unamortized leasehold improvements at that location. In total we expensed $788,000 in connection with the Chicago office relocation in 2006.

Termination of lease agreement in Michigan.  During 2006, we terminated a lease for our office in Michigan that had approximately 18 months remaining in the lease contract, resulting in $125,000 in accelerated lease expense.

Acquisitions.  In the fourth quarter of 2006, we expensed $697,000 to write off previously capitalized legal, accounting and other investigatory costs related to a potential acquisition that ultimately was not completed.

In 2004 and 2005 we acquired one retail agency, currently operating in Florida, and one underwriting agency, currently operating in Michigan. Both of these transactions were accounted for as purchases and the purchase price was allocated to the assets purchased based on their fair values at the time of acquisition.

•  Fed USA.  In December 2004, we acquired certain assets of Fed USA Retail, Inc., which owns retail agencies that produce and service non-standard personal automobile policies sold in Florida by owned and branded retail stores in three DMAs as of December 31, 2004. We also acquired certain assets of Fed USA Franchising, Inc., which produces and services policies sold in Florida through franchised retail stores in four DMAs as of December 31, 2004.

•  IPA.  On July 19, 2005, we acquired the assets of IPA, an underwriting agency with operations in Michigan. IPA generates approximately $20 million in premiums annually.

Reinsurance transaction with VIG.  Effective December 31, 2003, VIG restructured its internal reinsurance arrangements relating to non-standard personal automobile insurance policies to transfer to our insurance companies all of the future economic interest in VIG’s non-standard personal automobile insurance business. Under this transaction, which was effected through a quota share reinsurance agreement, VFIC retained all losses and loss

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adjustment expense reserves as of December 31, 2003 related to these policies and remains liable to indemnify us for any losses and allocated loss adjustment expenses associated with these policies that occurred on or prior to December 31, 2003. VIG’s non-standard personal automobile insurance business had net premiums earned of $167.4 million for the year ended December 31, 2003. We determined that this restructuring of VIG’s internal reinsurance did not constitute a business combination within the meaning of SFAS No. 141 and, accordingly, our historical consolidated statements of operations included in this report do not reflect any underwriting results on these policies during the periods presented.

Critical Accounting Policies

Our consolidated financial statements are based upon the selection and application of accounting policies that require management to make estimates and assumptions that can significantly affect amounts reported in the financial statements. As more information becomes known, these estimates and assumptions could change and therefore impact amounts reported in the future. We believe the following are some of the areas where the degree of judgment in determining amounts recorded in our historical consolidated financial statements make the accounting policies critical:

•  revenue recognition;

•  accounting and reporting for reinsurance;

•  recoverability of assets;

•  reinsurance recoverable on paid and incurred losses;

•  deferred policy acquisition costs;

•  reserving for unpaid losses and loss adjustment expenses;

•  statutory accounting practices;

•  valuation of investments; and

•  accounting for business combinations, goodwill and other intangible assets.

Revenue recognition.  Our consolidated revenues are derived principally from premiums, commissions, fees, investment income and investment gains and losses. Premiums are earned over the life of a policy on a pro rata basis. Unearned premiums represent that portion of premiums written that is applicable to the unexpired terms of policies in force

We receive commissions for policies that are written through our underwriting agencies or are sold by our retail agencies. These policies are subject to cancellation by the policyholder prior to the policy expiration date. We estimate the future cancellations in determining the amount of commission income and fees that is recorded in our consolidated financial statements. Our allowance for policy cancellations, presented as deferred revenue in our consolidated balance sheet, is periodically evaluated and adjusted as necessary. All commission and policy fee revenue and our related allowance for policy cancellations from our insurance companies are eliminated in consolidation.

The commission rate paid to our underwriting agencies is established annually in contractual agreements between our underwriting agencies and our insurance companies and the unaffiliated insurance companies that our retail agencies represent. Provisional commissions are paid to our underwriting agencies based upon a contractually established provisional commission rate multiplied by the premiums that they produce. Our underwriting agencies also can earn profit-sharing commissions from our insurance companies and the unaffiliated insurance company they represent if the loss ratio on the business they produce is lower than a contractually established provisional loss ratio. Profit-sharing is recorded when we conclude it is probable that estimates of losses will result in loss ratios that are lower than the provisional loss ratios. These loss ratio estimates are based on various actuarial assumptions and determinations by our internal actuaries regarding potential future losses. If the actual loss experience is less favorable than the estimates used, income may be reduced in subsequent periods.

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Fee income includes policy origination fees, agency and installment fees to compensate us for the costs of providing installment payment plans, as well as late payment, policy cancellation, policy rewrite and reinstatement fees. We recognize policy origination fees over the premium earning period of the underlying policies and recognize all other fees on a collected basis.

Claims processing fees are received from insurance companies over the premium earning period of the underlying policies. These fees are recognized as revenue over the expected period during which processing services are performed and in amounts appropriate to the processing effort and related costs. The service period and related revenues are based upon historical and expected claims settlement data. All claims processing fees from our insurance companies are eliminated in consolidation.

Accounting and reporting for reinsurance.  Pursuant to SFAS No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts, we are required to review the contractual terms of all our reinsurance purchases to ensure compliance with that statement. The statement establishes the conditions required for a contract with a reinsurer to be accounted for as reinsurance and prescribes accounting and reporting standards for those contracts. For all reinsurance transactions, immediate recognition of gains is precluded unless our liability to our policyholders is extinguished. Contracts that do not result in the reasonable possibility that the reinsurer may realize a significant loss from the insurance risk assumed generally do not meet the conditions for reinsurance accounting and must be accounted for as deposits.

SFAS No. 113 also requires us to disclose the nature, purpose and effect of reinsurance transactions, including the premium amounts associated with reinsurance assumed and ceded. It also requires disclosure of concentrations of credit risk associated with reinsurance receivables and prepaid reinsurance premiums. We believe we have properly accounted for all of our reinsurance contracts.

Recoverability of assets.  Our financial statements include as assets amounts we either: (1) expect to collect from third-parties, particularly reinsurance recoverables; or (2) expect to benefit from in future periods, particularly deferred acquisition costs. In establishing these amounts, we have made significant judgments and estimates regarding the ultimate realization of each asset. Specifically, we have made critical assumptions and judgments in establishing assets for reinsurance recoverables on paid losses and deferred policy acquisition costs. Changes in assumptions, judgments or estimates we have made with respect to each of these assets would directly impact our financial results and financial condition.

Reinsurance recoverable on paid and incurred losses.  We cede premiums and losses to reinsurers under quota share reinsurance agreements. Although a reinsurer is liable for losses to the extent of the coverage which it assumes, our reinsurance contracts do not discharge our insurance companies from primary liability to each policyholder for the full amount of the applicable policy. Consequently our insurance companies remain obligated to pay claims in accordance with the terms of the policies regardless of whether a reinsurer fulfills or defaults on its obligations under the related reinsurance agreement.

When we determine that a claim for loss and other costs associated with the loss made under one of our insurance policies is owed, we initially pay the full amount owed to the insured or claimant. Subsequently, we seek to recover any amounts due from reinsurers in accordance with the terms of the applicable reinsurance contract. We record the amounts we expect to receive from reinsurers pursuant to these contracts as assets on our balance sheet. Our insurance companies report as assets the estimated reinsurance recoverable on paid losses and unpaid losses, including an estimate for losses incurred but not reported, and premium amounts paid to reinsurers applicable to unexpired terms of policies in force. These amounts are estimated based on our interpretation of each reinsurer’s obligations pursuant to the individual reinsurance contracts between us and each reinsurer, as well as judgments we make regarding the financial viability of each reinsurer and its ability to pay us what is owed under the reinsurance contract. In evaluating the financial viability of each reinsurer, we rely upon financial statements, credit reports and other publicly available information applicable to each reinsurer, as well as management’s experience and industry knowledge.

At December 31, 2006, we had $24.8 million receivables from reinsurers, including $20.2 million gross recoverable from VFIC. Under the reinsurance agreement with VFIC, AIC had the right, under certain circumstances, to require VFIC to provide a letter of credit or establish a trust account to collateralize the gross amount due

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AIC and Insura from VFIC under the reinsurance agreement. Accordingly, AIC, Insura and VFIC entered into a Security Fund Agreement effective September 1, 2004. On August 30, 2005 AIC received a letter from VFIC’s President that irrevocably confirmed VFIC’s duty and obligations under the Security Fund Agreement to provide security sufficient to satisfy VFIC’s gross obligations under the reinsurance agreement (the “VFIC Trust”). Currently the VFIC Trust holds $23.1 million to collateralize the $20.2 million gross recoverable from VFIC. In June, 2006, the Texas Department of Insurance placed VFIC, along with several of its affiliates, into rehabilitation and subsequently into liquidation. Due to VFIC’s liquidation status, AIC is working through certain procedures to effect its right to withdraw funds from the VFIC Trust. AIC has been working with the Special Deputy Receiver (the “SDR”) and his staff on this matter since VFIC was placed into liquidation. To date, the SDR has not taken issue with the validity of the VFIC Trust; however, we currently are negotiating with the SDR the manner in which the funds will be withdrawn from the VFIC Trust, which must then be approved by the Special Master of the Receivership Court.

As of December 31, 2005, we separately included $7.2 million in other assets that was related to a receivable due from VIG as part of the transfer of the insurance companies to us at December 31, 2003. The $7.2 million was not included in the gross recoverable at December 31, 2005. We continue to believe that this receivable is due from VIG and have instituted appropriate legal proceedings to recover the full amount thereof. However, a loss for $7.2 million was included in selling, general and administrative expenses in the fourth quarter of 2006 when we set up a reserve equal to the full amount of the receivable. We established this reserve due to our uncertainty as to the collectibility of the receivable in light of the significant amount of claims made against VIG and VFIC as of December 31, 2006 in their bankruptcy and liquidation proceeding, respectively, and our creditor status in those proceedings.

At December 31, 2006, $18.4 million was included in reserves for losses and loss adjustment expenses that reflect the amounts owed from AIC and Insura under reinsurance agreements with the VIG affiliated companies, including Hawaiian Insurance and Guaranty Company, Ltd. Affirmative established a trust account to collateralize this payable, which currently holds $23.1 million in securities (the “AFIC Trust”). The AFIC Trust has not been drawn upon the SDR in Texas or the SDR in Hawaii. The SDRs will likely negotiate similar terms for withdrawal of funds from the AFIC trust as those agreed to in regards to the VFIC Trust.

Deferred policy acquisition costs.  Deferred policy acquisition costs represent the deferral of expenses that we incur acquiring new business or renewing existing business. Policy acquisition costs, primarily commissions and underwriting and agency expenses related to issuing a policy are deferred and charged against income ratably over the terms of the related policies. At December 31, 2006, we had $23.9 million of deferred policy acquisition costs. Management regularly reviews the categories of acquisition costs that are deferred and assesses the recoverability of this asset. A premium deficiency and a corresponding charge to income is recognized if the sum of the expected losses and loss adjustment expenses, unamortized acquisition costs and maintenance costs exceeds related unearned premiums and anticipated investment income. At December 31, 2006, we determined that there was no premium deficiency.

Reserving for unpaid losses and loss adjustment expenses.  We maintain reserves in the amount of the estimated ultimate liability for unpaid losses and loss adjustment expenses related to incurred claims and our estimate of unreported claims. Management’s estimation of the ultimate liability for unpaid losses and loss adjustment expenses is based on projections developed by our actuaries using analytical methodology commonly used in the property-casualty insurance industry. The liabilities stated for unpaid claims and for expenses of investigation and adjustment of unpaid claims are based on the following: (1) the accumulation of estimates of individual claims for losses reported prior to the close of the accounting period; (2) estimates received from ceding companies, reinsurers and insurance pools and associations; (3) estimates of unreported losses based on past experience; (4) estimates based on past experience of expenses for investigating and adjusting claims; and (5) estimates of subrogation and salvage collections. We periodically adjust our losses and loss adjustment expense reserves for changes in product mix, underwriting standards, loss cost trends and other factors. Our losses and loss adjustment expense reserves may also be impacted by factors such as the rate of inflation, claims settlement patterns, litigation and legislative activities. Unpaid losses and loss adjustment expenses have not been reduced for our reinsurance recoverables. Changes in estimates of the liabilities for unpaid losses and loss adjustment expenses are reflected in the consolidated statement of operations in the period in which determined. Ultimately, our actual

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losses and loss adjustment expenses may differ materially from the estimates we have recorded. As previously noted, our financial statements for periods before December 31, 2003 included the effects of a 100% quota share reinsurance contract with our affiliate, VFIC. Accordingly, we retained none of the underwriting risks associated with the reserves established at December 31, 2003 for our insurance companies.

In the fourth quarter of 2006, management determined that a reclassification would provide improved presentation for the liability for reserves for loss adjustment expenses that had previously been classified as deferred revenue liability. We reduced our consolidated deferred revenue liability for the years ended December 31, 2005 and 2004 while increasing our reserve for losses, loss adjustment expenses and deposits. This reclassification resulted in an adjustment to our statements of cash flows for the years ended December 31, 2005 and 2004. However, the reclassification does not affect “net cash provided by operating activities” because the reclassification was between two components of “net cash provided by operating activities”. The reclassification as of December 31, 2005 and December 31, 2004 was $16.0 million and $5.8 million, respectively.

Our losses, loss adjustment expense reserves and deposit liabilities were $162.6 million on a gross basis and $138.4 million on a net basis, which were our best estimates as of December 31, 2006. The analysis provided by our independent opining actuaries, as of December 31, 2006, indicated that the expected range for the ultimate liability for our losses and loss adjustment expense reserves was between $139.1 million and $168.8 million on a gross basis and between $121.1 million and $145.9 million on a net basis.

Statutory accounting practices.  We are required to report our results of operations and financial position to various state regulatory authorities based upon statutory accounting practices (“SAP”). One key difference under SAP, as compared to GAAP, is that we are required to expense all sales and other policy acquisition costs as they are incurred rather than capitalizing and amortizing them over the expected life of the policy. The immediate charge off of sales and acquisition expenses and other conservative valuations under SAP generally cause a lag between the sale of a policy and the emergence of reported earnings. Because this lag can reduce our gain from operations on a SAP basis, it can have the effect of reducing the amount of funds available for dividends from our insurance companies. In addition, we are required to file quarterly and annual financial reports with states using SAP, which reflect our insurance company subsidiaries on a going concern basis. In keeping with the intent to assure policyholder protection, SAP is used by state regulators and is generally based on a liquidation concept.

Valuation of investments.  Our investments are recorded at fair value, which is typically based on publicly available quoted prices. From time to time, the carrying value of our investments may be temporarily impaired because of the inherent volatility of publicly traded investments. We do not adjust the carrying value of any investment unless management determines that its value is other-than temporarily-impaired.

We conduct regular reviews to assess whether the amortized cost of our investments are impaired and if any impairment is other than temporary. Factors considered by us in assessing whether an impairment is other than temporary include the credit quality of the investment, the duration of the impairment, our ability and intent to hold the investment until recovery and overall economic conditions. If we determine that the value of any investment is other-than-temporarily impaired, we record a charge against earnings in the amount of the impairment.

The following table shows our investments with gross unrealized losses and fair value, aggregated by type of fixed maturity investment and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2006 (dollars in thousands):

	Year Ended December 31, 2006
	Less Than Twelve Months					Over Twelve Months					Total
	Gross					Gross					Gross
	Unrealized			Fair		Unrealized			Fair		Unrealized			Fair
	Losses			Value		Losses			Value		Losses			Value
U.S. Government and agencies	$	(1	)	$	323	$	(83	)	$	3,959	$	(84	)	$	4,282
Municipal		(219	)		81,054		(211	)		33,183		(430	)		114,237
Corporate and other		(51	)		3,042		(146	)		6,151		(197	)		9,193
Total investments	$	(271	)	$	84,419	$	(440	)	$	43,293	$	(711	)	$	127,712

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Accounting for business combinations, goodwill and other intangible assets.  We adopted SFAS No. 141 and SFAS No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002. With the exception of our acquisitions of our insurance companies and InsureOne from VIG, which were accounted for as a pooling of interests, we have accounted for all of our acquisitions using the purchase method of accounting. In acquisitions using the purchase method of accounting, the purchase price for the acquisition is allocated to the assets acquired, including identified intangible assets and liabilities assumed based on their estimated values. The excess of cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed is an asset referred to as goodwill. Indirect and general expenses related to business combinations are expensed as incurred.

Principally, all of our goodwill and intangible assets relate to our agency acquisitions. We test our goodwill and intangible assets for impairment annually, or more frequently if impairment indicators arise. We test for impairment based upon the following: (1) the historical financial performance of the unit; (2) the most recent financial performance of the unit; (3) management’s financial forecast for the unit; (4) information regarding publicly available financial terms of recent transactions in the insurance industry; and (5) other publicly available information. We perform impairment tests annually as of September 30. The test performed as of September 30, 2006 indicated there was no goodwill or indefinite life intangible asset impairment.

Intangible assets with finite lives are amortized over their useful lives and are periodically reviewed to ensure that no conditions exist indicating the recorded amount of finite life intangible assets is not recoverable from future undiscounted cash flows.

As of December 31, 2006, our financial statements include $65.3 million of goodwill, $14.7 million of indefinite life intangible assets and $3.4 million of finite life intangible assets having estimated lives of between two and 20 years.

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Results of Operations

The following table summarizes our consolidated results of operations (dollars in thousands except share data and ratio computations).

	Twelve Months Ended December 31,
							% Change						% Change
	2006			2005			’06 v ’05			2004			’05 v ’04
Revenues
Net premiums earned	$	288,110		$	297,799			−3.3	%	$	194,341			53.2	%
Commission income and fees		60,995			79,615			−23.4	%		126,679			−37.2	%
Net investment income		8,829			5,730			54.1	%		2,327			146.2	%
Net realized gains (losses)		(822	)		(1,665	)		−50.6	%		(8	)		NM
Total revenues		357,112			381,479			−6.4	%		323,339			18.0	%
Expenses
Losses and loss adjustment expenses		185,346			191,208			−3.1	%		128,969			48.3	%
Selling, general and administrative expenses		150,540			153,805			−2.1	%		148,095			3.9	%
Depreciation and amortization		4,398			4,207			4.5	%		4,218			−0.3	%
Interest expense		4,342			3,515			23.5	%		588			497.8	%
Total expenses		344,626			352,735			−2.3	%		281,870			25.1	%
Net income before income taxes and minority interest		12,486			28,744			−56.6	%		41,469			−30.7	%
Income tax expense		2,661			9,767			−72.8	%		15,319			−36.2	%
Minority interest, net of income taxes		81			672			−87.9	%		804			−16.4	%
Equity interest in unconsolidated subsidiaries, net of income taxes		—			—			NM			913			NM
Net income	$	9,744		$	18,305			−46.8	%	$	24,433			−25.1	%
Net income per common share — Basic	$	0.64		$	1.16			−45.1	%	$	1.74			−33.3	%
Net income per common share — Diluted	$	0.63		$	1.14			−44.3	%	$	1.72			−33.7	%
Weighted average shares outstanding — Basic		15,295,022			15,774,387			−3.0	%		14,018,530			12.5	%
Weighted average shares outstanding — Diluted		15,344,984			15,993,073			−4.1	%		14,213,682			12.5	%
Operational Information
Gross premiums written	$	286,180		$	321,204			−10.9	%	$	281,725			14.0	%
Net premiums written	$	284,807		$	315,498			−9.7	%	$	215,256			46.6	%
Percentage retained		99.5	%		98.2	%					76.4	%
Loss Ratio		64.3	%		64.2	%					66.4	%
Expense Ratio		32.6	%		26.3	%					13.2	%
Combined Ratio		96.9	%		90.5	%					79.6	%

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Comparison of the Year Ended December 31, 2006 to December 31, 2005

Total revenues for the year ended December 31, 2006 were $357.1 million, a decrease of $24.4 million, or 6.4%, as compared to total revenues of $381.5 million for the same period in 2005. The decrease in revenues was primarily due to a 23.4% decrease in commission income and fees as well as a 3.3% decrease in earned premium. Earned premium decreased primarily as a result of the 10.9% decrease in gross premiums written in the current period. As discussed below, the decrease in commission income and fees is due to our insurance companies’ retaining more premiums as well as a change in the amounts of our fees charged.

The largest component of our revenues is net premiums earned on insurance policies issued by our three affiliated insurance carriers. Net premiums earned for the year ended December 31, 2006 were $288.1 million, a decrease of $9.7 million, or 3.3%, as compared to $297.8 million in the prior year. Since insurance premiums are earned over the service period of the policies, our revenue in the current period includes premiums earned on insurance products written through our three distribution channels in both current and previous periods. As shown in the table below, net premiums earned on policies sold through our affiliated distribution channels (retail and independent agencies) increased by $5.9 million, or 2.4%. This increase reflects our increased retention of policies written by our insurance carriers in the last year, as compared to the higher level of reinsurance used in prior periods. Net premiums earned on insurance products sold through the unaffiliated underwriting agencies distribution channel decreased by $15.6 million, or 27.9% as compared to the prior year. For strategic reasons we have chosen to reduce our emphasis on the unaffiliated underwriting agencies distribution channel.

	Twelve Months Ended December 31,
	2006		2005		% Change
Our underwriting agencies	$	247,933	$	242,049		2.4	%
Unaffiliated underwriting agencies		40,177		55,750		(27.9	)%
Total net premiums earned	$	288,110	$	297,799		(3.3	)%

Commission income and fees consists of (a) the commission income and fees earned by our underwriting agencies on business that is not written or retained by us, (b) policy, installment and agency fees earned for business written or assumed by our insurance companies (affiliated) both through independent agents and our retail agencies and (c) the commissions and agency fees earned on sales of unaffiliated (third-party) insurance companies’ products sold by our retail agencies. The table below displays the components of consolidated commission income and fees earned for the two years ended December 31, 2006 and December 31, 2005 (dollars in thousands):

	Twelve Months Ended December 31,
					Variance			Variance
	2006		2005		($)			(%)
Income on non-retained business
— MGA commissions	$	1,296	$	7,058	$	(5,761	)		(81.6	)%
— Claims service fee income		2,358		9,528		(7,170	)		(75.3	)%
Affiliated
— Policyholder fee income		39,710		44,068		(3,734	)		(9.9	)%
— Agency fees		2,029		4,743		(2,715	)		(57.2	)%
Non-affiliated income — third party
— Commissions and fees		14,875		12,961		1,288			14.8	%
— Agency fees		727		1,257		(528	)		(42.2	)%
Total commission income and fees	$	60,995	$	79,615	$	(18,620	)		(23.4	)%

Total commission income and fees for the year ended December 31, 2006 were $61.0 million, a decrease of $18.6 million, or 23.4%, as compared to $79.6 million in the same period of the prior year. This decrease is primarily related to our increased retention of business written and assumed by our insurance companies. In our agencies, we earn commission income and fees that are based on premiums earned in the current period but written in both current and prior periods. In consolidation, we eliminate our agencies’ commission income and fees based

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on business that our insurance companies retain against our agencies’ expenses. Therefore, when we retain a higher percentage of our written premiums, we eliminate a greater portion of our agencies’ commission income and fees.

In connection with our strategy of operating our retail stores as independent agencies, in many of our markets we reduced or eliminated the agency fee charged to a customer when a policy was written. This allowed us to offer our customers a more affordable down payment on the insurance product that best met their needs and, in some cases, improved the competitiveness of our product offerings as compared to the products of unaffiliated insurance companies. By foregoing these fees, we believe that we gained new customers and increased premiums written. This resulted in a reduction of approximately $3.2 million in agency fees for both affiliated and non-affiliated business in 2006 as compared to 2005. We believe that this reduction will be largely or completely offset by an increase in the commission income earned on incremental sales of third-party products and earned premiums on incremental sales of our own insurance products. Commission income from sales of third-party business is earned over time as the customers pay their premiums to the third-party carriers. In the fourth quarter of 2006, we reinstituted certain agency fees but at a moderate level as compared to the first half of the year. For the year ended December 31, 2006, commission income and fees for sales of third-party products were $14.9 million, an increase of $1.9 million, or 14.8%, compared to $13.0 million in the same period of the prior year.

Net investment income for the year ended December 31, 2006 was $8.8 million, an increase of $3.1 million, or 54.1%, compared to $5.7 million for the same period in 2005. The increase was primarily a result of a 5.2% increase in total invested assets to $221.8 million at December 31, 2006 from $210.8 million at December 31, 2005 and the 32.0% increase in 2005 from $159.7 million at December 31, 2004. The increase in invested assets is primarily the result of increased cash flows from insurance operations. The average investment yield was 3.7% (5.3% on a taxable equivalent basis) for the year ended December 31, 2006 as compared to 3.3% (4.5% on a taxable equivalent basis) for the year ended December 31, 2005. This increase is primarily the result of the higher interest rates available for new investments in 2006.

Losses and loss adjustment expenses for the year ended December 31, 2006 were $185.3 million, a decrease of $5.9 million, or 3.1%, as compared to $191.2 million for the same period in 2005. The decrease was primarily due to favorable loss development in the current period as compared to loss estimates made in previous periods. For the year ended December 31, 2006, our overall loss and loss adjustment expense ratio was 64.3% as compared to 64.2% for the prior year. The increase in our overall loss and loss adjustment expense ratio is primarily due to less favorable loss development in the current year on prior years’ business than we experienced in the prior year. The impact from the favorable loss ratio development on our losses and loss adjustment expense ratio was 3.9% for the year ended December 31, 2006 as compared to 5.0% for the same period in the prior year. The following table displays the impact of favorable loss development on prior years’ business on our overall loss and loss adjustment expense ratio for the years ended December 31, 2006 and December 31, 2005:

	Twelve Months Ended
	December 31,
	2006			2005
Loss and loss adjustment expense ratio — current period		68.2	%		69.2	%
Favorable loss ratio development — prior period business		(3.9	)%		(5.0	)%
Reported loss and loss adjustment expense ratio		64.3	%		64.2	%

Selling, general and administrative expenses for the year ended December 31, 2006 were $150.5 million, a decrease of $3.3 million, or 2.1%, as compared to $153.8 million for the same period in 2005. As shown in the table below, the largest component of total selling, general and administrative expenses is the cost of policy acquisition (amortization of deferred policy acquisition costs). Policy acquisition costs, primarily commissions, premium taxes and underwriting expenses related to issuing a policy, are deferred and charged against income ratably over the remaining service periods of the policies produced. Accordingly, amortization of deferred policy acquisition costs is correlated with earned premium. In 2006, the amortization of deferred policy acquisition costs was 25.6% of earned premium as compared to 25.2% in the prior year. The following

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table displays the change in capitalized deferred acquisition costs as well as the impact that amortization of the deferred acquisition costs has on selling, general and administrative expenses:

	Twelve Months Ended
	December 31,
	2006			2005
	(Dollars in thousands)
Beginning deferred acquisition costs (“DAC”)	$	24,453		$	19,118
Additions		73,224			80,491
Amortization of DAC		(73,812	)		(75,156	)
Ending deferred acquisition costs	$	23,865		$	24,453
Amortization of DAC as % of Earned Premium		25.6%			25.2%
Policy acquisition costs (amortization of DAC)	$	73,812		$	75,156
Other selling, general and administrative expenses		76,728			78,649
Total selling, general and administrative expenses	$	150,540		$	153,805
Total SG&A expenses as % of Earned Premium		52.3%			51.6%

Significant costs that impact comparability of selling, general and administrative expenses for the year ended December 31, 2006 as compared to the prior year were approximately $16.6 million. These items include $7.2 million for the increase to our reserve for doubtful accounts for the uncertainty of collecting a receivable due from VIG, $6.5 million of IT transition expenses related to Accenture and other outsourcing costs, $0.8 million in severance for a former executive, $0.4 million in severance for IT due to the transition, $0.8 million for costs related to the Chicago office relocation, $0.7 million in costs related to an acquisition that ultimately was not completed, $0.1 million for the final installment on a retained executive search contract initiated in 2005 and $0.1 million in costs due to the early termination of a lease for office space in Michigan. Other selling, general and administrative expenses for the year ended December 31, 2006, including these events, were $76.7 million and $60.1 million excluding the unusual adjustments in 2006. Total selling, general and administrative expenses excluding expenses for the significant events as a percentage of earned premiums were 46.5% for the year ended December 31, 2006 as compared to 52.3% on the reported basis.

During 2005, we recognized expenses in relation to unusual events including $2.7 million in severance for three former executives, $2.4 million for the write-off of the BRT enterprise system and $0.2 million incurred for a retained search for a replacement executive. Other selling, general and administrative expenses for the year ended December 31, 2005 were $78.6 million and $73.4 million excluding the significant events in 2005, or 49.3% of earned premium.

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The following table summarizes the components of other selling, general and administrative expenses and the impact of significant events that impact comparability for the years ended December 31, 2006 and 2005:

	Twelve Months Ended
	December 31,
	2006		2005		% Change
Other selling, general, and administrative expenses
Other selling, general and administrative expenses*	$	37,398	$	48,632		(23.7	)%
Policy fee commission expense		22,703		24,766		(8.3	)%
Significant year over year changes:
— Write-down(a)		—		2,381		NM
— Allowance for doubtful accounts(b)		7,213		—		NM
— Management changes(c)		872		2,870		(66.1	)%
— IT outsourcing — Accenture(d)		6,554		—		NM
— Other significant changes(e)		1,998		—		NM
Total other selling, general, and administrative expenses		76,728		78,649		(2.4	)%
Policy acquisition costs (amortization of DAC)		73,812		75,156		(1.8	)%
Total selling, general, and administrative expenses	$	150,540	$	153,805		(2.1	)%

*	Personnel, rent, and other operating expenses less corporate eliminations
(a)	Write down of amounts capitalized on the enterprise system development and license agreement
(b)	Establishment of allowance for receivable from VIG
(c)	In 2006: executive severances — $0.8 million and CEO recruiting fees — $0.1 million In 2005: executive severances — $2.7 million and CEO recruiting fees — $0.2 million
(d)	Accenture and other related outsourcing costs
(e)	Includes: $0.4 million due to IT outsourcing; Burr Ridge office move — $0.8 million; Michigan office lease termination — $0.1 million; and cost of unsuccessful acquisition — $0.7 million

Other selling, general and administrative expenses for the year ended December 31, 2006 were $37.4 million, a decrease of $11.2 million, or 23.1%, as compared to $48.6 million for the prior year. The decrease in other selling, general and administrative expenses was primarily due to decreased salary and related expenses due to a reduction in workforce, as well as a reduction in advertising and repairs and maintenance expenses.

As of December 31, 2006, we employed 942 employees as compared to 1,182 as of December 31, 2005.

Our expense ratio for the year ended December 31, 2006 increased to 32.6%, as compared to 26.3% for the same period in 2005 even though our total selling, general and administrative expenses declined in the current year. The expense ratio calculation treats all commission income and fees as a reduction in the dividend, with the divisor consisting of earned premium only. Therefore, the increase in our expense ratio is due, in part, to the decision to reduce or eliminate agency fees for policies sold in our retail locations as discussed above, thereby reducing the amount of the revenue offset against expenses. Agency fees are a direct component of commission income and fees.

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The following table displays components of our expense ratio calculation for the years ended December 31, 2006 and 2005:

	Twelve Months Ended
	December 31,
	2006			2005
Selling, general and administrative expenses	$	150,540		$	153,805
Depreciation and amortization		4,398			4,207
Less: commission income and fees		(60,995	)		(79,615	)
Total dividend	$	93,943		$	78,397
Divisor: Net premiums earned	$	288,110		$	297,799
Expense ratio		32.6%			26.3%

Depreciation and amortization expenses for the year ended December 31, 2006, were $4.4 million, an increase of $191,000, or 4.5% as compared to $4.2 million in 2005. Depreciation expense decreased by $374,000 to $2.9 million for the year ended December 31, 2006 from $3.3 million for the year ended December 31, 2005. Our amortization expense in 2006 was $1.5 million as compared to $887,000 million in 2005. Included in the increase of amortization expense was a net increase of $565,000 associated with several non-competition agreements. In the fourth quarter of 2005, we completed non-competition agreements with two former executives that resulted in amortization expense of $885,000 in 2006 as compared to only $122,000 in 2005. Conversely, the cost of a non-competition agreement negotiated in 2004 was fully amortized in the first quarter of 2006, resulting in amortization expense of only $39,000 in 2006 as compared to $233,000 in 2005. Other amortization expense is related to amortization of intangible assets for acquired agency relationships.

Interest expense for the year ended December 31, 2006 was $4.3 million, an increase of $827,000, or 23.5%, as compared to $3.5 million in 2005. Interest expense is primarily related to our $56.7 million notes payable, which were issued in December 2004 and June 2005 following our private placements of $30.0 million and $25.0 million, respectively, of trust preferred securities. Our weighted average interest cost during the years ended December 31, 2006 and December 31, 2005 was 7.66%.

Pretax income for the year ended December 31, 2006 was $12.5 million, a decrease of $16.3 million, or 56.6%, as compared to $28.7 million for the same period in 2005. In 2006, $16.5 million of expenses for significant events that impact comparability was included in selling, general and administrative expenses, as described above, and impacted comparability. Pretax net income for 2006, excluding the significant events, would have been $26.2 million. In 2005, $5.3 million of costs for significant events were included in selling, general and administrative expenses, as described above, resulting in pretax income that would have been $34.0 million in 2005.

Income tax expense for the year ended December 31, 2006 was $2.7 million, or an effective rate of 21.3%, as compared to income tax expense of $9.8 million, or an effective rate of 34.0% for the same period in 2005. The decrease in our effective rate is primarily due to both an increased level of, and a relative proportion of, tax exempt income, which has a favorable tax impact. Net investment income represented 70.7% of our income before income taxes in 2006 as compared to 19.9% in 2005. The decrease in our effective rate is unusual and due in large part to the unusual costs in 2006. We anticipate that our future effective tax rates will be in the range of 34-38%, more similar to the 2005 tax rate.

Minority interest, net of income taxes, for the year ended December 31, 2006 was $81,000 as compared to $672,000 in the prior year. The decrease is due to our purchase of the remaining 27.0% interest in our Florida underwriting agency from the minority holders in March 2006. We now own 100% of this underwriting agency.

Comparison of the Year Ended December 31, 2005 to December 31, 2004

Total revenues for the year ended December 31, 2005 were $381.5 million, an increase of $58.1 million or 18.0%, as compared to total revenues of $323.3 million for the year ended December 31, 2004. The increase in total revenues was primarily due to our retention of gross premiums written in our insurance companies following the termination of the reinsurance agreements with various reinsurers, which allowed us to retain more of our written premiums.

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The largest component of our revenues is net premiums earned on insurance policies issued by our affiliated insurance carriers. Net premiums earned for the year ended December 31, 2005 were $297.8 million, an increase of $103.5 million, or 53.2%, as compared to $194.3 million in the prior year. Since insurance premiums are earned over the service period of the policies, our revenue in the current period includes premiums earned on insurance products written through our three distribution channels in both current and previous periods. As shown in the table below, net premiums earned on insurance products sold through the unaffiliated underwriting agency distribution channel for 2005 were $55.8 million, a decrease of $12.7 million or 18.5%, as compared to $68.4 million in the prior year. Net premiums earned on policies sold through our affiliated distribution channels (retail and independent agency) were $242.0 million, an increase of $116.2 million or 92.3%, for the year ended December 31, 2005 as compared to $125.9 million in the prior year. This increase reflects our increased retention of policies written by our insurance carriers in the last year, as compared to the higher level of reinsurance used in prior periods.

	Twelve Months Ended
	December 31,
	2005		2004		% Change
Our underwriting agencies	$	242,049	$	125,898		92.3	%
Unaffiliated underwriting agencies		55,750		68,443		(18.5	)%
Total net premiums earned	$	297,799	$	194,341		53.2	%

Commission income and fees consists of (a) the commission income and fees earned by our underwriting agencies on business that is not written or retained by us, (b) policy, installment, direct bill and agency fees earned for business written or assumed by our insurance companies (affiliated) both through independent agents and our retail agencies and (c) the commissions earned on sales of unaffiliated (third-party) insurance companies’ products sold by our retail agencies. The table below displays the components of consolidated commission income and fees earned for the specified periods (dollars in thousands):

	Twelve Months Ended
	December 31,
					Variance			Variance
	2005		2004		($)			(%)
Income on non-retained business
— MGA commissions	$	7,058	$	50,678	$	(43,620	)		(86.1	)%
— Claims service fee income		9,528		15,240		(5,712	)		(37.5	)%
Affiliated
— Policyholder fee income		44,068		47,165		(3,097	)		(6.6	)%
— Agency fees		4,743		4,332		411			9.5	%
Non-affiliated income — third party
— Commissions and fees		12,961		8,311		4,650			55.9	%
— Agency fees		1,257		953		304			31.9	%
Total commission income and fees	$	79,615	$	126,679	$	(47,064	)		(37.2	)%

Total commission income and fees for the year ended December 31, 2005 were $79.6 million, a decrease of $47.1 million, or 37.2%, as compared to $126.7 million for the same period in 2004. This decrease is primarily related to our increased retention of business written and assumed by our insurance companies. In our agencies, we earn commission income and fees that are based on premiums earned in the current period but written in both current and prior periods. In consolidation, we eliminate our agencies’ commission income and fees based on business that our insurance companies retain against our agencies’ expenses. Therefore, when we retain a higher percentage of our written premiums, we eliminate a greater portion of our agencies’ commission income and fees.

Commission income from sales of third-party business is earned over time as the customers pay their premiums to the third-party carriers. For the year ended December 31, 2005, commission income and fees for sales of third-party products were $13.0 million, an increase of $4.7 million or 55.9%, compared to $8.3 million in the prior year.

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Net investment income for the year ended December 31, 2005 was $5.7 million, an increase of $3.4 million, or 146.2%, compared to $2.3 million in the same period in 2004. The increase was primarily a result of a 32.0% increase in total invested assets to $210.8 million at December 31, 2005 from $159.7 million at December 31, 2004. The increase in invested assets is primarily the result of increased cash flows from operations. The average investment yield was 3.3% (4.5% on a taxable equivalent basis) in 2005 compared to 3.1% (3.8% on a taxable equivalent basis) in 2004 primarily as the result of the higher interest rates available for new investments in 2005.

Our investment committee reviewed our investment portfolio in December 2005 and decided to sell a portion of our investment portfolio in order to better align our portfolio with our historical claims life. Specifically, the Investment Committee determined that all securities with a maturity after December 31, 2008 should be sold. We determined that the identified securities to be sold would not fully recover (fair market value would not equal or exceed amortized cost) prior to the expected sale date, therefore the securities were deemed other than temporarily impaired in December 2005 when the decision to sell was made and we recorded a charge to earnings of $1.7 million in the fourth quarter of 2005. The identified securities were in compliance with our investment guidelines prior to the realignment decision by the Investment Committee. Net realized losses for the year ended December 31, 2005, included the $1.7 million related to the realignment of the investment portfolio. Our investment portfolio had not included securities with values that were other than temporarily impaired in previous fiscal periods.

Losses and loss adjustment expenses for the year ended December 31, 2005 were $191.2 million, an increase of $62.2 million, or 48.3%, as compared to $129.0 million for the same period in 2004. Our overall loss and loss adjustment expense ratio for the year ended December 31, 2005 was 64.2% as compared to 66.4% for the year ended December 31, 2004. The decrease in our overall loss and loss adjustment expense ratio was primarily due to greater favorable loss development on prior years’ business than we experienced in the prior year for the current period. The impact from the favorable loss ratio development on our losses and loss adjustment expense ratio was 5.0% for the year ended December 31, 2005 as compared to 1.5% in the prior year. The following table displays the impact of favorable loss development on prior years’ business on our overall loss and loss adjustment expense ratio for the years ended December 31, 2005 and December 31, 2004:

	Twelve Months Ended
	December 31,
	2005			2004
Loss and loss adjustment expense ratio — current period		69.2	%		67.9	%
Favorable loss ratio development — prior period business		(5.0	)%		(1.5	)%
Reported loss and loss adjustment expense ratio		64.2	%		66.4	%

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Selling, general and administrative expenses for the year ended December 31, 2005 were $153.8 million, an increase of $5.7 million, or 3.9%, as compared to $148.1 million for the same period in 2004, largely due to the growth in our business as well as increased retention. As shown in the table below, selling, general and administrative expenses include the cost of policy acquisition (amortization of deferred policy acquisition costs). Policy acquisition costs, primarily commissions, premium taxes and underwriting expenses related to issuing a policy, are deferred and charged against income ratably over the remaining service periods of the policies produced. Accordingly, amortization of deferred policy acquisition costs is correlated with earned premium. Earned premiums are up 53.2% for the year ended December 31, 2005 as compared to the prior year, so amortization of deferred policy acquisition costs is up commensurately. In 2005, the amortization of deferred policy acquisition costs were 25.2% of earned premiums as compared to 24.5% in the prior year. The following table displays the change in capitalized deferred acquisition costs as well as the impact that amortization of the deferred acquisition costs has on selling, general and administrative expenses:

	Twelve Months Ended
	December 31,
	2005			2004
	(Dollars in thousands)
Beginning deferred acquisition costs (“DAC”)	$	19,118		$	14,371
Additions		80,491			52,329
Amortization of DAC		(75,156	)		(47,582	)
Ending deferred acquisition costs	$	24,453		$	19,118
Amortization of DAC as % of Earned Premium		25.2%			24.5%
Policy acquisition costs (amortization of DAC)	$	75,156		$	47,582
Other selling, general and administrative expenses		78,649			100,513
Total selling, general and administrative expenses	$	153,805		$	148,095
Total SG&A expenses as % of Earned Premium		51.6%			76.2%

Significant events that impact comparability of selling, general and administrative for the year ended December 31, 2005 as compared to the prior year included $2.7 million in severance for three former executives, $2.4 million for the write-off of the BRT enterprise system and $0.2 million incurred for a retained search for a replacement executive. Other selling, general and administrative expenses for the year ended December 31, 2005 were $78.6 million and $73.4 million excluding the unusual adjustments in 2005, or 49.3% of earned premium. There were no expenses of a similar nature incurred in the fiscal year ended December 31, 2004.

Our expense ratio for the year ended December 31, 2005 increased to 26.3%, as compared to 13.2% in the prior year. The expense ratio calculation treats all commission income and fees as a reduction in the dividend, with the divisor consisting of earned premium only. Therefore, the increase in our expense ratio is due, in part, to the increased retention of premiums written by our insurance companies resulting in an increased amount of commission income fees being eliminated in consolidation, thereby reducing the amount of the revenue offset against expenses. As mentioned above, our commission income and fees decreased $47.1 million in 2005 to $79.6 million from $126.7 million in 2004 as a result of the elimination entries related to our increased retention of business produced. The following table displays components of our expense ratio calculation for the years ended December 31, 2005 and 2004:

	Twelve Months Ended
	December 31,
	2005			2004
Selling, general and administrative expenses	$	153,805		$	148,095
Depreciation and amortization		4,207			4,218
Less: commission income and fees		(79,615	)		(126,679	)
Total dividend	$	78,397		$	25,634
Divisor: Net premiums earned	$	297,799		$	194,341
Expense ratio		26.3%			13.2%

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Depreciation and amortization expenses for the year ended December 31, 2005 were $4.2 million, unchanged relative to the prior year. Depreciation expense decreased by $160,000 for the year ended December 31, 2005 as compared to the prior year. This decrease was offset by an increase of $148,000 in amortization expense primarily due to non-competition agreements with two former executives.

Interest expense for the year ended December 31, 2005 was $3.5 million, as compared to $588,000 for the prior year. Interest expense in 2005 is primarily related to our $56.7 million notes payable, which were issued in December 2004 and June 2005 following our private placement of $30.0 million and $25.0 million, respectively, of trust preferred securities. Interest expense for the prior year was primarily related to a note payable associated with a prior acquisition that was repaid in full in the third quarter of 2004.

Pretax income for the year ended December 31, 2005 was $28.7 million, a decrease of $12.7 million, or 30.7%, as compared to $41.5 million in the prior year. In 2005, $5.3 million in expenses related to significant events that impact comparability was included in selling, general and administrative expenses, as described above. Excluding these expenses, pretax income would have been $34.0 million in 2005.

Income tax expense for the year ended December 31, 2005 was $9.8 million, or an effective rate of 34.0%, as compared to income tax expense of $15.3 million, or an effective rate of 36.9% for the same period in 2004. In the fourth quarter of 2005, we recorded an adjustment to our deferred tax asset for state taxes. This adjustment reduced our income tax expense by $500,000 in the fourth quarter of 2005, resulting in an effective tax rate of 34.0% for 2005. Excluding the effect of this item, our effective tax rate would have been 35.7%. The decrease in the effective tax rate in year ended December 31, 2005 excluding the effect of the adjustment to our deferred tax asset, as compared to prior year, was principally due to the favorable impact of tax exempt income from our investment portfolio following our initial public offering in July 2004.

Minority interest net of income taxes, for the year ended December 31, 2005 was $672,000 as compared to $804,000 for the year ended December 31, 2004. The decrease in minority interest was a result of lower earnings from our Florida underwriting agency, where our ownership interest was 73.0% for the periods presented.

Liquidity and Capital Resources

Sources and uses of funds.  We are a holding company with no business operations of our own. Consequently, our ability to pay dividends to stockholders, meet our debt payment obligations and pay our taxes and administrative expenses is largely dependent on dividends or other distributions from our subsidiaries, including our insurance company subsidiaries.

There are no restrictions on the payment of dividends by our non-insurance company subsidiaries other than state corporate laws regarding solvency. As a result, our non-insurance company subsidiaries generate revenues, profits and net cash flows that are generally unrestricted as to their availability for the payment of dividends to the holding company, and we expect to use those revenues to service our corporate financial obligations, such as debt service and stockholder dividends. As of December 31, 2006, we had $16.9 million of cash and invested assets at the holding company level and $856,000 of cash and invested assets at our non-insurance company subsidiaries. As of March 8, 2007, our cash and invested assets at the holding company level was approximately $7.2 million. In January 2007, we paid $2.2 million in closing costs for the USAgencies acquisition, $0.6 million to Accenture under the outsourcing agreement, $0.6 million for payment of accrued construction costs for our new Chicago office, $0.2 million for the purchase of new premium finance software, with the remaining difference being attributed to every day operating expenses.

State insurance laws restrict the ability of our insurance company subsidiaries to declare stockholder dividends. These subsidiaries may not make an “extraordinary dividend” until 30 days after the applicable commissioner of insurance has received notice of the intended dividend and has not objected in such time or until the commissioner has approved the payment of the extraordinary dividend within the 30-day period. In most states, an extraordinary dividend is defined as any dividend or distribution of cash or other property whose fair market value, together with that of other dividends and distributions made within the preceding 12 months, exceeds the greater of 10.0% of the insurance company’s surplus as of the preceding December 31 or the insurance company’s net income for the 12-month period ending the preceding December 31, in each case determined in accordance with

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statutory accounting practices. In addition, an insurance company’s remaining surplus after payment of a dividend or other distribution to stockholder affiliates must be both reasonable in relation to its outstanding liabilities and adequate to its financial needs. In 2007, our insurance companies may pay up to $11.1 million in ordinary dividends to us without prior regulatory approval. However, the maximum dividend capacity is not immediately available in 2007 due to the dividend payment of $11.5 million by our insurance company subsidiaries in December 2006. For the year ended December 31, 2005, our insurance company subsidiaries paid us $5.0 million in dividends.

The National Association of Insurance Commissioners’ model law for risk-based capital provides formulas to determine the amount of capital that an insurance company needs to ensure that it has an acceptable expectation of not becoming financially impaired. At December 31, 2006, the capital ratios of our insurance companies substantially exceeded the risk-based capital requirements, as well as the highest level for regulatory action under the risk-based capital guidelines.

Our operating subsidiaries’ primary sources of funds are premiums received, commission income and fees, investment income and the proceeds from the sale and maturity of investments. Funds are used to pay claims and operating expenses, to purchase investments and to pay dividends to our holding company.

Net cash provided by operating activities was $34.7 million for the year ended December 31, 2006, as compared to $91.2 million for the year ended December 31, 2005, and $52.1 million for the year ended December 31, 2004. The decrease in cash provided by operating activities for the year ended December 31, 2006 as compared to the prior year was primarily due to a net decrease in insurance related items of $65.7 million such as collections of premiums and commissions receivable, payments of losses and loss adjustment expenses and unearned premiums, including $18.7 million that was collected as part of the novation and commutation agreements executed in 2005. In addition, we paid $6.0 million to Accenture in relation to our outsourcing contract in 2006, $0.7 million for an unsuccessful acquisition and $0.9 million for costs related to moving to our new Burr Ridge office and the closing of offices in Florida and Michigan. The decrease in cash provided was offset by a decrease in taxes paid during 2006 of approximately $14.5 million and tax refunds received for approximately $6.0 million. The increase in cash flow generated from operations for the year ended December 31, 2005 compared to the prior year was principally due to a net increase in insurance related items of $57.3 million such as collections of premiums and commissions receivable, payments of losses and loss adjustment expenses and unearned premiums, of which $18.7 million was collected as part of the novation and commutation agreements executed in 2005. This increase in cash flows was offset by $12.8 million in increased federal income tax payments over the prior year.

Net cash used in investment activities was $26.3 million for the year ended December 31, 2006, as compared to $66.6 million for the year ended December 31, 2004 and $129.2 million for the year ended December 31, 2004. The decrease in cash used in investment activities for the year ended December 31, 2006 as compared to the prior year is primarily due to a net decrease of $45.8 million in bonds acquired offset by $4.8 million in cash used for property, plant and equipment in 2006 as compared to the prior year. The decrease in cash used in investment activities for the year ended December 31, 2005 compared to the prior year is primarily due to a net decrease in bond purchases in the investment portfolios of our insurance companies of $59.5 million, as well as a decrease in cash used for acquisition in 2005 of $3.8 million as compared to the prior year.

Net cash used in financing activities was $4.0 million for the year ended December 31, 2006, as compared to $0.7 million for the year ended December 31, 2005 and $85.9 million in cash was provided by financing activities in the year ended December 31, 2004. Cash used in financing activities for the year ended December 31, 2006 included $4.1 million used to purchase outstanding shares of common stock and $1.2 million used to pay dividends offset by $1.3 million received from the issuance of common stock due to the exercise of stock options. Cash used in financing activities for the year ended December 31, 2005 included $28.0 million used to purchase outstanding shares of our common stock, offset by $24.4 million received from the private placement of trust preferred securities, net of fees, in June 2005, to fund this purchase. In addition, dividends of $1.3 million were paid in 2005 offset by $4.2 million received from the issuance of common stock in connection with the exercise of stock options. In 2004, $67.5 million was received from our initial public offering and $29.1 million was received in December 2004 from the private placement of trust preferred securities, partially offset by a $10.0 million principal payment on a note payable.

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We believe that existing cash and investment balances, as well as new cash flows generated from operations and other credit facilities will be adequate to meet our capital and liquidity needs during the 12-month period following the date of this report at both the holding company and insurance company levels. We do not currently know of any events that could cause a material increase or decrease in our long-term liquidity needs other than the debt service requirements of the senior term credit agreement completed on January 31, 2007 to fund the acquisition of USAgencies.

On January 31, 2007, we completed our acquisition of USAgencies. Pursuant to the terms of a Purchase and Sale Agreement, effective as of October 12, 2006 (the “Purchase Agreement”), among the Company and the unit holders (the “Sellers”) of USAgencies, we acquired all of the issued and outstanding membership interests of USAgencies from the Sellers for an aggregate purchase price of approximately $196.3 million in cash after giving effect to deductions based on the estimated indebtedness and book value of USAgencies and the estimated expenses of the transaction (the “Purchase Price”). $20.0 million of the Purchase Price was deposited into an escrow fund to satisfy any indemnification obligations of the Sellers under the Purchase Agreement. The Purchase Price is subject to a post-closing adjustment based on the actual indebtedness and book value of USAgencies and the actual expenses of the transaction, in each case as finally determined within a specified period following closing.

Initial Public Offering.  We completed our initial public offering of our common stock effective July 9, 2004. We issued 4,420,000 additional shares of our common stock and VIG sold 3,750,000 shares of our common stock that they owned, at an initial public offering price of $14.00 per share. On July 26, 2004, our underwriters exercised their option to purchase an additional 663,000 shares from us, and an additional 562,500 shares from VIG. The combined net proceeds to us from these transactions were approximately $65.3 million, of which $64.3 million was contributed to our insurance companies in order to increase their policyholder’s surplus.

Senior secured credit facility.  On January 31, 2007, we entered into a $220.0 million senior secured credit facility (the “Facility”) provided by a syndicate of lenders, including Credit Suisse, Cayman Islands Branch, as Administrative Agent and Collateral Agent. The Facility provides for a $200.0 million senior term loan facility and a revolving facility of up to $20.0 million, depending on our borrowing capacity. On March 8, 2007, we added The Frost National Bank, N.A. to the Facility when we received approval of the First Amendment to the Facility and executed a joinder agreement whereby Frost became the provider of an initial revolving credit commitment of $15.0 million. The revolving portion of the Facility includes an option to increase the $20.0 million principal amount of revolving loans available thereunder by up to an additional $20.0 million and a $2.0 million sublimit for letters of credit. Our obligations under the Facility are guaranteed by our material operating subsidiaries (other than our insurance companies) and are secured by a first lien security interest on all of our assets and the assets of our material operating subsidiaries (other than our insurance companies), including a pledge of 100% of the stock of AIC. The facility contains certain financial covenants, which include capital expenditure limitations, minimum interest coverage requirements, maximum leverage ratio requirements, minimum risk-based capital requirements, maximum combined ratio limitations, minimum fixed charge coverage ratios and a minimum consolidated net worth requirement, as well as other restrictive covenants.

Concurrently with entering into the Facility, the Company borrowed $200.0 million (the “Borrowing”) under the term loan portion of the Facility to finance its acquisition of USAgencies and to pay related costs and expenses. The principal amount of the Borrowing is payable in quarterly installments of $500,000, with the remaining balance due on the seventh anniversary of the closing of the Facility. Beginning in 2008, we are also required to make additional annual principal repayments that are to be calculated based upon our financial performance during the preceding fiscal year. In addition, certain events, such as the sale of material assets or the issuance of significant new equity, necessitate additional required principal repayments. As of March 14, 2007, we have no borrowings under the revolving portion of the Facility.

In connection with the closing of the Facility on that date, we terminated our existing Credit Agreement with The Frost National Bank dated July 30, 2004, as amended (the “Prior Credit Agreement”). At the time of the termination of the Prior Credit Agreement , there were no borrowings or other amounts outstanding under the Prior Credit Agreement. As of December 31, 2006, there were no outstanding loan amounts due under the Prior Credit Agreement, and we were in compliance with all of our financial and other restrictive covenants.

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Trust Preferred Securities.  On June 1, 2005, our newly formed trust entity, Affirmative Insurance Holdings Statutory Trust II (“Trust Entity II”), completed a private placement of $25.0 million of 30 year floating rate trust preferred securities. Simultaneously, we borrowed $25.0 million from Trust Entity II and the net proceeds from this borrowing, along with cash from operations, were used to purchase the 2.0 million shares of our common stock as discussed in Note 13 of our consolidated financial statements. The trust preferred securities, which can be redeemed in whole or in part by the issuer after five years, bear an initial interest rate of 7.792% until June 15, 2010, at which time they will adjust quarterly to the 90-day LIBOR rate plus 355 basis points.

Contractual Obligations

The following table identifies our contractual obligations by payment due period as of December 31, 2006 (dollars in thousands):

	2007		2008		2009		2010		2011		2012+		Total
Consideration due for acquisitions(1)	$	1,023	$	—	$	—	$	—	$	—	$	—	$	1,023
Operating leases(2)		8,245		6,806		5,754		3,246		2,108		9,400		35,560
Notes payable		—		—		—		—		—		56,702		56,702
Interest on notes payable		4,212		4,212		4,212		4,212		4,212		92,333		113,393
Reserves for loss and loss adjustment expense(3)		101,438		35,706		13,991		6,696		3,595		1,143		162,569
Total	$	114,918	$	46,724	$	23,957	$	14,154	$	9,915	$	159,578	$	369,247

(1)	Consists primarily of payments due in 2006 related to the asset purchase of InsureOne Independent Agency, LLC and Fed USA.
(2)	Consists primarily of rental obligations under real estate leases related to our retail operations and our corporate offices.
(3)	The payout pattern for reserves for losses and loss adjustment expenses are based upon historical payment patterns and do not represent actual contractual obligations. The timing and amount ultimately paid can and will vary from these estimates.

We and our subsidiaries are named from time to time as defendants in various legal actions arising in the ordinary course of our business and arising out of or related to claims made in connection with our insurance policies, claims handling and employment related disputes. We believe that the resolution of these legal actions will not have a material adverse effect on our financial position or results of operations. However, the ultimate outcome of these matters is uncertain. For detailed information concerning legal actions, please refer to “Legal Proceedings” contained elsewhere in this report.

From time to time, we and our subsidiaries are subject to random compliance audits from federal and state authorities regarding various operations within our business that involve collecting and remitting taxes in one form or another. Recently, two of our owned underwriting agencies were subject to a sales and use tax audit conducted by the State of Texas. The examiner for the State of Texas has now completed his audit report and delivered an audit assessment to us. The examiner’s report asserts that, for the period from January 2002 to December 2005, we should have collected and remitted approximately $2.9 million in sales tax derived from claims services performed by our underwriting agencies for policies sold by these underwriting agencies and issued by Old American County Mutual Insurance Company, an unaffiliated insurance company, through a fronting arrangement. Our insurance companies reinsured 100% of these policies. The assessment includes an additional $412,000 for accrued interest and penalty for a total assessment of $3.3 million. We believe that these services are not subject to sales tax, are vigorously contesting the assertions made by the state, and are exercising all available rights and remedies available to us. On October 19, 2006, we responded to the assessment by filing petitions with the Comptroller of Public Accounts for the State of Texas requesting a redetermination of the tax due and a hearing to present written and oral evidence and legal arguments to contest the imposition of the asserted taxes. As a result of the timely filing of these petitions, an administrative appeal process has commenced and the date for payment is delayed until the completion of the

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appeal process. Such appeals routinely take up to three years and much longer for complex cases. As such, the outcome of this tax assessment will not be known for a commensurate amount of time. At this time, we are uncertain of the probability of the outcome of our appeal. Additionally, we cannot reasonably estimate the ultimate liability at this time. We have not made an accrual for this as of December 31, 2006 as we do not believe this meets the requirements of Statement No. 5 (“SFAS 5”), Accounting for Contingencies.

Item 7A.   Quantitative and Qualitative Disclosures about Market Risk

We believe that interest rate risk and credit risk are the two types of market risk to which we are principally exposed.

Interest rate risk.  Our investment portfolio consists principally of investment-grade, fixed income securities, all of which are classified as available for sale. Accordingly, the primary market risk exposure to our debt securities is interest rate risk. In general the fair market value of a portfolio of fixed income securities increases or decreases inversely with changes in market interest rates, while net investment income realized from future investments in fixed income securities increases or decreases along with interest rates. In addition, some of our fixed income securities have call or prepayment options. This could subject us to reinvestment risk should interest rates fall and issuers call their securities and we reinvest at lower interest rates. We attempt to mitigate this interest rate risk by investing in securities with varied maturity dates and by managing the duration of our investment portfolio to a defined range of less than three years. The fair value of our fixed income securities as of December 31, 2006 was $221.8 million. The effective duration of the portfolio as of December 31, 2006 was 1.01 years. Should the market interest rates increase 1.0%, our fixed income investment portfolio would be expected to decline in market value by 1.01%, or $2.24 million, representing the effective duration multiplied by the change in market interest rates. Conversely, a 1.0% decline in interest rates would result in a 1.01%, or $2.24 million, increase in the market value of our fixed income investment portfolio.

Credit risk.  An additional exposure to our fixed income securities portfolio is credit risk. We attempt to manage our credit risk by investing only in investment grade securities and limiting our exposure to any single issuer. As of December 31, 2006, our fixed income investments were invested in the following: U.S. Treasury securities — 2.6%, corporate bonds securities — 4.1%, and municipal securities — 93.3%. The largest investment by a single issuer was 3.1% of the total portfolio. As of December 31, 2006, all of our fixed income securities were rated “A” or better by nationally recognized statistical rating organizations.

We are subject to credit risks with respect to our reinsurers. Although a reinsurer is liable for losses to the extent of the coverage which it assumes, our reinsurance contracts do not discharge our insurance companies from primary liability to each policyholder for the full amount of the applicable policy, and consequently our insurance companies remain obligated to pay claims in accordance with the terms of the policies regardless of whether a reinsurer fulfills or defaults on its obligations under the related reinsurance agreement. In order to mitigate credit risk to reinsurance companies, we attempt to select financially strong reinsurers with an A.M. Best rating of “A−” or better and continue to evaluate their financial condition.

At December 31, 2006, we had $24.8 million receivables from reinsurers, including $20.2 million gross recoverable from VFIC. Under the reinsurance agreement with VFIC, AIC had the right, under certain circumstances, to require VFIC to provide a letter of credit or establish a trust account to collateralize the gross amount due AIC and Insura from VFIC under the reinsurance agreement. Accordingly, AIC, Insura and VFIC entered into a Security Fund Agreement effective September 1, 2004. On August 30, 2005 AIC received a letter from VFIC’s President that irrevocably confirmed VFIC’s duty and obligations under the Security Fund Agreement to provide security sufficient to satisfy VFIC’s gross obligations under the reinsurance agreement (the “VFIC Trust”). Currently the VFIC Trust holds $23.1 million to collateralize the $20.2 million gross recoverable from VFIC. In June 2006, the Texas Department of Insurance placed VFIC, along with several of its affiliates, into rehabilitation and subsequently into liquidation. Due to VFIC’s liquidation status, AIC is working through certain procedures to effect its right to withdraw funds from the VFIC Trust. AIC has been working with the Special Deputy Receiver (the “SDR”) and his staff on this matter since VFIC was placed into liquidation. To date, the SDR has not taken issue with the validity of the VFIC Trust; however, we currently are negotiating with the SDR the manner in which the

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funds will be withdrawn from the VFIC Trust, which must then be approved by the Special Master of the Receivership Court.

As of December 31, 2005, we separately included $7.2 million in other assets that was related to a receivable due from VIG as part of the transfer of the insurance companies to us at December 31, 2003. The $7.2 million was not included in the gross recoverable at December 31, 2005. We continue to believe that this receivable is due from VIG and have instituted appropriate legal proceedings to recover the full amount thereof. However, a loss for $7.2 million was included in selling, general and administrative expenses in the fourth quarter of 2006 when we set up a reserve equal to the full amount of the receivable. We established this reserve due to our uncertainty as to the collectibility of the receivable in light of the significant amount of claims made against VIG and VFIC as of December 31, 2006 in their bankruptcy and liquidation proceeding, respectively, and our creditor status in those proceedings.

At December 31, 2006, $18.4 million was included in reserves for losses and loss adjustment expenses that reflect the amounts owed from AIC and Insura under reinsurance agreements with the VIG affiliated companies, including Hawaiian. AIC established a trust account to collateralize this payable, which currently holds $23.1 million in securities (the “AFIC Trust”). The AFIC Trust has not been drawn upon the SDR in Texas or the SDR in Hawaii. The SDRs will likely negotiate similar terms for withdrawal of funds from the AFIC trust as those agreed to in regards to the VFIC Trust.

In May of 2006, certain of VIG’s insurance companies, including VFIC, redomesticated to the state of Texas. Subsequently on June 28, 2006, an Agreed Order Appointing Rehabilitator and Permanent Injunction was issued by the Texas Department of Insurance (“Department”) whereby, based upon the Department’s findings, a rehabilitator was appointed, the company and certain of their officers were enjoined from various actions, and actions against the VIG companies were stayed. On July 18, 2006, the Department then filed an Application for Order of Liquidation and Requested for Expedited Hearing that remains pending. Such Order was granted on August 1, 2006 as to VFIC.

As part of the terms of the acquisition of AIC and Insura, VIG has indemnified us for any losses due to uncollectible reinsurance related to reinsurance agreements entered into with unaffiliated reinsurers prior to December 31, 2003. As of December 31, 2006, all such unaffiliated reinsurers had A.M. Best ratings of “A−” or better.

Effects of inflation.  We do not believe that inflation has a material effect on our results of operations, except for the effect that inflation may have on interest rates and claims costs. The effects of inflation are considered in pricing and estimating reserves for unpaid claims and claim expenses. The actual effects of inflation on our results are not known until claims are ultimately settled. In addition to general price inflation, we are exposed to a persisting long-term upward trend in the cost of judicial awards for damages. We attempt to mitigate the effects of inflation in our pricing and establishing of losses and loss adjustment expense reserves.

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Item 8.   Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Affirmative Insurance Holdings, Inc.:

We have audited the accompanying consolidated balance sheet of Affirmative Insurance Holdings, Inc. and subsidiaries as of December 31, 2006, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for the year ended December 31, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Affirmative Insurance Holdings, Inc. and subsidiaries as of December 31, 2006, and the results of its operations and its cash flows for the year ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Affirmative Insurance Holdings, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 16, 2007 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

/s/  KPMG LLP

Dallas, Texas
March 16, 2007

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Affirmative Insurance Holdings, Inc.:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that Affirmative Insurance Holdings, Inc. and its subsidiaries (the Company) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated Framework issued by COSO. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2006, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for the year ended December 31, 2006, and our report dated March 16, 2007 expressed an unqualified opinion on those consolidated financial statements.

/s/  KPMG LLP

Dallas, Texas
March 16, 2007

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders
of Affirmative Insurance Holdings, Inc.:

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)1 present fairly, in all material respects, the financial position of Affirmative Insurance Holdings, Inc. and its subsidiaries at December 31, 2005 and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15(a)1, present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As described in Note 2 to the consolidated financial statements included in the 2005 Form 10K (not separately presented herein), the Company restated its 2004 and 2003 consolidated financial statements.

/s/  PricewaterhouseCoopers, LLP

PricewaterhouseCoopers, LLP

Dallas, TX
April 11, 2006

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Affirmative Insurance Holdings, Inc.

Consolidated Balance Sheets

December 31, 2006 and 2005

	2006			2005
	(Dollars in thousands, except share data)
ASSETS
Fixed maturities — available for sale, at fair value (amortized cost 2006: $220,649; 2005: $211,087)	$	219,960		$	210,273
Short-term investments		1,810			477
Total invested assets		221,770			210,750
Cash and cash equivalents		52,484			48,037
Fiduciary and restricted cash		35,582			29,689
Accrued investment income		1,837			2,722
Premiums and fees receivable		78,307			81,680
Commissions receivable		909			2,144
Receivable from reinsurers		24,795			28,137
Deferred acquisition costs		23,865			24,453
Deferred tax asset, net		8,880			14,866
Federal income taxes receivable		7,153			6,823
Property and equipment, net		10,289			4,820
Goodwill		65,288			61,009
Other intangible assets, net		18,155			19,607
Other assets, net of allowance for doubtful accounts of — 2006: $7,213		7,953			9,388
Total assets	$	557,267		$	544,125
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Reserves for losses, loss adjustment expenses and deposits		162,569			142,977
Unearned premium		92,124			97,344
Amounts due reinsurers		5,089			8,715
Deferred revenue		7,877			11,064
Notes payable		56,702			56,702
Consideration due for acquisitions		1,023			1,352
Other liabilities		25,490			26,009
Total liabilities		350,874			344,163
Commitments and contingent liabilities (Notes 4, 6 and 14)
Stockholders’ equity
Common stock, $0.01 par value; 75,000,000 shares authorized; 17,707,938 shares issued and 15,354,575 outstanding at December 31, 2006; 17,483,520 shares issued and 15,432,557 outstanding at December 31, 2005		177			175
Additional paid-in capital		160,862			158,904
Treasury stock, at cost; 2,353,363 shares at December 31, 2006 and 2,050,963 shares at December 31, 2005		(32,880	)		(28,746	)
Accumulated other comprehensive income (loss)		(448	)		(529	)
Retained earnings		78,682			70,158
Total stockholders’ equity		206,393			199,962
Total liabilities and stockholders’ equity	$	557,267		$	544,125

See accompanying Notes to Consolidated Financial Statements

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Affirmative Insurance Holdings, Inc.

Consolidated Statements of Operations

Years Ended December 31, 2006, 2005 and 2004

	2006			2005			2004
	(Dollars in thousands, except share data)
Revenues
Net premiums earned	$	288,110		$	297,799		$	194,341
Commission income and fees (includes related parties — 2005: $594; 2004: $5,703)		60,995			79,615			126,679
Net investment income		8,829			5,730			2,327
Net realized losses		(822	)		(1,665	)		(8	)
Total revenues		357,112			381,479			323,339
Expenses
Losses and loss adjustment expenses		185,346			191,208			128,969
Selling, general and administrative expenses		150,540			153,805			148,095
Depreciation and amortization		4,398			4,207			4,218
Interest expense		4,342			3,515			588
Total expenses		344,626			352,735			281,870
Net income before income taxes, minority interest and equity interest in unconsolidated subsidiaries		12,486			28,744			41,469
Income tax expense		2,661			9,767			15,319
Minority interest, net of income taxes		81			672			804
Equity interest in unconsolidated subsidiaries, net of income taxes		—			—			913
Net income	$	9,744		$	18,305		$	24,433
Net income per common share — Basic	$	0.64		$	1.16		$	1.74
Net income per common share — Diluted	$	0.63		$	1.14		$	1.72
Weighted average shares outstanding
Basic		15,295,022			15,774,387			14,018,530
Diluted		15,344,984			15,993,073			14,213,682

See accompanying Notes to Consolidated Financial Statements

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Affirmative Insurance Holdings, Inc.

Consolidated Statements of Stockholders’ Equity and Comprehensive Income

Years Ended December 31, 2006, 2005 and 2004

																			Accumulated
								Additional											Other			Total
	Common Stock Issued							Paid-in			Retained			Treasury Stock					Comprehensive			Stockholders’
	Shares		Amount		Warrants			Capital			Earnings			Shares		Amount			Income (Loss)			Equity
	(Dollars in thousands, except share data)
Balance, December 31, 2003		11,557,215	$	116	$	157		$	84,074		$	29,039				$	—		$	(9	)	$	113,377
Comprehensive income:
Net income												24,433											24,433
Other comprehensive income																				260			260
Total comprehensive income																							24,693
Dividend ($.02 per share)												(337	)										(337	)
Issuance of common stock		5,281,304		52		(157	)		67,678														67,573
Balance, December 31, 2004		16,838,519	$	168	$	—		$	151,752		$	53,135				$	—		$	251		$	205,306
Comprehensive income:
Net income												18,305											18,305
Other comprehensive loss																				(780	)		(780	)
Total comprehensive income																							17,525
Purchase of treasury stock															2,050,963		(28,746	)					(28,746	)
Dividend ($.02 per share)												(1,282	)										(1,282	)
Issuance of common stock		627,267		7					4,971														4,978
Tax benefit of options exercised									1,346														1,346
Issuance of restricted stock		17,734							835														835
Balance, December 31, 2005		17,483,520	$	175	$	—		$	158,904		$	70,158			2,050,963	$	(28,746	)	$	(529	)	$	199,962
Comprehensive income:
Net income												9,744											9,744
Other comprehensive income																				81			81
Total comprehensive income																							9,825
Purchase of treasury stock															302,400		(4,134	)					(4,134	)
Dividends ($.02 per share)												(1,220	)										(1,220	)
Issuance of common stock		109,418		1					1,317														1,318
Issuance of restricted stock		115,000		1					(1	)													—
Tax benefit of options exercised									47														47
Equity based compensation									595														595
Balance, December 31, 2006		17,707,938	$	177	$	—		$	160,862			78,682			2,353,363	$	(32,880	)	$	(448	)	$	206,393

See accompanying Notes to Consolidated Financial Statements

81

Affirmative Insurance Holdings, Inc.

Consolidated Statements of Cash Flows

Years Ended December 31, 2006, 2005 and 2004

	For the Year Ended December 31,
	2006			2005			2004
	(Dollars in thousands)
Cash flows from operating activities
Net income	$	9,744		$	18,305		$	24,433
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,398			4,207			4,218
Undistributed equity in unconsolidated subsidiaries		—			—			913
Equity based compensation		595			150			—
Realized losses		822			1,665			8
Amortization of premiums and discounts on investments		1,521			2,615			—
Allowance for doubtful accounts (Vesta)		7,213			—			—
Loss on write down of enterprise system		—			2,381			—
Changes in assets and liabilities:
Fiduciary and restricted cash		(5,893	)		(13,422	)		(6,800	)
Premiums, fees and commissions receivable		4,608			28,966			(44,877	)
Reserves for loss and loss adjustment expenses		19,592			44,114			40,356
Net due to/from reinsurers		(284	)		13,888			14,370
Receivable from affiliates		—			7,523			(396	)
Deferred revenue		(3,187	)		(7,581	)		1,744
Unearned premiums		(5,220	)		6,649			19,469
Deferred acquisition costs		588			(5,335	)		(4,747	)
Deferred tax asset/liability		5,942			2,423			(8,031	)
Federal income taxes receivable/payable		(283	)		(13,003	)		(161	)
Other		(5,412	)		(2,372	)		11,597
Net cash provided by operating activities		34,744			91,173			52,096
Cash flows from investing activities
Proceeds from the sale of bonds		398,148			7,800			20,623
Cost of bonds acquired		(410,954	)		(66,407	)		(138,766	)
Purchases of property and equipment, net		(8,847	)		(4,023	)		(3,379	)
Net cash paid for acquisitions		(4,608	)		(3,921	)		(7,715	)
Net cash used in investing activities		(26,261	)		(66,551	)		(129,237	)
Cash flows from financing activities
Principal payments under capital lease obligation		—			—			(341	)
Proceeds from borrowings		—			24,369			29,094
Repayments of borrowings		—			—			(10,020	)
Proceeds from issuance of common stock, net		1,318			4,232			67,483
Acquisition of treasury stock		(4,134	)		(28,000	)		—
Dividends paid to common stockholders		(1,220	)		(1,282	)		(337	)
Net cash provided by (used in) financing activities		(4,036	)		(681	)		85,879
Net increase in cash and cash equivalents		4,447			23,941			8,738
Cash and cash equivalents, beginning of period		48,037			24,096			15,358
Cash and cash equivalents, end of period	$	52,484		$	48,037		$	24,096

See accompanying Notes to Consolidated Financial Statements

82

Affirmative Insurance Holdings, Inc.

Notes to Consolidated Financial Statements

1.   General

Affirmative Insurance Holdings, Inc., formerly known as Instant Insurance Holdings, Inc., was incorporated in Delaware on June 25, 1998. We are a distributor and producer of non-standard personal automobile insurance policies and related products and services for individual consumers in targeted geographic areas. Our subsidiaries include three insurance companies, four underwriting agencies, five retail agencies with 158 owned stores (16 of which are located in leased space within supermarkets owned by a major supermarket chain under an agreement signed in late 2005) and 33 franchise store locations as of December 31, 2006. Our underwriting agencies utilize approximately 3,200 independent agencies to sell the policies that they administer. In addition, we have two unaffiliated underwriting agencies producing business for our insurance companies through approximately 4,200 independent agencies. We are currently active in offering insurance directly to individual consumers through retail stores in 8 states (Illinois, Texas, Missouri, Indiana, South Carolina, Florida, Kansas and Wisconsin) and distributing our own insurance policies through independent agents in 9 states (Illinois, Texas, Missouri, Indiana, South Carolina, Florida, California, Michigan and New Mexico). Our growth has been achieved principally as a result of the acquisition of six retail and/or underwriting agencies in 2001 and 2002.

We completed our initial public offering of our common stock effective July 9, 2004. We issued 4,420,000 additional shares of our common stock and VIG sold 3,750,000 shares of our common stock that they owned, at an initial public offering price of $14.00 per share. On July 26, 2004, our underwriters exercised their option to purchase an additional 663,000 shares from us, and an additional 562,500 shares from VIG. On June 1, 2005, we purchased 2,000,000 of our shares of common stock from VIG at a price of $14.00 per share. In May and June, 2006, we purchased 302,400 shares of our common stock in open market purchases at an average price of $13.67 per share.

On June 14, 2005, VIG and VFIC entered into a stock purchase agreement with New Affirmative LLC (“New Affirmative”), J.C. Flowers I LP and Delaware Street Capital Master Fund for the sale by VIG and VFIC of 5,218,228 shares of our common stock (“Stock Purchase Agreement”). New Affirmative was formed for the purpose of acquiring, holding, voting and disposing of the shares of our common stock acquired in connection with the Stock Purchase Agreement and any shares of our common stock that New Affirmative may acquire in the future. At the time of the agreement, New Affirmative was (i) 50% owned by DSC AFFM, LLC (“DSC AFFM”), an entity controlled by DSC AFFM Manager LLC (“DSC Manager”), the sole managing member of DSC AFFM, and Andrew G. Bluhm, the managing member of DSC Manager, and (ii) 50% owned by Affirmative Investment LLC (“Affirmative Investment”), an entity owned, in part, by the Enstar Group, Inc., and controlled by Affirmative Associates LLC (“Affirmative Associates”), the sole managing member of Affirmative Investment, and J. Christopher Flowers, the sole member and manager of Affirmative Associates. Simultaneously with the closing of the transactions contemplated by the Stock Purchase Agreement: (1) DSC AFFM contributed 1,459,699 shares of our common stock which were previously acquired in open market transactions by members of DSC AFFM and subsequently contributed to DSC AFFM, to New Affirmative and (2) Affirmative Investment contributed 1,183,000 shares of our common stock, previously acquired by it in open market transactions, to New Affirmative. VIG completed the sale to New Affirmative on August 30, 2005.

On August 31, 2006, DSC AFFM and Affirmative Investment consummated the transactions contemplated by a purchase agreement, dated August 4, 2006, pursuant to which DSC AFFM sold to Affirmative Investment all of the membership units of New Affirmative owned by DSM AFFM. As a result, Affirmative Investment now owns 100% of New Affirmative. As of December 31, 2006, New Affirmative owned 7,860,927 shares, or approximately 51.2% of our outstanding common stock.

83

Affirmative Insurance Holdings, Inc.

Notes to Consolidated Financial Statements — (Continued)

2.   Summary of Significant Accounting Policies

Basis of Presentation

Our consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) and include our accounts and the accounts of our operating subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Management believes the accompanying consolidated financial statements are representative of our costs of doing business on a stand-alone basis. The accompanying consolidated statements of operations include charges for expenses allocated to us by VIG for various services through 2004. These charges were based upon specific identification when available or were allocated based upon estimated usage. Management believes the methods used to identify and allocate these costs are reasonable.

Use of Estimates in the Preparation of the Financial Statements

Our preparation of financial statements in con formity with GAAP requires us to make estimates and assumptions that affect our reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our financial statements and our reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. These estimates and assumptions are particularly important in determining revenue recognition, reserves for losses and loss adjustment expenses, deferred policy acquisition costs, reinsurance receivables and impairment of assets.

Cash and Cash Equivalents

Cash and cash equivalents are highly liquid investments with an original maturity of ninety days or less and include principally money market funds, repurchase agreements, and other bank deposits.

Fiduciary and Restricted Cash

In our capacity as an insurance agency, we collect premiums from insureds and, after deducting our authorized commissions, remit these premiums to the appropriate insurance companies. Unremitted insurance premiums are held in a fiduciary capacity until disbursed by us. In certain states where we operate, the use of investment alternatives for these funds is regulated by various state agencies. We invest these unremitted funds only in cash and money market accounts and report such amounts as restricted cash on our consolidated balance sheets. We report the unremitted liability of these funds as amounts due reinsurers on our consolidated balance sheets. Interest income earned on these unremitted funds is reported as investment income in our consolidated statements of operations.

Investments

Investment securities are classified as available for sale and reported at fair value, generally based on quoted market prices, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity, net of deferred income taxes.

Gains and losses realized on the disposition of bonds are determined on the specific identification basis and credited or charged to income. Amortization of premium and accretion of discount on bonds are determined on the interest method and credited or charged to income.

We conduct regular reviews to assess whether the amortized cost of our investments are impaired and if any impairment is other than temporary. Factors considered by us in assessing whether an impairment is other than temporary include the credit quality of the investment, the duration of the impairment, our ability and intent to hold the investment until recovery and overall economic conditions. If we determine that the value of any investment is other than temporarily impaired, we record a charge against earnings in the amount of the impairment and the investment is adjusted to fair value.

84

Affirmative Insurance Holdings, Inc.

Notes to Consolidated Financial Statements — (Continued)

Treasury Stock

We record treasury stock purchases under the cost method, whereby the entire cost of the acquired stock is recorded as treasury stock. When reissued, shares of treasury stock will be removed from the treasury stock account at the average purchase price per share of the aggregate treasury shares held.

Equity in Unconsolidated Subsidiaries

We account for our equity interest in unconsolidated subsidiaries under the equity method of accounting. Under the equity method of accounting, we record our proportionate share of the income (losses), net of income taxes in our consolidated statements of operations. As of December 31, 2006 and 2005, our equity investment and related income in unconsolidated subsidiaries was zero.

Statutory accounting practices

We are required to report our results of operations and financial position to insurance regulatory authorities based upon statutory accounting practices (“SAP”). One significant difference between SAP and GAAP is that under SAP the Company is required to expense all sales and other policy acquisition costs as they are incurred rather than capitalizing and amortizing them over the expected life of the policy as required by GAAP. The immediate charge off of sales and acquisition expenses and other conservative valuations under SAP generally cause a lag between the sale of a policy and the emergence of reported earnings. Because this lag can reduce the Company’s gain from operations on a SAP basis, it can have the effect of reducing the amount of funds available for dividends from insurance companies. A second significant difference is that under SAP, certain assets are designated as “nonadmitted” and are charged directly to unassigned surplus, whereas under GAAP, such assets are included in the balance sheet net of an appropriate valuation reserve. A third significant difference between SAP and GAAP is that under SAP, investments are carried at amortized book value and under GAAP, investments are carried at fair value.

Deferred Policy Acquisition Costs

Deferred policy acquisition costs represent the deferral of expenses that we incur acquiring new business or renewing existing business. Policy acquisition costs, consisting of primarily commission, premium taxes, underwriting and agency expenses, are deferred and charged against income ratably over the terms of the related policies. At December 31, 2006, we had $23.9 million of deferred policy acquisition costs. We regularly review the categories of acquisition costs that are deferred and assess the recoverability of this asset. A premium deficiency, and a corresponding charge to income is recognized, if the sum of the expected losses and loss adjustment expenses, unamortized acquisition costs, and maintenance costs exceeds related unearned premiums and anticipated investment income. At December 31, 2006, we determined that there was no premium deficiency. Amounts received as expense allowances on reinsurance contracts that represent reimbursement of acquisition costs are recorded as reductions of deferred acquisition costs.

Property and Equipment

Property and equipment is stated at cost, less accumulated depreciation, and consists primarily of computer and telephone equipment, furniture and fixtures and leasehold improvements. Depreciation is computed for property and equipment, excluding leasehold improvements, using the straight-line method over the estimated useful lives of our assets, typically ranging from three to five years. Leasehold improvements are depreciated using the straight-line method over the shorter of the useful life or the remainder of the lease term.

Goodwill and Other Intangible Assets

Intangible assets consist of brand names, agency relationships, non-competition agreements and goodwill. Goodwill represents the excess cost over the fair value of identifiable net assets acquired. Goodwill and indefinite

85

Affirmative Insurance Holdings, Inc.

Notes to Consolidated Financial Statements — (Continued)

life intangible assets are not amortized but are subject to periodic impairment testing. Finite life intangible assets are amortized on a prorata basis over their expected useful lives, ranging from two to twenty years (Note 9).

Losses and Loss Adjustment Expenses

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

Amounts Due Reinsurers

We collect premiums from insureds and after deducting our authorized commissions, we remit these premiums to the appropriate insurance and reinsurance companies. Our obligation to remit these premiums is recorded as amounts due reinsurers in our consolidated balance sheet.

Reclassification

Certain previously reported amounts have been reclassified in order to conform to current year presentation. Such reclassification had no effects on net income, stockholders’ equity or cash flows from operating, investing and financing activities.

Consideration Due for Acquisitions

In connection with certain acquisitions, we are liable for additional purchase price in the event specified earning levels or other contractual targets are met. These obligations are recorded as consideration due for acquisitions in our consolidated balance sheet upon the determination by us that such payments are both estimable and payable beyond a reasonable doubt.

Income Taxes

Effective July 9, 2004, the date of our initial public offering, we terminated our tax allocation agreement with VIG and have filed separate federal income tax returns from that date forward. Prior to July 9, 2004, we were included in the consolidated income tax return with VIG with our provision for income taxes having been recorded as if we filed a separate federal income tax return. Deferred federal income taxes reflect the future tax differences between the tax basis of assets and liabilities and amounts recorded for financial reporting purposes. Recorded amounts will be adjusted to reflect changes in income tax rates for the period in which the change is enacted.

86

Affirmative Insurance Holdings, Inc.

Notes to Consolidated Financial Statements — (Continued)

Stock Split

On May 25, 2004 we completed a stock split of 13.17 shares per one share of common stock effected through a stock dividend. All references to common shares, share prices, per share amounts, and stock plans have been restated retroactively in this report for our stock split.

Revenue Recognition

Premium income — Premium, net of premiums ceded, is earned over the life of a policy on a pro rata basis. Unearned premiums represent that portion of premiums written that is applicable to the unexpired terms of policies in force. Premiums receivable are recorded net of an estimated allowance for uncollectible amounts.

Commission income — Commission income and related policy fees, written for affiliated and unaffiliated insurance companies, are recognized at the date the customer is initially billed or as of the effective date of the insurance policy, whichever is later. Commissions on premium endorsements are recognized when premiums are processed. Our allowance for policy cancellations, presented as deferred revenue in our consolidated balance sheet, is periodically evaluated and adjusted as necessary. All commission and policy fee revenue and our related allowance for policy cancellations from our insurance companies are eliminated in consolidation.

Profit sharing commissions, which enable us to collect commission income and fees in excess of provisional commissions, are recorded when we conclude it is probable that estimates of loss ratios will be below the levels stated in our agency contracts.

Fee Income — Fee income includes policy origination fees, agency and installment fees to compensate us for the costs of providing installment payment plans, as well as late payment, policy cancellation, policy rewrite and reinstatement fees. We recognize policy origination fees over the premium earning period of the underlying policies and recognize all other fees on a collected basis.

Claims processing fees — Claims processing fees are received from insurance companies over the premium earning period of the underlying policies. The fees are recognized as revenue over the expected period during which processing services are performed and in amounts appropriate to the processing effort and related costs. The service period and related revenues are based upon historical and expected claims settlement data. All claims processing fees from our insurance companies are eliminated in consolidation.

Accounting and Reporting for Reinsurance.  Pursuant to SFAS No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts, we are required to review the contractual terms of all our reinsurance purchases to ensure compliance with that statement. The statement establishes the conditions required for a contract with a reinsurer to be accounted for as reinsurance and prescribes accounting and reporting standards for those contracts. For all reinsurance transactions, immediate recognition of gains is precluded unless our liability to our policyholders is extinguished. SFAS No. 113 also requires us to disclose the nature, purpose and effect of reinsurance transactions, including the premium amounts associated with reinsurance assumed and ceded. It also requires disclosure of concentrations of credit risk associated with reinsurance receivables and prepaid reinsurance premiums. Contracts that do not result in the reasonable possibility that the reinsurer may realize a significant loss from the insurance risk assumed generally do not meet the conditions for reinsurance accounting and must be accounted for as deposits according to the guidelines of SOP 98-7, Deposit Accounting for Insurance and Reinsurance Contracts that do not Transfer Insurance Risk. Under Deposit Accounting, excess deposit liabilities are recorded as income based on a percentage of actual paid losses, if the estimated deposit liabilities are less than the recorded deposit liabilities. We believe we have properly accounted for all of our reinsurance contracts (Note 6).

87

Affirmative Insurance Holdings, Inc.

Notes to Consolidated Financial Statements — (Continued)

Lease Expense

For long-term real estate leases, we estimate future rate increases to compute a straight-line monthly expense over the term of the lease.

Advertising Costs

We utilize various advertising mediums such as yellow pages, television and radio campaigns and print advertisements. We account for advertising costs in accordance with Statement of Position 93-7 (“SOP 93-7”), Reporting on Advertising Costs. SOP 93-7 requires all advertising costs not meeting the criteria for direct response advertising be expensed as incurred or at the first time the advertising takes place. Our advertising process does not meet the criteria for direct response advertising and therefore we expense all advertising costs as incurred or at the first time the advertising takes place.

Fair Value of Financial Instruments

We disclose the fair values of financial instruments for which it is practicable to estimate the value. Fair value disclosures exclude certain financial instruments such as premium receivables, commission receivables, and premium payables when carrying values approximate our fair value.

Stock Based Compensation

We adopted SFAS 123R on January 1, 2006 using the modified prospective method and, accordingly, prior periods have not been restated because of the adoption. We recognize stock-based payment expense using the straight-line method. For the year ended December 31, 2006, we have recognized approximately $595,000 before income taxes ($468,000 after income taxes) in stock-based payment expense under the requirements of SFAS 123R (Note 18).

As permitted by SFAS 123, until December 31, 2005, we accounted for stock-based payments to employees using APB 25’s intrinsic value method and, as such, generally recognized no compensation cost on grants of employee stock options. Had we adopted SFAS 123R in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described below.

The following table illustrates the effect on our net income and net income per share if we had applied SFAS 123 to stock-based compensation for the years ended December 31, 2005 and 2004 (dollars in thousands, except per share amounts):

	2005			2004
Net income, as reported	$	18,305		$	24,433
Add: stock-based employee compensation expense included in reported net income, net of related income taxes		—			—
Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of related income taxes		(1,197	)		(334	)
Net income, pro forma	$	17,108		$	24,099
Basic earnings per share — as reported	$	1.16		$	1.74
Basic earnings per share — pro forma	$	1.08		$	1.72
Diluted earnings per share — as reported	$	1.14		$	1.72
Diluted earnings per share — pro forma	$	1.07		$	1.70

88

Affirmative Insurance Holdings, Inc.

Notes to Consolidated Financial Statements — (Continued)

Supplemental Cash Flow Information

During the first quarter of 2004, we received $35.6 million in fixed income securities from VIG in lieu of cash, to settle the collection of premiums and fees, receivables from reinsurers, exchange of other invested assets, and miscellaneous intercompany balances.

In January 2005, we issued 6,734 shares of restricted common stock to certain members of our Board of Directors, in lieu of cash as their annual retainer. In both February and May 2005, we issued 7,500 shares of restricted common stock to certain members of our Board of Directors for compensation related to services performed. In November 2005, 7,000 shares of restricted common stock that had been issued were cancelled due to the resignation of certain board members.

On May 9, 2006, the board of directors approved a share repurchase program for up to $15 million of our common stock over the subsequent 12 months. From time to time, repurchases may be made in the open market or through privately negotiated transactions at the discretion of management based on management’s assessment of market conditions and other relevant factors. We expect to fund the purchases initially through internally available funds. 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.

We paid (recovered) the following amounts for the years ended December 31(dollars in thousands):

	2006			2005		2004
Income taxes paid (recovered)	$	(3,424	)	$	17,042	$	21,197
Interest expense paid	$	4,342		$	3,491	$	526

Segment Reporting

Our business is the design, sale, underwriting and servicing of non-standard personal automobile insurance policies. Our parent company is a holding company, with no revenues and only interest expense on corporate debt. Our subsidiaries consist of several types of legal entities: insurance companies, underwriting agencies, retail agencies, and a service company where all employees are paid. Our insurance companies possess the certificates of authority and capital necessary to transact insurance business and issue policies, but they rely on both affiliated and unaffiliated underwriting agencies to design, distribute and service those policies. Our underwriting agencies primarily design, distribute and service policies issued or reinsured by our insurance companies and that are distributed by our retail entities and by independent agents.

In November 2005, with a change in controlling ownership, we changed our board of directors and, subsequently, some members of senior management including the chief executive officer and the chief financial officer. The former senior management, with extensive experience in managing underwriting agencies and retail agencies, monitored the business on the basis of several segments consisting of an “agency” segment that was comprised of our underwriting and retail agencies, an “insurance” segment for the two insurance companies and a “corporate” segment. The current senior management has determined that with the significantly increased retention by the insurance companies of the business produced by the underwriting agencies, the Company should be analyzed as an integrated insurance company beginning January 1, 2006. Given the homogeneity of our products, the regulatory environments in which we operate, the nature of our customers and our distribution channels, we now monitor, control and manage our business lines as an integrated entity offering non-standard personal automobile insurance products through multiple distribution channels. Accordingly, the segment information previously viewed by the former management is no longer used to monitor the company and we have no segment information to disclose. Our previously reported historical consolidated financial results represent the integrated entity currently analyzed by management, so no additional or adjusted historical disclosures are required in order to reflect this change in management’s business analysis.

89

Affirmative Insurance Holdings, Inc.

Notes to Consolidated Financial Statements — (Continued)

Recently Issued Accounting Standards

In November 2005, the FASB issued Staff Position (FSP) FAS 115-1 and FAS 124-1, which nullifies certain provisions of EITF Issue 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, and completely supersedes EITF Topic D-44, Recognition of Other Than Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value, addresses (1) determining when an investment should be considered impaired, (2) determining whether an impairment should be deemed other than temporary, and (3) measuring impairment loss. Combined FSP Nos. FAS 115-1 and FAS 124-1 were applied to the realignment of a portion of our investment portfolio as discussed in Note 3 to our consolidated financial statements.

In July 2006, FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 (’FIN 48”), was issued. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements with FASB Statement No. 109, Accounting for Income Taxes.  FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, as well as providing guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006 with earlier application permitted as long as the enterprise has not yet issued financial statements, including interim financial statements, in the period of adoption. We have evaluated the requirements of FIN 48 and expect that the adoption of FIN 48 will have no material impact on our future financial statements.

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”) and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this statement does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for the fiscal year, including financial statements for an interim period within that fiscal year. We have not evaluated the requirements of SFAS 157 and have not yet determined if SFAS 157 will have a material impact on our future financial statements.

In February 2007, the FASB issued Statement No. 159, Establishing the Fair Value Option for Financial Assets and Liabilities (“SFAS 159”), which includes an amendment to FASB No. 115, Accounting for Certain Investments in Debt and Equity Securities (“SFAS 115”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments. This statement applies to all entities and most of the provisions of this statement apply only to entities that elect the fair value option. However, the amendment to FAS 115 applies to all entities with available-for-sale and trading securities. SFAS 159 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted for an entity that has also elected to apply the provisions of SFAS 157, Fair Value Measurements. An entity is prohibited from retrospectively applying SFAS 159, unless it chooses early adoption. SFAS 159 also applies to eligible items existing at November 15, 2007 (or early adoption). We have not evaluated the requirements of SFAS 159 and have not yet determined if SFAS 159 will have a material impact on our future financial statements.

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3.   Investments

Our investment portfolio consists of fixed income securities, which are classified as available-for-sale and are carried at fair value with unrealized gains and losses reported in our financial statements as a separate component of stockholders’ equity on an after-tax basis. Our investment committee reviewed our investment portfolio in December 2005 and decided to realign a portion of our investment portfolio in order to better align our portfolio with our historical claims life. We determined that the identified securities would not fully recover prior to the expected sale date, therefore the securities were deemed other-than-temporarily impaired in December 2005 when the decision to sell was made. The identified securities were in compliance with our investment guidelines prior to the review by the Investment Committee. The amortized cost, gross unrealized gains (losses) and estimated fair value of our investments at December 31 are as follows (dollars in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
2006
Fixed maturities
U.S. Government and agencies	$	5,689	$	17	$	(84	)	$	5,622
Municipal		205,570		5		(430	)		205,145
Corporate and other		9,390		—		(197	)		9,193
Total	$	220,649	$	22	$	(711	)	$	219,960
2005
Fixed maturities
U.S. Government and agencies	$	5,387	$	1	$	(151	)	$	5,237
Mortgage backed		13,171		—		—			13,171
Municipal		168,738		97		(460	)		168,375
Corporate and other		23,791		—		(301	)		23,490
Total	$	211,087	$	98	$	(912	)	$	210,273

As of December 31, 2005, the $210.3 million in fixed maturities includes $135.2 million in securities that had been identified by the investment committee of the board of directors as securities to be sold. The $135.2 million reflects the fair market value of such securities after $1.7 million in losses were recognized in December 2005.

Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without penalties. Our amortized cost and estimated fair value of fixed income securities at December 31, 2006 by contractual maturity are as follows (dollars in thousands):

	Amortized
	Cost		Fair Value
Securities — to be retained
Due in one year or less	$	35,444	$	35,191
Due after one year through five years		91,707		91,288
Due after five years through ten years		1,105		1,104
Due after ten years		92,393		92,377
Total securities — To be retained	$	220,649	$	219,960

As of December 31, 2006, we own approximately $16.0 million of pre-refunded municipal bonds. These pre-refunded municipal bonds have contractual maturities in excess of ten years. However, due to pre-refunding, these

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securities will be called by the issuer generally within three years or less. Pre-refunded municipal bonds are created when municipalities issue new debt to refinance debt issued when interest rates were higher. Once the refinancing is completed the issuer uses the proceeds to purchase U.S. Treasury securities and places these securities in an escrow account. These proceeds are then used to pay interest and principal on the original debt until the bond is called.

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

	2006			2005			2004
Fixed maturities	$	7,610		$	5,406		$	2,251
Short term investments		944			296			82
Other investments		—			—			1
Cash and cash equivalents		450			275			157
		9,004			5,977			2,491
Less: Investment expense		(175	)		(247	)		(164	)
Net investment income	$	8,829		$	5,730		$	2,327

Proceeds from sales, maturities, and principal receipts of bonds were $398.1 million, $7.8 million, and $20.6 million for the years ended December 31, 2006, 2005, and 2004, respectively.

Our investment committee reviewed our investment portfolio in December 2005 and decided to realign a portion of our investment portfolio in order to better align our portfolio with our historical claims life. We determined that the identified securities to be sold would not fully recover prior to the expected sale date, therefore the securities were deemed other than temporarily impaired in December 2005 when the decision to sell was made. The identified securities were in compliance with our investment guidelines prior to the realignment decision of the investment committee.

Gross realized gains and losses on investments for the years ended December 31 are summarized as follows (dollars in thousands):

	Gross		Gross
	Gains		Losses			Total
2006	$	73	$	(463	)	$	(390	)
2005	$	—	$	(1,678	)	$	(1,678	)
2004	$	75	$	(70	)	$	5

If a decline in the fair market value of investments is determined to be other than temporary, the investment is written down to fair value and the amount of the write-down is accounted for as a realized loss.

Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. On a quarterly basis, we consider available quantitative and qualitative evidence in evaluating potential impairment of our investments. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, the duration and extent to which the fair value is less than cost, and our intent and ability to hold the investment. We also consider potential adverse conditions related to the financial health of the issuer based on rating agency actions. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established. Our portfolio contains only highly rated fixed income securities. For fixed income securities with unrealized losses due to market conditions, we have the positive intent and ability to hold the investment for a period of time sufficient to allow a market recovery or to maturity. No single issue carries an unrealized loss in excess of $40,000 or more than 3% of cost. Management does not believe

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any unrealized losses represent an other-than-temporary impairment based on our evaluation of available evidence as of December 31, 2006.

The following table shows our investments with gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2006 and 2005 (dollars in thousands):

	Year Ended December 31, 2006
	Less Than Twelve Months					Over Twelve Months					Total
	Gross					Gross					Gross
	Unrealized			Fair		Unrealized			Fair		Unrealized			Fair
	Losses			Value		Losses			Value		Losses			Value
U.S. Government and agencies	$	(1	)	$	323	$	(83	)	$	3,959	$	(84	)	$	4,282
Municipal		(219	)		81,054		(211	)		33,183		(430	)		114,237
Corporate and other		(51	)		3,042		(146	)		6,151		(197	)		9,193
Total investments	$	(271	)	$	84,419	$	(440	)	$	43,293	$	(711	)	$	127,712

	Year Ended December 31, 2005
	Less Than Twelve Months					Over Twelve Months					Total
	Gross					Gross					Gross
	Unrealized			Fair		Unrealized			Fair		Unrealized			Fair
	Losses			Value		Losses			Value		Losses			Value
U.S. Government and agencies	$	—		$	—	$	(151	)	$	5,185	$	(151	)	$	5,185
Municipal		(362	)		47,058		(98	)		10,448		(460	)		57,506
Corporate and other		—			—		(301	)		11,858		(301	)		11,858
Total investments	$	(362	)	$	47,058	$	(550	)	$	27,491	$	(912	)	$	74,549

At December 31, 2006 and 2005, investments in fixed maturity securities with an approximate carrying value of $52.7 million and $54.3 million, respectively, were on deposit with regulatory authorities as required by insurance regulations.

4.   Income Taxes

Effective July 9, 2004, the date of our initial public offering, we terminated our tax allocation agreement with VIG and began filing separate federal income tax returns on a go forward basis. Prior to July 9, 2004, we were included in a consolidated income tax return filed by VIG. Under the tax allocation agreement with VIG, a company with taxable income pays tax equal to an amount that would have been paid had the company filed a separate return. A company with a taxable loss is paid a tax benefit currently to the extent that affiliated companies within the consolidated group utilizes that loss.

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

	2006			2005		2004
Current tax expense (benefit)	$	(3,281	)	$	7,479	$	23,037
Deferred tax expense (benefit)		5,942			2,288		(7,718	)
Total income tax expense	$	2,661		$	9,767	$	15,319

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Our effective tax rate differs from the statutory rate of 35% for the years ended December 31 as follows (dollars in thousands):

	2006			2005			2004
Statutory federal income tax rate	$	4,342		$	10,060		$	14,514
Increases (reductions) in tax resulting from:
Tax exempt interest		(1,983	)		(1,118	)		(346	)
State income tax		183			779			1,444
Other		119			46			(293	)
	$	2,661		$	9,767		$	15,319

Tax effects of temporary differences that give rise to significant portions of our deferred tax assets and deferred tax liabilities at December 31, 2006 and 2005 are as follows (dollars in thousands):

	2006		2005
Deferred Tax Assets:
Unearned and advance premiums	$	6,363	$	6,595
Net operating loss carryforward		5,470		6,529
Discounted unpaid losses		3,073		2,194
Deferred revenue		2,779		8,755
Bad debt		2,525		—
Capital loss — carryforward		725		—
Fixed assets		500		1,695
Claim reserves		226		461
Unrealized losses		241		285
Other		2,376		1,948
Total deferred tax assets		24,278		28,462
Deferred Tax Liabilities:
Deferred acquisition costs		8,353		8,559
Goodwill		6,319		4,975
Other		1		62
Total deferred tax liabilities		14,673		13,596
Deferred tax asset, net, before valuation allowance		9,605		14,866
Valuation allowance		725		—
Deferred tax asset, net	$	8,880	$	14,866

In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of our deferred tax assets will not be realized. Our ultimate realization of deferred tax assets is dependent upon our generation of future taxable income during the periods in which those temporary differences become deductible. We have not established a valuation allowance against deferred tax assets, other than discussed below, as we believe it is more likely than not the net deferred tax asset will be realized.

As of December 31, 2006, we have available for income tax purposes approximately $15.6 million in federal net operating loss carryforwards (“NOLs”), which may be used to offset future taxable income.

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We initially recorded a valuation allowance of $7.1 million for NOLs that were generated prior to the acquisition of a greater than 50% voting interest in our company, as these NOLs are subject to a number of acquisition related limitations. The NOLs generated prior to December 2000 are subject to annual limitation prescribed by the Internal Revenue Code Section 382 and losses generated prior to December 2001 are subject to separate return year (“SRLY”) limitations. We established a valuation allowance for the full amount of these NOLs as part of VIG’s purchase accounting of greater than 50% voting interest in our company as VIG determined they would not be able to realize these NOLs. Our separation from VIG has allowed us to evaluate these NOLs based on our expected taxable income and if we believe we will generate taxable income in future years to utilize these NOLs, the reversal of the valuation allowance and applicable tax benefits will reduce our goodwill balance related to the VIG acquisition. We were able to complete our evaluation of these NOLs in the fourth quarter of 2005 and determined that our beginning NOL balance was incorrectly calculated by VIG by approximately $3.1 million due to incorrect assumptions regarding tax utilization limitations. The additional NOL increased our NOL carryforward and valuation allowance to approximately $10.2 million. In addition, during our review, we further determined that we will generate taxable income in future years to utilize our NOLs and reversed our valuation allowance and reduced our goodwill balance related to the VIG acquisition in the amount of $10.2 million, the total value of our NOLs as determined by our analysis.

Our loss carryforwards expire as follows (dollars in thousands):

2019	$	7,444
2020		5,952
2021		90
2022		3
2023		2,140
	$	15,629

At December 31, 2006, we have available approximately $2.1 million capital loss carryforward resulting primarily from sales of securities executed in 2006 to realign a portion of our investment portfolio to better align our portfolio with our historical claims life. This capital loss carryforward, which may be carried forward for five years, may only be used to offset future realized capital gains. We recorded a valuation allowance of $725,000 for the full amount of the deferred tax asset resulting from this capital loss carryforward. We believe the available objective evidence, principally the capital loss carryforward being utilizable to offset only future capital gains, our current investment strategy, and a lack of significant historical realized capital gains, creates sufficient uncertainty regarding the realizability of its capital loss carryforward. As a result, it is more likely than not, that substantially all of the capital loss carryforward is not realizable.

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5.   Purchase Acquisitions

On December 31, 2004, we acquired certain assets of the retail agency and franchise operations of 21st Century Holding Company. The acquisition added 24 company owned retail stores and franchise operations consisting of 42 franchise locations operating in Florida. We paid $7.0 million at closing and up to an additional $2.5 million subject to certain performance criteria being met. The retail agency and franchise operations operate under the FED USA brand. Summarized below is an allocation of assets and liabilities acquired (dollars in thousands):

Assets acquired:
Cash	$	1,512
Other assets		129
Other intangible assets		4,397
Goodwill		2,474
Total assets	$	8,512
Liabilities acquired:
Unearned revenue	$	1,512
Total liabilities	$	1,512

The $4.4 million of other intangible assets acquired was allocated to brand name, which is not subject to amortization.

On July 19, 2005, we acquired the assets of IPA, an underwriting agency with operations in Michigan. IPA generates approximately $20.0 million in premiums annually. We paid $600,000 at closing to the owners of IPA, assumed certain liabilities for processing of claims and providing of customer service from existing business, and may pay up to an additional $1.3 million if certain performance criteria are met. During 2005 and 2006, we paid $246,000 and $502,400, respectively, of the $1.3 million to the previous owners of IPA for meeting certain performance criteria.

On March 14, 2006, we completed the acquisition of the 27% minority ownership interest of Space Coast Holdings, Inc. We paid approximately $3.2 million to the minority owners and recorded $3.2 million in goodwill. Consequently, our current ownership interest in Space Coast is 100%.

For the year ended December 31, 2006, we have paid $1.1 million in contingent purchase price adjustments related to prior acquisitions, $225,000 for the acquisition of two retail stores and $63,800 for the purchase of a franchise.

6.   Reinsurance

Current Reinsurance Status

As of December 31, 2005, AIC had two quota share reinsurance agreements in place for active programs where the cession ranged from 25% to 100%. In Florida, our underwriting agency, Space Coast Underwriters, produces business on behalf of AIC, and 25% of the business is ceded to FolksAmerica. In Georgia, AIC serves as direct front for an unaffiliated underwriting agency to which 100% of the business is ceded to their insurance company.

Effective May 1, 2006, our quota-share reinsurance agreement with FolksAmerica where we ceded 25% of business produced by Space Coast, our Florida underwriting agency was terminated.

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Historical Background

VIG transferred our insurance company subsidiaries to us on December 31, 2003. Before this time, these insurance companies had ceded 100% of the business that they wrote to VFIC as part of an intercompany reinsurance agreement. In connection with a reinsurance restructuring agreement, VFIC retained all liability with respect to any losses and allocated loss adjustment expenses occurring on or prior to December 31, 2003 on policies issued by our insurance companies, and retained all corresponding losses and loss adjustment expense reserves as of December 31, 2003. As a result, as of December 31, 2003, our insurance companies had no net loss or loss adjustment expense reserves. In connection with the acquisition of our insurance companies from VIG, this reinsurance agreement was terminated as of December 31, 2003, and our insurance companies began accruing losses and loss adjustment expenses, 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% reinsurance agreement as of December 31, 2003, our insurance companies have recorded losses and loss adjustment expenses in their respective statements of operations beginning January 1, 2004. Although VFIC remains liable as a reinsurer for all of our insurance companies’ losses and loss adjustment expenses associated with these policies occurring on or prior to December 31, 2003, we are subject to primary liability with respect to these policies. Consequently, we face exposure to credit risk with respect to VFIC’s ability to satisfy its obligations to us.

As of December 31, 2005, we separately included $7.2 million in other assets that was related to a receivable due from VIG as part of the transfer of the insurance companies to us at December 31, 2003. The $7.2 million was not included in the gross recoverable at December 31, 2005. We continue to believe that this receivable is due from VIG and have instituted appropriate legal proceedings to recover the full amount thereof. However, a loss for $7.2 million was included in selling, general and administrative expenses in the fourth quarter of 2006 when we set up a reserve equal to the full amount of the receivable. We established this reserve due to our uncertainty as to the collectibility of the receivable in light of the significant amount of claims made against VIG and VFIC as of December 31, 2006 in their bankruptcy and liquidation proceeding, respectively, and our creditor status in those proceedings.

In June, 2006, the Texas Department of Insurance placed VFIC, along with several of its affiliates, into rehabilitation and subsequently into liquidation. Due to VFIC’s liquidation status, AIC is working through certain procedures to effect its right to withdraw funds from the VFIC Trust. AIC has been working with the Special Deputy Receiver (the “SDR”) and his staff on this matter since VFIC was placed into liquidation. To date, the SDR has not taken issue with the validity of the VFIC Trust; however, we currently are negotiating with the SDR the manner in which the funds will be withdrawn from the VFIC Trust, which must then be approved by the Special Master of the Receivership Court. We have $23.1 million currently in a trust account to collateralize the $20.2 million gross recoverable from VFIC.

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

	2006						2005						2004
	Written			Earned			Written			Earned			Written			Earned
Direct	$	201,132		$	190,251		$	173,776		$	175,646		$	182,562		$	155,989
Assumed — affiliate		—			—			27,436			33,846			73,732			87,069
Assumed — non affiliate		85,048			101,148			119,992			105,063			25,431			18,776
Ceded — affiliate		—			—			(239	)		(687	)		80			(14,509	)
Ceded — non affiliate		(1,373	)		(3,289	)		(5,467	)		(16,069	)		(66,549	)		(52,984	)
Total	$	284,807		$	288,110		$	315,498		$	297,799		$	215,256		$	194,341

We are continuing to transition the non-standard personal automobile business written on all VIG insurance company subsidiaries to AIC and Insura. During this transitional period AIC or Insura will reinsure the new and

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renewal policies written by the VIG insurance company subsidiaries through a 100% quota share reinsurance agreement, whereby AIC will assume 100% of the underwriting results of the VIG insurance subsidiaries related to non-standard personal automobile polices produced by our underwriting agencies.

The amounts included in our balance sheets for the unpaid losses and loss adjustment expenses and unearned premium we would remain liable for in the event our reinsurers are unable to meet their obligations at December 31 are as follows (dollars in thousands):

	2006		2005
Unpaid loss and loss adjustment expense	$	21,590	$	19,169
Unearned premiums		1,221		3,137
Total	$	22,811	$	22,306

For the year ended December 31, 2006, we have ceded $5.9 million of paid losses and $6.8 million of incurred losses and loss adjustment expense to various reinsurers. For the year ended December 31, 2005, we ceded $29.2 million of paid losses and $6.1 million of incurred losses and loss adjustment expense to various reinsurers. These amounts are included as loss and loss adjustment expenses in our statements of operations for the years ended December 31, 2006 and 2005.

At December 31, 2006, $18.4 million was included in reserves for losses and loss adjustment expenses that reflect the amounts owed from AIC and Insura under reinsurance agreements with the VIG affiliated companies, including Hawaiian. AIC established the AFIC Trust to collateralize this payable, which currently holds $23.054 million in securities (the “AFIC Trust”). The AFIC Trust has not been drawn upon the SDR in Texas or the SDR in Hawaii. The SDRs will likely negotiate similar terms for withdrawal of funds from the AFIC trust as those agreed to in regards to the VFIC Trust.

Effective January 1, 2005, we reduced the amount of business we ceded to our reinsurers on all business written through our underwriting agencies in Illinois, Indiana, Missouri, New Mexico and South Carolina to zero. Our insurance companies retained 100% of this business.

Effective January 1, 2005, we entered into two quota share reinsurance agreements with Old American County Mutual Fire Insurance Company, where we will assume 100% of the business written through our underwriting agencies in the state of Texas.

Effective May 1, 2005, we amended our quota share reinsurance agreement entered into on May 1, 2004 to continue ceding 25% of the business written through our Florida underwriting agency to the unaffiliated reinsurer at substantially the same terms and conditions. This contract continues in force until terminated by us or our reinsurer at any April 30 with not less than 90 days prior notice. The reinsurance under this agreement is provided by Folksamerica, which is rated “A” by A.M. Best.

Effective May 1, 2006, our quota-share reinsurance agreement with FolksAmerica where we ceded 25% of business produced by Space Coast, our Florida underwriting agency, was terminated.

All of our quota share reinsurance agreements contain provisions for sliding scale commissions, under which the commission paid to us varies with the loss ratio results under each contract. The effect of this feature in the quota share reinsurance agreements is to limit the reinsurer’s aggregate exposure to loss and thereby reduce the ultimate cost to us as the ceding company. These features also have the effect of reducing the amount of protection relative to the quota share amount of premiums ceded by us. Before entering into these reinsurance agreements, and based on our prior operating history, we concluded that each agreement met the risk transfer test of SFAS No. 113 (“SFAS 113”), Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts as the reinsurers assume significant risk and have a reasonable possibility of significant loss.

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We have ceded premium to the Michigan Catastrophic Claims Association (“MCCA”), a mandatory facility in that state. In 2006, we ceded $1.8 million in written premiums and $735,000 in earned premium to MCCA.

AIC is a party to a 100% quota share reinsurance agreement with Hawaiian, which is ultimately a wholly-owned subsidiary of VIG. On November 4, 2004, Hawaiian was named among a group of four other named defendants and twenty unnamed defendants in a complaint filed in the Superior Court of the State of California for the County of Los Angeles alleging causes of action as follows: enforcement of coverage under Hawaiian’s policy of an underlying default judgment plaintiff obtained against Hawaiian’s former insured, who was denied a defense in the underlying lawsuit due to his failure to timely pay the Hawaiian policy premium; ratification and waiver of policy lapse and declaratory relief against Hawaiian; breach of implied covenant of good faith and fair dealing against Hawaiian with the plaintiff as the assignee of the insured; intentional misconduct as to the defendant SCJ ; and professional negligence as to the defendants Prompt Insurance Services, Paul Ruelas, and Anthony David Medina. SCJ, Prompt Insurance Services, Paul Ruelas, and Anthony David Medina are not affiliated with AIC. The plaintiff sought to enforce an underlying default judgment obtained against Hawaiian’s insured on September 24, 2004 in the amount of $35,000,643 and additional bad faith damages including punitive damages in the amount of $35.0 million. AIC, as a party to a 100% quota share reinsurance agreement, is sharing in the defense of this matter.

On August 8, 2005, we were served a copy of plaintiff’s Second Amended Complaint, which added a cause of action for fraud and deceit against all defendants, and a cause of action for negligent misrepresentation against Hawaiian and SCJ.

On January 31, 2006, Judge Bigelow absolved Hawaiian and SCJ of all counts plaintiff filed against them in this litigation on the trial court level by virtue of court order on motions for summary judgment that were submitted by both Hawaiian and SCJ. A partial dismissal without prejudice was entered as to defendant Paul Ruelas. Plaintiff filed a notice of appeal on April 18, 2006. On September 22, 2006, Hawaiian moved to stay appellate proceedings pursuant to an Order of Liquidation entered on August 21, 2006, in the Circuit Court for the State of Hawaii. Hawaiian and the other defendants thereto believe plaintiff’s allegations in this lawsuit are without merit and will continue to vigorously contest the claims brought by the plaintiff, and intend to exercise all available rights and remedies against them; however, the ultimate outcome of this matter is uncertain.

On October 2, 2006, The Court of Appeal of the State of California, Second Appellate District, Division Five, granted the stay order requested by Hawaiian, which effectively stayed the entire litigation proceeding. On December 11, 2006, the court modified its October 2, 2006 stay order by lifting it as to SCJ, causing the suit to proceed with SCJ as the sole defendant. Hawaiian filed a status update with the court on March 7, 2007 indicating that the liquidation proceeding for Hawaiian remains pending and that the August 21, 2006 Order of Liquidation entered by the Circuit Court of the State of Hawaii remains in full force and effect.

Effective August 1, 2005, we entered into novation agreements with several unaffiliated reinsurers who participated in a quota share reinsurance agreement in which we also participated. Pursuant to these agreements, we were substituted in place of these reinsurers assuming all rights, interests, liabilities and obligations related to the original quota share reinsurance agreement. As a result of these novation agreements, our participation in the original reinsurance agreement increased from 5% to 100% effective August 1, 2005. In consideration for our assumption of their liabilities, these reinsurers agreed to pay us an amount equal to their share of the liabilities under the original quota share agreement as of July 31, 2005. We received cash in the amount of $14.2 million in relation to this novation. The terms of this reinsurance agreement did not meet the risk transfer requirements according to FAS 113; therefore, this contract was accounted for as deposits according to the guidelines of SOP 98-7, “Deposit Accounting for Insurance and Reinsurance Contracts that do not Transfer Insurance Risk”. Under deposit accounting, the deposit liability should be adjusted based on the adjusted amount and timing of the cash flows. Changes in the carrying amount of the deposit liability should be reported as income or expense as appropriate. For the years ended December 31, 2006 and 2005, we have recognized $683,000 and $476,700, respectively, in income related to this novation. As of December 31, 2006, $635,000 is included in deferred revenue.

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Effective August 1, 2005, we entered into novation agreements with several unaffiliated reinsurers related to an assumed aggregate excess of loss reinsurance agreement for business produced in the state of Texas by one of our underwriting agencies, written by Old American and ceded to the reinsurers. These novation agreements eliminated excess of loss coverage that was not necessary so these agreements had no financial impact on us.

Effective October 1, 2005, we entered into commutation agreements with several unaffiliated reinsurers who participated in a quota share reinsurance agreement in which we were the direct writer. Pursuant to these agreements, we were substituted in place of these reinsurers assuming all rights, interests, liabilities and obligations related to the original quota share reinsurance agreement. In consideration for our assumption of their liabilities, these reinsurers agreed to pay us an amount equal to their share of the liabilities under the original quota share agreement as of September 30, 2005. As of December 31, 2005, we had received $4.5 million in relation to this commutation.

7.   Losses and Loss Adjustment Expenses

VIG transferred our insurance company subsidiaries to us on December 31, 2003. Before this time, these insurance companies had ceded 100% of the business that they wrote to VFIC as part of an intercompany reinsurance agreement. In connection with a reinsurance restructuring agreement, VFIC retained all liability with respect to any losses and allocated loss adjustment expenses occurring on or prior to December 31, 2003 on policies issued by our insurance companies, and retained all corresponding losses and loss adjustment expense reserves as of December 31, 2003. As a result, as of December 31, 2003, our insurance companies had no net loss or loss adjustment expense reserves. In connection with the acquisition of our insurance companies from VIG, this reinsurance agreement was terminated as of December 31, 2003, and our insurance companies began accruing losses and loss adjustment expenses, 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.

The following table provides a reconciliation of the beginning and ending reserves for unpaid losses and loss adjustment expenses, presented in conformity with generally accepted accounting principles, or GAAP, for the periods indicated:

	Years Ended December 31,
	2006			2005			2004
	(Dollars in thousands)
Balance at the beginning of the period	$	142,977		$	98,863		$	58,507
Less: Reinsurance recoverable		19,169			43,363			58,507
Less: Deposits		7,699			—			—
Net balance as of the beginning of the period		116,109			55,500			—
Incurred related to:
Current year		190,580			199,953			128,969
Prior years		(5,234	)		(8,745	)		—
Paid related to:
Current year		100,320			113,203			73,469
Prior years		62,714			17,396			—
Net balance as of the end of the period		138,421			116,109			55,500
Plus: Reinsurance recoverable		21,590			19,169			43,363
Plus: Deposits		2,558			7,699			—
Balance at the end of the period including deposits	$	162,569		$	142,977		$	98,863

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We had favorable reserve development relating to prior year losses of $5.2 million in 2006 and $8.7 million in 2005. These reserve redundancies resulted from decreased estimates of the ultimate liability for losses and related loss adjustment expense for claims reported in previous periods.

In the fourth quarter of 2006, management determined that a reclassification would provide improved presentation for the liability for reserves for loss adjustment expenses that had previously been classified as deferred revenue liability. We reduced our consolidated deferred revenue liability for the year ended December 31, 2005 while increasing our reserve for losses, loss adjustment expenses and deposits. This reclassification resulted in an adjustment to our statements of cash flows for the years ended December 31, 2005 and 2004. However, the reclassification does not affect “net cash provided by operating activities” because the reclassification was between two components of “net cash provided by operating activities”. The reclassification as of December 31, 2005 and December 31, 2004 was $16.0 million and $5.8 million, respectively and has been reflected in the table above.

Our recorded loss, loss adjustment expense reserves and deposit liabilities of $162.6 million on a gross basis and $138.4 million on a net basis are our best estimates as of December 31, 2006.

8.   Policy Acquisition Expenses

Policy acquisition expenses, primarily commissions, premium taxes and underwriting expenses related to issuing a policy, are deferred and charged against income ratably over the terms of the related policies.

Our components of deferred policy acquisition costs and the related policy acquisition expenses amortized to expense for our insurance companies at December 31, 2006 and December 31, 2005 are as follows (dollars in thousands):

	Twelve Months Ended
	December 31,
	2006			2005
Beginning deferred acquisition costs (“DAC”)	$	24,453		$	19,118
Additions		73,224			80,491
Amortization of DAC		(73,812	)		(75,156	)
Ending deferred acquisition costs	$	23,865		$	24,453

9.   Goodwill and Other Intangible Assets

We adopted SFAS No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002. With the exception of the pooling of historical financial results relative to acquisitions of businesses under common control, we have accounted for all other business combinations using the purchase method of accounting. In business combinations using the purchase method of accounting, the excess cost of the acquisition is allocated to the assets acquired (including identified intangible assets) and liabilities assumed based on their estimated values. The excess of cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed is an asset referred to as “excess of cost over net assets acquired” or “goodwill.” Indirect and general expenses related to business combinations are expensed as incurred.

On January 1, 2002, we ceased goodwill amortization. We test annually for impairment or more frequently if impairment indicators arise. Intangible assets with finite lives are amortized over their useful lives and are periodically reviewed to ensure that no conditions exist indicating the recorded amount of intangible assets is not recoverable from future undiscounted cash flows.

We evaluate impairment of goodwill and indefinite life intangibles in our agency reporting unit, as the insurance company reporting unit has no associated goodwill or indefinite life intangibles. Goodwill impairment is based upon (1) the historical financial performance of the unit; (2) the most recent financial performance of the unit;

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(3) our financial forecast for the unit; (4) information regarding publicly available financial terms of recent transactions in the industry; and (5) other publicly available information. We perform an impairment test annually as of September 30. The test performed as of September 30, 2006 indicated there was no goodwill impairment.

As of December 31, 2006, our financial statements include $65.3 million of goodwill, $14.7 million of indefinite life intangible assets and $3.4 million of intangible assets having estimated lives of between two and 20 years and a weighted average life remaining of approximately 12 years. We expect $46.7 million of our goodwill and other intangible assets to be fully deductible for tax purposes.

Other intangible assets at December 31, 2006, 2005 and 2004 are as follows (dollars in thousands):

	2006					2005					2004
	Gross					Gross					Gross
	Carrying		Accumulated			Carrying		Accumulated			Carrying		Accumulated
	Amount		Amortization			Amount		Amortization			Amount		Amortization
Amortizable intangible assets:
Non-compete agreements	$	4,354	$	(3,591	)	$	4,354	$	(2,313	)	$	2,585	$	(1,593	)
Agency relationships		3,484		(798	)		3,484		(624	)		3,120		(457	)
Non-amortizable intangible assets:
Brand name		14,706		—			14,706		—			14,706		—
	$	22,544	$	(4,389	)	$	22,544	$	(2,937	)	$	20,411	$	(2,050	)

Amortization expense was $1.5 million, $887,000, and $738,000 for the years ended December 31, 2006, 2005 and 2004, respectively.

The following table represents our anticipated intangible amortization over the next five years, assuming no future acquisitions, (dollars in thousands):

	2007		2008		2009		2010		2011
Total	$	937	$	174	$	174	$	174	$	174

The changes in the carrying amount of goodwill as of December 31, 2006 and 2005 and for the years ended December 31, 2006 and 2005 are as follows (dollars in thousands):

Balance, December 31, 2004	$	67,430
Goodwill acquired		3,427
Other adjustments		(9,848	)
Balance, December 31, 2005		61,009
Goodwill acquired		3,571
Other adjustments		708
Balance, December 31, 2006	$	65,288

As of December 31, 2006, other adjustments to goodwill are for contingent purchase consideration on certain acquisitions.

As of December 31, 2005, other adjustments to goodwill included the valuation allowance for NOLs of $10.2 million offset by changes to the contingent purchase consideration on certain acquisitions and final adjustments to purchase price allocations.

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10.   Property and Equipment

Property and equipment is stated at cost, less accumulated depreciation, and consists primarily of computer and telephone equipment, furniture and fixtures and leasehold improvements. Excluding leasehold improvements, depreciation is computed using the straight-line method over the estimated useful lives of the assets, typically ranging from three to five years. Leasehold improvements are depreciated over the shorter of the useful life or the remainder of the lease term.

A summary of property and equipment at December 31, 2006 and 2005 is as follows (dollars in thousands):

	2006			2005
Data processing equipment	$	5,629		$	4,431
Furniture and office equipment		3,106			2,916
Software		4,763			6,311
Leasehold improvements		3,282			2,861
Other		4,441			76
		21,221			16,595
Accumulated depreciation		(10,932	)		(11,775	)
Net property and equipment	$	10,289		$	4,820

Depreciation expense was $2.9 million, $3.3 million, and $3.5 million for the years ended December 31, 2006, 2005 and 2004, respectively.

For the year ended December 31, 2006 we recognized a realized loss on disposal of assets of $432,000 and recognized a realized gain of $13,000 for the year ended December 31, 2005.

During the fourth quarter of 2005, we determined that the outside vendor used to develop our new enterprise system had not met the terms of the development and license agreement and had breached the contract. We also determined that we would not be able to obtain any benefit from our investment in this project. We have since initiated litigation and are seeking relief to the full extent possible (See “Legal Proceedings” contained elsewhere in this report). As a result, the $2.4 million invested in this project was written down to zero in 2005.

11. Related Party Transactions

We have provided various services for VIG and its subsidiaries, including underwriting, premium processing, and claims processing. Accordingly, for the years ended December 31, the accompanying consolidated statements of operations reflect income from these services as follows (dollars in thousands):

	2006		2005		2004
Commission income	$	—	$	594	$	5,703

As of August 30, 2005, we and our subsidiaries are no longer affiliated with VIG (See Note 1). As a result, there are no amounts related to contracts with VIG and its subsidiaries included in our consolidated balance sheet that would be considered related party.

As part of the terms of the acquisition of AIC and Insura, VIG has indemnified us for any losses due to uncollectible reinsurance related to reinsurance agreements entered into with unaffiliated reinsurers prior to December 31, 2003. As of December 31, 2006, all such unaffiliated reinsurers had A.M. Best ratings of “A−” or better.

We lease six of our Insure One retail stores in Chicago, Illinois from ATR Investments, LLC or entities controlled by ATR Investments. The former president of our retail division, Alan T. Rasof, is the sole owner and manager of ATR Investments. These six leases have terms ranging from 3 to 4 years and expiration dates ranging

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from 2007 to 2011. The leases relate to properties with square footage ranging from approximately 1,200 to 1,800 square feet and provide for monthly rental ranging from $2,400 to $4,750. The total rent due under the leases during their term is approximately $860,000. As of December 31, 2006, we have made rent payments to ATR Investments of approximately $137,000. In some instances, we also have engaged Captain Management Services, Ltd. to remodel our retail store locations. Captain Management is wholly owned by Mr. Rasof. For the year ended December 31, 2006, we paid Captain Management approximately $352,000 relating to remodeling and build out services performed for 15 of our retail locations in Illinois and Indiana. We were party to a consulting agreement with ATR Investments from June 1, 2006 through October 8, 2006 pursuant to which ATR Investments provided us with certain consulting services, including, without limitation, marketing, management and operational services relating to new and existing and competitor retail store locations and developing retail location site selection criteria. For the year ended December 31, 2006, we paid ATR Investments and Captain Management Services an aggregate amount of $135,000 for consulting services. On March 6, 2007, we announced the resignation of Mr. Rasof.

12.   Regulatory Restrictions

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.

Our insurance company subsidiaries are subject to risk-based capital standards and other minimum capital and surplus requirements imposed under applicable state laws, including the laws of their state of domicile, 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 company subsidiaries to report their results of risk-based capital calculations to state departments of insurance and the NAIC.

Any failure by one of our insurance company subsidiaries 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, 2006 each of our insurance company subsidiaries maintained a risk-based capital level in excess of an amount that would require any corrective actions on our part.

State insurance laws restrict the ability of our insurance company subsidiaries to declare stockholder dividends. These subsidiaries may not make an “extraordinary dividend” until 30 days after the applicable commissioner of insurance has received notice of the intended dividend and has not objected in such time or until the commissioner has approved the payment of the extraordinary dividend within the 30-day period. In most states, an extraordinary dividend is defined as any dividend or distribution of cash or other property whose fair market value, together with that of other dividends and distributions made within the preceding 12 months, exceeds the greater of 10.0% of the insurance company’s surplus as of the preceding December 31 or the insurance company’s net income for the 12-month period ending the preceding December 31, in each case determined in accordance with statutory accounting practices. In addition, an insurance company’s remaining surplus after payment of a dividend or other distribution to stockholder affiliates must be both reasonable in relation to its outstanding liabilities and adequate to its financial needs. In 2007, our insurance companies may pay up to $11.1 million in ordinary dividends

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to us without prior regulatory approval. However, the maximum dividend capacity is not immediately available in 2007 due to the dividend payment of $11.5 million by our insurance company subsidiaries in December 2006.

13.   Notes Payable

On December 31, 2004, our newly formed trust subsidiary, Affirmative Insurance Holdings Statutory Trust I (“Trust Subsidiary I”), completed a private placement of $30.0 million of 30 year floating rate trust preferred securities. Simultaneously, we borrowed $30.9 million from Trust Subsidiary I and contributed $29.0 million to AIC’s policyholders’ surplus. The trust preferred securities, which can be redeemed in whole or in part by the issuer after five years, bears an initial interest rate of 7.545 percent until December 15, 2009, at which time the securities will adjust quarterly to the 90-day LIBOR rate plus 3.6 percentage points. As of December 31, 2006 the note balance was $30.9 million.

On June 1, 2005, our newly formed trust subsidiary, Affirmative Insurance Holdings Statutory Trust II (“Trust Subsidiary II”), completed a private placement of $25.0 million of 30 year floating rate trust preferred securities. Simultaneously, we borrowed $25.0 million from Trust Subsidiary II and the net proceeds from this borrowing, along with cash from operations, were used to purchase the 2.0 million shares of our common stock as discussed in Note 16. The trust preferred securities, which can be redeemed in whole or in part by the issuer after five years, bear an initial interest rate of 7.792% until June 15, 2010, at which time they will adjust quarterly to the 90-day LIBOR rate plus 355 basis points. As of December 31, 2006 the note balance was $25.8 million.

14.   Commitments and Contingent Liabilities

Employee agreements.  We have entered into employment agreements with our key executive officers, Kevin R. Callahan, Chief Executive Officer, Mark E. Pape, Executive Vice President and Chief Financial Officer; M. Sean McPadden, Executive Vice President and Robert A. Bondi, Executive Vice President and Chief Operating Officer. These agreements grant these individuals the right to receive certain benefits, including base salary, should the executives be terminated other than for cause.

Service agreements.  On October 16, 2006, we entered into a master services agreement with Accenture LLP under which we will outsource substantially all of our IT operations to Accenture, including our data center, field support and application management. The initial term of the agreement is ten years, although it may be terminated for convenience by us at any time upon six month’s notice after the first two years, subject to the payment of certain stranded costs and other termination fees.

Operating leases.  As of the year ended December 31, 2006, we leased an aggregate of approximately 543,851 square feet of office space for our agencies, insurance companies and retail stores in various locations throughout the United States.

The office space of approximately 543,851 square feet includes a new lease that was entered into in 2006 for approximately 56,875 square feet of office space in Burr Ridge, Illinois. We officially occupied the office space on January 1, 2007, while simultaneously moving from our Bedford Park, Illinois location where we leased approximately 96,722 square feet of office space. The lease for the office space in Bedford Park was terminated on December 31, 2006.

The following table identifies our contractual obligations by payment due period as of December 31, 2006 (dollars in thousands):

	2007		2008		2009		2010		2011		2012+		Total
Consideration due for acquisitions(1)	$	1,023	$	—	$	—	$	—	$	—	$	—	$	1,023
Operating leases(2)		8,245		6,806		5,754		3,246		2,108		9,400		35,560
Notes payable		—		—		—		—		—		56,702		56,702

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	2007		2008		2009		2010		2011		2012+		Total
Interest on notes payable		4,212		4,212		4,212		4,212		4,212		92,333		113,393
Reserves for loss and loss adjustment expense(3)		101,438		35,706		13,991		6,696		3,595		1,143		162,569
Total	$	114,918	$	46,724	$	23,957	$	14,154	$	9,915	$	159,578	$	369,247

(1)	Consists primarily of payments due in 2006 related to the asset purchase of InsureOne Independent Agency, LLC and Fed USA.
(2)	Consists primarily of rental obligations under real estate leases related to our retail operations and our corporate offices.
(3)	The payout pattern for reserves for losses and loss adjustment expenses are based upon historical payment patterns and do not represent actual contractual obligations. The timing and amount ultimately paid can and will vary from these estimates.

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

In December 2003, InsureOne Independent Agency, LLC (“InsureOne”), American Agencies General Agency, Inc. and Affirmative Insurance Holdings, Inc. (collectively “Affirmative”) brought action in the Circuit Court of Cook County, Illinois to enforce non-compete and non-solicitation agreements entered into with James Hallberg, the former president of InsureOne, a wholly-owned subsidiary, and eight former employees of InsureOne and two of Hallberg’s family trusts. The court entered interim orders prohibiting all defendants, including Hallberg, from hiring any employees of InsureOne or of plaintiffs’ other underwriting agencies. On November 9, 2005 upon the close of Affirmative’s case, the court ruled that the following counts from our 5th Amended Verified Complaint would remain in the case to be considered until the close of trial: 1) breach of contract by James P. Hallberg; 2) breach of contract by James P. Hallberg Gift Trust and Patricia L. Hallberg Gift Trust; and 3) breach of contract by William Hallberg. James Hallberg’s currently pending counterclaims include breach of contract, fraud, and breach of fiduciary duty. The Hallberg family gift trusts have also asserted a single counterclaim that alleges fraud and breach of fiduciary duty in relation to the purchase of that same 20% minority interest in InsureOne in 2003. We are seeking between $15 and $23 million in damages for lost profits and diminution in value. James Hallberg and the Hallberg family gift trust are seeking combined damages of at least $4,530,482. The trial and post-trial briefing of this matter are complete. The court is expected to render judgment in the case in the first half of 2007.

Affirmative Insurance Holdings, Inc. and Affirmative Property Holdings, Inc. brought action against Business Risk Technology, Inc. and Steven M. Repetti (“BRT”) in the Circuit Court of the 17th Judicial Circuit, Broward County, Florida on January 6, 2006 for fraudulent inducement, breach of contract, breach of the covenant of good faith and fair dealing, and for declaratory and supplemental relief arising from the defendant’s wrongful conduct and contractual breaches. The details of such allegations are set forth in the petition. This action involves our enforcement of certain rights under a software license agreement we entered with BRT wherein BRT agreed to develop and provide us with a complete, turnkey software system for use by our various affiliates. Among the requested relief, we are seeking declaratory relief, a return of confidential and proprietary information, monetary damages, attorneys’ fees, reasonable pre-judgment and post-judgment interest, and any other relief the court deems just. On April 27, 2006, BRT counterclaimed for breach of contract, unjust enrichment, fraud, unfair and deceptive trade practices and libel. Subsequently, the court dismissed the unfair and deceptive trade practices and libel claims without prejudice and provided BRT with leave to amend its complaint in ten (10) days; however, BRT did not

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amend. The case is in discovery at this time. We are vigorously prosecuting the claims against the defendants and are exercising all available rights and remedies against them.

One of our insurance subsidiaries, AIC, was the subject of a purported class action in the Circuit Court of the 3rd Judicial Circuit, Madison County, Illinois in a second-amended complaint wherein Plaintiff alleged that AIC committed fraud and misrepresentation by 1) falsely stating “it would pay only a stated fee for a rental car when, in fact, it would pay more than the stated fee;” 2) falsely stating “that a car could be rented for this stated fee when, in fact, a car was not available for rental at this amount;” 3) falsely stating “the facts of the obligation of it and its insureds when one of its insureds was involved in an accident with a third-party such as plaintiff and the members of the Class in that it stated that its obligation with respect to a rental car was limited to the stated fee per day it said it would pay when, in fact, its insured might be liable for a greater amount;” and 4) falsely stating “that it would not pay an amount for rental that would allow Illinois consumers to rent a car of the same or similar kind and quality as that which was damaged, when, in fact, it sometimes did pay such an amount.” The plaintiff sought declaratory relief as to the underlying action, specific relief concerning the class action in the form of various court orders; reasonable attorneys’ fees, compensatory damages in an amount less than $75,000 per class member, and pre-judgment and post-judgment interest. The case concluded on December 18, 2006, when AIC obtained a motion for summary judgment in its favor on the grounds of mootness. Plaintiff did not appeal.

Affirmative Insurance Holdings, Inc. and Affirmative Insurance Company v. Nance, Meadows, Saeger, Wright and Does 1-10: Affirmative Insurance Holdings, Inc. and Affirmative Insurance Company (referred to herein collectively as “Affirmative”) brought action against certain officers and directors of Vesta Fire Insurance Corporation and its parents and/or subsidiaries, including, Hopson B. Nance, E. Murray Meadows, Paul H. Saeger, Jr., Fred H. Wright, and Does 1-10 in the United States District Court of the Northern District of Alabama, Southern Division, on December 28, 2006, for negligent misrepresentation, fraud, tortuous interference with contractual relations, breach of fiduciary duty, negligence and conversion. The details of such allegations are set forth in the petition. The case involves an action by Affirmative to recover $7.2 million of Affirmative’s funds used improperly by Defendants to satisfy a debt of one of Vesta Insurance Group, Inc.’s subsidiaries. Among the requested relief, Affirmative seeks judgment against the Defendants for $7.2 million, plus prejudgment interest and punitive damages. This matter subsequently was transferred to the U.S. Bankruptcy Court for the Northern District of Alabama for pre-trial proceedings in connection with the bankruptcy proceeding of Vesta Insurance Group, Inc. We are vigorously prosecuting the claims against the defendants and are exercising all available rights and remedies against them.

Assessments.  Recently, two of our owned underwriting agencies were subject to a routine sales and use tax audit conducted by the State of Texas. The examiner for the State of Texas has now completed his audit report and delivered an audit assessment to us. The examiner’s report asserts that, for the period from January 2002 to December 2005, we should have collected and remitted approximately $2.9 million in sales tax derived from claims services performed by our underwriting agencies for policies sold by these underwriting agencies and issued by Old American County Mutual Insurance Company, an unaffiliated insurance company, through a fronting arrangement. The assessment includes an additional $412,000 for accrued interest and penalty for a total assessment of $3.3 million. We believe that these services are not subject to sales tax, are vigorously contesting the assertions made by the state, and are exercising all available rights and remedies available to us. On October 19, 2006, we responded to the assessment by filing petitions with the Comptroller of Public Accounts for the State of Texas requesting a redetermination of the tax due and a hearing to present written and oral evidence and legal arguments to contest the imposition of the asserted taxes. As a result of the timely filing of these petitions, an administrative appeal process has commenced and the date for payment is delayed until the completion of the appeal process. Such appeals routinely take up to three years and much longer for complex cases. As such, the outcome of this tax assessment will not be known for a commensurate amount of time. At this time, we are uncertain of the probability of the outcome of our appeal. Additionally, we cannot reasonably estimate the ultimate liability at this time. We have not made an accrual for this as of December 31, 2006, as we do not believe this meets the requirements of FAS 5, Accounting for Contingencies.

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Notes to Consolidated Financial Statements — (Continued)

15.   Credit Facility

On August 6, 2004, we entered into a credit agreement (the “Credit Agreement”) with The Frost National Bank, effective July 30, 2004, which provided us with a senior secured credit facility. On August 7, 2006, we entered into a Fourth Amendment to our Credit Agreement dated July 30, 2004, which amended certain provisions of the Credit Agreement. The Fourth Amendment extended the term to July 30, 2008, modified certain affirmative and negative covenants, and increased the revolving commitment to $20.0 million. Under this credit facility, the maximum amount available to us from time to time was $20.0 million, which may include up to $20.0 million under a two-year revolving line of credit, up to $10.0 million in five-year term loans and up to $10.0 million in five-year stand-by letters of credit. The borrowings under our credit facility would accrue interest based on the 90-day LIBOR rate plus 150 basis points and we would pay letter of credit fees based on an annual rate of 75 basis points. Our obligations under the credit facility were guaranteed by our material operating subsidiaries (other than our insurance companies) and were secured by a first lien security interest on all of our assets and the assets of our material operating subsidiaries (other than our insurance companies), including a pledge of 100% of the stock of AIC. The credit facility contained certain financial covenants, which included combined ratio, risk-based capital requirement, fixed charge coverage ratio, consolidated net worth and consolidated net income requirements and other restrictive covenants governing distributions and management changes. The proceeds were available to issue letters of credit securing our obligations under reinsurance agreements, to fund general working capital for our agency operations, capital surplus for our insurance companies and to finance acquisition activities. During 2005, we executed letters of credit under this credit facility of approximately $2.3 million to collateralize an assumed reinsurance contract with certain of our reinsurers, all of which were released on December 1, 2005. Total fees were approximately $13,000.

Our Credit Agreement required us to provide the bank with written notification and documents related to certain events. On August 12, 2005 we entered into a First Amendment to Credit Agreement and Waiver of Defaults to the credit facility which amended and waived certain notice requirements of the Credit Agreement and waived all existing defaults and all events of default related to written notice requirements related to certain acquisitions of business in December 2004 and January, February, and July 2005, the repurchase of shares in June of 2005, and the issuance of trust preferred securities in December of 2004 and June of 2005.

Under the terms of our Credit Agreement, we were required to file our Annual Report on Form 10-K on or before March 31, 2006. Frost Bank waived, for a certain period of time, our compliance with the above covenant of the Credit Agreement, and we filed our Annual Report on Form 10-K within the waiver period. All other terms of the Credit Agreement are unaffected by this waiver.

As of December 31, 2006, there were no outstanding loan amounts due under the above mentioned credit facility, and we were in compliance with all of our financial and other restrictive covenants.

On January 31, 2007, we entered into a $220.0 million senior secured credit facility (the “Facility”) provided by a syndicate of lenders, including Credit Suisse, Cayman Islands Branch, as Administrative Agent and Collateral Agent. The Facility provides for a $200.0 million senior term loan facility and a revolving facility of up to $20.0 million, depending on our borrowing capacity. On March 8, 2007, we added The Frost National Bank, N.A. to the Facility when we received approval of the First Amendment to the Facility and executed a joinder agreement whereby Frost became the provider of an initial revolving credit commitment of $15.0 million. The revolving portion of the Facility includes an option to increase the $20.0 million principal amount of revolving loans available thereunder by up to an additional $20.0 million and a $2.0 million sublimit for letters of credit. Our obligations under the Facility are guaranteed by our material operating subsidiaries (other than our insurance companies) and are secured by a first lien security interest on all of our assets and the assets of our material operating subsidiaries (other than our insurance companies), including a pledge of 100% of the stock of AIC. The facility contains certain financial covenants, which include capital expenditure limitations, minimum interest coverage requirements, maximum leverage ratio requirements, minimum risk-based capital requirements, maximum combined ratio

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limitations, minimum fixed charge coverage ratios and a minimum consolidated net worth requirement, as well as other restrictive covenants.

Concurrently with entering into the Facility, the Company borrowed $200.0 million (the “Borrowing”) under the term loan portion of the Facility to finance its acquisition of USAgencies and to pay related costs and expenses. The principal amount of the Borrowing is payable in quarterly installments of $500,000, with the remaining balance due on the seventh anniversary of the closing of the Facility. Beginning in 2008, we are also required to make additional annual principal repayments that are to be calculated based upon our financial performance during the preceding fiscal year. In addition, certain events, such as the sale of material assets or the issuance of significant new equity, necessitate additional required principal repayments. As of March 14, 2007, we have no borrowings under the revolving portion of the Facility.

16.   Stockholders’ Equity

On March 12, 2004, we issued 35,216 shares of our common stock to E.B. Lyon, III, a minority stockholder, at a purchase price of $9.76 per share, for aggregate consideration of $343,809 in cash.

On March 12, 2004, we issued 39,944 shares of our common stock to LBL Partners, Ltd., a minority stockholder, at a purchase price of $9.76 per share, for aggregate consideration of $389,967 in cash.

On March 12, 2004, we issued 19,623 shares of our common stock to Thomas E. Mangold, our former chief executive officer, at a purchase price of $9.76 per share, for aggregate consideration of $191,576 in cash. We believe that the fair value of our common stock issued to Mr. Mangold was higher than our historical carrying value we assigned to our shares of common stock for this transaction. In light of our proposed public offering, we used a projected public valuation model to determine the estimated fair value of the common shares issued to Mr. Mangold. Based on the projections, we recorded $44,000 of compensation expense in 2004.

On March 12, 2004, we issued 19,886 shares of our common stock to VIG in connection with the exercise of warrants, with an exercise price of $0.08 per share, which were originally purchased by VIG in 2000.

On March 12, 2004 we filed an Amendment and Restated Certificate of Incorporation increasing the number of shares of authorized common stock from 40 million to 75 million.

On July 9, 2004, we completed our initial public offering of our common stock. We issued 4,420,000 additional shares of our common stock and VIG sold 3,750,000 shares of our common stock that they owned, at an initial public offering price of $14 per share. On July 26, 2004, our underwriters exercised their option to purchase an additional 663,000 shares from us, and an additional 562,500 shares from VIG. Our net proceeds from the offering were $65.3 million, after deducting our estimated offering expenses. We contributed $64.3 million of the net proceeds to our insurance companies in order to increase their statutory surplus. This additional capital allowed us to reduce our reinsurance purchases and retain more gross premiums. The remaining $1.0 million of net proceeds were held for general corporate purposes.

On September 28, 2004, we issued 80,837 shares of our common stock to VIG in connection with the exercise of options, with an exercise price of $7.59 per share, which we originally issued to VIG on June 30, 2000.

In January 2005, we issued 6,734 shares of restricted common stock to certain members of our board of directors, in lieu of cash as their annual retainer. In both February and May 2005, we issued 7,500 shares of restricted common stock to certain members of our board of directors for compensation related to services performed. In November 2005, 7,000 shares of restricted common stock that had been issued were cancelled due to the resignation of certain board members. We are expensing the amount to compensation expense over the service period for the remaining issued shares. Total compensation expense recognized for the years ended December 2006 and December 2005 was zero and approximately $108,000, respectively.

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On June 1, 2005, we purchased 2,000,000 shares of treasury stock from VIG for $14.00 per share. We recorded the purchase at cost. The purchase was funded with the proceeds from our new trust preferred securities, as discussed in Note 13, and with cash from operations.

In August and September 2005, we issued 3,657 shares of our common stock upon the exercise of options.

In November 2005, we issued 623,610 shares of our common stock to Thomas E. Mangold upon the exercise of options. In addition, we purchased 50,963 shares of stock from Thomas E. Mangold for $14.63 per share, which was market value on the date of the transaction.

In December 2005, we issued 3,000 shares of restricted common stock to Mark E. Pape, Executive Vice President and Chief Financial Officer, which vested immediately. Total compensation recorded at the date of the grant was $42,480.

In May 2006, we issued 2,925 shares of our common stock upon the exercise of options.

On May 9, 2006, the board of directors approved a share repurchase program for up to $15.0 million of our common stock over the subsequent 12 months. From time to time, repurchases may be made in the open market or through privately negotiated transactions at the discretion of management based on management’s assessment of market conditions and other relevant factors. We expect to fund the purchases initially through internally available funds. 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.

In June 2006, we issued 5,300 shares of our common stock upon the exercise of options.

In August 2006, we issued 2,104 shares of our common stock upon the exercise of options.

In October 2006, we issued 70,000 shares of restricted stock to Kevin R. Callahan, Chief Executive Officer, which vests ratably over five years. Total compensation recorded for the year ended December 31, 2006 was approximately $34,000.

In October 2006, we issued 37,285 shares of our common stock upon the exercise of options.

In November 2006, we issued 20,000 shares of restricted stock to Joseph G. Fisher, Senior Vice President and General Counsel, which vests ratably over five years. Total compensation recorded for the year ended December 31, 2006 was approximately $5,000.

In November 2006, we issued 25,000 shares of restricted stock to Robert A. Bondi, Executive Vice President and Chief Operations Officer, which vests ratably over five years. Total compensation recorded for the year ended December 31, 2006 was approximately $7,000.

In November 2006, we issued 61,804 shares of our common stock upon the exercise of options.

During the year ended December 31, 2006, we paid dividends to holders of our common stock in an aggregate amount of $1.2 million.

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17.   Earnings per Share

The provisions of SFAS No. 128 (“SFAS 128”) Earnings per Share require presentation of both basic and diluted earnings per share. A reconciliation of the numerators and denominators of the basic and diluted earnings per share computations as required by SFAS 128 is presented below:

	Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
	(Dollars in thousands, except number of
	shares and per share amounts)
For the year ended December 31, 2006
Basic Earnings per Share
Net Income	$	9,744		15,295,022	$	0.64
Diluted Earnings per Share
Net Income	$	9,744		15,295,022	$	0.64
Effect of Dilutive Securities		—		49,962		(0.01	)
	$	9,744		15,344,984	$	0.63
For the year ended December 31, 2005
Basic Earnings per Share
Net Income	$	18,305		15,774,387	$	1.16
Diluted Earnings per Share
Net Income	$	18,305		15,774,387	$	1.16
Effect of Dilutive Securities		—		218,686		(0.02	)
	$	18,305		15,993,073	$	1.14
For the year ended December 31, 2004
Basic Earnings per Share
Net Income	$	24,433		14,018,530	$	1.74
Diluted Earnings per Share
Net Income	$	24,433		14,018,530	$	1.74
Effect of Dilutive Securities		—		195,152		(0.02	)
	$	24,433		14,213,682	$	1.72

18.  Stock-Based Compensation

Effective January 1, 2006, we account for our stock-based compensation in accordance with FASB Statement No. 123R (“SFAS 123R”), Share-Based Payment.

In December 2004, the FASB issued SFAS 123R, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25 (“APB25”), Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. This standard was effective for public companies at the beginning of the first annual period beginning after June 15, 2005. In March 2005, the SEC issued Staff Accounting Bulletin 107 (“SAB 107”) to assist preparers by simplifying some of the implementation challenges of SFAS 123R. In particular, SAB 107 provides supplemental implementation guidance on SFAS 123R, including guidance on valuation methods, classification of compensation expense, inventory capitalization of share-based compensation cost, income tax effects, disclosures in Management’s

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Discussion and Analysis and several other issues. We applied the principles of SAB 107 in conjunction with our adoption of SFAS 123R.

SFAS 123R permits us to adopt its requirements using one of two methods:

1. A “modified prospective” method in which compensation cost is recognized beginning with the adoption date (a) based on the requirements of SFAS 123R for all share-based compensation payments granted after the adoption date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the adoption date that remain unvested on the adoption date.

2. A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all periods presented or (b) prior interim periods of the year of adoption.

We adopted SFAS 123R on January 1, 2006 using the modified prospective method.

For the year ended December 31, 2006, we have recognized approximately $595,000 before income taxes ($468,000 after income taxes) in share-based compensation expense under the requirements of SFAS 123R resulting in a negligible impact on earnings per share.

As permitted by SFAS 123, until December 31, 2005, we accounted for share-based payments to employees using APB 25’s intrinsic value method and, as such, generally recognized no compensation cost on grants of employee stock options. Had we adopted SFAS 123R in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share in Note 2.

In connection with our initial public offering, on May 25, 2004, our board of directors adopted and our stockholders approved the 2004 Stock Incentive Plan (“2004 Plan”) to enable us to attract, retain and motivate eligible employees, directors and consultants through equity-based compensatory awards, including stock options, stock bonus awards, restricted and unrestricted stock awards, performance stock awards, stock appreciation rights and dividend equivalent rights. The maximum number of shares of common stock reserved for issuance under the 2004 Plan, as amended, is 3,000,000, subject to adjustment to reflect certain corporate transactions or changes in our capital structure.

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

Under the 2004 Plan, the board or committee may fix the term and vesting schedule of each stock option, but no incentive stock option will be exercisable more than ten years after the date of grant. Vested stock options generally remain exercisable for up to three months after a participant’s termination of service or up to 12 months after a participant’s death or disability. Typically, the exercise price of each incentive stock option must not be less than 100% of the fair market value of our common stock on the grant date, and the exercise price of a nonqualified stock option must not be less than 20% of the fair market value of our common stock on the grant date. In the event that an incentive stock option is granted to a 10% stockholder, the term of such stock option may not be more than five years and the exercise price may not be less than 110% of the fair market value on the grant date. The exercise

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price of each stock option granted under the 2004 Plan may be paid in cash or in other forms of consideration in certain circumstances, including shares of common stock, deferred payment arrangements or pursuant to cashless exercise programs. A stock option award may provide that if shares of our common stock are used to pay the exercise price, an additional option will be granted to the participant to purchase that number of shares used to pay the exercise price. Generally, stock options are not transferable except by will or the laws of descent and distribution, unless the board or committee provides that a nonqualified stock option may be transferred.

As permitted by SFAS 123R, we used the modified Black-Scholes model to estimate the value of employee stock options on the date of grant that used the assumptions noted below. The risk-free rate for periods within the contractual life of the options is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term of each option is based on our estimate that all individuals granted stock options would have an average holding period of two years after the vesting before any of the vested options are exercised. We expect all grantees to exercise their options within two years after each individual tranche’s vesting date within the single option grant. Expected volatilities are based on historical volatilities of our common stock. The dividend yield was based on expected dividends at the time of grant.

	2006		2005		2004
Weighted average risk-free interest rate: 1998 Plan		—		4.5%		3.8%
Weighted average risk-free interest rate: 2004 Plan		4.6%		4.1%		4.0%
Expected term of option (in years): 1998 Plan		5.0		5.0		5.0
Expected term of option (in years): 2004 Plan		4.97		4.57		10.0
Volatility		25%		35%		30%
Dividend yield		0.5%		0.5%		0.4%

A summary of activity under the 1998 and 2004 Plans for the years ended December 31 is as follows:

	2006
						Weighted
				Weighted		Average		Aggregate
				Average		Remaining		Intrinsic
				Exercise		Contractual		Value
	Options			Price		Term (years)		(000’s)
1998 Plan
Outstanding, beginning of year		94,675		$	7.59
Granted		—			—
Exercised		(36,214	)		7.59
Forfeited		—			—
Outstanding, end of year		58,461		$	7.59		0.97	$	507
Exercisable at end of period		58,461		$	7.59		0.97	$	507
2004 Plan
Outstanding, beginning of year		1,453,428		$	16.92
Granted		915,000			21.13
Exercised		(73,204	)		14.25
Forfeited		(359,144	)		16.96
Outstanding, end of year		1,936,080		$	19.01		9.15	$	1,235
Exercisable at end of period		415,332		$	16.00		8.63	$	488

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Notes to Consolidated Financial Statements — (Continued)

	2005
						Weighted
				Weighted		Average		Aggregate
				Average		Remaining		Intrinsic
				Exercise		Contractual		Value
	Options			Price		Term (years)		(000’s)
1998 Plan
Outstanding, beginning of year		722,203		$	7.92
Granted		—			—
Exercised		(627,267	)		7.97
Forfeited		(261	)		7.59
Outstanding, end of year		94,675		$	7.59		1.93	$	663
Exercisable at end of period		94,675		$	7.59		1.93	$	663
2004 Plan
Outstanding, beginning of year		533,450		$	14.06
Granted		1,224,862			17.56
Exercised		—			—
Forfeited		(304,884	)		14.48
Outstanding, end of year		1,453,428		$	16.92		9.46	$	210
Exercisable at end of period		310,806		$	14.75		9.47	$	48

	2004
						Weighted
				Weighted		Average		Aggregate
				Average		Remaining		Intrinsic
				Exercise		Contractual		Value
	Options			Price		Term (years)		(000’s)
1998 Plan
Outstanding, beginning of year		847,029		$	7.87
Granted		—			—
Exercised		(80,837	)		7.59
Forfeited		(43,989	)		7.59
Outstanding, end of year		722,203		$	7.92		1.91	$	6,443
Exercisable at end of period		608,908		$	7.98		1.72	$	5,395
2004 Plan
Outstanding, beginning of year		—		$	—
Granted		548,950			14.06
Exercised		—			—
Forfeited		(15,500	)		13.95
Outstanding, end of year		533,450		$	14.06		9.53	$	1,482
Exercisable at end of period		—		$	—		—	$	—

Stock option compensation expense is the estimated fair market value of options granted and amortized on a straight-line basis over the requisite service period for each separately vesting portion of the award. The weighted average estimated fair value of stock options granted during the twelve month period ended December 31, 2006 was $2.33.

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A summary of activity for our nonvested restricted stock grants for the year ended December 31, 2006 is as follows:

	2006					2005					2004
				Weighted					Weighted				Weighted
				Average					Average				Average
	Restricted			Grant-Date		Restricted			Grant-Date		Restricted		Grant-Date
	Stock			Fair Value		Stock			Fair Value		Stock		Fair Value
Nonvested, beginning of period		8,000		$	15.50		2,799		$	14.25		—	$	—
Granted		115,000			15.44		64,734			14.72		2,799		14.25
Vested		(8,000	)		15.50		(12,533	)		14.86		—		—
Canceled or expired		—			—		(47,000	)		14.44		—		—
Nonvested, end of period		115,000		$	15.44		8,000		$	15.50		2,799	$	14.25

As of December 31, 2006, there was $2.8 million of total unrecognized compensation cost related to nonvested stock option compensation expense and $1.7 million of unrecognized compensation cost for nonvested restricted stock compensation expense that will be recognized over the remaining requisite service periods.

19.   Business Concentrations

The majority of our commission income and fees are directly related to the premiums written from policies sold to individuals located in eleven states. Accordingly, we could be adversely affected by economic downturns, natural disasters, and other conditions that may occur from time-to-time in these states, which may not as significantly affect more diversified competitors.

The following table identifies the states in which we operate and the gross premiums written by state by our affiliated and unaffiliated underwriting agencies for the years ended December 31, 2006 and 2005 (dollars in thousands):

	Year Ended December 31,
	2006		2005
Texas	$	79,084	$	101,106
Illinois		66,826		80,654
California		37,996		38,259
Florida		21,150		25,598
Michigan		19,689		8,824
South Carolina		19,000		20,367
Indiana		18,027		22,710
Missouri		12,184		4,265
New Mexico		9,590		12,724
Arizona		1,594		4
Georgia		551		923
Utah		449		7,153
Alabama		—		(1,685	)
Other		40		302
Total	$	286,180	$	321,204

In 2006, our affiliated and unaffiliated underwriting agencies utilized approximately 7,400 independent agencies and, as of December 31, 2006, 158 owned retail stores and 33 franchised retail stores to sell the policies

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that we administer. In 2006, no one independent agency accounted for more than 3.1% of the gross written premiums produced by our affiliated and unaffiliated underwriting agencies, and only two independent agencies accounted for more than 1% of these gross written premiums.

20.   Employee Benefit Plan

We sponsor a defined contribution retirement plan under Section 401(k) of the Internal Revenue Code. The plan covers substantially all employees who meet specified service requirements. Under the plan, we may, at our discretion, match 100% of each employee’s contribution, up to 3% of the employee’s earnings, plus 50% of each employee’s contribution for the next 2% of the employee’s salary. We made $1.0 million in contributions to the plan during 2006, $1.0 million in 2005 and $1.1 million in 2004.

21.   Fair Value of Financial Instruments

The carrying amount of and estimated fair values of our financial instruments at December 31, 2006 and 2005 are as follows (dollars in thousands):

	2006				2005
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Assets:
Fixed maturities	$	219,960	$	219,960	$	210,273	$	210,273
Short term investments		1,810		1,810		477		477
Cash and cash equivalents		52,484		52,484		48,037		48,037
Liabilities:
Notes payable	$	56,702	$	56,702	$	56,702	$	56,702
Consideration due for acquisitions		1,023		1,023		1,352		1,352

The fair values presented represent our best estimates and may not be substantiated by comparisons to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Certain financial instruments and all non-financial instruments are not required to be disclosed. Therefore, the aggregate fair value amounts presented do not purport to represent our underlying value.

The methods used in determining the fair value of financial instruments are as follows:

Fixed maturities and short-term investments — The fair values of fixed maturities and short term investments are calculated using quoted market prices by third-party organizations.

Cash and cash equivalents — The fair value of cash and cash equivalents approximates carrying value due to the highly liquid nature of the instruments.

Notes payable — The fair value of the notes payable approximates carrying value as the explicit interest rate of notes payable approximates current interest rates.

Consideration due for acquisitions — The fair value of consideration due for acquisition approximates carrying value.

22.   Statutory Financial Information and Accounting Policies

Our insurance subsidiaries are required to file statutory-basis financial statements with state insurance departments in all states where they are licensed. These statements are prepared in accordance with accounting practices prescribed or permitted by the applicable state of domicile. Each state of domicile requires that insurance companies domiciled in those states prepare their statutory-basis financial statements in accordance with the

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National Association of Insurance Commissioners Accounting Principles and Procedures Manual subject to any deviations prescribed or permitted by the insurance commissioner in each state of domicile.

The following is a summary of selected statutory information of our insurance subsidiaries at and for the years ended December 31 (dollars in thousands):

	2006		2005		2004
Statutory Capital and Surplus
Affirmative Insurance Company	$	133,409	$	129,511	$	139,316
Insura Property and Casualty Insurance Company		24,572		23,580		23,516
Affirmative Insurance Company — Michigan		9,204		—		—
Statutory Net Income (Loss)
Affirmative Insurance Company	$	10,057	$	7,458	$	7,698
Insura Property and Casualty Insurance Company		636		213		203
Affirmative Insurance Company — Michigan		204		—		—

Insura and AIC of Michigan are wholly owned by AIC and are included as common stock investments on AIC’s balance sheet in its statutory surplus.

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23.   Unaudited Quarterly Consolidated Results of Operations

The following is a summary of our unaudited quarterly consolidated results of operations for the years ended December 31, 2006 and 2005:

	Three Months Ended
	March 31,			June 30,		September 30,			December 31,
	2006			2006		2006			2006
	(Dollars in thousands, except share data)
Net premiums earned	$	73,038		$	73,753	$	71,877		$	69,442
Commission income and fees		17,499			14,552		14,420			14,524
Net investment income		2,060			2,154		2,233			2,382
Realized gains (losses)		(367	)		1		(78	)		(378	)
Total Revenues		92,230			90,460		88,452			85,970
Losses and loss adjustment expenses		47,652			47,081		46,044			44,569
Selling, general and administrative expenses		32,601			34,194		32,979			50,766
Depreciation and amortization		1,060			1,059		1,094			1,185
Interest expense		1,085			1,086		1,085			1,086
Total expenses		82,398			83,420		81,202			97,606
Net income before income taxes and minority interest		9,832			7,040		7,250			(11,636	)
Income tax expense		3,520			2,156		2,278			(5,293	)
Minority interest, net of income taxes		81			—		—			—
Net income (loss)	$	6,231		$	4,884	$	4,972		$	(6,343	)
Net income (loss) per common share — Basic	$	0.40		$	0.32	$	0.33		$	(0.41	)
Net income (loss) per common share — Diluted	$	0.40		$	0.32	$	0.33		$	(0.41	)
Weighted average shares — Basic		15,432,557			15,321,771		15,139,571			15,289,582
Weighted average shares — Diluted		15,463,132			15,359,004		15,186,777			15,378,363

118

Affirmative Insurance Holdings, Inc.

Notes to Consolidated Financial Statements — (Continued)

	Three Months Ended
	March 31,		June 30,		September 30,		December 31,
	2005		2005		2005		2005
	(Dollars in thousands, except share data)
Net premiums earned	$	67,936	$	77,441	$	77,544	$	74,878
Commission income and fees		20,995		21,707		19,721		17,192
Net investment income		1,257		1,353		1,447		1,673
Realized gains (losses)		3		3		5		(1,676	)
Total Revenues		90,191		100,504		98,717		92,067
Losses and loss adjustment expenses		44,567		51,217		47,350		48,074
Selling, general and administrative expenses		31,926		37,896		40,097		43,886
Depreciation and amortization		1,029		993		912		1,273
Interest expense		579		796		1,124		1,016
Total expenses		78,101		90,902		89,483		94,249
Net income before income taxes and minority interest		12,090		9,602		9,234		(2,182	)
Income tax expense		4,284		3,403		3,274		(1,194	)
Minority interest, net of income taxes		33		326		217		96
Net income (loss)	$	7,773	$	5,873	$	5,743	$	(1,084	)
Net income (loss) per common share — Basic	$	0.46	$	0.36	$	0.39	$	(0.07	)
Net income (loss) per common share — Diluted	$	0.45	$	0.36	$	0.38	$	(0.07	)
Weighted average shares — Basic		16,845,934		16,218,769		14,893,310		15,167,658
Weighted average shares — Diluted		17,119,853		16,434,410		15,165,677		15,288,847

119

Affirmative Insurance Holdings, Inc.

Notes to Consolidated Financial Statements — (Continued)

24.   Parent Company Financials

The condensed financial information of the parent company, Affirmative Insurance Holdings, Inc. only as of December 31, 2006 and 2005, and for the years ended December 31, 2006, 2005, and 2004 is presented as follows:

Condensed Balance Sheets

	2006			2005
	(Dollars in thousands, except share data)
Assets
Cash and cash equivalents	$	16,948		$	12,215
Investment in affiliates *		253,001			256,556
Deferred tax asset		17,798			18,762
Federal income taxes receivable		2,405			12,297
Property and equipment, net		65			138
Goodwill		9,755			9,585
Other intangible assets, net		273			273
Other assets		3,261			3,480
Total assets		303,506			313,306
Liabilities and Shareholders’ Equity
Liabilities
Payable to affiliates *		34,663			52,452
Notes payable		56,702			56,702
Consideration due for acquisitions		48			48
Other liabilities		5,700			4,142
Total liabilities		97,113			113,344
Stockholders’ equity
Common stock, $0.01 par value; 75,000,000 shares authorized; 17,707,938 shares issued and 15,334,575 outstanding at December 31, 2006; 17,483,520 shares issued and 15,432,557 outstanding at December 31, 2005		177			175
Additional paid-in capital		160,862			158,904
Treasury stock, at cost; 2,353,363 shares at December 31, 2006 and 2,050,963 shares at December 31, 2005		(32,880	)		(28,746	)
Accumulated other comprehensive income (loss)		(448	)		(529	)
Retained earnings		78,682			70,158
Total stockholders’ equity		206,393			199,962
Total liabilities and stockholders’ equity		303,506		$	313,306

*  Eliminated in consolidation

120

Affirmative Insurance Holdings, Inc.

Notes to Consolidated Financial Statements — (Continued)

Condensed Statements of Operations

	2006			2005			2004
	(Dollars in thousands)
Revenues
Dividends from subsidiaries	$	11,500		$	—		$	—
Net investment income		163			—			10
Total revenues	$	11,663			—			10
Expenses
Depreciation and amortization		—			—			162
Operating expenses		—			—			1,070
Interest expense		4,342			3,515			588
Total expenses		4,342			3,515			1,820
Net loss before federal income taxes and earnings		7,321			(3,515	)		(1,810	)
of affiliates
Federal income tax benefit		(891	)		(1,187	)		(669	)
Equity in undistributed earnings of affiliates *		(1,532	)		(20,633	)		(25,574	)
Net income	$	9,744		$	18,305		$	24,433

*  Eliminated in consolidation

Condensed Statements of Cash Flows

	2006			2005			2004
	(Dollars in thousands)
Net cash provided by (used in) operating activities	$	(2,547	)	$	10,509		$	205
Cash flows from investing activities
Dividends received from subsidiaries		11,500			—			—
Capital contribution to affiliate		—			—			(93,300	)
Purchases of property and equipment		(14	)		—			—
Cash paid for acquisitions		(170	)		(369	)		(568	)
Net cash provided by (used in) investing activities		11,316			(369	)		(93,868	)
Cash flows from financing activities
Principal payments under capital lease obligation		—			—			(341	)
Proceeds of borrowings		—			24,369			29,094
Proceeds from issuance of common stock, net		1,318			4,232			67,483
Acquisition of treasury stock		(4,134	)		(28,000	)		—
Dividends paid		(1,220	)		(1,282	)		(337	)
Net cash provided by (used in) financing activities		(4,036	)		(681	)		95,899
Net increase in cash and cash equivalents		4,733			9,459			2,236
Cash and cash equivalents, beginning of year		12,215			2,756			520
Cash and cash equivalents, end of year	$	16,948		$	12,215		$	2,756

121

Affirmative Insurance Holdings, Inc.

Notes to Consolidated Financial Statements — (Continued)

25.   Subsequent Events

On January 31, 2007, we completed the acquisition of USAgencies. Pursuant to the terms of a Purchase and Sale Agreement that was effective as of October 12, 2006 (the “Purchase Agreement”), among the Company and the unit holders (the “Sellers”) of USAgencies, we acquired all of the issued and outstanding membership interests of USAgencies from the Sellers for an aggregate purchase price of approximately $196.3 million in cash after giving effect to deductions based on the estimated indebtedness and book value of USAgencies and the estimated expenses of the transaction (the “Purchase Price”). The transaction is effective January 1, 2007 for accounting purposes. Of the Purchase Price, $20.0 million was deposited into an escrow fund to satisfy any indemnification obligations of the Sellers under the Purchase Agreement. The Purchase Price is subject to a post-closing adjustment based on the actual indebtedness and book value of USAgencies and the actual expenses of the transaction, in each case as finally determined within a specified period following closing.

On January 31, 2007, we entered into a $220.0 million senior secured credit facility (the “Facility”) provided by a syndicate of lenders, including Credit Suisse, Cayman Islands Branch, as Administrative Agent and Collateral Agent. The Facility provides for a $200.0 million senior term loan facility and a revolving facility of up to $20.0 million, depending on our borrowing capacity. On March 8, 2007, we added The Frost National Bank, N.A. to the Facility when we received approval of the First Amendment to the Facility and executed a joinder agreement whereby Frost became the provider of an initial revolving credit commitment of $15.0 million. The revolving portion of the Facility includes an option to increase the $20.0 million principal amount of revolving loans available thereunder by up to an additional $20.0 million and a $2.0 million sublimit for letters of credit. Our obligations under the Facility are guaranteed by our material operating subsidiaries (other than our insurance companies) and are secured by a first lien security interest on all of our assets and the assets of our material operating subsidiaries (other than our insurance companies), including a pledge of 100% of the stock of AIC. The facility contains certain financial covenants, which include capital expenditure limitations, minimum interest coverage requirements, maximum leverage ratio requirements, minimum risk-based capital requirements, maximum combined ratio limitations, minimum fixed charge coverage ratios and a minimum consolidated net worth requirement, as well as other restrictive covenants.

Concurrently with entering into the Facility, the Company borrowed $200.0 million (the “Borrowing”) under the term loan portion of the Facility to finance its acquisition of USAgencies and to pay related costs and expenses. The principal amount of the Borrowing is payable in quarterly installments of $500,000, with the remaining balance due on the seventh anniversary of the closing of the Facility. Beginning in 2008, we are also required to make additional annual principal repayments that are to be calculated based upon our financial performance during the preceding fiscal year. In addition, certain events, such as the sale of material assets or the issuance of significant new equity, necessitate additional required principal repayments. As of March 14, 2007, we have no borrowings under the revolving portion of the Facility.

On March 6, 2007, we announced that Alan T. Rasof resigned as the president of our retail division. We had no employment agreement with Mr. Rasof.

122

Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.   Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined in the Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Disclosure Committee and management, including the principal executive officer and the principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b). Based upon this evaluation, the principal executive officer and the principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2006, the end of the period covered by this Annual Report on Form 10-K.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2006. In making this assessment, management used the criteria described in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies and procedures may deteriorate. Based on this evaluation, management determined that, as of December 31, 2006, the Company maintained effective internal control over financial reporting.

Our independent auditor, KPMG LLP, a registered public accounting firm that audited the financial statements included in this annual report, has issued an attestation report on our management’s assessment of the effectiveness of our internal control over financial reporting which may be found in Item 8 above.

Changes in Internal Control over Financial Reporting

The following changes have been made subsequent to September 30, 2006 to remediate the material weaknesses described in the Company’s 2005 Annual Report on Form 10-K and have materially affected the Company’s internal control over financial reporting.

We have remediated the material weakness in its internal control over information technology by implementing new policies and procedures to ensure proper access controls are maintained and monitored. We have increased the supervisory control over access controls, centralizing it for more direct monitoring. In some instances, we have adjusted system configurations and incorporated software tools where appropriate to limit and restrict the ability of system users to enter, change and view data and to provide a detailed history of changes to the applications and data. Furthermore, we entered into an agreement to outsource the data center and the application development and support to Accenture, a widely recognized IT consulting firm.

123

There have been no changes other than those described in the previous paragraph in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B.   Other Information

None.

Part III

Item 10.   Directors, Executive Officers and Corporate Governance

The information relating to this Item 10 is incorporated by reference to the disclosure in the sections headed “Item 1 — Election of Directors,” “Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance” in the Proxy Statement for our 2007 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2006.

Item 11.   Executive Compensation

The information relating to this Item 11 is incorporated by reference to the disclosure in the sections headed “Compensation Discussion and Analysis,” “Compensation Committee Report” and “Executive Compensation” in the Proxy Statement for our 2007 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2006.

Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information relating to this Item 12 is incorporated by reference to the disclosure in the sections headed “Item 2 — Adoption of the Affirmative Performance Based Incentive Plan” and “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement for our 2007 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2006.

Item 13.   Certain Relationships and Related Transactions, and Director Independence

The information relating to this Item 13 is incorporated by reference to the disclosure in the section headed “Certain Relationships and Related Transactions” in the Proxy Statement for our 2007 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2006.

Item 14.   Principal Accounting Fees and Services

The information relating to this Item 14 is incorporated by reference to the disclosure in the section headed “Corporate Governance — Audit Committee — Fees Paid to Independent Auditor” in the Proxy Statement for our 2007 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2006.

124

Part IV

Item 15.   Exhibits and Financial Statement Schedules

	(a)(1)	Financial Statements — Documents filed as part of this report.
		Reports of Independent Registered Public Accounting Firms
		Consolidated Balance Sheets — As of December 31, 2006 and 2005
		Consolidated Statements of Operations — For the Years Ended December 31, 2006, 2005 and 2004
		Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the Years Ended December 31, 2006, 2005 and 2004
		Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004
		Notes to Consolidated Financial Statements
(b) Exhibits

2	.1	Purchase and Sale Agreement, dated October 3, 2006 and effective as of October 12, 2006, by and among the equityholders of USAgencies, L.L.C. and Affirmative Insurance Holdings, Inc. (incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed with the SEC on October 18, 2006, File No. 000-50795).
3	.1	Amended and Restated Certificate of Incorporation of Affirmative Insurance Holdings, Inc. (incorporated by reference to Exhibit 3.1 to our Registration Statement on Form S-1 filed with the SEC on March 22, 2004, File No. 333-113793).
3	.2	Amended and Restated Bylaws of Affirmative Insurance Holdings, Inc. (incorporated by reference to Exhibit 3.2 to our Registration Statement on Form S-1 filed with the SEC on March 22, 2004, File No. 333-113793).
4	.1	Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 3 to our Registration Statement on Form S-1 filed with the SEC on June 14, 2004, File No. 333-113793).
4	.2	Form of Registration Rights Agreement between Affirmative Insurance Holdings, Inc. and Vesta Insurance Group, Inc. (incorporated by reference to Exhibit 4.2 to Amendment No. 2 to our Registration Statement on Form S-1 filed with the SEC on May 27, 2004, File No. 333-113793).
10	.1+	Affirmative Insurance Holdings, Inc. 1998 Omnibus Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to our Registration Statement on Form S-1 filed with the SEC on March 22, 2004, File No. 333-113793).
10	.2+	Affirmative Insurance Holdings, Inc. 2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to Amendment No. 2 to our Registration Statement on Form S-1 filed with the SEC on May 27, 2004, File No. 333-113793).
10	.3+	Affirmative Insurance Holdings, Inc. Amended and Restated 2004 Stock Incentive Plan (incorporated by reference to our Information Statement on Form DEF 14-C filed with the SEC on December 30, 2005, File No. 000-50795).
10	.4+	First Amendment to the Amended and Restated Affirmative Insurance Holdings, Inc. 2004 Stock Incentive Plan (incorporated by reference to Annex A to our Definitive Proxy Statement on Form DEF 14A filed with the SEC on April 28, 2006, File No. 000-50795).
10	.5+	Form of Stock Option Agreement (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on March 1, 2005, File No. 000-50795).
10	.6+	Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed with the SEC on March 1, 2005, File No. 000-50795).
10	.7 +	Separation Agreement and General Release between Affirmative Insurance Holdings, Inc. and Thomas E. Mangold, dated November 13, 2005 (incorporated by reference to Exhibit 10.6 to our Annual Report on Form 10-K filed with the SEC on April 11, 2006, File No. 000-50795).
10	.8+	Employment Agreement, dated as of November 23, 2006, between Affirmative Insurance Holdings, Inc. and M. Sean McPadden (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on November 30, 2005, File No. 000-50795).

125

10	.9+	Employment Agreement, dated as of November 23, 2006, between Affirmative Insurance Holdings, Inc. and Katherine C. Nolan (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed with the SEC on November 30, 2005, File No. 000-50795).
10	.10+	Separation Agreement and General Release between Affirmative Insurance Holdings, Inc. and Timothy A. Bienek, dated December 31, 2005 (incorporated by reference to Exhibit 10.9 to our Annual Report on Form 10-K filed with the SEC on April 11, 2006, File No. 000-50795).
10	.11+	Employment Agreement, dated as of November 30, 2006, between Affirmative Insurance Holdings, Inc. and Mark E. Pape (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on November 21, 2005, File No. 000-50795).
10	.12+	Separation Agreement and General Release, dated October 13, between Affirmative Insurance Holdings, Inc. and George M. Daly (including Supplemental General Release Agreement attached as Exhibit A) (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on October 13, 2005, File No. 000-50795).
10	.13+	Description of Non-Employee Director Compensation (incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q filed with the SEC on May 16, 2005, File No. 000-50795).
10	.14	Quota Share Reinsurance Agreement between Old American County Mutual Fire Insurance Company and Affirmative Insurance Company dated as of January 1, 2005, for the business written through A-Affordable Managing General Agency, Inc. (incorporated by reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q filed with the SEC on May 16, 2005, File No. 000-50795).
10	.15	Quota Share Reinsurance Agreement between Old American County Mutual Fire Insurance Company and Affirmative Insurance Company dated as of January 1, 2005, for the business written through American Agencies General Agency, Inc. (incorporated by reference to Exhibit 10.5 to our Quarterly Report on Form 10-Q filed with the SEC on May 16, 2005, File No. 000-50795).
10	.16	Amended and Restated 100% Quota Share Reinsurance Contract between the Shelby Insurance Company, Affirmative Insurance Company, Insura Property & Casualty Insurance Company and VFIC Insurance Corporation, with Addendum No. 1 thereto, effective December 31, 2003 (incorporated by reference to Exhibit 10.7 to our Registration Statement on Form S-1 filed with the SEC on March 22, 2004, File No. 333-113793).
10	.17	Addendum No. 2 to the Amended and Restated 100% Quota Share Reinsurance Contract between Affirmative Insurance Company, Insura Property & Casualty Insurance Company and VFIC Insurance Corporation, dated May 10, 2004 (incorporated by reference to Exhibit 10.17 to Amendment No. 2 to our Registration Statement on Form S-1 filed with the SEC on May 27, 2004, File No. 333-113793).
10	.18	100% Quota Share Reinsurance Contract between VFIC Insurance Corporation, Vesta Insurance Corporation, Insura Property & Casualty Insurance Company, Shelby Casualty Insurance Company, The Hawaiian Insurance & Guaranty Company, Ltd. and Affirmative Insurance Company, effective December 31, 2003 (incorporated by reference to Exhibit 10.8 to our Registration Statement on Form S-1 filed with the SEC on March 22, 2004, File No. 333-113793).
10	.19	Private Passenger Automobile Quota Share Reinsurance Contract issued to Affirmative Insurance Company and Insura Property & Casualty Insurance Company, covering Florida business, effective January 1, 2004 (incorporated by reference to Exhibit 10.11 to Amendment No. 3 to our Registration Statement on Form S-1 filed with the SEC on June 14, 2004, File No. 333-113793).
10	.20	Addendum No. 1 to the Private Passenger Automobile Quota Share Reinsurance Contract issued to Affirmative Insurance Company and Insura Property & Casualty Insurance Company, covering Florida business, effective May 1, 2005 (incorporated by reference to Exhibit 10.19 to our Annual Report on Form 10-K filed with the SEC on April 11, 2006, File No. 000-50795).
10	.21	First Amended and Restated Managing General Agency Agreement between Old American County Mutual Fire Insurance Company and A-Affordable Managing General Agency, Inc. dated as of January 1, 2004 (incorporated by reference to Exhibit 10.13 to Amendment No. 2 to our Registration Statement on Form S-1 filed with the SEC on May 27, 2004, File No. 333-113793).
10	.22	First Amended and Restated Managing General Agency Agreement between Old American County Mutual Fire Insurance Company and American Agencies General Agency, Inc. dated as of January 1, 2004 (incorporated by reference to Exhibit 10.14 to Amendment No. 2 to our Registration Statement on Form S-1 filed with the SEC on May 27, 2004, File No. 333-113793).

126

10	.23	Form of Separation Agreement between Affirmative Insurance Holdings, Inc. and Vesta Insurance Group, Inc. (incorporated by reference to Exhibit 10.16 to Amendment No. 2 to our Registration Statement on Form S-1 filed with the SEC on May 27, 2004, File No. 333-113793).
10	.24+	Form of Change of Control Agreement (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on July 22, 2005, File No. 000-50795).
10	.25	First Amendment to Credit Agreement and Waiver of Defaults between Affirmative Insurance Holdings, Inc. and The Frost National Bank dated August 12, 2005 (incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q filed with the SEC on August 15, 2005, File No. 000-50795).
10	.26	Second Amendment to Credit Agreement and Waiver of Defaults between Affirmative Insurance Holdings, Inc. and The Frost National Bank dated September 30, 2005 (incorporated by reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q filed with the SEC on November 14, 2005, File No. 000-50795).
10	.27	Master Services Agreement, dated as of October 16, 2006, between Affirmative Insurance Holdings, Inc. and Accenture LLP (incorporated by reference to Exhibit 10.27 to our Current Report on Form 8-K filed with the SEC on October 20, 2006, File No. 000-50795).
10	.28	Third Amendment to Credit Agreement between Affirmative Insurance Holdings, Inc. and The Frost National Bank, dated March 28, 2006 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on March 31, 2006, File No. 000-50795).
10	.29	Fourth Amendment to Credit Agreement between Affirmative Insurance Holdings, Inc. and The Frost National Bank dated as of August 7, 2006 (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed with the SEC on August 9, 2006, File No. 000-50795).
10	.30+	Executive Employment Agreement, dated as of October 5, 2006, between Affirmative Insurance Holdings, Inc. and Kevin R. Callahan (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on October 10, 2006, File No. 000-50795).
10	.31+	Executive Employment Agreement, effective as of November 27, 2006, between Affirmative Insurance Holdings, Inc. and Robert Bondi (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on February 1, 2007, File No. 000-50795).
10	.32*	$220,000,000 Credit Agreement, dated as of January 31, 2007, among Affirmative Insurance Holdings, Inc. as Borrower, the Lenders party thereto, Credit Suisse, Cayman Islands Branch as Administrative Agent and Collateral Agent and Credit Suisse Securities (USA) LLC, as Sole Bookrunner and Sole Lead Arranger.
10	.33*	First Amendment to Credit Agreement and Guarantee and Collateral Agreement, dated as of March 8, 2007, among Affirmative Insurance Holdings, Inc. as Borrower, the lenders party thereto, Credit Suisse, Cayman Islands Branch, as Administrative Agent, Collateral Agent, Outgoing Issuing Bank and Outgoing Swingline Lender and The Frost National Bank as Incoming Issuing Bank and Incoming Swingline Lender.
10	.34*	Consent to Assignment, dated as of January 10, 2007, among Affirmative Property Holdings, Inc., KR Callahan & Company, LLC and 227 West Monroe Street, Inc. with respect to the Assignment of Lease, effective as of January 10, 2007, between Affirmative Property Holdings, Inc. and KR Callahan & Company, LLC.
10	.35*	Lease, dated as of May 8, 2006, between KR Callahan & Company, LLC, as tenant, and 227 West Monroe Street, Inc., as landlord.
21	.1*	Subsidiaries of Affirmative Insurance Holdings, Inc.
23	.1*	Consent of KPMG LLP.
23	.2*	Consent of PricewaterhouseCoopers LLP.
31	.1*	Certification of Kevin R. Callahan, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31	.2*	Certification of Mark E. Pape, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

127

32	.1*	Certification of Kevin R. Callahan, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32	.2*	Certification of Mark E. Pape, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Filed herewith
+	Management contract, compensatory plan or arrangement

128

Signatures

Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Affirmative Insurance Holdings, Inc.

/s/  Kevin R. Callahan

Kevin R. Callahan

Chairman and Chief Executive Officer

Date: March 16, 2007

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

Date: March 16, 2007

/s/  Kevin R. Callahan Kevin R. Callahan	Chairman and Chief Executive Officer
/s/  Mark E. Pape Mark E. Pape	Executive Vice President and Chief Financial Officer (and in his capacity as Principal Financial Officer)
/s/  V. Van Vaughan V. Van Vaughan	Senior Vice President and Chief Accounting Officer
/s/  Thomas C. Davis Thomas C. Davis	Director
/s/  Nimrod T. Frazer Nimrod T. Frazer	Director
/s/  Avshalom Y. Kalichstein Avshalom Y. Kalichstein	Director
/s/  Suzanne T. Porter Suzanne T. Porter	Director
/s/  David I. Schamis David I. Schamis	Director
/s/  Paul J. Zucconi Paul J. Zucconi	Director

129

EX-10.32

Exhibit 10.32

Execution Copy

$220,000,000
CREDIT AGREEMENT

dated as of January 31, 2007

among

AFFIRMATIVE INSURANCE HOLDINGS, INC.,
as Borrower

THE LENDERS PARTY HERETO

and

CREDIT SUISSE, CAYMAN ISLANDS BRANCH
as Administrative Agent and Collateral Agent

CREDIT SUISSE SECURITIES (USA) LLC,
as Sole Bookrunner and Sole Lead Arranger

TABLE OF CONTENTS

	PAGE
ARTICLE I.
Definitions
SECTION 1.01. Defined Terms		1
SECTION 1.02. Terms Generally		32
SECTION 1.03. Classification of Loans and Borrowings		33
SECTION 1.04. Pro Forma Calculations		33
ARTICLE II.
The Credits
SECTION 2.01. Commitments		33
SECTION 2.02. Loans		34
SECTION 2.03. Borrowing Procedure		36
SECTION 2.04. Repayment of Loans; Evidence of Debt		36
SECTION 2.05. Fees		37
SECTION 2.06. Interest on Loans		38
SECTION 2.07. Default Interest		38
SECTION 2.08. Alternate Rate of Interest		39
SECTION 2.09. Termination and Reduction of Commitments		39
SECTION 2.10. Conversion and Continuation of Borrowings		40
SECTION 2.11. Repayment of Term Borrowings		41
SECTION 2.12. Prepayment		42
SECTION 2.13. Mandatory Prepayments		43
SECTION 2.14. Reserve Requirements; Change in Circumstances		45
SECTION 2.15. Change in Legality		46
SECTION 2.16. Indemnity		47
SECTION 2.17. Pro Rata Treatment		47
SECTION 2.18. Sharing of Setoffs		48
SECTION 2.19. Payments		48
SECTION 2.20. Taxes		49
SECTION 2.21. Assignment of Commitments Under Certain Circumstances; Duty to Mitigate		50
SECTION 2.22. Swingline Loans		52
SECTION 2.23. Letters of Credit		53
SECTION 2.24. Incremental Facilities		57
SECTION 2.25. Extension of Revolving Credit Maturity Date		60

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	PAGE
ARTICLE III.
Representations and Warranties
SECTION 3.01. Organization; Powers		61
SECTION 3.02. Authorization; No Conflicts		62
SECTION 3.03. Enforceability		62
SECTION 3.04. Governmental Approvals		62
SECTION 3.05. Financial Statements		62
SECTION 3.06. No Material Adverse Change		63
SECTION 3.07. Title to Properties; Possession Under Leases		63
SECTION 3.08. Subsidiaries		65
SECTION 3.09. Litigation; Compliance with Laws		65
SECTION 3.10. Agreements		66
SECTION 3.11. Federal Reserve Regulations		66
SECTION 3.12. Investment Company Act		66
SECTION 3.13. Use of Proceeds		66
SECTION 3.14. Tax Returns		67
SECTION 3.15. No Material Misstatements; Acquisition Documentation		67
SECTION 3.16. Employee Benefit Plans		67
SECTION 3.17. Environmental Matters		68
SECTION 3.18. Insurance		69
SECTION 3.19. Security Documents		69
SECTION 3.20. Location of Real Property		70
SECTION 3.21. Labor Matters		70
SECTION 3.22. Liens		70
SECTION 3.23. Intellectual Property		70
SECTION 3.24. Solvency		70
SECTION 3.25. Acquisition Documentation		71
SECTION 3.26. Permits		71
SECTION 3.27. Reinsurance Agreements		71
SECTION 3.28. Premium Finance Agreements		72
SECTION 3.29. Senior Indebtedness		72
SECTION 3.30. Closing Date Inactive Subsidiaries		72
ARTICLE IV.
Conditions of Lending
SECTION 4.01. All Credit Events		72
SECTION 4.02. First Credit Event		73

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	PAGE
ARTICLE V.
Affirmative Covenants
SECTION 5.01. Existence; Businesses and Properties		78
SECTION 5.02. Insurance		79
SECTION 5.03. Obligations and Taxes		79
SECTION 5.04. Financial Statements, Reports, etc.		79
SECTION 5.05. Litigation and Other Notices		82
SECTION 5.06. Information Regarding Collateral		83
SECTION 5.07. Maintaining Records; Access to Properties and Inspections; Environmental Assessments		83
SECTION 5.08. Use of Proceeds		84
SECTION 5.09. Additional Collateral, etc		84
SECTION 5.10. Further Assurances		87
SECTION 5.11. Interest Rate Protection		88
SECTION 5.12. Maintain Reinsurance		88
SECTION 5.13. Tax Sharing Arrangements		88
ARTICLE VI.
Negative Covenants
SECTION 6.01. Indebtedness		89
SECTION 6.02. Liens		90
SECTION 6.03. Sale and Lease-Back Transactions		92
SECTION 6.04. Investments, Loans and Advances		92
SECTION 6.05. Mergers, Consolidations, Sales of Assets and Acquisitions		93
SECTION 6.06. Restricted Payments; Restrictive Agreements		94
SECTION 6.07. Transactions with Affiliates		95
SECTION 6.08. Business of the Borrower and Subsidiaries; Limitation on Hedging Agreements		95
SECTION 6.09. Other Indebtedness and Agreements; Amendments to Acquisition Documentation		96
SECTION 6.10. Capital Expenditures		97
SECTION 6.11. Interest Coverage Ratio		97
SECTION 6.12. Leverage Ratio		98
SECTION 6.13. Minimum Risk-Based Capital Ratio		99
SECTION 6.14. Combined Ratio		99
SECTION 6.15. Fixed Charge Coverage Ratio		99
SECTION 6.16. Consolidated Net Worth		99
SECTION 6.17. Fiscal Year		99
ARTICLE VII. Events of Default
ARTICLE VIII.
The Agents and the Arranger

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	PAGE
ARTICLE IX.
Miscellaneous
SECTION 9.01. Notices		105
SECTION 9.02. Survival of Agreement		106
SECTION 9.03. Binding Effect		106
SECTION 9.04. Successors and Assigns		106
SECTION 9.05. Expenses; Indemnity		110
SECTION 9.06. Right of Setoff		111
SECTION 9.07. Applicable Law		111
SECTION 9.08. Waivers; Amendment		112
SECTION 9.09. Interest Rate Limitation		113
SECTION 9.10. Entire Agreement		113
SECTION 9.11. WAIVER OF JURY TRIAL		113
SECTION 9.12. Severability		113
SECTION 9.13. Counterparts		114
SECTION 9.14. Headings		114
SECTION 9.15. Jurisdiction; Consent to Service of Process		114
SECTION 9.16. Confidentiality		114
SECTION 9.17. Delivery of Lender Addenda		115

Exhibits and Schedules

Exhibit A	Form of Administrative Questionnaire
Exhibit B	Form of Affiliate Subordination Agreement
Exhibit C	Form of Assignment and Acceptance
Exhibit D	Form of Borrowing Request
Exhibit E	Form of Guarantee and Collateral Agreement
Exhibit F	Form of Lender Addendum
Exhibit G	Form of Mortgage (Owned and Leased Real Property)
Exhibit H	Form of Perfection Certificate
Exhibit I	Form of Non-Bank Certificate
Exhibit J	Form of Opinion of McDermott Will & Emery
Exhibits K-1, K-2, K-3	Forms of Premium Finance Agreements

Schedule 1.01(a)	Mortgaged Properties
Schedule 1.01(b)	Subsidiary Guarantors
Schedule 3.08	(a)Subsidiaries
Schedule 3.08(b)	Additional Prohibitions and Restrictions
Schedule 3.09	Litigation
Schedule 3.17	Environmental Matters

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Schedule 3.18	Insurance
Schedule 3.19(a)	UCC Filing Offices
Schedule 3.19(c)	Mortgage Filing Offices
Schedule 3.20	Owned and Leased Real Property
Schedule 3.25	Acquisition Documentation
Schedule 3.26	Regulated Insurance Subsidiary Permits
Schedule 6.01	Existing Indebtedness
Schedule 6.02	Existing Liens
Schedule 6.04	Existing Investments

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     CREDIT AGREEMENT dated as of January 31, 2007 (this “Agreement”), among AFFIRMATIVE INSURANCE HOLDINGS, INC., a Delaware corporation, (the “Borrower”), the LENDERS from time to time party hereto, and CREDIT SUISSE, CAYMAN ISLANDS BRANCH as administrative agent (in such capacity and together with its successors, the “Administrative Agent”).

     The parties hereto agree as follows:

ARTICLE I.

Definitions

     SECTION 1.01. Defined Terms. As used in this Agreement, the following terms shall have the meanings specified below:

     “2004 Debentures” shall mean the $30,928,000 aggregate principal amount of Junior Subordinated Debt Securities due 2035 issued by Borrower to Affirmative Trust I, as the same may be amended, supplemented or otherwise modified from time to time in accordance with this Agreement.

     “2005 Debentures” shall mean the $25,774,000 aggregate principal amount of Junior Subordinated Debt Securities due 2035 issued by Borrower to Affirmative Trust II, as the same may be amended, supplemented or otherwise modified from time to time in accordance with this Agreement.

     “ABR”, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Alternate Base Rate.

     “Acquired Entity” shall have the meaning assigned to such term in the definition of Permitted Acquisition.

     “Acquisition” shall mean the acquisition by the Borrower pursuant to the Purchase Agreement of all the Equity Interests in USAgencies from the Sellers, with the Sellers receiving an aggregate amount of $200,000,000 in cash (the “Acquisition Consideration”).

     “Acquisition Consideration” shall have the meaning assigned to such term in the definition of “Acquisition”.

     “Acquisition Documentation” shall mean, collectively, the Purchase Agreement and all schedules, exhibits, annexes and amendments thereto and all side letters and agreements affecting the terms thereof or entered into in connection therewith, as the same may be amended, supplemented or otherwise modified from time to time in accordance with this Agreement.

     “Acquisition Transactions” shall mean, collectively, (a) the Acquisition, including the payment of the Acquisition Consideration, (b) the obtaining by the Borrower of the Facility provided for by this Agreement, (c) the repayment by the Borrower of all amounts outstanding under the Existing Credit Facilities, the termination of the Existing Credit Facilities and, in each

case, the release of all Liens and guarantees granted in respect thereof, in each case in a manner satisfactory to the Administrative Agent and (d) the payment of fees and expenses incurred in connection with the foregoing.

     “Adjusted Book Value” shall mean, at the applicable date, the Book Value on such date adjusted to disregard the positive or negative effects, net of taxes, of (a) unrealized gains or losses accruing on the investment portfolio after June 30, 2006, (b) any losses or expenses that are the result of a natural catastrophe occurring after the effective date of the Purchase Agreement, (c) any claim settlement of the business interruption insurance claim currently being negotiated with Hartford Insurance Company recognized after the effective date of the Purchase Agreement, (d) any prior treaty year ceding commission adjustments paid or payable by GMAC RE Corporation (“GMAC”) and recorded after the effective date of the Purchase Agreement, (e) any current treaty year ceding commission adjustments resulting from a change in the commission rate that are paid or payable by GMAC and recorded after the effective date of the Purchase Agreement, and (f) after the tax effect of any Transaction Expenses (as defined in the Purchase Agreement) to the extent such expenses have reduced Book Value prior to the applicable date.

     “Adjusted LIBO Rate” shall mean, with respect to any Eurodollar Borrowing for any Interest Period, an interest rate per annum equal to the product of (a) the LIBO Rate in effect for such Interest Period and (b) Statutory Reserves.

     “Administrative Agent” shall have the meaning assigned to such term in the preamble.

     “Administrative Agent Fees” shall have the meaning assigned to such term in Section 2.05(b).

     “Administrative Questionnaire” shall mean an Administrative Questionnaire in the form of Exhibit A, or such other form as may be supplied from time to time by the Administrative Agent.

     “Affiliate” shall mean, when used with respect to a specified person, another person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the person specified; provided, however, that, for purposes of Section 6.07. , the term “Affiliate” shall also include any person that directly or indirectly owns 10% or more of any class of Equity Interests of the person specified or that is an officer or director of the person specified.

     “Affiliate Subordination Agreement” shall mean an Affiliate Subordination Agreement in the form of Exhibit B pursuant to which intercompany obligations and advances owed by any Loan Party are subordinated to the Obligations.

     “Affirmative Intercompany Tax Agreement” shall have the meaning assigned to such term in Section 5.13.

     “Affirmative Trust I” shall mean Affirmative Insurance Holdings Statutory Trust I, a special purpose statutory Delaware business trust established by Borrower, of which Borrower holds all the common securities, which purchased from Borrower the 2004 Debentures.

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     “Affirmative Trust II” shall mean Affirmative Insurance Holdings Statutory Trust II, a special purpose statutory Delaware business trust established by Borrower, of which Borrower holds all the common securities, which purchased from Borrower the 2005 Debentures.

     “Agents” shall have the meaning assigned to such term in Article VIII.

     “Aggregate Revolving Credit Exposure” shall mean the aggregate amount of the Lenders’ Revolving Credit Exposures.

     “Agreement” shall have the meaning assigned to such term in the preamble.

     “Alternate Base Rate” shall mean, for any day, a rate per annum equal to the greater of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective as of the opening of business on the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, respectively.

     “A.M. Best” shall mean A.M. Best & Company, Inc.

     “Applicable Margin” shall mean, (y) with respect to the Loans that are Eurodollar Loans, 3.50% per annum and (z) with respect to Loans that are ABR Loans, 2.50 % per annum.

     “Approved Premium Finance Facility” shall means any line or lines of credit with an aggregate principal amount of not greater than $50,000,000, entered into by Premium Finance Co., the proceeds of which are used solely to fund loans to retail customers who are purchasing nonstandard automobile insurance from any Regulated Insurance Subsidiary of the Borrower and which such loans are secured by the unearned portion of the insurance premiums being so financed; provided that (a) such Approved Premium Finance Facility may be secured solely by the assets of the Premium Finance Co. (which may include, without limitation, a pledge of eligible accounts receivable of the Premium Finance Co., as well as the rights under such accounts receivable to insurance policies, proceeds thereof and refunds of unearned premiums thereunder pledged by insurance policyholders financed by the borrowers under any such Approved Premium Finance Facility); (b) such Approved Premium Finance Facility shall not be secured by any Equity Interests of Borrower or any Subsidiary thereof (including, without limitation, Premium Finance Co.); (c) such Approved Premium Finance Facility shall not be secured by the assets of Borrower or any Subsidiary thereof (other than as provided for in clause (a) above); (d) such Approved Premium Finance Facility shall not be guaranteed by any Subsidiary of Borrower (other than Premium Finance Co. and its Subsidiaries); (e) such Approved Premium Finance Facility shall not be guaranteed by any Regulated Insurance Subsidiary; (f) such Approved Premium Finance Facility shall not be exchangeable or convertible into Indebtedness or Equity Interests of Borrower or any Subsidiary thereof; (g) such Approved Premium Finance Facility shall not prohibit, restrict or impose any condition upon the ability of any Subsidiary (including any Premium Finance Co. or any of its Subsidiaries) to pay dividends or other distributions with respect to any of its Equity Interests or to make or repay loans or advances to the Borrower or any other Subsidiary (including any Premium Finance Co. or any of its Subsidiaries) or to Guarantee Indebtedness of the Borrower or any other Subsidiary under this Agreement or the other Loan Documents; and (h) the documents and other agreements

3

executed by Premium Finance Co. in connection with such Approved Premium Finance Facility shall otherwise be reasonably satisfactory in form and substance to the Administrative Agent.

     “Arranger” shall mean CS Securities acting in its capacity as sole bookrunner and sole lead arranger for the Facilities.

     “Asset Sale” shall mean the sale, lease, sub-lease, sale and leaseback, assignment, conveyance, transfer, issuance or other disposition (by way of merger, casualty, condemnation or otherwise) by the Borrower or any Subsidiary (other than Premium Finance Co.) to any person other than the Borrower or any Subsidiary Guarantor of (a) any Equity Interests of any of the Subsidiaries or (b) any other assets of the Borrower or any of the Subsidiaries, including Equity Interests of any person that is not a Subsidiary (other than inventory, obsolete or worn out assets, scrap and Permitted Investments, in each case disposed of in the ordinary course of business); provided that any asset sale or series of related asset sales described in clause (b) above having a value not in excess of, in the aggregate, $1,000,000 annually, shall be deemed not to be an “Asset Sale” for purposes of this Agreement.

     “Assignment and Acceptance” shall mean an assignment and acceptance entered into by a Lender and an assignee (with the consent of any person whose consent is required by Section 9.04. ), and accepted by the Administrative Agent, in the form of Exhibit C or such other form as shall be approved by the Administrative Agent.

     “Authorized Control Level” shall mean “Authorized Control Level Risk-Based Capital” as defined by the NAIC as of December 31, 1994, as such definition has been amended from time to time, and as applied in the context of the Risk-Based Capital Guidelines promulgated by the NAIC.

     “Benefit Plan” shall mean any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Tax Code or Section 307 of ERISA, and in respect of which the Borrower or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an “employer” as defined in Section 3(5) of ERISA.

     “Board” shall mean the Board of Governors of the Federal Reserve System of the United States of America.

     “Book Value” shall mean at the applicable date an amount equal to all of the assets of USAgencies minus all of the liabilities of USAgencies as set forth on the consolidated balance sheet of USAgencies at such date, prepared in accordance with GAAP consistent with past practices.

     “Borrower” shall have the meaning assigned to such term in the preamble.

     “Borrower Subordinated Notes” shall mean (i) the 2004 Debentures and (ii) the 2005 Debentures.

     “Borrower Trust Preferred Note Documents” shall mean each of the indentures under which each of the Borrower Subordinated Notes is issued and all other instruments, agreements

4

and other documents evidencing or governing each of the Borrower Subordinated Notes or providing any Guarantee or other right in respect thereof, as the same may be amended, supplemented or otherwise modified from time to time in accordance with this Agreement.

     “Borrowing” shall mean (a) Loans of the same Class and Type made, converted or continued on the same date and, in the case of Eurodollar Loans, as to which a single Interest Period is in effect, or (b) a Swingline Loan.

     “Borrowing Request” shall mean a request by the Borrower in accordance with the terms of Section 2.03. and substantially in the form of Exhibit D, or such other form as shall be approved by the Administrative Agent.

     “Breakage Event” shall have the meaning assigned to such term in Section 2.16.

     “Business” shall mean the businesses of the Borrowers and its subsidiaries limited to the provision of nonstandard automobile insurance and the premium finance thereof, including businesses incidental thereto.

     “Business Day” shall mean any day other than a Saturday, Sunday or day on which commercial banks in New York City are authorized or required by law to close; provided, however, that when used in connection with a Eurodollar Loan (including with respect to all notices and determinations in connection therewith and any payments of principal, interest or other amounts thereon), the term “Business Day” shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market.

     “Capital Expenditures” shall mean, for any period, with respect to any person, (a) the additions to property, plant and equipment and other capital expenditures of such person and its consolidated subsidiaries that are (or should be) set forth in a consolidated statement of cash flows of such person for such period prepared in accordance with GAAP and (b) Capital Lease Obligations incurred by such person and its consolidated subsidiaries during such period.

     “Capital Lease Obligations” of any person shall mean the obligations of such person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such person under GAAP, and the amount of such obligations at any time shall be the capitalized amount thereof at such time determined in accordance with GAAP.

     “Cash Capital Expenditures” shall mean any Capital Expenditures the source of funds for which was not or is not proceeds of any Indebtedness (whether or not subordinate to any other obligation of any person).

     “Cash Flow” shall mean, for any relevant 12 month fiscal period, the sum, without duplication, of (i) for the Borrower, USAgencies and their respective subsidiaries (other than the Regulated Insurance Subsidiaries and other than Premium Finance Co. and its Subsidiaries) Consolidated EBITDA for the relevant period, (ii) all state and federal income tax expenses incurred by the Regulated Insurance Subsidiaries for the relevant period, and (iii) the lesser of (a) combined statutory earnings for all Regulated Insurance Subsidiaries for the December 31^st

5

calendar period most recently ended prior to the relevant period, and (b) the sum of 10% of surplus of all Regulated Insurance Subsidiaries as of the last day of the December 31^st calendar period most recently ended prior to the relevant period, provided that for purposes of calculating Cash Flow for any period (A) the Cash Flow of USAgencies and of any other Acquired Entity acquired by the Borrower or any Subsidiary (other than Premium Finance Co.) pursuant to a Permitted Acquisition during such period shall be included on a pro forma basis for such period (assuming the consummation of such acquisition and the incurrence or assumption of any Indebtedness in connection therewith occurred as of the first day of such period) and (B) the Cash Flow of any person or line of business sold or otherwise disposed of by the Borrower or any Subsidiary during such period for shall be excluded for such period (assuming the consummation of such sale or other disposition and the repayment of any Indebtedness in connection therewith occurred as of the first day of such period). The preceding formula shall be adjusted on a proportionate basis for any relevant period that is not a fiscal twelve month period.

     A “Change in Control” shall be deemed to have occurred if (a) the Permitted Holders shall fail to own directly or indirectly, beneficially and of record, Equity Interests representing at least the Required Minimum Percentage of the aggregate ordinary voting power and aggregate equity value represented by the issued and outstanding Equity Interests in the Borrower, (b) any “person” or “group” (within the meaning of Rule 13d5 of the Securities Exchange Act of 1934 as in effect on the date hereof) other than the Permitted Holders shall own directly or indirectly, beneficially or of record, Equity Interests representing a greater percentage of either the aggregate ordinary voting power or the aggregate equity value represented by the issued and outstanding Equity Interests in the Borrower then held, directly or indirectly, beneficially and of record, by the Permitted Holders; (c) a majority of the seats (other than vacant seats) on the board of directors of the Borrower shall at any time be occupied by persons who are not Continuing Directors; (d) Borrower shall at any time fail to own directly or indirectly, beneficially and of record, 100% of each class of issued and outstanding Equity Interests in each of its direct whollyowned Subsidiaries free and clear of all Liens (other than Liens created by the Guarantee and Collateral Agreement); or (e) any change of control (or similar event, however denominated) with respect to the Borrower or any Subsidiary shall occur under and as defined in the Subordinated Debt Documents, any Qualified Additional Subordinated Debt Documents, or any Approved Premium Financing to which the Borrower or any Subsidiary is a party, provided, that a Change in Control shall not be deemed to have occurred as a result of the Acquisition and other Acquisition Transactions.

     “Change in Law” shall mean (a) the adoption of any law, rule or regulation after the date of this Agreement, (b) any change in any law, rule or regulation or in the interpretation or application thereof by any Governmental Authority after the date of this Agreement or (c) compliance by any Lender or the Issuing Bank (or, for purposes of Section 2.14. , by any lending office of such Lender or by such Lender’s or Issuing Bank’s holding company, if any) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the date of this Agreement.

     “Charges” shall have the meaning assigned to such term in Section 9.09.

     “Class”, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are Revolving Loans, Term Loans or Swingline Loans

6

and, when used in reference to any Commitment, refers to whether such Commitment is a Revolving Credit Commitment, Term Loan Commitment or Swingline Commitment.

     “Closing Date” shall mean January 31, 2007.

     “Closing Date Material Adverse Effect” shall mean (i) a material adverse condition or material adverse change in or materially affecting (a) the business, assets, liabilities, operations, condition (financial or otherwise), operating results, Projections or prospects of the Borrower and its Subsidiaries, taken as a whole (excluding USAgencies and its Subsidiaries), or (b) the validity or enforceability of any of the Loan Documents or the rights and remedies of the Administrative Agent, the Collateral Agent or the Secured Parties thereunder; provided, however, that the following shall be excluded from a determination of whether such a material adverse change has occurred: any change or effect relating to (A) the effects or conditions or events that are generally applicable to (1) the industries in which the Borrower or its subsidiaries operate, which do not have a materially disproportionate effect (relative to other industry participants) on the Borrower and its subsidiaries, taken as a whole (excluding USAgencies and its subsidiaries), or (2) the capital, financial, banking or currency markets; (B) changes in applicable accounting regulations and principles resulting from changes in GAAP or SAP, which do not have a materially disproportionate effect (relative to other industry participants) on the Borrower and its subsidiaries, taken as a whole (excluding USAgencies and its subsidiaries); (C) any change resulting from the announcement of the transactions described in the Commitment Letter or the Transactions; (D) national or international political or social conditions, including the engagement by the United States in hostilities, whether or not pursuant to the declaration of a nation emergency or war, or the occurrence of any military or terrorist attack upon the United States, or any of its territories, possessions, or diplomatic or consular offices or upon any military installation, equipment or personnel of the United States, which do not have a materially disproportionate effect (relative to other industry participants) on the Borrower and its subsidiaries, taken as a whole (excluding USAgencies and its subsidiaries); or (E) any event that has or is reasonably expected to have a negative impact of less than 15% on the earnings of the Borrower and its subsidiaries, taken as a whole (excluding USAgencies and its subsidiaries) or (ii) any effect, change, development, state of facts, or circumstance that individually or taken as a whole with all other such effects, changes, developments, states of fact, or circumstances has or is reasonably expected to have a material adverse effect on (a) the business, assets, liabilities, financial condition or results of operations of USAgencies and its Subsidiaries taken as a whole or (b) the ability of the Borrower to operate USAgencies and its Subsidiaries or conduct the Business immediately after the closing of the Acquisition in substantially the same manner as such operations were being conducted by USAgencies and its Subsidiaries prior to the closing of the Acquisition (disregarding for purposes of this clause (a) any specific effect, change, development, state of facts, or circumstance existing or occurring prior to the Closing Date that is solely attributable to or solely impacts the Borrower or its affiliates and is not connected in any way to the operation of USAgencies and its Subsidiaries or the conduct of the Business prior to the Closing Date), which shall include, without limitation, any effect, change, development, state of facts, or circumstance that has resulted in the Adjusted Book Value falling below the MAE Book Value as of the applicable date for such MAE Book Value or is reasonably expected to result in a 10% reduction in the projected consolidated revenues of USAgencies and its subsidiaries for fiscal year ended December 31, 2007 of $104,700,000; provided that any such effect, change, development, state of facts or circumstances described above attributable to or

7

resulting from any action or omission of USAgencies or any of its subsidiaries taken with the express prior written consent of the Borrower shall not be considered for purposes of determining whether a Closing Date Material Adverse Effect exists.

     “Collateral” shall mean all property and assets of the Loan Parties, now owned or hereafter acquired, upon which a Lien is purported to be created by any Security Document, and shall include the Mortgaged Properties.

     “Collateral Agent” shall have the meaning assigned to such term in the preamble.

     “Combined Ratio” means the (a) Loss Ratio plus the (b) Expense Ratio.

     “Combined Risk-Based Capital Ratio” shall mean the ratio (expressed as a percentage), at any time, of (i) the sum, without duplication, of the Total Adjusted Capital of each Regulated Insurance Subsidiary to (ii) the sum, without duplication, of the Authorized Control Level of each Regulated Insurance Subsidiary.

     “Commitment” shall mean, with respect to any Lender, such Lender’s Revolving Credit Commitment, Term Loan Commitment and Swingline Commitment.

     “Commitment Fee” shall have the meaning assigned to such term in Section 2.05. (a) .

     “Commitment Fee Rate” shall mean a rate per annum equal to ¹/2 of 1%.

     “Commitment Letter” shall mean the Commitment Letter dated as of October 5, 2006, among the Borrower, CS and CS Securities.

     “Confidential Information Memorandum” shall mean the Confidential Information Memorandum of the Borrower dated November, 2006.

     “Consolidated EBITDA” shall mean, for any period, Consolidated Net Income for such period plus (a) without duplication and to the extent deducted in determining such Consolidated Net Income, the sum of (i) Consolidated Interest Expense for such period, (ii) consolidated income tax expense for such period, (iii) all amounts attributable to depreciation and amortization for such period, (iv) any non-cash charges, (other than the write-down of current assets, provided that, the Borrower may include as a non-cash charge a write-down of uncollected accounts receivable in an amount up to $7,200,000 that occurs during the fourth quarter of fiscal year 2006 or any quarter of fiscal year 2007) (v) fees, costs and expenses related to the consummation of the Acquisition of up to $2,000,000 in the aggregate incurred on or prior to June 30, 2007 and (vi) unusual or non-recurring charges in an amount not to exceed $9,000,000 for periods ending in fiscal years 2006 and 2007 and $5,000,000 for periods ending in any fiscal year thereafter (provided that to the extent that all or any portion of the income of any person is excluded from Consolidated Net Income pursuant to the definition thereof for all or any portion of such period any amounts set forth in the preceding clauses (i) through (iv) that are attributable to such person shall not be included for purposes of this definition for such period or portion thereof), and minus (b) without duplication (i) all cash payments made during such period on account of reserves, restructuring charges and other non-cash charges added to Consolidated Net Income pursuant to clause (a)(iv) above in a previous period and (ii) to the

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extent included in determining such Consolidated Net Income, any extraordinary gains and all non-cash items of income for such period, all determined on a consolidated basis in accordance with GAAP; provided that for purposes of calculating Consolidated EBITDA for any period (A) the Consolidated EBITDA of USAgencies and of any other Acquired Entity acquired by the Borrower or any Subsidiary (other than Premium Finance Co.) pursuant to a Permitted Acquisition during such period shall be included on a pro forma basis for such period (assuming the consummation of such acquisition and the incurrence or assumption of any Indebtedness in connection therewith occurred as of the first day of such period) and (B) the Consolidated EBITDA of any person or line of business sold or otherwise disposed of by the Borrower or any Subsidiary during such period for shall be excluded for such period (assuming the consummation of such sale or other disposition and the repayment of any Indebtedness in connection therewith occurred as of the first day of such period).

     “Consolidated Interest Expense” shall mean, for any period, the sum of (a) the interest expense (including imputed interest expense in respect of Capital Lease Obligations and Synthetic Lease Obligations) of the Borrower and its Subsidiaries (other than Premium Finance Co. and its Subsidiaries) for such period (including all commissions, discounts and other fees and charges owed by the Borrower and the Subsidiaries (other than Premium Finance Co. and its Subsidiaries) with respect to letters of credit and bankers’ acceptance financing), net of interest income, in each case determined on a consolidated basis in accordance with GAAP, plus (b) any interest accrued during such period in respect of Indebtedness of the Borrower or any Subsidiary (other than Premium Finance Co. and its Subsidiaries) that is required to be capitalized rather than included in consolidated interest expense for such period in accordance with GAAP, provided that for purposes of calculating Consolidated Interest Expense for any period (A) the Consolidated Interest Expense of USAgencies and of any other Acquired Entity acquired by the Borrower or any Subsidiary (other than Premium Finance Co.) during such period shall be included on a pro forma basis for such period (assuming the consummation of such acquisition and the incurrence or assumption of any Indebtedness in connection therewith occurred as of the first day of such period) and (B) the Consolidated Interest Expense of any person or line of business sold or otherwise disposed of by the Borrower or any Subsidiary in accordance with the terms of this Agreement during such period shall be excluded for such period (assuming the consummation of such sale or other disposition and the repayment of any Indebtedness in connection therewith occurred as of the first day of such period). For purposes of the foregoing, interest expense shall be determined after giving effect to any net payments made or received by the Borrower or any Subsidiary (other than Premium Finance Co. and its Subsidiaries) with respect to interest rate Hedging Agreements.

     “Consolidated Net Income” shall mean, for any period, the net income or loss of the Borrower and the Subsidiaries for such period determined on a consolidated basis in accordance with GAAP; provided that there shall be excluded (a) the income of any Subsidiary to the extent that the declaration or payment of dividends or similar distributions by the Subsidiary of that income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, statute, rule or governmental regulation applicable to such Subsidiary, (b) the income or loss of any person accrued prior to the date it becomes a Subsidiary or is merged into or consolidated with the Borrower or any Subsidiary or the date that such person’s assets are acquired by the Borrower or any Subsidiary, (c) the income of any person (other than a Subsidiary) in which any other person (other than the Borrower or a wholly owned

9

Subsidiary or any director holding qualifying shares in accordance with applicable law) has an interest, except to the extent of the amount of dividends or other distributions actually paid to the Borrower or a wholly owned Subsidiary by such person during such period, and (d) any gains attributable to sales of assets out of the ordinary course of business; provided, that there shall be excluded from Consolidated Net Income for any period the net income or loss of Premium Finance Co. and its Subsidiaries for such period to the extent otherwise included in Consolidated Net Income, except to the extent actually received in cash by Borrower or any of its Subsidiaries (other than Premium Finance Co. or any Subsidiary thereof) during such period through dividends or other distributions other than intercompany loans.

     “Consolidated Net Worth” shall mean the net worth of Borrower and its Subsidiaries determined on a consolidated basis in accordance with GAAP after appropriate deduction for any minority interests in Subsidiaries.

     “Continuing Directors” shall mean, at any time, any member of the board of directors of Borrower who (a) was a member of such board of directors on the Closing Date, after giving effect to the Acquisition, or (b) was nominated for election or elected to such board of directors with the approval of a majority of the Continuing Directors who were members of such board of directors at the time of such nomination or election.

     “Control” shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a person, whether through the ownership of voting securities, by contract or otherwise, and the terms “Controlling” and “Controlled” shall have meanings correlative thereto.

     “Credit Event” shall have the meaning assigned to such term in Section 4.01.

     “CS” shall mean Credit Suisse, Cayman Islands Branch.

     “CS Securities” shall mean Credit Suisse Securities (USA) LLC.

     “Default” shall mean any event or condition which constitutes an Event of Default or which upon notice, lapse of time or both would constitute an Event of Default.

     “dollars” or “$” shall mean lawful money of the United States of America.

     “Domestic Subsidiaries” shall mean all Subsidiaries incorporated, formed or organized under the laws of the United States of America, any State thereof or the District of Columbia.

     “Environmental Laws” shall mean all former, current and future Federal, state, local and foreign laws (including common law), treaties, regulations, rules, ordinances, codes, decrees, judgments, directives, orders (including consent orders), and agreements in each case, relating to protection of the environment, natural resources, human health and safety or the presence, Release of, threatened Release, or exposure to, Hazardous Materials, or the generation, manufacture, processing, distribution, use, treatment, storage, transport, recycling or handling of, or the arrangement for such activities with respect to, Hazardous Materials.

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     “Environmental Liability” shall mean all liabilities, obligations, damages, losses, claims, actions, suits, judgments, orders, fines, penalties, fees, expenses and costs (including administrative oversight costs, natural resource damages and remediation costs), whether contingent or otherwise, arising out of or relating to (a) compliance or noncompliance with any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the Release or threatened Release of any Hazardous Materials or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing.

     “Environmental Permit” shall mean any Permit issued pursuant to any Environmental Law.

     “Equity Interests” shall mean shares of capital stock, partnership interests, membership interests in a limited liability company, beneficial interests in a trust or other equity interests in any person, or any obligations convertible into or exchangeable for, or giving any person a right, option or warrant to acquire, such equity interests or such convertible or exchangeable obligations.

     “Equity Issuance” shall mean any issuance or sale by the Borrower of any Equity Interests of the Borrower, or the receipt by the Borrower of any capital contribution, as applicable, except in each case for (a) any issuance of directors’ qualifying shares and (b) sales or issuances of common stock of Borrower to management or employees of the Borrower or any Subsidiary under any employee stock option or stock purchase plan or employee benefit plan in existence from time to time in the ordinary course of business.

     “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time.

     “ERISA Affiliate” shall mean any trade or business (whether or not incorporated) that, together with the Borrower, is treated as a single employer under Section 414(b) or (c) of the Tax Code, or solely for purposes of Section 302 of ERISA and Section 412 of the Tax Code, is treated as a single employer under Section 414 of the Tax Code.

     “ERISA Event” shall mean (a) any “reportable event”, as defined in Section 4043 of ERISA or the regulations issued thereunder, with respect to a Benefit Plan (other than an event for which the 30-day notice period is waived); (b) the existence with respect to any Benefit Plan of an “accumulated funding deficiency” (as defined in Section 412 of the Tax Code or Section 302 of ERISA), whether or not waived; (c) the filing pursuant to Section 412(d) of the Tax Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Benefit Plan; (d) the incurrence by the Borrower or any of its ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Benefit Plan or the withdrawal or partial withdrawal of the Borrower or any of its ERISA Affiliates from any Benefit Plan or Multiemployer Plan; (e) the receipt by the Borrower or any of its ERISA Affiliates from the PBGC or a plan administrator of any notice relating to the intention to terminate any Benefit Plan or Plans or to appoint a trustee to administer any Benefit Plan; (f) the adoption of any amendment to a Benefit Plan that would require the provision of

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security pursuant to Section 401(a)(29) of the Tax Code or Section 307 of ERISA; (g) the receipt by the Borrower or any of its ERISA Affiliates of any notice, or the receipt by any Multiemployer Plan from the Borrower or any of its ERISA Affiliates of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA; (h) the occurrence of a “prohibited transaction” with respect to which the Borrower or any of the Subsidiaries is a “disqualified person” (within the meaning of Section 4975 of the Tax Code) or with respect to which the Borrower or any such Subsidiary could otherwise be liable; or (i) any other event or condition with respect to a Benefit Plan or Multiemployer Plan that could result in liability of the Borrower or any Subsidiary.

     “Eurodollar”, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Adjusted LIBO Rate.

     “Event of Default” shall have the meaning assigned to such term in Article VII.

     “Excess Cash Flow” shall mean, for any relevant twelve (12) month fiscal period, without duplication, Cash Flow, less (i) the consolidated aggregate amount of all Capital Expenditures for such period, including capital payments for business expenditures and investments, such as capital lease payments, (ii) consolidated state and federal income taxes for such period, (iii) Consolidated Interest Expense, (iv) consolidated minimum required principal amortization repayments actually paid in accordance with Section 2.11(a) hereof, (v) ordinary corporate dividends made in accordance with the terms hereof during such period, and (vi) cash consideration utilized for Permitted Acquisitions during the relevant twelve (12) month fiscal period. The preceding formula shall be adjusted on a pro rata basis for any relevant period that is not a fiscal twelve (12) month period.

     “Excluded Foreign Subsidiaries” shall mean, at any time, any Foreign Subsidiary that is (or is treated as) for United States federal income tax purposes either (a) a corporation or (b) a pass-through entity owned directly or indirectly by another Foreign Subsidiary that is (or is treated as) a corporation, or any subsidiary that is prohibited by applicable law from guaranteeing the Obligations.

     “Excluded Taxes” shall mean, with respect to the Administrative Agent, any Lender, the Issuing Bank or any other recipient of any payment to be made by or on account of any obligation of the Borrower hereunder, (a) income or franchise taxes imposed on (or measured by) its net income as a result of a present or former connection between such recipient and the jurisdiction imposing such tax (or any political subdivision thereof), other than any such connection arising solely from such recipient having executed, delivered or performed its obligations or received a payment under, or enforced, this Agreement or any other Loan Document and (b) in the case of a Foreign Lender (other than an assignee pursuant to a request by the Borrower under Section 2.21. (a) , any United States withholding tax that is imposed on amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party to this Agreement (or designates a new lending office) or is attributable to such Foreign Lender’s failure to comply with Section 2.20. (d) , except to the extent that such Foreign Lender (or its assignor, if any) was entitled, at the time of designation of a new lending office (or assignment), to receive

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additional amounts from the Borrower with respect to such withholding tax pursuant to Section 2.20. (a) (it being understood and agreed, for the avoidance of doubt, that any withholding tax imposed on a Foreign Lender as a result of a Change in Law or regulation or interpretation thereof occurring after the time such Foreign Lender became a party to this Agreement shall not be an Excluded Tax).

     “Existing Credit Facilities” shall mean, collectively, the Frost Credit Facility and the Hibernia Credit Facility.

     “Existing TruPS Business Trusts” shall mean Affirmative Trust I and Affirmative Trust II.

     “Expense Ratio” means the sum of operating expenses and depreciation and amortization expenses less commission income and fees, divided by earned premiums.

     “Extraordinary Receipts” means any Net Cash Proceeds received by any Loan Party or any of their respective Subsidiaries (other than Premium Finance Co.) not in the ordinary course of business (and not consisting of proceeds described in Section 2.3(b), (c), (d), (e) or (f) hereof), including, without limitation, (i) foreign, federal, state or local tax refunds, (ii) pension plan reversions, (iii) proceeds of insurance to the extent not constituting a Recovery Event, (iv) judgments, proceeds of settlements or other consideration of any kind in connection with any cause of action or litigation, (v) condemnation awards (and payments in lieu thereof) to the extent not constituting a Recovery Event, (vi) indemnity payments in respect of the Acquisition Documentation or any other purchase and sale agreement and related documentation in respect of any Permitted Acquisition and (vii) any purchase price adjustment (or similar payments) received in connection with the Acquisition Documentation any other purchase and sale agreement and related documentation in respect of any Permitted Acquisition.

     “Facility” shall mean each of (a) the Term Loan Commitments and the Term Loans made thereunder (the “Term Loan Facility”) and (b) the Revolving Credit Commitments and the extensions of credit made thereunder (the “Revolving Credit Facility”).

     “Federal Funds Effective Rate” shall mean, for any day, the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for the day for such transactions received by the Administrative Agent from three federal funds brokers of recognized standing selected by it.

     “Fee Letter” shall mean the Fee Letter dated as of October 5, 2006, among the Borrower, CS and CS Securities.

     “Fees” shall mean the Commitment Fees, the Administrative Agent Fees, the L/C Participation Fees and the Issuing Bank Fees.

     “Financial Officer” of any person shall mean the chief financial officer, principal accounting officer, treasurer or controller of such person.

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     “Financial Reinsurance Agreement” shall mean a reinsurance agreement covering any transaction in which any Regulated Insurance Subsidiary cedes business that does not meet the conditions for reinsurance accounting as provided by the Financial Accounting Standards Board in Statement of Financial Accounting Standards No. 113, as the same may be revised, replaced, or supplemented from time to time.

     “Fixed Charge Coverage Ratio” shall mean the ratio (rounded to two decimal places) determined as at the last day of the most recent fiscal year of Borrower of (a) Consolidated EBITDA for the four fiscal quarter period ended on the last day of such fiscal year, to (b) Fixed Charges determined as at the last day of such fiscal year.

     “Fixed Charges” means the sum of (a) Consolidated Interest Expense for the four fiscal quarter period ended on the date of determination, plus (b) scheduled principal payments of Indebtedness which would be classified as a current liability on a consolidated balance sheet of Borrower and its consolidated Subsidiaries payable during the four fiscal quarter period beginning on the day following the date of determination, plus (c) Cash Capital Expenditures (other than Permitted IT Capital Expenditures) actually paid by Borrower and its consolidated Subsidiaries during the four fiscal quarter period ended on the date of determination, plus (d) the aggregate amount of Taxes actually paid by Borrower and its consolidated Subsidiaries during the four fiscal quarter period ended on the date of determination, plus (e) cash Restricted Payments actually paid by Borrower during the four fiscal quarter period ended on the date of determination.

     “Foreign Lender” shall mean any Lender that is organized under the laws of a jurisdiction other than that in which the Borrower is located. For purposes of this definition, the United States of America, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction.

     “Foreign Subsidiary” shall mean any Subsidiary that is not a Domestic Subsidiary.

     “Frost Credit Facility” shall mean the credit facility of the Borrower under the credit agreement dated as of July 30, 2004, as amended, among the Borrower, Frost National Bank, as a lender and as agent for all lenders, and the other lenders party thereto.

     “GAAP” shall mean generally accepted accounting principles in the United States.

     “Governmental Authority” shall mean the government of the United States of America or any other nation, any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government.

     “Granting Lender” shall have the meaning assigned to such term in Section 9.04. (i).

     “Guarantee” of or by any person (the “guarantor”) shall mean any obligation, contingent or otherwise, of (a) the guarantor or (b) another person (including any bank under a letter of credit) to induce the creation of which the guarantor has issued a reimbursement, counterindemnity or similar obligation, in either case guaranteeing or having the economic effect

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of guaranteeing any Indebtedness or other obligation of any other person (the “primary obligor”) in any manner, whether directly or indirectly, and including any obligation, contingent or otherwise, of the guarantor, direct or indirect, (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such Indebtedness or other obligation, (ii) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness or other obligation of the payment of such Indebtedness or other obligation, (iii) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation, (iv) to act as an account party in respect of any letter of credit or letter of guaranty issued to support such Indebtedness or obligation or (v) to otherwise assure or hold harmless the owner of such Indebtedness or other obligation against loss in respect thereof; provided, however, that the term “Guarantee” shall not include (x) endorsements for collection or deposit in the ordinary course of business or (y) obligations of Regulated Insurance Subsidiaries under Insurance Contracts, Reinsurance Agreements or Retrocession Agreements.

     “Guarantee and Collateral Agreement” shall mean the Guarantee and Collateral Agreement in the form of Exhibit E, to be executed and delivered by the Borrower and each Subsidiary Guarantor.

     “Hazardous Materials” shall mean any petroleum (including crude oil or fraction thereof) or petroleum products or byproducts, or any pollutant, contaminant, chemical, compound, constituent, or hazardous, toxic or other substances, materials or wastes defined, or regulated as such by, or pursuant to, any Environmental Law, or requires removal, remediation or reporting under any Environmental Law, including asbestos, or asbestos containing material, radon or other radioactive material, polychlorinated biphenyls and urea formaldehyde insulation.

     “Hedging Agreement” shall mean any agreement with respect to any swap, forward, future or derivative transaction or option or similar agreement involving, or settled by reference to, one or more rates, currencies, fuel or other commodities, equity or debt instruments or securities, or economic, financial or pricing indices or measures of economic, financial or pricing risk or value or any similar transaction or any combination of these transactions; provided, however, that no phantom stock or similar plan providing for payments and on account of services provided by current or former directors, officers, employees or consultants of the Borrower or any Subsidiary shall be a Hedging Agreement.

     “Hibernia Credit Facility” shall mean the credit facility of under the Second Amended and Restated Credit Agreement dated as of July 28, 2005, as amended as of the Closing Date, among LIFCO, L.L.C., a Louisiana limited liability company, USAgencies, Hibernia National Bank, as a lender and as agent for all lenders, and the other parties thereto.

     “Increased Amount Date” shall have the meaning assigned to such term in Section 2.24.

     “Increase Loan Notice” shall have the meaning assigned to such term in Section 2.24.

     “Indebtedness” of any person shall mean, without duplication, (a) all obligations of such person for borrowed money or with respect to deposits or advances of any kind, (b) all

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obligations of such person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such person under conditional sale or other title retention agreements relating to property or assets acquired by such person, (d) all obligations of such person in respect of the deferred purchase price of property or services (other than current trade accounts payable incurred in the ordinary course of business, which for the avoidance of doubt, shall mean trade payables that are no more than ninety (90) days outstanding after the earlier of (i) the typical payment date or (ii) the required payment date), (e) all obligations of such person, contingent or otherwise, to purchase, redeem, retire or otherwise acquire for value any Equity Interests in such person, (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such person, whether or not the Indebtedness secured thereby has been assumed; provided that if such Indebtedness has expressly not been assumed, the amount of such Indebtedness for purposes of this Agreement shall be the lesser of (1) the amount of such Indebtedness and (2) the fair market value of the collateral subject to such Lien, (g) all obligations of such person under Financial Reinsurance Agreements, (h) all Guarantees by such person of Indebtedness of others, (i) all Capital Lease Obligations or Synthetic Lease Obligations of such person, (j) all obligations, contingent or otherwise, of such person as an account party in respect of letters of credit and letters of guaranty and (k) all obligations, contingent or otherwise, of such person in respect of bankers’ acceptances. The Indebtedness of any person shall include the Indebtedness of any other person (including any partnership in which such person is a general partner) to the extent such person is liable therefor as a result of such person’s ownership interest in, or other relationship with, such other person, except to the extent the terms of such Indebtedness provide that such person is not liable therefor. For the avoidance of doubt, Indebtedness shall not include obligations to employees undertaken in the ordinary course and consistent with past practice under health or disability employee benefit programs not constituting obligations for borrowed money.

     “Indemnified Taxes” shall mean Taxes other than Excluded Taxes and Other Taxes.

     “Indemnitee” shall have the meaning assigned to such term in Section 9.05. (b) .

     “Information” shall have the meaning assigned to such term in Section 9.16.

     “Installment Agreement” shall mean an agreement or arrangement (however evidenced) pursuant to which a policyholder agrees to pay a Regulated Insurance Subsidiary the premium cost on an insurance policy at a future date in one or more installments, together with a service charge.

     “Insurance Business” shall mean one or more aspects of the business of (a) selling, issuing or underwriting nonstandard personal auto insurance and (b) selling or issuing reinsurance substantially related to the foregoing.

     “Insurance Contract” shall mean any insurance contract or policy issued by a Regulated Insurance Subsidiary (but shall not include any Reinsurance Agreement or Retrocession Agreement).

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     “Insurance Regulators” shall mean, with respect to any Regulated Insurance Subsidiary, the Governmental Authority, insurance department or similar administrative authority or agency located in (a) each state in which such Regulated Insurance Subsidiary is domiciled or (b) to the extent asserting regulatory jurisdiction over such Regulated Insurance Subsidiary, the Governmental Authority, insurance department, authority or agency in each state in which such Regulated Insurance Subsidiary is licensed, shall include any federal insurance regulatory department, authority or agency that may be created and that asserts regulatory jurisdiction over such Regulated Insurance Subsidiary.

     “Intellectual Property Collateral” shall have the meaning assigned to such term in the Guarantee and Collateral Agreement.

     “Intellectual Property Security Agreement” shall mean all Intellectual Property Security Agreements to be executed and delivered by the Loan Parties, each substantially in the applicable form required by the Guarantee and Collateral Agreement.

     “Interest Coverage Ratio” shall mean, on any date, the ratio of (a) Cash Flow for the Borrower and its Subsidiaries (other than Premium Finance Co. and its Subsidiaries) for the period of four consecutive fiscal quarters most recently ended on or prior to such date, taken as one accounting period, to (b) Consolidated Interest Expense for the Borrower its Subsidiaries (other than Premium Finance Co. and its Subsidiaries) for the period of four consecutive fiscal quarters ended on or prior to such date, taken as one accounting period.

     “Interest Payment Date” shall mean (a) with respect to any ABR Loan, the last Business Day of each March, June, September and December commencing March 30, 2007, (b) with respect to any Eurodollar Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Eurodollar Borrowing with an Interest Period of more than three months’ duration, each day that would have been an Interest Payment Date had successive Interest Periods of three months’ duration been applicable to such Borrowing.

     “Interest Period” shall mean, with respect to any Eurodollar Borrowing, the period commencing on the date of such Borrowing and ending on the numerically corresponding day in the calendar month that is 1, 2, 3 or 6 months thereafter, as the Borrower may elect; provided, however, that (a) if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day and (b) any Interest Period that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period. Interest shall accrue from and including the first day of an Interest Period to but excluding the last day of such Interest Period. For purposes hereof, the date of a Borrowing initially shall be the date on which such Borrowing is made and thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing.

     “Investments” shall have the meaning assigned to such term in Section 6.04.

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     “Issuing Bank” shall mean, as the context may require, (a) CS, in its capacity as the issuer of Letters of Credit hereunder, and (b) any other Lender that may become an Issuing Bank pursuant to Section 2.23. (i) or Section 2.23. (k) , with respect to Letters of Credit issued by such Lender. The Issuing Bank may, in its discretion, arrange for one or more Letters of Credit to be issued by Affiliates of the Issuing Bank, in which case the term “Issuing Bank” shall include any such Affiliate with respect to Letters of Credit issued by such Affiliate.

     “Issuing Bank Fees” shall have the meaning assigned to such term in Section 2.05. (c).

     “Joinder Agreement” means the joinder agreement, if any, by and among Borrower, each New Revolving Loan Lender and Administrative Agent, executed in accordance with Section 2.24, which shall set forth the terms and conditions for the making of the New Revolving Loans by the New Revolving Loan Lenders.

     “L/C Commitment” shall mean the commitment of the Issuing Bank to issue Letters of Credit pursuant to Section 2.23..

     “L/C Disbursement” shall mean a payment or disbursement made by the Issuing Bank pursuant to a Letter of Credit.

     “L/C Exposure” shall mean, at any time, the sum of (a) the aggregate undrawn amount of all Letters of Credit at such time and (b) the aggregate amount of all L/C Disbursements that have not been reimbursed at such time. The L/C Exposure of any Revolving Credit Lender at any time shall equal its Pro Rata Percentage of the aggregate L/C Exposure at such time.

     “L/C Fee Payment Date” shall have the meaning assigned to such term in Section 2.05. (c).

     “L/C Participation Fee” shall have the meaning assigned to such term in Section 2.05. (c).

     “Lender Addendum” shall mean, with respect to any initial Lender, a Lender Addendum in the form of Exhibit F, or such other form as may be supplied by the Administrative Agent, to be executed and delivered by such Lender on the Closing Date.

     “Lenders” shall mean (a) the persons that deliver a Lender Addendum (other than any such person that has ceased to be a party hereto pursuant to an Assignment and Acceptance) and (b) any person that has become a party hereto pursuant to an Assignment and Acceptance. Unless the context otherwise requires, the term “Lenders” shall include the Swingline Lender.

     “Letter of Credit” shall mean any letter of credit issued pursuant to Section 2.23.

     “Leverage Ratio” shall mean, on any date, the ratio of (a) Total Debt on such date to (b) Cash Flow for the period of four consecutive fiscal quarters most recently ended on or prior to such date, taken as one accounting period.

     “LIBO Rate” shall mean, with respect to any Eurodollar Borrowing for any Interest Period, the rate per annum determined by the Administrative Agent at approximately 11:00 a.m.,

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London time, on the date that is two Business Days prior to the commencement of such Interest Period by reference to the British Bankers’ Association Interest Settlement Rates for deposits in dollars (as set forth by the Bloomberg Information Service or any successor thereto or any other service selected by the Administrative Agent which has been nominated by the British Bankers’ Association as an authorized information vendor for the purpose of displaying such rates) for a period equal to such Interest Period; provided that, to the extent that an interest rate is not ascertainable pursuant to the foregoing provisions of this definition, the “LIBO Rate” shall be the interest rate per annum determined by the Administrative Agent to be the average of the rates per annum at which deposits in dollars are offered for such relevant Interest Period to major banks in the London interbank market in London, England by the Administrative Agent at approximately 11:00 a.m. (London time) on the date that is two Business Days prior to the beginning of such Interest Period.

     “Lien” shall mean, with respect to any asset, (a) any mortgage, deed of trust, lien (statutory or otherwise), pledge, hypothecation, encumbrance, collateral assignment, charge or security interest in, on or of such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities.

     “LIFCO” shall mean LIFCO, L.L.C., a Louisiana limited liability company.

     “Loan Documents” shall mean this Agreement and the Security Documents.

     “Loan Parties” shall mean the Borrower and each Subsidiary that is or becomes a party to a Loan Document.

     “Loans” shall mean the Revolving Loans, the Term Loans and the Swingline Loans.

     “Loss Ratio” means the ratio of loss and loss adjustment expense to earned premiums.

     “MAE Book Value” shall mean (a) $88,800,000 as of October 31, 2006, (b) $90,100,000 as of November 30, 2006, (c) $91,500,000 as of December 31, 2006, (d) $92,900,000 as of January 31, 2007, and (e) $94,300,000 as of February 28, 2007.

     “Majority Facility Lenders” shall mean, with respect to any Facility, the holders of a majority of the aggregate unpaid principal amount of the Term Loans or the Aggregate Revolving Credit Exposure, as the case may be, outstanding under such Facility (or, in the case of the Revolving Credit Facility, prior to the termination of the Revolving Credit Commitments, the holders of a majority of the Total Revolving Credit Commitment).

     “Margin Stock” shall have the meaning assigned to such term in Regulation U.

     “Material Adverse Effect” shall mean shall mean a material adverse condition or material adverse change in or materially affecting (a) the business, assets, liabilities, operations or condition (financial or otherwise) of the Borrower and the Subsidiaries, taken as a whole, or (b) the validity or enforceability of any of the Loan Documents or the rights and remedies of the

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Arranger, the Administrative Agent, the Collateral Agent or the Secured Parties thereunder; provided that solely for purposes of the representations and warranties given on and as of the Closing Date, “Material Adverse Effect” shall mean a Closing Date Material Adverse Effect.

     “Material Real Property” shall mean (i) all Real Property owned in fee by any Loan Party that, together with any improvements thereon, individually has a fair market value of at least $5,000,000, and (ii) all leased Real Property of any Loan Party which lease individually has a fair market value of at least $5,000,000.

     “Material Indebtedness” shall mean Indebtedness (other than the Loans and Letters of Credit), or obligations in respect of one or more Hedging Agreements, of any one or more of the Borrower or the Subsidiaries in an aggregate principal amount exceeding $2,500,000. For purposes of determining Material Indebtedness, the “principal amount” of the obligations of the Borrower or any Subsidiary in respect of any Hedging Agreement at any time shall be the maximum aggregate amount (giving effect to any netting agreements) that the Borrower or such Subsidiary would be required to pay if such Hedging Agreement were terminated at such time.

     “Maximum Rate” shall have the meaning assigned to such term in Section 9.09.

     “Moody’s” shall mean Moody’s Investors Service, Inc.

     “Mortgaged Properties” shall mean, initially, each parcel of real property and the improvements thereto owned or leased by a Loan Party and specified on Schedule 1.01(a), and shall include each other parcel of real property and improvements thereto with respect to which a Mortgage is granted pursuant to Section 5.09 or 5.10.

     “Mortgages” shall mean the fee or leasehold mortgages or deeds of trust, assignments of leases and rents and other security documents granting a Lien on any Mortgaged Property to secure the Obligations, in the form of Exhibit G, with such changes as shall be advisable under the law of the jurisdiction in which such Mortgage is to be recorded and as are reasonably satisfactory to the Collateral Agent, as the same may be amended, supplemented, replaced or otherwise modified from time to time in accordance with this Agreement.

     “Multiemployer Plan” shall mean a multiemployer plan as defined in Section 4001(a)(3) of ERISA.

     “NAIC” shall mean the National Association of Insurance Commissioners or any successor organization thereto.

     “Net Cash Proceeds” shall mean (a) with respect to any Asset Sale, Recovery Event or Extraordinary Receipts, the proceeds thereof in the form of cash and Permitted Investments (including any such proceeds subsequently received (as and when received) in respect of noncash consideration initially received), net of (i) in respect of Asset Sales or Recovery Events, selling expenses (including reasonable and customary broker’s fees or commissions, legal fees, transfer and similar taxes incurred by the Borrower and the Subsidiaries in connection therewith and the Borrower’s good faith estimate of income taxes paid or payable in connection with such sale, after taking into account any available tax credits or deductions and any tax sharing arrangements), (ii) in respect of Asset Sales, amounts provided as a reserve, in accordance with

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GAAP, against any liabilities under any indemnification obligations or purchase price adjustment associated with such Asset Sale (provided that, to the extent and at the time any such amounts are released from such reserve, such amounts shall constitute Net Cash Proceeds) and (iii) in respect of Asset Sales or Recovery Events, the principal amount, premium or penalty, if any, interest and other amounts on any Indebtedness for borrowed money which is secured by the asset sold in such Asset Sale and which is required to be repaid with such proceeds (other than any such Indebtedness assumed by the purchaser of such asset); provided, however, that, in respect of Asset Sales and Recovery Events, if (x) the Borrower shall deliver a certificate of a Financial Officer of the Borrower to the Administrative Agent at the time of receipt thereof setting forth the Borrower’s intent to reinvest such proceeds in productive assets of a kind then used or usable in the business of the Borrower and the Subsidiaries within 180 days of receipt of such proceeds and (y) no Default or Event of Default shall have occurred and shall be continuing at the time of such certificate or at the proposed time of the application of such proceeds, such proceeds shall not constitute Net Cash Proceeds except to the extent not so used at the end of such 180day period, at which time such proceeds shall be deemed to be Net Cash Proceeds; and (b) with respect to any issuance or disposition of Indebtedness or any Equity Issuance, the cash proceeds thereof, net of all taxes and reasonable and customary fees, commissions, costs and other expenses incurred by the Borrower and the Subsidiaries in connection therewith.

     “New Revolving Loan Commitment” shall have the meaning assigned to such term in Section 2.24.

     “New Revolving Loan Lender” shall have the meaning assigned to such term in Section 2.24.

     “New Revolving Loan” shall have the meaning assigned to such term in Section 2.24.

     “Obligations” shall mean all obligations defined as “Obligations” in the Guarantee and Collateral Agreement and the other Security Documents.

     “Other Taxes” shall mean any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies (including interest, fines, penalties and additions to tax) arising from any payment made under any Loan Document or from the execution, delivery or enforcement of, or otherwise with respect to, any Loan Document.

     “Paying Agent” shall have the meaning assigned to such term in Article VIII.

     “PBGC” shall mean the Pension Benefit Guaranty Corporation referred to and defined in ERISA and any successor entity performing similar functions.

     “Perfection Certificate” shall mean the Pre-Closing UCC Diligence Certificate substantially in the form of Exhibit H or any other form approved by the Collateral Agent.

     “Permits” shall mean any and all franchises, licenses, leases, permits, approvals, notifications, certifications, registrations, authorizations, exemptions, qualifications, easements, rights of way, Liens and other rights, privileges and approvals required under any Requirement of Law.

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     “Permitted Acquisition” shall mean (i) the acquisition by Borrower of USAgencies and its Subsidiaries pursuant to the Purchase Agreement and the transactions contemplated thereby, and (ii) the acquisition by the Borrower or any Subsidiary of all or substantially all the assets of a person or line of business of such person, or all of the Equity Interests of a person (referred to herein as the “Acquired Entity”); provided that (w) the Acquired Entity shall be a going concern and shall be in a similar line of business as that of the Borrower and the Subsidiaries as conducted during the current and most recently concluded calendar year; (x) at the time of such transaction (A) both before and after giving effect thereto, no Event of Default or Default shall have occurred and be continuing; and (B) the Borrower would be in compliance with the covenants set forth in Sections 6.11 through 6.16, in each case as of the most recently completed period ending prior to such transaction for which the financial statements and certificates required by Section 5.04(a) or 5.04(b) were required to be delivered or for which comparable financial statements have been filed with the Securities and Exchange Commission, after giving pro forma effect to such transaction and to any other event occurring after such period as to which pro forma recalculation is appropriate (including any other transaction described in this definition occurring after such period) as if such transaction (and the occurrence or assumption of any Indebtedness in connection therewith) had occurred as of the first day of such period; and (C) after giving effect to such acquisition, there must be at least $3,000,000 of unused and available Revolving Credit Commitments; (y) the Borrower and the Subsidiaries shall not incur or assume any Indebtedness in connection with such acquisition, except as permitted by Section 6.01; and (iv) the Borrower shall comply, and shall cause the Acquired Entity to comply, with the applicable provisions of Sections 5.09 and 5.10 and the Security Documents.

     “Permitted Holders” shall mean JC Flowers I L.P., JC Flowers II L.P., JC Flowers II-A L.P., JC Flowers II-B L.P., JC Flowers & Co., LLC and any other affiliated investment funds which are managed or controlled thereby or an Affiliate thereof in the ordinary course of business and pursuant to written agreements (including, without limitation, pursuant to the organizational documents of such persons).

     “Permitted Investments” shall mean:

     (a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America), in each case maturing within one year from the date of acquisition thereof;

     (b) investments in commercial paper maturing within 270 days from the date of acquisition thereof and having, at such date of acquisition, the highest credit rating obtainable from S&P or from Moody’s;

     (c) investments in certificates of deposit, banker’s acceptances and time deposits maturing within 180 days from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, the Administrative Agent or any domestic office of any commercial bank organized under the laws of the United States of America or any State thereof that has a combined capital and surplus and undivided profits of not less than $500,000,000;

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     (d) fully collateralized repurchase agreements with a term of not more than 30 days for securities described in clause (a) above and entered into with a financial institution satisfying the criteria of clause (c) above;

     (e) investments in “money market funds” within the meaning of Rule 2a-7 of the Investment Company Act of 1940, as amended, substantially all of whose assets are invested in investments of the type described in clauses (a) through (d) above; and

     (f) other shortterm investments utilized by Foreign Subsidiaries in accordance with normal investment practices for cash management in investments of a type analogous to the foregoing.

     “Permitted IT Capital Expenditures” shall have the meaning assigned to such term in Section 6.10.

     “Permitted Refinancing Indebtedness” shall mean Indebtedness issued or incurred (including by means of the extension or renewal of existing Indebtedness) to refinance, refund, extend, renew or replace existing Indebtedness (“Refinanced Indebtedness”); provided that (a) the principal amount of such refinancing, refunding, extending, renewing or replacing Indebtedness is not greater than the principal amount of such Refinanced Indebtedness plus the amount of any premiums or penalties and accrued and unpaid interest paid thereon and reasonable fees and expenses, in each case associated with such refinancing, refunding, extension, renewal or replacement, (b) such refinancing, refunding, extending, renewing or replacing Indebtedness has a final maturity that is no sooner than, and a weighted average life to maturity that is no shorter than, such Refinanced Indebtedness, (c) if such Refinanced Indebtedness or any Guarantees thereof are subordinated to the Obligations, such refinancing, refunding, extending, renewing or replacing Indebtedness and any Guarantees thereof remain so subordinated on terms no less favorable to the Lenders, (d) the obligors in respect of such Refinanced Indebtedness immediately prior to such refinancing, refunding, extending, renewing or replacing are the only obligors on such refinancing, refunding extending, renewing or replacing Indebtedness and (e) such refinancing, refunding, extending, renewing or replacing Indebtedness contains covenants and events of default and is benefited by Guarantees, if any, which, taken as a whole, are determined in good faith by a Financial Officer of the Borrower to be no less favorable to the Borrower or the applicable Subsidiary and the Lenders in any material respect than the covenants and events of default or Guarantees, if any, in respect of such Refinanced Indebtedness.

     “person” shall mean any natural person, corporation, trust, business trust, joint venture, joint stock company, association, company, limited liability company, partnership, Governmental Authority or other entity.

     “Pledged Collateral” shall have the meaning assigned to such term in the Guarantee and Collateral Agreement.

     “Premium Finance Agreement” shall mean an agreement (however evidenced) by which a policyholder agrees to pay LIFCO or a Premium Finance Co. the premium cost on an insurance policy at a future date in one or more installments, together with a finance charge and any related

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fees, as the same may be amended, supplemented or otherwise modified from time to time in accordance with this Agreement.

     “Premium Finance Co.” shall mean a wholly owned bankruptcy remote single purpose subsidiary of the Borrower organized to provide premium financing to customers of the Borrower, its Subsidiaries and other third parties engaged in the Insurance Business (excluding USAgencies and its Subsidiaries, or any person that USAgencies or any of its Subsidiaries are or may be merged with or into) to which such persons have provided non-standard automobile insurance policies, which was formed pursuant to organizational documents acceptable in form and content to the Administrative Agent, which has entered into an Approved Premium Finance Facility, and which does not compete in the state of Louisiana with USAgencies or any of its Subsidiaries with respect to the provision of premium financing to customers of USAgencies, its Subsidiaries or any other Subsidiary of the Borrower operating under the brand or trade name “USAgencies” or any other brand or trade name used by the Borrower or its Subsidiaries.

     “Primary New Revolving Loan Commitment” shall have the meaning assigned to such term in Section 2.24.

     “Prime Rate” shall mean the rate of interest per annum announced from time to time by CS as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective as of the opening of business on the date such change is announced as being effective. The Prime Rate is a reference rate and does not necessarily represent the lowest or best rate actually available.

     “Pro Forma Cash Flow” shall have the meaning assigned to such term in Section 4.02. (j) .

     “Pro Rata Percentage” of any Revolving Credit Lender, at any time, shall mean the percentage of the Total Revolving Credit Commitment represented by such Lender’s Revolving Credit Commitment. In the event the Revolving Credit Commitments shall have expired or been terminated, the Pro Rata Percentages of any Revolving Credit Lender shall be determined on the basis of the Revolving Credit Commitments most recently in effect prior thereto.

     “Projections” shall have the meaning assigned such term in Section 4.02(k).

     “Purchase Agreement” shall mean the purchase and sale agreement dated as of October 3, 2006, among the Sellers and the Borrower, as the same may be amended, supplemented or otherwise modified from time to time in accordance with this Agreement.

     “Qualified Additional Subordinated Debt” shall mean any Indebtedness of the Borrower incurred pursuant to the issuance of any TruPS and any related TruPS instrument, which (i) shall not be secured by any Equity Interests or assets of the Borrower, any Subsidiary thereof or any other person; (ii) shall not be guaranteed by any person other than the Borrower; (iii) shall not mature, and shall not be subject to any mandatory repurchase, redemption or amortization, in each case, prior to the date that is six months after the latest of the Revolving Credit Maturity Date and the Term Loan Maturity Date, as either of the foregoing may be extended in accordance with the terms of this Agreement; (iv) may be optionally or voluntarily redeemable, at the Borrower’s option, subject to the restrictions set forth in Section 6.09(b) hereof; (v) shall

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not contain any financial maintenance covenants; (vi) shall not contain any other covenants, events of default (including cross defaults) or remedies, more restrictive or less advantageous to the Borrower, its Subsidiaries and the Lenders than those set forth in the Subordinated Debt; (vii) shall not be exchangeable or convertible into Indebtedness of Borrower or any of its Subsidiaries (other than additional Qualified Additional Subordinated Debt) or any preferred stock or other Equity Interests; (viii) after giving effect to the incurrence of such Indebtedness, (A) Borrower and its Subsidiaries must be in pro forma compliance with the financial covenants set forth in Sections 6.12 and 6.16 and (B) no Default or Event of Default shall exist or would result from such incurrence; (ix) shall be contractually subordinated in right of payment and otherwise to the Obligations pursuant to provisions substantially similar to those set forth in the Subordinated Debt, such terms of subordination to be subject to the consent of the Administrative Agent, which consent shall not be unreasonably conditioned withheld or delayed (it being understood that provisions substantially similar to those set forth in the Subordinated Debt shall be deemed to be so satisfactory); and (x) shall otherwise contain provisions substantially similar to those set forth in the Subordinated Debt.

     “Qualified Additional Subordinated Debt Documents” shall mean the TruPS, TruPS Instruments, indentures and all other instruments, agreements and other documents evidencing or governing the Qualified Additional Subordinated Debt or providing any Guarantee or other right in respect thereof, executed by the Borrower and/or any TruPS Business Trust established in connection with the issuance of such Qualified Additional Subordinated Debt for the benefit of the lenders, noteholders or other securities holders thereunder, as the same may be amended, supplemented, replaced or otherwise modified from time to time in accordance with this Agreement.

     “Qualified Insurance Holding Company” means each Subsidiary of the Borrower that (x) is an entity which has as its only assets (a) the direct ownership of the Equity Interests of one or more Regulated Insurance Subsidiaries, (b) any de minimis assets related to such Regulated Insurance Subsidiaries and (c) any cash or other distributions from any such Regulated Insurance Subsidiary prior to prompt further distribution of such cash or distribution, subject to the Requirements of Law, if any, to the Qualified Insurance Holding Company’s parent, and (y) is subject to a Requirement of Law which, in the reasonable judgment of the Borrower and upon advice of counsel, prohibits, restricts or otherwise places limitations upon the ability of the Collateral Agent, for the benefit of the Secured Parties, being granted a perfected first priority security interest in the Equity Interests in such Subsidiary as if such Subsidiary were a Regulated Insurance Subsidiary, in each case, if, only to the extent and only for so long as such Requirement of Law remains in effect; provided that the Collateral Agent, for the benefit of the Secured Parties, shall have been granted a perfected first priority security interest in the Equity Interests in a wholly-owned Subsidiary of the Borrower (i) that at all times owns and controls 100% of the Equity Interests in each such Qualified Insurance Holding Company, (ii) is not itself a Qualified Insurance Holding Company, (iii) is and remains a Guarantor hereunder and (iv) has otherwise complied with its obligations under Section 5.09.

     “Real Property” shall mean all Mortgaged Property and all other real property owned or leased from time to time by the Borrower and the Subsidiaries.

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     “Recovery Event” shall mean any settlement of or payment in respect of any property or casualty insurance claim or any taking under power of eminent domain or by condemnation or similar proceeding of or relating to any property or asset of the Borrower or any Subsidiary.

     “Register” shall have the meaning assigned to such term in Section Section 9.04. (d)         .

     “Regulated Insurance Subsidiaries” shall mean collectively, Affirmative Insurance Company, an Illinois corporation, Affirmative Insurance Company of Michigan, a Michigan corporation, Insura Property and Casualty Insurance Company, an Illinois corporation, USDirect and USCasualty and any Subsidiary of the Borrower, formed or acquired after the Closing Date, which is authorized or admitted to carry on or transact Insurance Business in any jurisdiction, is regulated by an Insurance Regulator, and is required by any Insurance Regulator to file an annual statement in the form prescribed by NAIC for an insurance company.

     “Regulation T” shall mean Regulation T of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof.

     “Regulation U” shall mean Regulation U of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof.

     “Regulation X” shall mean Regulation X of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof.

     “Reinsurance Agreement” shall mean any agreement, contract, treaty or other arrangement whereby one or more insurers, as reinsurers, assume liabilities under insurance policies or agreements issued by another insurance or reinsurance company or companies.

     “Related Fund” shall mean, with respect to any Lender that is a fund that invests in bank loans, any other fund that invests in bank loans and is advised or managed by the same investment advisor as such Lender or by an Affiliate of such investment advisor.

     “Related Parties” shall mean, with respect to any specified person, such person’s Affiliates and the respective directors, officers, trustees, employees, agents and advisors of such person and such person’s Affiliates.

     “Release” shall mean any release, spill, seepage, emission, leaking, pumping, injection, pouring, emptying, deposit, disposal, discharge, dispersal, dumping, escaping, leaching, or migration into, onto or through the environment or within or upon any building, structure or facility.

     “Repayment Date” shall have the meaning given such term in Section 2.11. (d) .

     “Required Lenders” shall mean, at any time, Lenders having Loans (excluding Swingline Loans), L/C Exposure, Swingline Exposure and unused Revolving Credit Commitments and Term Loan Commitments representing at least a majority of the sum of all Loans outstanding (excluding Swingline Loans), L/C Exposure, Swingline Exposure and unused Revolving Credit Commitments and Term Loan Commitments at such time.

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     “Required Minimum Percentage” shall mean 30%; provided that the Required Minimum Percentage shall decrease to a revised Required Minimum Percentage of no lower than 15% if, and for so long (and only for so long as) the Permitted Holders continue to appoint and control the greater of three (3) or a majority of the seats (other than vacant seats) on the board of directors of the Borrower; provided further that such decrease shall be limited to the percentage of the Permitted Holders’ ownership dilution caused solely by the issuance of Equity Interests of the Borrower and not, for the avoidance of doubt, by the sale, transfer or other assignment of any Equity Interests of the Borrower by Permitted Holders to persons that are not Permitted Holders.

     “Required Prepayment Percentage” shall mean (a) in the case of any Asset Sale or Recovery Event, 100%; (b) in the case of any Equity Issuance, 50%; (c) in the case of any issuance or other incurrence of Indebtedness, 100%; (d) in the case of any Excess Cash Flow, 75%, or, if on the date of the applicable prepayment, the Leverage Ratio is less than 3.00 to 1.00 but greater than 2.50 to 1.00, 50% or if on the date of the applicable prepayment, the Leverage Ratio is less than or equal to 2.50 to 1.00, 25%; and (e) in the case of Extraordinary Receipts, 100%.

     “Required Revolving Credit Lenders” shall mean, at any time, Revolving Credit Lenders having Revolving Loans (excluding Swingline Loans), L/C Exposure, Swingline Exposure and unused Revolving Credit Commitments representing at least a majority of the sum of all Revolving Loans outstanding (excluding Swingline Loans), L/C Exposure, Swingline Exposure and unused Revolving Credit Commitments at such time.

     “Requirement of Law” shall mean as to any person, the governing documents of such person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such person or any of its Real Property or personal property or to which such person or any of its property of any nature is subject.

     “Responsible Officer” of any person shall mean any executive officer or Financial Officer of such person and any other officer or similar official thereof responsible for the administration of the obligations of such person in respect of this Agreement.

     “Restricted Indebtedness” shall mean Indebtedness of any Loan Party, the payment, prepayment, repurchase or defeasance of which is restricted under Section 6.09. (b) .

     “Restricted Payment” shall mean any dividend or other distribution (whether in cash, securities or other property) with respect to any Equity Interests in the Borrower or any Subsidiary, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, defeasance, retirement, acquisition, cancellation or termination of any Equity Interests in Borrower or any Subsidiary or any option, warrant or other right to acquire any such Equity Interests in Borrower or any Subsidiary.

     “Retrocession Agreement” shall mean any agreement, contract, treaty or other arrangement whereby one or more insurers or reinsurers, as retrocessionaires, assume liabilities

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of reinsurers under a Reinsurance Agreement or other retrocessionaires under another Retrocession Agreement.

     “Revolving Credit Borrowing” shall mean a Borrowing comprised of Revolving Loans.

     “Revolving Credit Commitment” shall mean, with respect to each Lender, the commitment, if any, of such Lender to make Revolving Loans (and to acquire participations in Letters of Credit and Swingline Loans) hereunder as set forth on the Lender Addendum delivered by such Lender, or in the Assignment and Acceptance pursuant to which such Lender assumed its Revolving Credit Commitment, as applicable, as the same may be (a) increased from time to time pursuant to Section 2.24, (b) reduced from time to time pursuant to Section 2.09. or Section 2.25 and (c) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04.         .

     “Revolving Credit Exposure” shall mean, with respect to any Lenders, at any time, the aggregate principal amount at such time of all outstanding Revolving Loans of such Lender, plus the aggregate amount at such time of such Lender’s L/C Exposure, plus the aggregate amount at such time of such Lender’s Swingline Exposure.

     “Revolving Credit Lender” shall mean a Lender with a Revolving Credit Commitment or an outstanding Revolving Loan.

     “Revolving Credit Maturity Date” shall mean the third anniversary of the Closing Date.

     “Revolving Loan Facility” shall have the meaning assigned to such term in the definition of “Facility”.

     “Revolving Loans” shall mean the revolving loans made by the Lenders to the Borrower pursuant to clause (b) of Section 2.01.

     “Risk-Based Capital Ratio” shall mean, for any Regulated Insurance Subsidiary, the ratio (expressed as a percentage), at any time, of the Total Adjusted Capital of such Regulated Insurance Subsidiary to the Authorized Control Level of such Regulated Insurance Subsidiary.

     “S&P” shall mean Standard & Poor’s Ratings Group, Inc.

     “SAP” shall mean the statutory accounting and reporting practices prescribed or permitted by the insurance laws or Insurance Regulator (or other similar Governmental Authority) with respect to each Regulated Insurance Subsidiary.

     “Secondary New Revolving Loan Commitment” shall have the meaning assigned to such term in Section 2.24.

     “Secured Parties” shall have the meaning assigned to such term in the Guarantee and Collateral Agreement.

     “Security Documents” shall mean the Guarantee and Collateral Agreement, the Mortgages, the Intellectual Property Security Agreements and each of the other security

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agreements, pledges, mortgages, consents and other instruments and documents executed and delivered pursuant to any of the foregoing or pursuant to Section 5.09 or 5.10.

     “Sellers” shall mean persons identified on Exhibit A of the Purchase Agreement that are signatories thereto.

     “SPC” shall have the meaning assigned to such term in Section 9.04(i).

     “Statutory Reserves” shall mean a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board and any other banking authority, domestic or foreign, to which the Administrative Agent or any Lender (including any branch, Affiliate or other fronting office making or holding a Loan) is subject for eurocurrency funding (currently referred to as “Eurocurrency Liabilities” in Regulation D of the Board). Eurodollar Loans shall be deemed to constitute eurocurrency funding and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D or any comparable regulation. Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in any reserve percentage.

     “Subordinated Debt” shall mean all Indebtedness outstanding under the Subordinated Debt Documents.

     “Subordinated Debt Documents” shall mean the USAgencies Trust Preferred Note Documents and the Borrower Trust Preferred Note Documents.

     “subsidiary” shall mean, with respect to any person (herein referred to as the “parent”), any corporation, partnership, limited liability company, association or other entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or more than 50% of the general partnership interests are, at the time any determination is being made, owned, controlled or held, or (b) that is, at the time any determination is made, otherwise Controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent.

     “Subsidiary” shall mean any subsidiary of any Loan Party.

     “Subsidiary Guarantor” shall mean, initially, each Subsidiary specified on Schedule 1.01(b) and, at any time thereafter, shall include each other Subsidiary that is not an Excluded Foreign Subsidiary, a Regulated Insurance Subsidiary or a Premium Finance Co.

     “Survey” shall have the meaning assigned to such term in Section 4.02(q).

     “Swingline Commitment” shall mean the commitment of the Swingline Lender to make loans pursuant to Section 2.22, as the same may be reduced from time to time pursuant to Section 2.09.

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     “Swingline Exposure” shall mean, at any time, the aggregate principal amount at such time of all outstanding Swingline Loans. The Swingline Exposure of any Revolving Credit Lender at any time shall equal its Pro Rata Percentage of the aggregate Swingline Exposure at such time.

     “Swingline Lender” shall mean Credit Suisse acting in its capacity as lender of Swingline Loans hereunder.

     “Swingline Loan” shall mean any loan made by the Swingline Lender pursuant to Section 2.22.

     “Synthetic Lease Obligations” shall mean all monetary obligations of a person under (a) a so-called synthetic, off-balance sheet or tax retention lease or (b) an agreement for the use or possession of any property (whether real, personal or mixed) creating obligations which do not appear on the balance sheet of such person, but which, upon the insolvency or bankruptcy of such person, would be characterized as Indebtedness of such person (without regard to accounting treatment).

     “Synthetic Purchase Agreement” shall mean any swap, derivative or other agreement or combination of agreements pursuant to which the Borrower or any Subsidiary is or may become obligated to make (a) any payment in connection with a purchase by any third party from a person other than the Borrower or any Subsidiary of any Equity Interest or Restricted Indebtedness or (b) any payment (other than on account of a permitted purchase by it of any Equity Interest or Restricted Indebtedness) the amount of which is determined by reference to the price or value at any time of any Equity Interest or Restricted Indebtedness; provided that no phantom stock or similar plan providing for payments only to current or former directors, officers or employees of the Borrower or the Subsidiaries (or to their heirs or estates) shall be deemed to be a Synthetic Purchase Agreement.

     “Tax Code” shall mean the Internal Revenue Code of 1986, as amended from time to time.

     “Taxes” shall mean any and all present or future taxes, levies, imposts, duties, deductions, charges, liabilities or withholdings imposed by any Governmental Authority.

     “Term Borrowing” shall mean a Borrowing comprised of Term Loans.

     “Term Lender” shall mean a Lender with a Term Loan Commitment or an outstanding Term Loan.

     “Term Loan Commitment” shall mean, with respect to each Lender, the commitment, if any, of such Lender to make Term Loans hereunder as set forth on the Lender Addendum delivered by such Lender, or in the Assignment and Acceptance pursuant to which such Lender assumed its Term Loan Commitment, as applicable, as the same may be (a) reduced from time to time pursuant to Section 2.09 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04. The initial aggregate amount of the Term Loan Commitments is $200,000,000.

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     “Term Loan Facility” shall have the meaning assigned to such term in the definition of “Facility.”

     “Term Loan Maturity Date” shall mean the seventh anniversary of the Closing Date.

     “Term Loans” shall mean the term loans made by the Lenders to the Borrower pursuant to Section 2.01.

     “Title Insurance Company” shall have the meaning assigned to such term in Section 4.02(o).

     “Total Adjusted Capital” shall mean “Total Adjusted Capital” as defined by the NAIC as of December 31, 1994, as such definition has been amended from time to time, and as applied in the context of the Risk-Based Capital Guidelines promulgated by the NAIC.

     “Total Debt” shall mean, at any time, the aggregate amount of Indebtedness of the Borrower and the Subsidiaries (other than Premium Finance Co. and its Subsidiaries) outstanding at such time, in the amount that would be reflected on a balance sheet prepared at such time on a consolidated basis in accordance with GAAP.

     “Total Revolving Credit Commitment” shall mean, at any time, the aggregate amount of the Revolving Credit Commitments, as in effect at such time. The initial Total Revolving Credit Commitment is $0.00.

     “Transactions” shall mean, collectively, (a) the execution, delivery and performance by the Loan Parties of the Loan Documents to which they are a party, (b) the borrowings hereunder, the issuance of Letters of Credit and the use of proceeds of each of the foregoing, (c) the granting of Liens pursuant to the Security Documents, (d) the Acquisition and the other Acquisition Transactions and (e) any other transactions related to or entered into in connection with any of the foregoing.

     “TruPS” shall mean trust preferred securities issued to investors by a wholly-owned subsidiary of the Borrower formed as a business trust (each a “TruPS Business Trust”) pursuant to organizational and charter documents substantially similar to those of the Existing TruPS Business Trusts, in exchange for an investment of funds by such investors, which funds in turn are loaned by such TruPS Business Trust to the Borrower in exchange for the issuance by the Borrower of Indebtedness in the form of a debenture or similar instrument to such TruPS Business Trust (each a “TruPS Instrument”) and which otherwise contains provisions substantially similar to those set forth in the Subordinated Debt outstanding.

     “TruPS Business Trust” has the meaning given such term in the definition of TruPS.

     “TruPS Instrument” has the meaning given such term in the definition of TruPS.

     “Type”, when used in respect of any Loan or Borrowing, shall refer to the Rate by reference to which interest on such Loan or on the Loans comprising such Borrowing is determined. For purposes hereof, the term “Rate” shall include the Adjusted LIBO Rate and the Alternate Base Rate.

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     “UCC” shall mean the Uniform Commercial Code.

     “Uniform Customs” shall have the meaning assigned to such term in Section 9.07.

     “USAgencies” shall mean USAgencies L.L.C., a Louisiana limited liability company and its Subsidiaries.

     “USAgencies Indenture” shall mean the Indenture, dated as of March 29, 2005, by and among USAgencies and JPMorgan Chase Bank, National Association, as trustee, as the same may be amended, supplemented or otherwise modified from time to time in accordance with this Agreement.

     “USAgencies Intercompany Tax Agreement” shall have the meaning assigned to such term in Section 5.13.

     “USAgencies Subordinated Notes” shall mean USAgencies’s Floating Rate Subordinate Notes due 2035 in the aggregate amount of $20,000,000 issued pursuant to the USAgencies Indenture.

     “USAgencies Trust Preferred Note Documents” shall mean the USAgencies Indenture and all other instruments, agreements and other documents evidencing or governing the USAgencies Subordinated Notes or providing any Guarantee or other right in respect thereof, as the same may be amended, supplemented or otherwise modified from time to time in accordance with this Agreement.

     “USCasualty” shall mean USAgencies Casualty Insurance Company, Inc., a Louisiana corporation.

     “USDirect” shall mean USAgencies Direct Insurance Company, Inc., a New York corporation.

     “wholly owned subsidiary” of any person shall mean a subsidiary of such person of which securities (except for directors’ qualifying shares) or other ownership interests representing 100% of the Equity Interests are, at the time any determination is being made, owned, controlled or held by such person or one or more wholly owned subsidiaries of such person or by such person and one or more wholly owned subsidiaries of such person; a “wholly owned Subsidiary” shall mean any wholly owned subsidiary of the Borrower.

     “Withdrawal Liability” shall mean liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA.

     SECTION 1.02. Terms Generally. The definitions in Section 1.01 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words “include”, “includes” and “including”, and words of similar import, shall not be limiting and shall be deemed to be followed by the phrase “without limitation”. The word “will” shall be construed to have the same meaning and effect as the word “shall”. The words “asset” and

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“property” shall be construed as having the same meaning and effect and to refer to any and all rights and interests in tangible and intangible assets and properties of any kind whatsoever, whether real, personal or mixed, including cash, securities, Equity Interests, accounts and contract rights. The words “herein”, “hereof” and “hereunder”, and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision of this Agreement unless the context shall otherwise require. All references herein to Articles, Sections, Exhibits and Schedules shall be deemed references to Articles and Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require. Except as otherwise expressly provided herein, (a) any definition of, or reference to, any Loan Document or any other agreement, instrument or document in this Agreement shall mean such Loan Document or other agreement, instrument or document as amended, restated, supplemented or otherwise modified from time to time (subject to any restrictions on such amendments, restatements, supplements or modifications set forth herein) and (b) all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided, however, that if the Borrower notifies the Administrative Agent that the Borrower wishes to amend any covenant in Article VI or any related definition to eliminate the effect of any change in GAAP occurring after the date of this Agreement on the operation of such covenant (or if the Administrative Agent notifies the Borrower that the Required Lenders wish to amend Article VI or any related definition for such purpose), then the Borrower’s compliance with such covenant shall be determined on the basis of GAAP in effect immediately before the relevant change in GAAP became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Borrower and the Required Lenders.

     SECTION 1.03. Classification of Loans and Borrowings. For purposes of this Agreement, Loans may be classified and referred to by Class (e.g., a “Revolving Loan”) or by Type (e.g., a “Eurodollar Loan”) or by Class and Type (e.g., a “Eurodollar Revolving Loan”). Borrowings also may be classified and referred to by Class (e.g., a “Revolving Borrowing”) or by Type (e.g., a “Eurodollar Borrowing”) or by Class and Type (e.g., a “Eurodollar Revolving Borrowing”).

     SECTION 1.04. Pro Forma Calculations. All pro forma calculations permitted or required to be made by the Borrower or any Subsidiary pursuant to this Agreement shall include only those adjustments that would be permitted or required by Regulation S-X under the Securities Act of 1933, as amended, together with those adjustments that (a) have been certified by a Financial Officer of the Borrower as having been prepared in good faith based upon reasonable assumptions and (b) are based on reasonably detailed written assumptions reasonably acceptable to the Administrative Agent.

ARTICLE II.

The Credits

     SECTION 2.01. Commitments. Subject to the terms and conditions hereof and relying upon the representations and warranties set forth herein, (a) each Term Lender agrees, severally and not jointly, to make a Term Loan to the Borrower on the Closing Date in a principal amount not to exceed its Term Loan Commitment and (b) each Revolving Credit Lender agrees, severally and not jointly, to make Revolving Loans to the Borrower, at any time

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and from time to time on or after the date that is sixty (60) days following Closing Date (or such earlier date as the Borrower and the Revolving Credit Lenders as of such date may agree) and until the earlier of the Revolving Credit Maturity Date and the termination of the Revolving Credit Commitment of such Revolving Credit Lender in accordance with the terms hereof, in an aggregate principal amount at any time outstanding that will not result in such Revolving Credit Lender’s Revolving Credit Exposure exceeding such Revolving Credit Lender’s Revolving Credit Commitment. Within the limits set forth in clause (b) of the preceding sentence and subject to the terms, conditions and limitations set forth herein, the Borrower may borrow, pay or prepay and reborrow Revolving Loans. Amounts paid or prepaid in respect of Term Loans may not be reborrowed.

     SECTION 2.02. Loans. (a) Each Loan (other than Swingline Loans) shall be made as part of a Borrowing consisting of Loans of the same Class and Type made by the Lenders ratably in accordance with their respective Commitments of the applicable Class; provided, however, that the failure of any Lender to make any Loan required to be made by it shall not in itself relieve any other Lender of its obligation to lend hereunder (it being understood, however, that no Lender shall be responsible for the failure of any other Lender to make any Loan required to be made by such other Lender). Except for Loans deemed made pursuant to Section 2.02(f) and subject to Section 2.22 relating to Swingline Loans, the Loans comprising any Borrowing shall be in an aggregate principal amount that is (i) an integral multiple of $500,000 and not less than $1,000,000 or (ii) equal to the remaining available balance of the applicable Commitments.

     (b) Subject to Sections 2.08 and 2.15, each Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans as the Borrower may request pursuant to Section 2.03; provided that no Borrowings may be converted into or continued as a Eurodollar Borrowing having an Interest Period in excess of one month prior to the date which is 60 days after the Closing Date. Each Lender may at its option make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement. Borrowings of more than one Type may be outstanding at the same time; provided, however, that the Borrower shall not be entitled to request any Borrowing that, if made, would result in more than ten Eurodollar Borrowings outstanding hereunder at any time. For purposes of the foregoing, Borrowings having different Interest Periods, regardless of whether they commence on the same date, shall be considered separate Borrowings.

     (c) Except with respect to Loans made pursuant to Section 2.02(f) and subject to Section 2.22 relating to Swingline Loans, each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds to such account in New York City as the Administrative Agent may designate not later than 1:30 p.m., New York City time, and the Administrative Agent shall promptly credit the amounts so received to an account in the name of the Borrower, and designated by the Borrower in the applicable Borrowing Request or, if a Borrowing shall not occur on such date because any condition precedent herein specified shall not have been met, return the amounts so received to the respective Lenders.

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     (d) Unless the Administrative Agent shall have received notice from a Lender prior to the date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender’s portion of such Borrowing, the Administrative Agent may assume that such Lender has made such portion available to the Administrative Agent on the date of such Borrowing in accordance with paragraph (c) of this Section and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If the Administrative Agent shall have so made funds available then, to the extent that such Lender shall not have made such portion available to the Administrative Agent, such Lender and the Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower to but excluding the date such amount is repaid to the Administrative Agent at (i) in the case of the Borrower, the interest rate applicable at the time to the Loans comprising such Borrowing or (ii) in the case of such Lender, a rate determined by the Administrative Agent to represent its cost of overnight or shortterm funds (which determination shall be conclusive absent manifest error). If such Lender shall repay to the Administrative Agent such corresponding amount, such amount shall constitute such Lender’s Loan as part of such Borrowing for purposes of this Agreement.

     (e) Notwithstanding any other provision of this Agreement, the Borrower shall not be entitled to request any Revolving Credit Borrowing if the Interest Period requested with respect thereto would end after the Revolving Credit Maturity Date.

     (f) If the Issuing Bank shall not have received from the Borrower the payment required to be made by Section 2.23(e) with respect to a Letter of Credit within the time specified in such Section, the Issuing Bank will promptly notify the Administrative Agent of the L/C Disbursement and the Administrative Agent will promptly notify each Revolving Credit Lender of such L/C Disbursement and its Pro Rata Percentage thereof. Each Revolving Credit Lender shall pay by wire transfer of immediately available funds to the Administrative Agent not later than 2:00 p.m. Noon, New York City time, on such date (or, if such Revolving Credit Lender shall have received such notice later than 12:00 (noon), New York City time, on any day, not later than 10:00 a.m., New York City time, on the immediately following Business Day), an amount equal to such Lender’s Pro Rata Percentage of such L/C Disbursement (it being understood that such amount shall be deemed to constitute an ABR Revolving Loan of such Lender and such payment shall be deemed to have reduced the L/C Exposure), and the Administrative Agent will promptly pay to the Issuing Bank amounts so received by it from the Revolving Credit Lenders. The Administrative Agent will promptly pay to the Issuing Bank any amounts received by it from the Borrower pursuant to Section 2.23(e) prior to the time that any Revolving Credit Lender makes any payment pursuant to this paragraph; any such amounts received by the Administrative Agent thereafter will be promptly remitted by the Administrative Agent to the Revolving Credit Lenders that shall have made such payments and to the Issuing Bank, as their interests may appear. If any Revolving Credit Lender shall not have made its Pro Rata Percentage of such L/C Disbursement available to the Administrative Agent as provided above, such Lender and the Borrower severally agree to pay interest on such amount, for each day from and including the date such amount is required to be paid in accordance with this paragraph to but excluding the date such amount is paid, to the Administrative Agent for the account of the Issuing Bank at (i) in the case of the Borrower, a rate per annum equal to the interest rate applicable to Revolving Loans pursuant to Section 2.06(a), and (ii) in the case of

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such Lender, for the first such day, the Federal Funds Effective Rate, and for each day thereafter, the Alternate Base Rate.

     SECTION 2.03. Borrowing Procedure. In order to request a Borrowing (other than a Swingline Loan or a deemed Borrowing pursuant to Section 2.02(f), as to which this Section 2.03 shall not apply), the Borrower shall hand deliver or fax (or request telephonically with prompt hand delivery or fax made thereafter) to the Administrative Agent a duly completed Borrowing Request (a) in the case of a Eurodollar Borrowing, not later than 12:00 Noon, New York City time, three Business Days before a proposed Borrowing and (b) in the case of an ABR Borrowing, not later than 12:00 Noon, New York City time, one Business Day before a proposed Borrowing. Each Borrowing Request shall be irrevocable, shall be signed by or on behalf of the Borrower and shall specify the following information: (i) whether the Borrowing then being requested is to be a Term Borrowing or a Revolving Credit Borrowing, and whether such Borrowing is to be a Eurodollar Borrowing or an ABR Borrowing; (ii) the date of such Borrowing (which shall be a Business Day); (iii) the number and location of the account to which funds are to be disbursed (which shall be an account that complies with the requirements of Section 2.02(c)); (iv) the amount of such Borrowing; and (v) if such Borrowing is to be a Eurodollar Borrowing, the initial Interest Period with respect thereto; provided, however, that, notwithstanding any contrary specification in any Borrowing Request, each requested Borrowing shall comply with the requirements set forth in Section 2.02. If no election as to the Type of Borrowing is specified in any such notice, then the requested Borrowing shall be an ABR Borrowing. If no Interest Period with respect to any Eurodollar Borrowing is specified in any such notice, then the Borrower shall be deemed to have selected an Interest Period of one month’s duration. The Administrative Agent shall promptly advise the applicable Lenders of any notice given in accordance with this Section 2.03 (and the contents thereof), and of each Lender’s portion of the requested Borrowing.

     SECTION 2.04. Repayment of Loans; Evidence of Debt. (a) The Borrower hereby unconditionally promises to pay to the Administrative Agent for the account of each Lender (i) the principal amount of each Term Loan of such Lender made to the Borrower as provided in Section 2.11 and (ii) the then unpaid principal amount of each Revolving Loan (including any Swingline Loan) of such Lender made to the Borrower on the Revolving Credit Maturity Date. The Borrower hereby unconditionally promises to pay to the Swingline Lender the then unpaid principal amount of each Swingline Loan made to the Borrower on the earlier of the Revolving Credit Maturity Date and the first date after such Swingline Loan is made that is the 15th day or the last day of a calendar month and is at least three Business Days after such Swingline Loan is made.

     (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender to the Borrower from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time under this Agreement.

     (c) The Administrative Agent shall maintain accounts in which it will record (i) the amount of each Loan made hereunder, the Type thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) the amount of the sum received by

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the Administrative Agent hereunder from the Borrower or any Guarantor and each Lender’s share thereof.

     (d) The entries made in the accounts maintained pursuant to paragraphs (b) and (c) of this Section shall be conclusive evidence (absent manifest error) of the existence and amounts of the obligations therein recorded; provided, however, that the failure of any Lender or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligations of the Borrower to repay the Loans made to the Borrower in accordance with the terms of this Agreement.

     (e) Any Lender may request that Loans made by it hereunder be evidenced by a promissory note. In such event, the Borrower shall execute and deliver to such Lender a promissory note payable to such Lender and its registered assigns and in a form and substance reasonably acceptable to the Administrative Agent. Notwithstanding any other provision of this Agreement, in the event any Lender shall request and receive such a promissory note, the interests represented by such note shall at all times (including after any assignment of all or part of such interests pursuant to Section 9.04) be represented by one or more promissory notes payable to the payee named therein or its registered assigns.

     SECTION 2.05. Fees. (a) The Borrower agrees to pay to each Lender, through the Administrative Agent, on the last Business Day of March, June, September and December (commencing March 30, 2007) in each year and on each date on which any Commitment of such Lender shall expire or be terminated as provided herein, a commitment fee (a “Commitment Fee”) equal to the Commitment Fee Rate on the average daily unused amount of the Commitments of such Lender (other than the Swingline Commitment) during the preceding quarter (or other period commencing with the date hereof or ending with the Revolving Credit Maturity Date or the date on which the Commitments of such Lender shall expire or be terminated). All Commitment Fees shall be computed on the basis of the actual number of days elapsed in a year of 360 days. The Commitment Fee due to each Lender shall commence to accrue on the date hereof and shall cease to accrue on the date on which the Commitment of such Lender shall expire or be terminated as provided herein. For purposes of calculating Commitment Fees with respect to Revolving Credit Commitments only, no portion of the Revolving Credit Commitments shall be deemed utilized under Section 2.22 as a result of outstanding Swingline Loans.

     (b) The Borrower agrees to pay to the Administrative Agent, for its own account, the fees in the amounts and at the times from time to time agreed to in writing by the Borrower (or any Affiliate) and the Administrative Agent, including pursuant to the Fee Letter (the “Administrative Agent Fees”).

     (c) The Borrower agrees to pay (i) to each Revolving Credit Lender, through the Administrative Agent, on the last Business Day of March, June, September and December (commencing March 30, 2007) of each year and on the date on which the Revolving Credit Commitment of such Lender shall be terminated as provided herein (each, an “L/C Fee Payment Date”) a fee (an “L/C Participation Fee”) calculated on such Lender’s Pro Rata Percentage of the daily aggregate L/C Exposure (excluding the portion thereof attributable to unreimbursed L/C Disbursements which are earning interim interest pursuant to Section 2.23(h)) during the

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preceding quarter (or shorter period commencing with the date hereof or ending with the Revolving Credit Maturity Date or the date on which all Letters of Credit have been canceled or have expired and the Revolving Credit Commitments of all Lenders shall have been terminated) at a rate per annum equal to the Applicable Margin used to determine the interest rate on Revolving Credit Borrowings comprised of Eurodollar Loans pursuant to Section 2.06, and (ii) to the Issuing Bank with respect to each outstanding Letter of Credit issued for the account of (or at the request of) the Borrower a fronting fee, which shall accrue at the rate of ¹/4 of 1% per annum or such other rate as shall be separately agreed upon between the Borrower and the Issuing Bank, on the drawable amount of such Letter of Credit, payable quarterly in arrears on each L/C Fee Payment Date after the issuance date of such Letter of Credit, as well as the Issuing Bank’s standard fees with respect to the issuance, amendment, renewal or extension of any Letter of Credit issued for the account of (or at the request of) the Borrower or processing of drawings thereunder (the fees in this clause (ii), collectively, the “Issuing Bank Fees”). All L/C Participation Fees and Issuing Bank Fees shall be computed on the basis of the actual number of days elapsed in a year of 360 days.

     (d) All Fees shall be paid on the dates due, in immediately available funds, to the Administrative Agent for distribution, if and as appropriate, among the Lenders, except that the Issuing Bank Fees shall be paid directly to the Issuing Bank. Once paid, none of the Fees shall be refundable under any circumstances, other than in connection with the over-payment of any such Fees as a result of any erroneous calculation by the Agent or the Issuing Bank, as the case may be.

     SECTION 2.06. Interest on Loans. (a) Subject to the provisions of Section 2.07, the Loans comprising each ABR Borrowing, including each Swingline Loan, shall bear interest (computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be, when the Alternate Base Rate is determined by reference to the Prime Rate and over a year of 360 days at all other times) at a rate per annum equal to the Alternate Base Rate plus the Applicable Margin in effect from time to time.

     (b) Subject to the provisions of Section 2.07, the Loans comprising each Eurodollar Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days) at a rate per annum equal to the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Margin in effect from time to time.

     (c) Interest on each Loan shall be payable on the Interest Payment Dates applicable to such Loan except as otherwise provided in this Agreement. The applicable Alternate Base Rate or Adjusted LIBO Rate for each Interest Period or day within an Interest Period, as the case may be, shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error.

     SECTION 2.07. Default Interest. If the Borrower shall default in the payment of the principal of or interest on any Loan or any other amount becoming due hereunder or under any other Loan Document, by acceleration or otherwise, the Borrower shall on demand from time to time pay interest, to the extent permitted by law, on such defaulted amount to but excluding the date of actual payment (after as well as before judgment) (a) in the case of overdue principal, at the rate otherwise applicable to such Loan pursuant to Section 2.06 plus 2.00% per

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annum and (b) in all other cases, at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be, when determined by reference to the Prime Rate and over a year of 360 days at all other times) equal to the rate that would be applicable to an ABR Revolving Loan plus 2.00%.

     SECTION 2.08. Alternate Rate of Interest. In the event, and on each occasion, that prior to the commencement of any Interest Period for a Eurodollar Borrowing (a) the Administrative Agent shall have determined that adequate and reasonable means do not exist for determining the Adjusted LIBO Rate for such Interest Period or (b) the Administrative Agent is advised by the Majority Facility Lenders in respect of the relevant Facility that the Adjusted LIBO Rate for such Interest Period will not adequately and fairly reflect the cost to such Lenders of making or maintaining their Loans included in such Borrowing for such Interest Period, the Administrative Agent shall, as soon as practicable thereafter, give written or fax notice of such determination to the Borrower and the Lenders. In the event of any such determination, until the Administrative Agent shall have advised the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, (i) any request by the Borrower for a Eurodollar Borrowing pursuant to Section 2.03 or 2.10 shall be deemed to be a request for an ABR Borrowing and (ii) any Interest Period election that requests the conversion of any Borrowing to, or continuation of any Borrowing as, a Eurodollar Borrowing shall be ineffective. Each determination by the Administrative Agent under this Section 2.08 shall be conclusive absent manifest error.

     SECTION 2.09. Termination and Reduction of Commitments. (a) Unless previously terminated in accordance with the terms hereof, (i) the Term Loan Commitments shall automatically terminate at 5:00 p.m., New York City time, on the Closing Date and (ii) the Revolving Credit Commitments, the Swingline Commitment and the L/C Commitment shall automatically terminate on the Revolving Credit Maturity Date. Notwithstanding the foregoing, all the Commitments shall automatically terminate at 5:00 p.m., New York City time, on January 31, 2007, if the initial Credit Event shall not have occurred by such time.

     (b) Upon at least three Business Days’ prior irrevocable written or fax notice to the Administrative Agent, the Borrower may at any time in whole permanently terminate, or from time to time in part permanently reduce, the Term Loan Commitments, the Revolving Credit Commitments or the Swingline Commitment; provided, however, that (i) each partial reduction of the Term Loan Commitments, the Revolving Credit Commitments or the Swingline Commitment shall be in an integral multiple of $1,000,000 and in a minimum amount of $1,000,000 and (ii) the Total Revolving Credit Commitment shall not be reduced to an amount that is less than the Aggregate Revolving Credit Exposure then in effect.

     (c) Each reduction in the Term Loan Commitments, Revolving Credit Commitments or Swingline Commitment hereunder shall be made ratably among the applicable Lenders in accordance with their Pro Rata Percentages. The Borrower shall pay to the Administrative Agent for the account of the applicable Lenders, on the date of each termination or reduction, the Commitment Fees on the amount of the Commitments so terminated or reduced accrued to but excluding the date of such termination or reduction.

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     SECTION 2.10. Conversion and Continuation of Borrowings. (a) The Borrower shall have the right at any time upon prior irrevocable notice to the Administrative Agent (x) not later than 12:00 (noon), New York City time, one Business Day prior to conversion, to convert any Eurodollar Borrowing of the Borrower into an ABR Borrowing, (y) not later than 10:00 a.m., New York City time, three Business Days prior to conversion or continuation, to convert any ABR Borrowing of the Borrower into a Eurodollar Borrowing or to continue any Eurodollar Borrowing of the Borrower as a Eurodollar Borrowing for an additional Interest Period and (z) not later than 12:00 (noon) New York City time, three Business Days prior to conversion, to convert the Interest Period with respect to any Eurodollar Borrowing of the Borrower to another permissible Interest Period, subject in each case to the following:

     (i) each conversion or continuation shall be made pro rata among the Lenders in accordance with the respective principal amounts of the Loans comprising the converted or continued Borrowing;

     (ii) if less than all the outstanding principal amount of any Borrowing shall be converted or continued, then each resulting Borrowing shall satisfy the limitations specified in Sections 2.02(a) and 2.02(b) regarding the principal amount and maximum number of Borrowings of the relevant Type;

     (iii) each conversion shall be effected by each Lender and the Administrative Agent by recording for the account of such Lender the new Loan of such Lender resulting from such conversion and reducing the Loan (or portion thereof) of such Lender being converted by an equivalent principal amount; accrued interest on any Eurodollar Loan (or portion thereof) being converted shall be paid by the Borrower at the time of conversion;

     (iv) if any Eurodollar Borrowing is converted at a time other than the end of the Interest Period applicable thereto, the Borrower shall pay, upon demand, any amounts due to the Lenders pursuant to Section 2.16;

     (v) any portion of a Borrowing maturing or required to be repaid in less than one month may not be converted into or continued as a Eurodollar Borrowing;

     (vi) any portion of a Eurodollar Borrowing that cannot be converted into or continued as a Eurodollar Borrowing by reason of the immediately preceding clause shall be automatically converted at the end of the Interest Period in effect for such Borrowing into an ABR Borrowing;

     (vii) no Interest Period may be selected for any Eurodollar Term Borrowing that would end later than a Repayment Date occurring on or after the first day of such Interest Period if, after giving effect to such selection, the aggregate outstanding amount of (A) the Eurodollar Term Borrowings with Interest Periods ending on or prior to such Repayment Date and (B) the ABR Term Borrowings would not be at least equal to the principal amount of Term Borrowings to be paid on such Repayment Date; and

     (viii) after the occurrence and during the continuance of a Default or Event of Default, no outstanding Loan may be converted into, or continued as, a Eurodollar Loan.

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     (b) Each notice pursuant to this Section 2.10 shall be irrevocable and shall refer to this Agreement and specify (i) the identity and amount of the Borrowing that the Borrower requests be converted or continued, (ii) whether such Borrowing is to be converted to or continued as a Eurodollar Borrowing or an ABR Borrowing, (iii) if such notice requests a conversion, the date of such conversion (which shall be a Business Day) and (iv) if such Borrowing is to be converted to or continued as a Eurodollar Borrowing, the Interest Period with respect thereto. If no Interest Period is specified in any such notice with respect to any conversion to or continuation as a Eurodollar Borrowing, the Borrower shall be deemed to have selected an Interest Period of one month’s duration. The Administrative Agent shall advise the Lenders of any notice given pursuant to this Section 2.10 and of each Lender’s portion of any converted or continued Borrowing. If the Borrower shall not have given notice in accordance with this Section 2.10 to continue any Borrowing into a subsequent Interest Period (and shall not otherwise have given notice in accordance with this Section 2.10 to convert such Borrowing), such Borrowing shall, at the end of the Interest Period applicable thereto (unless repaid pursuant to the terms hereof), automatically be converted or continued into an ABR Borrowing.

     SECTION 2.11. Repayment of Term Borrowings. (a) On the dates set forth below, or if any such date is not a Business Day, on the next preceding Business Day (each such date being called a “Repayment Date”), the Borrower shall pay to the Administrative Agent, for the account of the Term Lenders, a principal amount of the Term Loans (as adjusted from time to time pursuant to Sections 2.11(b), 2.12 and 2.13(f)) equal to the amount set forth below for such date, together in each case with accrued and unpaid interest and Fees on the amount to be paid to but excluding the date of such payment:

Repayment Date	Amount
March 31, 2007	$	500,000
June 30, 2007	$	500,000
September 30, 2007	$	500,000
December 31, 2007	$	500,000
March 31, 2008	$	500,000
June 30, 2008	$	500,000
September 30, 2008	$	500,000
December 31, 2008	$	500,000
March 31, 2009	$	500,000
June 30, 2009	$	500,000
September 30, 2009	$	500,000
December 31, 2009	$	500,000
March 31, 2010	$	500,000
June 30, 2010	$	500,000
September 30, 2010	$	500,000
December 31, 2010	$	500,000
March 31, 2011	$	500,000
June 30, 2011	$	500,000
September 30, 2011	$	500,000
December 31, 2011	$	500,000
March 31, 2012	$	500,000
June 30, 2012	$	500,000

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Repayment Date	Amount
September 30, 2012	$	500,000
December 31, 2012	$	500,000
March 31, 2013	$	500,000
June 30, 2013	$	500,000
September 30, 2013	$	500,000
December 31, 2013	$	500,000
March 31, 2014	$	500,000
June 30, 2014	$	500,000
September 30, 2014	$	500,000
Term Loan Maturity Date	$	184,500,000

     (b) In the event and on each occasion that any Term Loan Commitments shall be reduced or shall expire or terminate other than as a result of the making of a Term Loan, the installments payable on each Repayment Date shall be reduced pro rata by an aggregate amount equal to the amount of such reduction, expiration or termination.

     (c) To the extent not previously paid, all Term Loans shall be due and payable on the Term Loan Maturity Date, together with accrued and unpaid interest on the principal amount to be paid to but excluding the date of payment.

     (d) All repayments pursuant to this Section 2.11 shall be subject to Section 2.16, but shall otherwise be without premium or penalty.

     SECTION 2.12. Prepayment. (a) The Borrower shall have the right at any time and from time to time to prepay any Borrowing, in whole or in part, upon at least three Business Days’ prior written (including electronic mail) or fax notice (or telephone notice promptly confirmed by written or fax notice) in the case of Eurodollar Loans, or written or fax notice (or telephone notice promptly confirmed by written or fax notice) at least one Business Day prior to the date of prepayment in the case of ABR Loans, to the Administrative Agent before 12:00 (noon), New York City time; provided, however, that each partial prepayment shall be in an amount that is an integral multiple of $500,000 and not less than $1,000,000.

     (b) Optional prepayments of Term Loans shall be applied pro rata against the remaining scheduled installments of principal due in respect of the Term Loans.

     (c) Each notice of prepayment shall specify the prepayment date and the principal amount of each Borrowing (or portion thereof) to be prepaid, shall be irrevocable and shall commit the Borrower to prepay such Borrowing by the amount stated therein on the date stated therein. All prepayments under this Section 2.12 shall be subject to Section 2.16, but otherwise without premium or penalty, except as provided in Section 2.12(d) below. All prepayments under this Section 2.12 shall be accompanied by accrued and unpaid interest on the principal amount to be prepaid to but excluding the date of payment (other than any accrued and unpaid interest on any ABR Loan, which shall be payable on the earlier of next Interest Payment Date or the Term Loan Maturity Date or the Revolving Credit Maturity Date).

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     (d) In the event that the Term Loans are prepaid or repaid in whole or in part pursuant to Section 2.12 prior to the first anniversary of the Closing Date, the Borrower shall pay to Lenders having Term Loans a prepayment premium on the amount so prepaid or repaid in an amount equal to 1.0% of the amount so prepaid or repaid.

     SECTION 2.13. Mandatory Prepayments. (a) In the event of any termination of all the Revolving Credit Commitments, the Borrower shall, on the date of such termination, repay or prepay all its outstanding Revolving Credit Borrowings and all its outstanding Swingline Loans and replace all its outstanding Letters of Credit and/or deposit an amount equal to the L/C Exposure in cash in a cash collateral account established with the Collateral Agent for the benefit of the Secured Parties. If as a result of any partial reduction of the Revolving Credit Commitments the Aggregate Revolving Credit Exposure would exceed the Total Revolving Credit Commitment after giving effect thereto, then the Borrower shall, on the date of such reduction, repay or prepay Revolving Credit Borrowings or Swingline Loans (or a combination thereof) and/or cash collateralize Letters of Credit in an amount sufficient to eliminate such excess.

     (b) Not later than the fifth Business Day following the completion of any Asset Sale or the occurrence of any Recovery Event, in each case by the Borrower or any Subsidiary thereof (other than any Premium Finance Co. and its Subsidiaries), the Borrower shall apply the Required Prepayment Percentage of the Net Cash Proceeds received with respect thereto to prepay outstanding Term Loans in accordance with Section 2.13(g).

     (c) In the event and on each occasion that an Equity Issuance occurs, the Borrower shall, substantially simultaneously with (and in any event not later than the fifth Business Day next following) the occurrence of such Equity Issuance, apply the Required Prepayment Percentage of the Net Cash Proceeds therefrom to prepay outstanding Term Loans in accordance with Section 2.13(g).

     (d) In the event that any Loan Party or any subsidiary of a Loan Party shall receive Net Cash Proceeds from the issuance or other incurrence of Indebtedness of any Loan Party or any subsidiary of a Loan Party (other than Indebtedness permitted pursuant to Section 6.01) (other than pursuant to Section 6.01(g)), the Borrower shall, substantially simultaneously with (and in any event not later than the third Business Day next following) the receipt of such Net Cash Proceeds by such Loan Party or such subsidiary, apply an amount equal to the Required Prepayment Percentage of such Net Cash Proceeds to prepay outstanding Term Loans in accordance with Section 2.13(g). For the avoidance of doubt, this paragraph (d) in no event or circumstances shall be interpreted to permit the Borrower to incur any Indebtedness that is not permitted under Section 6.01.

     (e) No later than the earlier of (i) 90 days after the end of each fiscal year of the Borrower, commencing with the fiscal year ending on December 31, 2007, and (ii) the date on which the financial statements with respect to such period are delivered pursuant to Section 5.04(a), the Borrower shall prepay outstanding Term Loans in accordance with Section 2.13(g), in an aggregate principal amount equal to the Required Prepayment Percentage of Excess Cash Flow for the fiscal year then ended.

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     (f) Immediately upon receipt by the Borrower or any Subsidiary (other than Premium Finance Co. or its Subsidiaries) of any Extraordinary Receipts (other than Extraordinary Receipts received by any Regulated Insurance Subsidiary, in each case, of less than $500,000), the Borrower shall apply the Required Prepayment Percentage of the Net Cash Proceeds received with respect thereto to prepay outstanding Term Loans in accordance with Section 2.13(g), provided that, with respect to the receipt of any Extraordinary Receipt in excess of $500,000 by any Regulated Insurance Subsidiary, any prepayment pursuant to this Section 2.13(f) shall be subject to Requirements of Law and the receipt of any required Governmental Authority approval, if any, which the Borrower shall use commercially reasonable efforts to obtain so long as there is a reasonable expectation of obtaining such approval.

     (g) Mandatory prepayments of outstanding Loans pursuant to clauses (b) through (f) above shall be applied, first pro rata against the remaining scheduled installments due in respect of the Term Loans under Section 2.11, second, to prepay outstanding Swingline Loans to the full extent thereof, third, to prepay Revolving Loans to the full extent thereof and fourth, to prepay outstanding reimbursement obligations with respect to Letters of Credit. Any Lender may elect, by notice to the Administrative Agent by facsimile at least two Business Days of receiving notice of such prepayment, as set forth in Section 2.13(h), to decline its portion of any prepayment of its Loans pursuant to clauses (b) through (f) above, in which case the aggregate amount of the prepayment that would have been applied to prepay such Loans but was so declined shall be re-offered to those Lenders under this Agreement who have initially accepted such prepayment (such re-offer to be made to each such Lender based on the percentage which such Lender’s Loans represents of the aggregate Loans of all such Lenders who have initially accepted such prepayment). In the event of such a re-offer, each of the relevant Lenders may elect, by notice to the Administrative Agent by telephone by facsimile within two Business Days of receiving notification of such re-offer, to decline its portion of the amount of such prepayment that is re-offered to them and, to the extent so declined by such Lenders, with any remaining amounts being retained by the Borrower to be used for any other purpose not prohibited by this Agreement.

     (h) The Borrower shall deliver to the Administrative Agent, at the time of each prepayment required under this Section 2.13, (i) a certificate signed by a Financial Officer of the Borrower setting forth in reasonable detail the calculation of the amount of such prepayment and (ii) to the extent practicable, at least three days prior written notice of such prepayment. Each notice of prepayment shall specify the prepayment date and the principal amount to be prepaid. If all Lenders accept the prepayment offer, the prepayment amount will be applied first to ABR Loans outstanding then Eurodollar Loans (in inverse order of maturity). If any Lender refuses the prepayment offer, the prepayment amount will be applied to the then outstanding Loans on a pro rata basis, regardless of Type. All prepayments of Borrowings pursuant to this Section 2.13 shall be subject to Section 2.16, but shall otherwise be without premium or penalty.

     (i) Notwithstanding anything to the contrary contained above in this Section 2.13, to the extent that (i) funds for any prepayment otherwise required to be made pursuant to the terms of Section 2.13(b) are only available to the Borrower through dividend payments to the Borrower from one or more Regulated Insurance Subsidiaries, (ii) such dividend payments cannot be made at such time within the ordinary dividend-paying capacity of such Regulated Insurance Subsidiary or Subsidiaries and, accordingly, require specific affirmative regulatory approval for

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the payment of extraordinary dividends and (iii) after due written application or request, such approval for the payment of extraordinary dividends is not obtained by such Regulated Insurance Subsidiary, upon certification by the Borrower to the Administrative Agent to such effect (together with, in the case of an application or request for regulatory approval, copies of all documents submitted, and all written responses received, in connection therewith), the Borrower shall not, to such extent, be required to make such prepayment for so long as (but only for so long as) such dividend payments may not, for such reasons, be made, provided that, promptly upon any such restrictions no longer being applicable, any such accrued prepayments that would be delinquent but for the foregoing provisions shall be made with the proceeds of any dividends or other distributions no longer subject to such restrictions.

SECTION 2.14. Reserve Requirements; Change in Circumstances. (a) Notwithstanding any other provision of this Agreement, if any Change in Law shall:

     (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender, the Administrative Agent or the Issuing Bank (except any such reserve requirement which is reflected in the Adjusted LIBO Rate) or

     (ii) impose on any Lender, the Administrative Agent or the Issuing Bank or the London interbank market any other condition affecting this Agreement or Eurodollar Loans made by such Lender or any Letter of Credit or participation therein,

and the result of any of the foregoing shall be to increase the cost to such Lender or the Issuing Bank of making or maintaining any Eurodollar Loan (or of maintaining its obligation to make any such Loan) or to increase the cost to any Lender, the Administrative Agent or the Issuing Bank of issuing or maintaining any Letter of Credit or purchasing or maintaining a participation therein or to reduce the amount of any sum received or receivable by such Lender or the Issuing Bank hereunder (whether of principal, interest or otherwise but excluding Excluded Taxes) by an amount deemed in good faith by such Lender, the Administrative Agent or the Issuing Bank to be material, then the Borrower will pay to such Lender, the Administrative Agent or the Issuing Bank, as the case may be, upon demand such additional amount or amounts as will compensate such Lender or the Issuing Bank, as the case may be, for such additional costs incurred or reduction suffered.

     (b) If any Lender, the Administrative Agent or the Issuing Bank shall have determined that any Change in Law regarding capital adequacy has or would have the effect of reducing the rate of return on such Lender’s, the Administrative Agent’s or the Issuing Bank’s capital or on the capital of such Lender’s, the Administrative Agent’s or the Issuing Bank’s holding company, if any, as a consequence of this Agreement or the Loans made by, or participations in Letters of Credit purchased by, such Lender or the Letters of Credit issued by the Issuing Bank to a level below that which such Lender, the Administrative Agent or the Issuing Bank or such Lender’s, the Administrative Agent’s or the Issuing Bank’s holding company could have achieved but for such Change in Law (taking into consideration such Lender’s, the Administrative Agent’s or the Issuing Bank’s policies and the policies of such Lender’s, the Administrative Agent’s or the Issuing Bank’s holding company with respect to capital adequacy) by an amount deemed in good faith by such Lender, the Administrative Agent

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or the Issuing Bank to be material, then from time to time the Borrower shall pay to such Lender, the Administrative Agent or the Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender, the Administrative Agent or the Issuing Bank or such Lender’s, the Administrative Agent’s or the Issuing Bank’s holding company for any such reduction suffered.

     (c) A certificate in reasonable detail of a Lender, the Administrative Agent or the Issuing Bank setting forth the amount or amounts necessary to compensate such Lender, the Administrative Agent or the Issuing Bank or its holding company, as applicable, as specified in paragraph (a) or (b) of this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender, the Administrative Agent or the Issuing Bank, as the case may be, the amount or amounts shown as due on any such certificate delivered by it within 10 days after its receipt of the same.

     (d) Failure or delay on the part of any Lender, the Administrative Agent or the Issuing Bank to demand compensation pursuant to this Section shall not constitute a waiver of such Lender’s, the Administrative Agent’s or the Issuing Bank’s right to demand such compensation; provided that the Borrower shall not be under any obligation to compensate any Lender, the Administrative Agent or the Issuing Bank under paragraph (a) or (b) above for increased costs or reductions with respect to any period prior to the date that is 180 days prior to such request if such Lender, the Administrative Agent or the Issuing Bank knew or could reasonably have been expected to know of the circumstances giving rise to such increased costs or reductions and of the fact that such circumstances would result in a claim for increased compensation by reason of such increased costs or reductions; provided further that the foregoing limitation shall not apply to any increased costs or reductions arising out of the retroactive application of any Change in Law within such 180-day period. The protection of this Section shall be available to each Lender, the Administrative Agent and the Issuing Bank regardless of any possible contention of the invalidity or inapplicability of the Change in Law that shall have occurred or been imposed.

     SECTION 2.15. Change in Legality. (a) Notwithstanding any other provision of this Agreement, if any Change in Law shall make it unlawful for any Lender to make or maintain any Eurodollar Loan or to give effect to its obligations as contemplated hereby with respect to any Eurodollar Loan, then, by written notice to the Borrower and to the Administrative Agent:

     (i) such Lender may declare that Eurodollar Loans will not thereafter (for the duration of such unlawfulness) be made by such Lender hereunder (or be continued for additional Interest Periods and ABR Loans will not thereafter (for such duration) be converted into Eurodollar Loans), whereupon any request for a Eurodollar Borrowing (or to convert an ABR Borrowing to a Eurodollar Borrowing or to continue a Eurodollar Borrowing for an additional Interest Period) shall, as to such Lender only, be deemed a request for an ABR Loan (or a request to continue an ABR Loan as such for an additional Interest Period or to convert a Eurodollar Loan into an ABR Loan, as the case may be), unless such declaration shall be subsequently withdrawn; and

     (ii) such Lender may require that all outstanding Eurodollar Loans made by it be converted to ABR Loans, in which event all such Eurodollar Loans shall be

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automatically converted to ABR Loans as of the effective date of such notice as provided in paragraph (b) below.

In the event any Lender shall exercise its rights under (i) or (ii) above, all payments and prepayments of principal that would otherwise have been applied to repay the Eurodollar Loans that would have been made by such Lender or the converted Eurodollar Loans of such Lender shall instead be applied to repay the ABR Loans made by such Lender in lieu of, or resulting from the conversion of, such Eurodollar Loans. Any such conversion of a Eurodollar Loan under (i) above shall be subject to Section 2.16.

     (b) For purposes of this Section 2.15, a notice to the Borrower by any Lender shall be effective as to each Eurodollar Loan made by such Lender, if lawful, on the last day of the Interest Period then applicable to such Eurodollar Loan; in all other cases such notice shall be effective on the date of receipt by the Borrower.

     SECTION 2.16. Indemnity. The Borrower shall indemnify each Lender against any loss or expense that such Lender may sustain or incur as a consequence of (a) any event, other than a default by such Lender in the performance of its obligations hereunder, which results in (i) such Lender receiving or being deemed to receive any amount on account of the principal of any Eurodollar Loan prior to the end of the Interest Period in effect therefor, (ii) except as set forth in Section 2.15 the conversion of any Eurodollar Loan to an ABR Loan, or the conversion of the Interest Period with respect to any Eurodollar Loan, in each case other than on the last day of the Interest Period in effect therefor or (iii) any Eurodollar Loan to be made by such Lender (including any Eurodollar Loan to be made pursuant to a conversion or continuation under Section 2.10) not being made after notice of such Loan shall have been given by the Borrower hereunder (any of the events referred to in this clause (a) being called a “Breakage Event”) or (b) any default in the making of any payment or prepayment required to be made hereunder. In the case of any Breakage Event, such loss shall include an amount equal to the excess, as reasonably determined by such Lender, of (i) its cost of obtaining funds for the Eurodollar Loan that is the subject of such Breakage Event for the period from the date of such Breakage Event to the last day of the Interest Period in effect (or that would have been in effect) for such Loan over (ii) the amount of interest likely to be realized by such Lender in redeploying the funds released or not utilized by reason of such Breakage Event for such period. A certificate of any Lender setting forth any amount or amounts which such Lender is entitled to receive pursuant to this Section 2.16 shall be delivered to the Borrower and shall be conclusive absent manifest error.

     SECTION 2.17. Pro Rata Treatment. Except as provided below in this Section 2.17 with respect to Swingline Loans and as required under Sections 2.13 and 2.15, each Borrowing, each payment or prepayment of principal of any Borrowing, each payment of interest on the Loans, each payment of the Commitment Fees, each reduction of the Term Loan Commitments or the Revolving Credit Commitments and each conversion of any Borrowing to or continuation of any Borrowing as a Borrowing of any Type shall be allocated pro rata among the Lenders in accordance with their respective applicable Commitments (or, if such Commitments shall have expired or been terminated, in accordance with the respective principal amounts of their outstanding Loans). For purposes of determining the available Revolving Credit Commitments of the Lenders at any time, each outstanding Swingline Loan shall be deemed to have utilized the Revolving Credit Commitments of the Lenders (including those Lenders which shall not have

47

made Swingline Loans) pro rata in accordance with such respective Revolving Credit Commitments. Each Lender agrees that in computing such Lender’s portion of any Borrowing to be made hereunder, the Administrative Agent may, in its discretion, round each Lender’s percentage of such Borrowing to the next higher or lower whole dollar amount.

     SECTION 2.18. Sharing of Setoffs. Each Lender agrees that if it shall, through the exercise of a right of banker’s lien, setoff or counterclaim against the Borrower or any other Loan Party, or pursuant to a secured claim under Section 506 of Title 11 of the United States Code or other security or interest arising from, or in lieu of, such secured claim, received by such Lender under any applicable bankruptcy, insolvency or other similar law or otherwise, or by any other means, obtain payment (voluntary or involuntary) in respect of any Loan or Loans or L/C Disbursement as a result of which the unpaid principal portion of its Loans and participations in L/C Disbursements shall be proportionately less than the unpaid principal portion of the Loans and participations in L/C Disbursements of any other Lender, it shall be deemed simultaneously to have purchased from such other Lender at face value, and shall promptly pay to such other Lender the purchase price for, a participation in the Loans and L/C Exposure of such other Lender, so that the aggregate unpaid principal amount of the Loans and L/C Exposure and participations in Loans and L/C Exposure held by each Lender shall be in the same proportion to the aggregate unpaid principal amount of all Loans and L/C Exposure then outstanding as the principal amount of its Loans and L/C Exposure prior to such exercise of banker’s lien, setoff or counterclaim or other event was to the principal amount of all Loans and L/C Exposure outstanding prior to such exercise of banker’s lien, setoff or counterclaim or other event; provided, however, that if any such purchase or purchases or adjustments shall be made pursuant to this Section 2.18 and the payment giving rise thereto shall thereafter be recovered, such purchase or purchases or adjustments shall be rescinded to the extent of such recovery and the purchase price or prices or adjustment restored without interest. The Borrower expressly consents to the foregoing arrangements and agrees that any Lender holding a participation in a Loan or L/C Disbursement deemed to have been so purchased may exercise any and all rights of banker’s lien, setoff or counterclaim with respect to any and all moneys owing by the Borrower to such Lender by reason thereof as fully as if such Lender had made a Loan directly to the Borrower in the amount of such participation.

SECTION 2.19. Payments. (a) The Borrower shall make each payment (including principal of or interest on any Borrowing or any L/C Disbursement or any Fees or other amounts) hereunder and under any other Loan Document not later than 12:00 (noon), New York City time, on the date when due in immediately available dollars, without setoff, defense or counterclaim. Each such payment (other than (i) Issuing Bank Fees, which shall be paid directly to the Issuing Bank, and (ii) principal of and interest on Swingline Loans, which shall be paid directly to the Swingline Lender except as otherwise provided in Section 2.21(e)) shall be made to an account designated by the Administrative Agent. All payments hereunder and under each other Loan Document shall be made in dollars.

     (b) Except as otherwise expressly provided herein, whenever any payment (including principal of or interest on any Borrowing or any Fees or other amounts) hereunder or under any other Loan Document shall become due, or otherwise would occur, on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such

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extension of time shall in such case be included in the computation of interest or Fees, if applicable.

     SECTION 2.20. Taxes. (a) Any and all payments by or on account of any obligation of the Borrower or any other Loan Party hereunder or under any other Loan Document shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes; provided that if any Indemnified Taxes or Other Taxes are required to be withheld or deducted from such payments, then (i) the sum payable by the Borrower shall be increased as necessary so that after all required deductions or withholding (including deductions or withholdings applicable to additional sums payable under this Section) the Administrative Agent or such Lender (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower or such other Loan Party shall make (or cause to be made) such deductions and (iii) the Borrower or such other Loan Party shall pay (or cause to be paid) the full amount deducted to the relevant Governmental Authority in accordance with applicable law. In addition, the Borrower or any other Loan Party hereunder shall pay (or cause to be paid) any Other Taxes to the relevant Governmental Authority in accordance with applicable law.

     (b) The Borrower shall jointly and severally indemnify the Administrative Agent and each Lender, within 10 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes paid by the Administrative Agent or such Lender, as the case may be, or any of their respective Affiliates, on or with respect to any payment by or on account of any obligation of the Borrower or any Loan Party hereunder or under any other Loan Document (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) and any penalties, interest and expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate in reasonable detail as to the amount of such payment or liability delivered to the Borrower by a Lender, or by the Administrative Agent on its behalf or on behalf of a Lender, shall be conclusive absent manifest error.

     (c) As soon as practicable after any payment of Indemnified Taxes or Other Taxes pursuant to Section 2.20(a), and in any event within 30 days of any such payment being due, the Borrower shall deliver (or cause to be delivered) to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent.

     (d) Any Foreign Lender that is entitled to an exemption from or reduction of withholding tax under the law of the jurisdiction in which the Borrower is located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to the Borrower (with a copy to the Administrative Agent), at the reasonable written request of the Borrower, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate; provided that such Lender is legally entitled to complete, execute and deliver such documentation and in such Lender’s judgment such completion, execution or delivery would not materially prejudice the legal position of such Lender. In addition, each Foreign Lender shall (i) furnish on or before

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it becomes a party to the Agreement either (a) two accurate and complete originally executed U.S. Internal Revenue Service Form W-8BEN (or successor form) or (b) an accurate and complete U.S. Internal Revenue Service Form W-8ECI (or successor form), certifying, in either case, to such Foreign Lender’s legal entitlement to an exemption or reduction from U.S. federal withholding tax with respect to all interest payments hereunder, and (ii) provide a new Form W-8BEN (or successor form) or Form W-8ECI (or successor form) upon the expiration or obsolescence of any previously delivered form to reconfirm any complete exemption from, or any entitlement to a reduction in, U.S. federal withholding tax with respect to any interest payment hereunder; provided that any Foreign Lender that is not a “bank” within the meaning of Section 881(c)(3)(A) of the Code and is relying on the so-called “portfolio interest exemption” shall also furnish a “Non-Bank Certificate” in the form of Exhibit I together with a Form W-8BEN. Notwithstanding any other provision of this paragraph, a Foreign Lender shall not be required to deliver any form pursuant to this paragraph that such Foreign Lender is not legally able to deliver.

     (e) Any Lender that is a United States person, as defined in Section 7701(a)(30) of the Internal Revenue Code, and is not an exempt recipient within the meaning of Treasury Regulations Section 1.6049-4(c) shall deliver to the Borrower (with a copy to the Administrative Agent) two accurate and complete original signed copies of Internal Revenue Service Form W-9, or any successor form that such person is entitled to provide at such time in order to comply with United States back-up withholding requirements.

     (f) Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in this Section 2.20 shall survive the payment in full of all amounts due hereunder.

SECTION 2.21. Assignment of Commitments Under Certain Circumstances; Duty to Mitigate. (a) In the event (i) any Lender or the Issuing Bank delivers a certificate requesting compensation pursuant to Section 2.14, (ii) any Lender or the Issuing Bank delivers a notice described in Section 2.15, (iii) the Borrower is required to pay any additional amount to any Lender or the Issuing Bank or any Governmental Authority on account of any Lender or the Issuing Bank pursuant to Section 2.20, (iv) any Lender is in default of its obligations under this Agreement, (v) any Lender does not consent to a proposed amendment, modification or waiver of this Agreement requested by the Borrower which requires the consent of all of the Lenders or all of the Lenders under any Facility to become effective (and which is approved by at least the Required Lenders), (vi) any Revolving Credit Lender does not consent to a proposed extension of the Revolving Credit Facility requested by the Borrower in accordance with Section 2.25 (and which is approved by Revolving Credit Lenders holding at least the minimum aggregate principal amount set forth in Section 2.25(a) (iv)) or (vii) any Revolving Credit Lender does not consent to a proposed amendment, modification or waiver of Section 6.15 or 6.16 of this Agreement requested by the Borrower which requires the consent of the Required Revolving Credit Lenders to become effective (and which is approved by all other Required Revolving Credit Lenders other than such non-consenting Revolving Credit Lender), the Borrower may, at its sole expense and effort (including with respect to the processing and recordation fee referred to in Section 9.04(b)), upon notice to such Lender or the Issuing Bank and the Administrative Agent, require such Lender or the Issuing Bank to transfer and assign, without recourse (in accordance with and subject to the restrictions contained in Section 9.04), all of its interests,

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rights and obligations under this Agreement to an assignee that shall assume such assigned obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (x) such assignment shall not conflict with any law, rule or regulation or order of any court or other Governmental Authority having jurisdiction, (y) solely with respect to replacements of Lenders pursuant to clauses (i), (ii) or (iii) of this Section, the Borrower shall have received the prior written consent of the Administrative Agent (and, if a Revolving Credit Commitment is being assigned, of the Issuing Bank and the Swingline Lender), which consent shall not unreasonably be withheld, and (z) the Borrower or such assignee shall have paid to the affected Lender or the Issuing Bank in immediately available funds an amount equal to the sum of the principal of and interest accrued to the date of such payment on the outstanding Loans or L/C Disbursements of such Lender or the Issuing Bank, respectively, plus all Fees and other amounts accrued for the account of such Lender or the Issuing Bank hereunder (including any amounts under Section 2.14 and with respect to a replacement pursuant to clauses (i), (ii), (iii) and (v) of Section 2.16); provided further that, if prior to any such transfer and assignment the circumstances or event that resulted in such Lender’s or the Issuing Bank’s claim for compensation under Section 2.14 or notice under Section 2.15 or the amounts paid pursuant to Section 2.20, as the case may be, cease to cause such Lender or the Issuing Bank to suffer increased costs or reductions in amounts received or receivable or reduction in return on capital, or cease to have the consequences specified in Section 2.15, or cease to result in amounts being payable under Section 2.20, as the case may be (including as a result of any action taken by such Lender or the Issuing Bank pursuant to paragraph (b) below), or if such Lender or the Issuing Bank shall waive its right to claim further compensation under Section 2.14 in respect of such circumstances or event or shall withdraw its notice under Section 2.15 or shall waive its right to further payments under Section 2.20 in respect of such circumstances or event, as the case may be, then such Lender or the Issuing Bank shall not thereafter be required to make any such transfer and assignment hereunder. In connection with any such replacement, if the replaced Lender does not execute and deliver to the Administrative Agent a duly completed Assignment and Acceptance reflecting such replacement within five Business Days of the date on which the replacement Lender executes and delivers such Assignment and Acceptance to the replaced Lender, then such replaced Lender shall be deemed to have executed and delivered such Assignment and Acceptance; provided, that in connection with any such replacement of a Revolving Credit Lender following its determination not to consent to a proposed extension of the Revolving Credit Facility requested by the Borrower in accordance with Section 2.25, such duly completed Assignment and Acceptance Agreement shall have been delivered to the non-consenting Revolving Credit Lender at least five Business Days prior to the then scheduled Revolving Credit Maturity Date (as in effect prior to the applicable proposed extension) (and if such Assignment and Acceptance is not so delivered, the provisions of Section 2.25 shall apply as if no such assignment had been made).

     (b) If (i) any Lender or the Issuing Bank shall request compensation under Section 2.14, (ii) any Lender or the Issuing Bank delivers a notice described in Section 2.15 or (iii) the Borrower is required to pay any additional amount to any Lender or the Issuing Bank or any Governmental Authority on account of any Lender or the Issuing Bank, pursuant to Section 2.20, then such Lender or the Issuing Bank shall use reasonable efforts (which shall not require such Lender or the Issuing Bank to incur an unreimbursed loss or unreimbursed cost or expense or otherwise take any action inconsistent with its internal policies or legal or regulatory restrictions or suffer any disadvantage or burden deemed by it to be significant) (x) to file any

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certificate or document reasonably requested in writing by the Borrower or (y) to assign its rights and delegate and transfer its obligations hereunder to another of its offices, branches or affiliates, if such filing or assignment would reduce its claims for compensation under Section 2.14 or enable it to withdraw its notice pursuant to Section 2.15 or would reduce amounts payable pursuant to Section 2.20, as the case may be, in the future. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender or the Issuing Bank in connection with any such filing or assignment, delegation and transfer.

     SECTION 2.22. Swingline Loans. (a) Swingline Commitment. Subject to the terms and conditions hereof and relying upon the representations and warranties, set forth herein, the Swingline Lender agrees to make loans to the Borrower, at any time and from time to time after the Closing Date, and until the earlier of the Revolving Credit Maturity Date and the termination of the Revolving Credit Commitments in accordance with the terms hereof, in an aggregate principal amount at any time outstanding that will not result in (i) the aggregate principal amount of all Swingline Loans exceeding $2,000,000 in the aggregate or (ii) the Aggregate Revolving Credit Exposure, after giving effect to any Swingline Loan, exceeding the Total Revolving Credit Commitment. Each Swingline Loan shall be in a principal amount that is an integral multiple of $100,000. The Swingline Commitment may be terminated or reduced from time to time as provided herein. Within the foregoing limits, the Borrower may borrow, pay or prepay and reborrow Swingline Loans hereunder, subject to the terms, conditions and limitations set forth herein.

     (b) Swingline Loans. The Borrower shall notify the Administrative Agent by fax, or by telephone (confirmed by fax), not later than 12:00 (noon), New York City time, on the day of a proposed Swingline Loan to be made to it. Such notice shall be delivered on a Business Day, shall be irrevocable and shall refer to this Agreement and shall specify the requested date (which shall be a Business Day) and amount of such Swingline Loan. The Administrative Agent will promptly advise the Swingline Lender of any notice received from the Borrower pursuant to this paragraph (b). The Swingline Lender shall make each Swingline Loan available to the Borrower by means of a credit to the general deposit account of the Borrower as specified in the Borrowing Request by 3:00 p.m. on the date such Swingline Loan is so requested.

     (c) Prepayment. The Borrower shall have the right at any time and from time to time to prepay any Swingline Loan, in whole or in part, upon giving written or fax notice (or telephone notice promptly confirmed by written or fax notice) to the Swingline Lender and to the Administrative Agent before 12:00 (noon), New York City time, on the date of prepayment at the Swingline Lender’s address for notices specified in the Lender Addendum delivered by the Swingline Lender. All principal payments of Swingline Loans shall be accompanied by accrued interest on the principal amount being repaid to the date of payment.

     (d) Interest. Each Swingline Loan shall be an ABR Loan and, subject to the provisions of Section 2.07, shall bear interest as provided in Section 2.06(a).

     (e) Participations. The Swingline Lender may by written notice given to the Administrative Agent not later than 10:00 a.m., New York City time, on any Business Day require the Revolving Credit Lenders to acquire participations on such Business Day in all or a portion of the Swingline Loans outstanding. Such notice shall specify the aggregate amount of

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Swingline Loans in which Revolving Credit Lenders will participate. The Administrative Agent will, promptly upon receipt of such notice, give notice to each Revolving Credit Lender, specifying in such notice such Lender’s Pro Rata Percentage of such Swingline Loan or Loans. In furtherance of the foregoing, each Revolving Credit Lender hereby absolutely and unconditionally agrees, upon receipt of notice as provided above, to pay to the Administrative Agent, for the account of the Swingline Lender, such Revolving Credit Lender’s Pro Rata Percentage of such Swingline Loan or Loans. Each Revolving Credit Lender acknowledges and agrees that its obligation to acquire participations in Swingline Loans pursuant to this paragraph is absolute and unconditional and shall not be affected by any circumstance whatsoever, including the occurrence and continuance of a Default or an Event of Default, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. Each Revolving Credit Lender shall comply with its obligation under this paragraph by wire transfer of immediately available funds, in the same manner as provided in Section 2.02(c) with respect to Loans made by such Lender (and Section 2.02(c) shall apply, mutatis mutandis, to the payment obligations of the Lenders under this Section) and the Administrative Agent shall promptly pay to the Swingline Lender the amounts so received by it from the Lenders. The Administrative Agent shall notify the Borrower of any participations in any Swingline Loan acquired pursuant to this paragraph and thereafter payments in respect of such Swingline Loan shall be made to the Administrative Agent and not to the Swingline Lender. Any amounts received by the Swingline Lender from the Borrower (or other party on behalf of the Borrower) in respect of a Swingline Loan after receipt by the Swingline Lender of the proceeds of a sale of participations therein shall be promptly remitted to the Administrative Agent; any such amounts received by the Administrative Agent shall be promptly remitted by the Administrative Agent to the Lenders that shall have made their payments pursuant to this paragraph and to the Swingline Lender, as their interests may appear. The purchase of participations in a Swingline Loan pursuant to this paragraph shall not relieve the Borrower (or other party liable for obligations of the Borrower) of any default in the payment thereof.

     SECTION 2.23. Letters of Credit. (a) General. Subject to the terms and conditions hereof, the Borrower may request the issuance of a Letter of Credit at any time and from time to time while the Revolving Credit Commitments remain in effect for its own account or for the account of any of the Subsidiary Guarantors (in which case the Borrower and such Subsidiary Guarantor shall be co-applicants with respect to such Letter of Credit), but not later than thirty (30) days prior to the Revolving Loan Maturity Date in a form reasonably acceptable to the Administrative Agent and the Issuing Bank. This Section shall not be construed to impose an obligation upon the Issuing Bank to issue any Letter of Credit that is inconsistent with the terms and conditions of this Agreement.

     (b) Notice of Issuance, Amendment, Renewal, Extension; Certain Conditions. In order to request the issuance of a Letter of Credit (or to amend, renew or extend an existing Letter of Credit), the Borrower shall hand deliver or fax to the Issuing Bank and the Administrative Agent (no less than three Business Days (or such shorter period of time acceptable to the Issuing Bank) in advance of the requested date of issuance, amendment, renewal or extension) a notice requesting the issuance of a Letter of Credit, or identifying the Letter of Credit to be amended, renewed or extended, the date of issuance, amendment, renewal or extension, the date on which such Letter of Credit is to expire (which shall comply with paragraph (c) below), the amount of such Letter of Credit, the name and address of the

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beneficiary thereof and such other information as shall be necessary to prepare such Letter of Credit. A Letter of Credit shall be issued, amended, renewed or extended only if, and upon issuance, amendment, renewal or extension of each Letter of Credit the Borrower shall be deemed to represent and warrant that, after giving effect to such issuance, amendment, renewal or extension (i) the L/C Exposure shall not exceed $2,000,000 and (ii) the Aggregate Revolving Credit Exposure shall not exceed the Total Revolving Credit Commitment.

     (c) Expiration Date. Each Letter of Credit shall expire at the close of business on the earlier of (i) the date one year after the date of the issuance of such Letter of Credit and (ii) the date that is five Business Days prior to the Revolving Credit Maturity Date, unless such Letter of Credit expires by its terms on an earlier date; provided, however, that a Letter of Credit may, upon the request of the Borrower, include a provision whereby such Letter of Credit shall be renewed automatically for additional consecutive periods of 12 months or less (but not beyond the date that is five Business Days prior to the Revolving Credit Maturity Date) unless the Issuing Bank notifies the beneficiary thereof at least 45 days prior to the then-applicable expiration date that such Letter of Credit will not be renewed.

     (d) Participations. By the issuance of a Letter of Credit and without any further action on the part of the Issuing Bank or the Lenders, the Issuing Bank hereby grants to each Revolving Credit Lender, and each such Lender hereby acquires from the Issuing Bank, a participation in such Letter of Credit equal to such Lender’s Pro Rata Percentage of the aggregate amount available to be drawn under such Letter of Credit, effective upon the issuance of such Letter of Credit. In consideration and in furtherance of the foregoing, each Revolving Credit Lender hereby absolutely and unconditionally agrees to pay to the Administrative Agent, for the account of the Issuing Bank, such Lender’s Pro Rata Percentage of each L/C Disbursement made by the Issuing Bank and not reimbursed by the Borrower (or, if applicable, another party pursuant to its obligations under any other Loan Document) forthwith on the date due as provided in Section 2.02(f). Each Revolving Credit Lender acknowledges and agrees that its obligation to acquire participations pursuant to this paragraph in respect of Letters of Credit is absolute and unconditional and shall not be affected by any circumstance whatsoever, including the occurrence and continuance of a Default or an Event of Default, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever.

     (e) Reimbursement. If the Issuing Bank shall make any L/C Disbursement in respect of a Letter of Credit, the Borrower shall pay to the Administrative Agent an amount equal to such L/C Disbursement not later than two hours after the Borrower shall have received notice from the Issuing Bank that payment of such draft will be made if such notice is received on or before 10:00 am New York time, or, if the Borrower shall have received such notice later than 10:00 a.m., New York City time, on any Business Day, not later than 10:00 a.m., New York City time, on the immediately following Business Day. To the extent that the Borrower does not reimburse the Issuing Bank on the same business day, the Lenders under the Revolving Facility shall be irrevocably obligated to reimburse the Issuing Bank pro rata based upon their respective Revolving Credit Commitment.

     (f) Obligations Absolute. The Borrower’s obligations to reimburse L/C Disbursements as provided in paragraph (e) above shall be absolute, unconditional and

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irrevocable, and shall be performed strictly in accordance with the terms of this Agreement, under any and all circumstances whatsoever, and irrespective of:

     (i) any lack of validity or enforceability of any Letter of Credit or any Loan Document, or any term or provision therein;

     (ii) any amendment or waiver of, or any consent to departure from, all or any of the provisions of any Letter of Credit or any Loan Document;

     (iii) the existence of any claim, setoff, defense or other right that the Borrower, any other party guaranteeing, or otherwise obligated with, the Borrower, any subsidiary or other Affiliate thereof or any other person may at any time have against the beneficiary under any Letter of Credit, the Issuing Bank, the Administrative Agent or any Lender or any other person, whether in connection with this Agreement, any other Loan Document or any other related or unrelated agreement or transaction;

     (iv) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect;

     (v) payment by the Issuing Bank under a Letter of Credit against presentation of a draft or other document that does not comply with the terms of such Letter of Credit; and

     (vi) any other act or omission to act or delay of any kind of the Issuing Bank, any Lender, the Administrative Agent or any other person or any other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section, constitute a legal or equitable discharge of the Borrower’s obligations hereunder.

     Without limiting the generality of the foregoing, it is expressly understood and agreed that the absolute and unconditional obligation of the Borrower hereunder to reimburse L/C Disbursements will not be excused by the gross negligence, bad faith or willful misconduct of the Issuing Bank. However, the foregoing shall not be construed to excuse the Issuing Bank from liability to the Borrower to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by the Borrower to the extent permitted by applicable law) suffered by the Borrower that are caused by the Issuing Bank’s gross negligence, bad faith or willful misconduct in determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof; it is understood that the Issuing Bank may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary and, in making any payment under any Letter of Credit (i) the Issuing Bank’s exclusive reliance on the documents presented to it under such Letter of Credit as to any and all matters set forth therein, including reliance on the amount of any draft presented under such Letter of Credit, whether or not the amount due to the beneficiary thereunder equals the amount of such draft and whether or not any document presented pursuant to such Letter of Credit proves to be insufficient in any respect, if such document on its face appears to be in order, and whether or not any other statement or any

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other document presented pursuant to such Letter of Credit proves to be forged or invalid or any statement therein proves to be inaccurate or untrue in any respect whatsoever and (ii) any noncompliance in any immaterial respect of the documents presented under such Letter of Credit with the terms thereof shall, in each case, be deemed not to constitute willful misconduct or gross negligence of the Issuing Bank.

     (g) Disbursement Procedures. The Issuing Bank shall, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment under a Letter of Credit. The Issuing Bank shall as promptly as possible give telephonic notification, confirmed by fax, to the Administrative Agent and the Borrower of such demand for payment and whether the Issuing Bank has made or will make an L/C Disbursement thereunder; provided that any failure to give or delay in giving such notice shall not relieve the Borrower of its obligation to reimburse the Issuing Bank and the applicable Lenders with respect to any such L/C Disbursement. The Administrative Agent shall promptly give each Revolving Credit Lender notice thereof.

     (h) Interim Interest. If the Issuing Bank shall make any L/C Disbursement in respect of a Letter of Credit, then, unless the Borrower shall reimburse such L/C Disbursement in full on such date, the unpaid amount thereof shall bear interest for the account of the Issuing Bank, for each day from and including the date of such L/C Disbursement to but excluding the earlier of the date of payment by the Borrower or the date on which interest shall commence to accrue thereon as provided in Section 2.02(f), at the rate per annum that would apply to such amount if such amount were an ABR Revolving Loan.

     (i) Resignation or Removal of the Issuing Bank. The Issuing Bank may resign at any time by giving 30 days’ prior written notice to the Administrative Agent, the Lenders and the Borrower. Subject to the next succeeding paragraph, upon the acceptance of any appointment as the Issuing Bank hereunder by a Lender that shall agree to serve as successor Issuing Bank, such successor shall succeed to and become vested with all the interests, rights and obligations of the retiring Issuing Bank and the retiring Issuing Bank shall be discharged from its obligations to issue additional Letters of Credit hereunder. At the time such removal or resignation shall become effective, the Borrower shall pay all accrued and unpaid fees pursuant to Section 2.05(c)(ii). The acceptance of any appointment as the Issuing Bank hereunder by a successor Lender shall be evidenced by an agreement entered into by such successor, in a form satisfactory to the Borrower and the Administrative Agent, and, from and after the effective date of such agreement, (i) such successor Lender shall have all the rights and obligations of the previous Issuing Bank under this Agreement and the other Loan Documents and (ii) references herein and in the other Loan Documents to the term “Issuing Bank” shall be deemed to refer to such successor or to any previous Issuing Bank, or to such successor and all previous Issuing Banks, as the context shall require. After the resignation or removal of the Issuing Bank hereunder, the retiring Issuing Bank shall remain a party hereto and shall continue to have all the rights and obligations of an Issuing Bank under this Agreement and the other Loan Documents with respect to Letters of Credit issued by it prior to such resignation or removal, but shall not be required to issue additional Letters of Credit.

     (j) Cash Collateralization. If any Event of Default shall occur and be continuing, the Borrower shall, on the Business Day it receives notice from the Administrative Agent or the

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Required Lenders (or, if the maturity of the Loans has been accelerated, Revolving Credit Lenders representing greater than 50% of the total L/C Exposure) thereof and of the amount to be deposited, deposit in an account with the Collateral Agent, for the ratable benefit of the Revolving Credit Lenders, an amount in cash equal to the L/C Exposure as of such date. Such deposit shall be held by the Collateral Agent as collateral for the payment and performance of the obligations of the Borrower under this Agreement. The Collateral Agent shall have exclusive dominion and control, including the exclusive right of withdrawal, over such account. Other than any interest earned on the investment of such deposits in Permitted Investments, which investments shall be made at the option and sole discretion of the Collateral Agent, such deposits shall not bear interest. Interest or profits, if any, on such investments shall accumulate in such account. Moneys in such account shall (i) automatically be applied by the Administrative Agent to reimburse the Issuing Bank for L/C Disbursements for which it has not been reimbursed, (ii) be held for the satisfaction of the reimbursement obligations of the Borrower for the L/C Exposure at such time and (iii) if the maturity of the Loans has been accelerated (but subject to the consent of Revolving Credit Lenders representing greater than 50% of the total L/C Exposure), be applied to satisfy the Obligations. If the Borrower is required to provide an amount of cash collateral hereunder as a result of the occurrence of an Event of Default, such amount (to the extent not applied as aforesaid) shall be returned to the Borrower within three Business Days after all Events of Default have been cured or waived.

     (k) Additional Issuing Banks. The Borrower may, at any time and from time to time with the consent of the Administrative Agent (which consent shall not be unreasonably withheld) and such Lender, designate one or more additional Lenders to act as an issuing bank under the terms of the Agreement. Any Lender designated as an issuing bank pursuant to this paragraph shall be deemed to be an “Issuing Bank” (in addition to being a Lender) in respect of Letters of Credit issued or to be issued by such Lender, and, with respect to such Letters of Credit, such term shall thereafter apply to the other Issuing Bank and such Lender.

     SECTION 2.24. Incremental Facilities.

     (a) (i) Borrower may by written notice to the Administrative Agent (the “Increase Loan Notice”) elect to request prior to the first anniversary of the Closing Date, an increase to the existing Revolving Credit Commitment (any such increase, the “Primary New Revolving Loan Commitments”) on any one or more occasions by an amount not in excess of $20,000,000 in the aggregate. Any Primary New Revolving Loan Commitment shall be in the minimum amount of $5,000,000 and integral multiples of $500,000 in excess thereof (or, in the aggregate, if less, the entire remaining amount of an amount equal to $20,000,000 less the amount of Revolving Loan Commitments outstanding as of the applicable Increased Amount Date (as defined below)), and shall be subject to the voluntary participation of Lenders in such Primary New Revolving Loan Commitment as otherwise provided herein. Such notice shall specify (A) the date (the “Increased Amount Date”) on which Borrower proposes that the Primary New Revolving Loan Commitments shall be effective, which need not be the same date for all Primary New Revolving Loan Commitments and shall be a date not less than 5 Business Days after the date on which such notice is delivered to the Administrative Agent (or such shorter period as may be approved by the Administrative Agent) and (B) the identity of each Lender or other Person that is an Eligible Assignee (each, a “New

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Revolving Loan Lender”) to whom Borrower proposes any portion of such Primary New Revolving Loan Commitments be allocated and the amounts of such proposed allocations.

          (ii) Borrower may by written Increase Loan Notice elect to request, prior to the Revolving Credit Maturity Date, an increase to the existing Revolving Credit Commitment (any such increase, the “Secondary New Revolving Loan Commitments” and, together with the Primary New Revolving Loan Commitments, the “New Revolving Loan Commitments”) on any one occasion by an amount not in excess of $20,000,000 in the aggregate; provided that, notwithstanding the foregoing, no Secondary New Revolving Loan Commitments may be requested until the date the Borrower shall have fully activated all permitted Primary New Revolving Loan Commitments in accordance with Section 2.24(a)(i) and (y) the Business Day immediately following the first anniversary of the Closing Date. Any Secondary New Revolving Loan Commitment shall be in the minimum amount of $5,000,000 and integral multiples of $500,000 in excess thereof, and shall be subject to the voluntary participation of Lenders or Eligible Assignees in such Secondary New Revolving Loan Commitment as otherwise provided herein. Such notice shall specify (A) the Increased Amount Date, which shall be the same date for all Secondary New Revolving Loan Commitments and shall be a date not less than 10 Business Days after the date on which such notice is delivered to the Administrative Agent (or such shorter period as may be approved by the Administrative Agent) and (B) the identity of each New Revolving Loan Lender to whom Borrower proposes any portion of such New Revolving Loan Commitments be allocated and the amounts of such proposed allocations.

     (b) The entering into of New Revolving Loan Commitments shall be subject to the satisfaction of each of the following conditions precedent, as determined by Administrative Agent in its good faith judgment:

          (i) any existing Lender may elect or decline, in its sole discretion, to provide a New Revolving Loan Commitment; provided, however, that the election by any such Lender to provide or not provide New Revolving Loan Commitments shall, in no way affect its then existing obligations under the Loan Documents;

          (ii) no Default or Event of Default shall exist on the date the Increased Loan Notice is delivered and no Default or Event of Default shall exist on the Increased Amount Date, both before and after giving effect to such New Revolving Loan Commitments;

          (iii) in connection with the making of any Secondary New Revolving Loan Commitments only, both before and after giving effect to the making of any New Revolving Loan Commitments, Borrower and its Subsidiaries shall be in compliance, on a pro forma basis (after giving effect to such New Revolving Loan Commitments and such other customary adjustments reasonably acceptable to the Administrative Agent), with each of the covenants set forth in Sections 6.11, 6.12, 6.13, 6.14, 6.15 and 6.16 as of the last day of the most recently ended fiscal quarter after giving effect to such New Revolving Loan Commitments;

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          (iv) the New Revolving Loan Commitments shall be effected pursuant to one or more Joinder Agreements executed and delivered by Borrower and Administrative Agent, and each of which shall be recorded in the Register and shall be subject to the requirements set forth in Section 2.20(d);

          (v) Borrower shall make any payments required pursuant to Section 2.16(c) in connection with the New Revolving Loan Commitments;

          (vi) in connection with the making of any Secondary New Revolving Loan Commitments only, Borrower shall deliver or cause to be delivered any legal opinions or other documents reasonably requested by Administrative Agent in connection with the New Revolving Loan Commitments;

          (vii) in connection with the making of any Secondary New Revolving Loan Commitments only, and as requested by Administrative Agent, the Loan Parties shall have acknowledged and ratified that their obligations under the applicable Loan Documents remain in full force and effect, and continue to guaranty the Obligations under the Loan Documents, as modified by the implementation of the New Revolving Loan Commitments; and

          (viii) in connection with the making of any New Revolving Loan Commitments, Borrower shall have paid all reasonable out-of-pocket costs and expenses incurred by the Administrative Agent in connection with the implementation of the New Revolving Loan Commitments.

     (c) Each New Revolving Loan Commitment shall be deemed, for all purposes (and shall have identical terms, including without limitation, pricing, as), the existing Revolving Loan Commitments (including, without limitation, for purposes of calculating Revolving Facility Exposure) and each Loan made thereunder (a “New Revolving Loan”) shall be deemed, for all purposes (and shall have identical terms as), the existing Revolving Loans. In the event an Eligible Assignee participates in the New Revolving Loan Commitments (in such capacity, a “New Revolving Loan Lender”), such New Revolving Loan Lender shall be deemed, for all purposes, a Lender and a Revolving Credit Lender hereunder.

     (d) On any Increased Amount Date on which New Revolving Loan Commitments are effected, subject to the satisfaction of the foregoing terms and conditions, each of the Revolving Credit Lenders shall assign to each of the New Revolving Loan Lenders, and each of the New Revolving Loan Lenders shall purchase from each of the Revolving Credit Lenders, at the principal amount thereof (together with accrued interest), such interests in the Revolving Loans outstanding on such Increased Amount Date as shall be necessary in order that, after giving effect to all such assignments and purchases, such Revolving Loans will be held by existing Revolving Loan Lenders and New Revolving Loan Lenders ratably in accordance with their Revolving Loan Commitments after giving effect to the addition of such New Revolving Loan Commitments to the Revolving Loan Commitments.

     (e) Administrative Agent shall notify Lenders promptly upon receipt of Borrower’s notice of each Increased Amount Date and in respect thereof (y) the New Revolving Loan

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Commitments and the New Revolving Loan Lenders and (z) in the case of each notice to any Revolving Loan Lender, the respective interests in such Revolving Loan Lender’s Revolving Loans, in each case subject to the assignments contemplated by this Section.

     (f) Each Joinder Agreement may, without the consent of any other Lenders, effect such amendments to this Agreement and the other Loan Documents as may be necessary or appropriate, in the opinion of the Administrative Agent to give effect to the provisions of this Section 2.24.

     SECTION 2.25. Extension of Revolving Credit Maturity Date. (a) Borrower shall have the right to extend the Revolving Credit Maturity Date for three (3) additional distinct consecutive periods, each of one year in duration (each an “Extension Period”). To request an extension of the Revolving Credit Maturity Date, Borrower shall deliver to Administrative Agent at least thirty (30) days’ prior written notice (an “Extension Notice”; such 30^th day after delivery of the Extension Notice being hereinafter referred to as the “Extension Effectiveness Date”) containing Borrower’s election to extend the term of the Revolving Credit Maturity Date, which Extension Notice shall be delivered not less than one (1) month nor more than three (3) months prior to the then scheduled Revolving Credit Maturity Date. As further provided below, on the applicable Extension Effectiveness Date, the Revolving Credit Maturity Date shall be extended one year from the then scheduled Revolving Credit Maturity Date, respectively, subject to the satisfaction of the following conditions precedent:

          (ix) no Event of Default exists on the date such Extension Notice is delivered and no Default or Event of Default exists on the Extension Effectiveness Date;

          (x) Borrower shall have paid any reasonable out of pocket costs and expenses incurred by Administrative Agent, in connection with the requested extension (including, without limitation, reasonable attorneys’ fees and costs);

          (xi) both before and after giving effect to such extension, Borrower and its Subsidiaries shall be in compliance, on a pro forma basis (after giving effect to such extension and such other customary adjustments reasonably acceptable to the Administrative Agent), with each of the covenants set forth in Sections 6.11, 6.12, 6.13, 6.14, 6.15 and 6.16 as of the last day of the most recently ended fiscal quarter after giving effect to such extension; and

          (xii) Revolving Credit Lenders holding Revolving Credit Commitments, in aggregate, of at least $2,000,000, shall have consented in writing to such extension at least five (5) Business Days before the scheduled Extension Effectiveness Date.

For the avoidance of doubt, and notwithstanding anything herein to the contrary, (x) any Revolving Credit Lender may elect or decline, in its sole discretion, to consent to a request for any extension of the Revolving Credit Maturity Date and (y) the consent to any such extension of the Revolving Credit Maturity Date by any Term Lender shall not be required.

     (b) Upon the satisfaction of the conditions set forth in clauses (i) through (iv) of Section 2.25(a), the Revolving Credit Maturity Date shall be deemed extended on the Extension Effectiveness Date. If the Revolving Credit Maturity Date is extended, all the terms and

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conditions of the Credit Documents shall continue to apply, except that (i) Borrower shall have no further option to extend the Revolving Credit Maturity Date beyond the expiration of the third occurring Extension Period, (ii) as of each Extension Effectiveness Date, the Revolving Credit Commitments shall be deemed permanently reduced by an amount equal to the Revolving Credit Commitments of those Revolving Credit Lenders that did not consent in writing to such extension at least five (5) Business Days before the scheduled Extension Effectiveness Date and whose Revolving Credit Commitments were not otherwise assigned to one or more replacement Revolving Credit Lenders in accordance with Section 2.21(a), (iii) such reduction in the Revolving Credit Commitments shall be made ratably among solely the applicable Revolving Credit Lenders that did not so consent in accordance with their Pro Rata Percentages and whose Revolving Credit Commitments were not otherwise assigned to one or more replacement Revolving Credit Lenders in accordance with Section 2.21(a) (and not, for the avoidance of doubt, all Revolving Credit Lenders) and (iv) notwithstanding anything in Section 2.13 or otherwise contained herein to the contrary, Borrower shall pay to the Administrative Agent for the account of the applicable Revolving Credit Lenders that did not so consent and whose Revolving Credit Commitments were not otherwise assigned to one or more replacement Revolving Credit Lenders in accordance with Section 2.21(a), on the Extension Effectiveness Date, (A) the amount of Revolving Loans outstanding as of such date attributable to such Revolving Credit Lenders in accordance with their Pro Rata Percentages and (B) the Commitment Fees on the amount of the Commitments so terminated or reduced accrued to but excluding the date of such termination or reduction (it being understood and agreed that Borrower shall be permitted to make additional borrowings of Revolving Loans from continuing Revolving Credit Lenders to fund such payments, in accordance with and subject to the limitations of this Section 2 and Section 4).

ARTICLE III.

Representations and Warranties

     The Borrower represents and warrants to the Administrative Agent, the Collateral Agent, the Issuing Bank and each of the Lenders that:

     SECTION 3.01. Organization; Powers. The Borrower and each Subsidiary (a) is duly organized or formed, validly existing and in good standing under the laws of the jurisdiction of its organization or formation, (b) has all requisite corporate or limited liability company power and authority, and the legal right, to own and operate its property and assets, to lease the property it operates as lessee and to carry on its business as now conducted and as proposed to be conducted, (c) is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required (except where failure to do so could not reasonably be expected to have a Material Adverse Effect) and (d) has the corporate or limited liability company power and authority, and the legal right, to execute, deliver and perform its obligations under this Agreement, each of the other Loan Documents, the Acquisition Documentation and each other agreement or instrument contemplated hereby or thereby to which it is or will be a party, including, in the case of the Borrower, to borrow hereunder, in the case of each Loan Party, to grant the Liens contemplated to be granted by it under the Security Documents and, in the case

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of each Subsidiary Guarantor, to Guarantee the Obligations as contemplated by the Guarantee and Collateral Agreement.

     SECTION 3.02. Authorization; No Conflicts. The Transactions (a) have been duly authorized by all requisite corporate, partnership or limited liability company and, if required, stockholder, partner or member action and (b) will not (i) violate (A) any provision of law, statute, rule or regulation, or of the certificate or articles of incorporation or other constitutive documents or by-laws of the Borrower or any Subsidiary, (B) any order of any Governmental Authority or arbitrator or (C) any provision of any indenture, agreement or other instrument to which the Borrower or any Subsidiary is a party or by which any of them or any of their property is or may be bound (except where such violation could not reasonably be expected to have a Material Adverse Effect), (ii) be in conflict with, result in a breach of or constitute (alone or with notice or lapse of time or both) a default under, or give rise to any right to accelerate or to require the prepayment, repurchase or redemption of any obligation under any such indenture, agreement or other instrument or (iii) result in the creation or imposition of any Lien upon or with respect to any property or assets now owned or hereafter acquired by the Borrower or any Subsidiary (other than Liens created under the Security Documents or as permitted by this Agreement).

     SECTION 3.03. Enforceability. This Agreement has been duly executed and delivered by the Borrower and constitutes, and each other Loan Document when executed and delivered by each Loan Party party thereto will constitute, a legal, valid and binding obligation of such Loan Party enforceable against such Loan Party in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors’ rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law.

     SECTION 3.04. Governmental Approvals. No action, consent or approval of, registration or filing with, Permit from, notice to, or any other action by, any Governmental Authority is or will be required in connection with the Transactions, except for (a) the filing of UCC financing statements and filings with the United States Patent and Trademark Office and the United States Copyright Office, (b) recordation of the Mortgages, (c) such as have been made or obtained and are in full force and effect, other than, in the case of each of the foregoing, the failure of which to obtain or make could not reasonably be expected to have a Material Adverse Effect or which are not material to the consummation of the Transactions.

     SECTION 3.05. Financial Statements. (a) The Borrower has heretofore furnished to the Lenders the consolidated balance sheets and related statements of income, stockholder’s equity and cash flows of each of the Borrower and USAgencies as of and for the fiscal years ended December 31, 2005, December 31, 2004 and December 31, 2003 in each case audited by and accompanied by the opinion of (i) in the case of the Borrower, PricewaterhouseCoopers LLP, and (ii) in the case of USAgencies, Postlethwaite & Netterville, in both cases independent public accountants. Such financial statements present fairly in all material respects the financial condition and results of operations and cash flows of USAgencies, the Borrower and each of their consolidated Subsidiaries as of such dates and for such periods. Such balance sheets and the notes thereto disclose all material liabilities, direct or contingent, of USAgencies, the Borrower and each of their consolidated Subsidiaries as of the dates thereof. Such financial statements were prepared in accordance with GAAP applied on a consistent basis.

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     (b) The Borrower has heretofore delivered to the Lenders its unaudited pro forma consolidated balance sheet and related statements of income, stockholder’s equity and cash flows as of September 30, 2006, prepared giving effect to the Transactions as if they had occurred, with respect to such balance sheet, on such date and, with respect to such other financial statements, on the first day of the 12-month period ending on such date. Such pro forma financial statements (i) have been prepared in good faith by the Borrower, based on the assumptions used to prepare the pro forma financial information contained in the Confidential Information Memorandum (which assumptions are believed by the Borrower on the date hereof and on the Closing Date to be reasonable), (ii) are based on the best information available to the Borrower after due inquiry as of the date of delivery thereof, (iii) accurately reflect all material adjustments required to be made to give effect to the Transactions and (iv) present fairly in all material respects on a pro forma basis the estimated consolidated financial position of the Borrower and its consolidated Subsidiaries as of such date and for such period, assuming that the Transactions had actually occurred at such date or at the beginning of such period, as the case may be.

     SECTION 3.06. No Material Adverse Change. No event, change or condition has occurred since December 31, 2005 that has caused, or could reasonably be expected to cause, a Material Adverse Effect.

     SECTION 3.07. Title to Properties; Possession Under Leases. (a) Each of the Borrower and each Subsidiary has good and valid title to, or valid leasehold interests in, all its material properties and assets (including, good and marketable title to, or valid leasehold interests in all its material Real Property), except for minor defects in title that, in the aggregate, are not substantial in amount and do not materially detract from the value of the property subject thereto and do not interfere in any material respect with its ability to conduct its business as currently conducted or to utilize such properties and assets for their intended purposes. Each parcel of Real Property is free from material structural defects and all building systems contained therein are in good working order and condition, ordinary wear and tear excepted, suitable for the purposes for which they are currently being used. No portion of the Real Property has suffered any material damage by fire or other casualty loss that has not heretofore been completely repaired and restored to its original condition. Each parcel of Real Property and the current use thereof complies with all applicable laws (including building and zoning ordinances and codes) and with all insurance requirements; the Borrower is not a non-conforming user of any Real Property.

     (b) Each of the Borrower and the Subsidiaries, and, to the knowledge of the Borrower, each other party thereto, has complied with all obligations under all material leases to which it is a party and all such leases are legal, valid, binding and in full force and effect and are enforceable in accordance with their terms. Each of the Borrower and the Subsidiaries enjoys peaceful and undisturbed possession under all such material leases. No landlord Lien has been filed, and, to the knowledge of the Borrower, no claim is being asserted, with respect to any lease payment under any material lease. None of the Real Property is subject to any lease, sublease, license or other agreement granting to any person (other than the Borrower and their Affiliates) any right to the use, occupancy, possession or enjoyment of the Real Property or any portion thereof. The Borrower has delivered to the Administrative Agent true, complete and correct copies of all leases (whether as landlord or tenant) of Real Property.

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     (c) None of the Borrower or any of the Subsidiaries has received any notice of, nor has any knowledge of, any pending or contemplated condemnation proceeding affecting the Real Properties or any sale or disposition thereof in lieu of condemnation.

     (d) None of the Borrower or any of the Subsidiaries is obligated under any right of first refusal, option or other contractual right to sell, assign or otherwise dispose of any Real Property or any interest therein.

     (e) There are no pending or, to the knowledge of the Borrower, proposed special or other assessments for public improvements or otherwise affecting any material portion of the owned Real Property, nor are there any contemplated improvements to such owned Real Property that may result in such special or other assessments. The Borrower has not suffered, permitted or initiated the joint assessment of any owned Real Property with any other real property constituting a separate tax lot. Each owned parcel of Real Property is comprised of one or more parcels, each of which constitutes a separate tax lot and none of which constitutes a portion of any other tax lot.

     (f) The Borrower has obtained all permits, licenses, variances and certificates required by applicable law to be obtained and necessary to the use and operation of each parcel of Real Property, except where the failure to have such permit, license, certificate or variance would not prohibit the use of such parcel of Real Property as it is currently being used. The use being made of each parcel of Real Property conforms with the certificate of occupancy and/or such other permits, licenses, variances and certificates for such Real Property and any other restrictions, covenants or conditions affecting such Real Property, except for any such nonconformity that could not reasonably be expected to be enjoined or to result in material fines.

     (g) (i) each parcel of Real Property has adequate rights of access to public ways to permit the Real Property to be used for its intended purpose, and is served by installed, operating and adequate water, electric, gas, telephone, sewer, sanitary sewer and storm drain facilities; (ii) all public utilities necessary to the continued use and enjoyment of each parcel of Real Property as used and enjoyed on the Closing Date are located in the public right-of-way abutting the premises, and all such utilities are connected so as to serve such Real Property without passing over other Property except for land of the utility company providing such utility service or, in the case of leased Real Property, contiguous land owned by the lessor of such leased Real Property; (iii) each parcel of Real Property, including each leased parcel, has adequate available parking to meet legal and operating requirements; (iv) all roads necessary for the full utilization of each parcel of Real Property for its current purpose have been completed and dedicated to public use and accepted by all governmental authorities or are the subject of access easements for the benefit of such Real Property; (v) no building or structure constituting Real Property or any appurtenance thereto or equipment thereon, or the use, operation or maintenance thereof, violates any restrictive covenant or encroaches on any easement or on any property owned by others, which violation or encroachment interferes with the use or could materially adversely affect the value of such building, structure or appurtenance or which encroachment is necessary for the operation of the business at any Real Property; and (vi) all buildings, structures, appurtenances and equipment necessary for the use of each parcel of Real Property for the purpose for which it is currently being used are located on the real property encumbered by such Mortgage.

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     SECTION 3.08. Subsidiaries. (a) Schedule 3.08(a) sets forth as of the Closing Date a list of all Subsidiaries, after giving effect to the Acquisition, including each Subsidiary’s exact legal name (as reflected in such Subsidiary’s certificate or articles of incorporation or other constitutive documents) and jurisdiction of incorporation or formation and the percentage ownership interest of the Borrower (direct or indirect) therein, and identifies each Subsidiary that is Loan Party. The shares of capital stock or other Equity Interests so indicated on Schedule 3.08(a) are fully paid and non-assessable and are owned by the Borrower, directly or indirectly, free and clear of all Liens (other than Liens created under the Security Documents).

     (b) As of the Closing Date, there are no restrictions on any Regulated Insurance Subsidiary which prohibit or otherwise restrict the ability of any Regulated Insurance Subsidiary to (i) pay dividends or make other distributions or pay any Indebtedness owed to the Borrower or any Subsidiary, (ii) make loans or advances to the Borrower or any Subsidiary, (iii) transfer any of its properties or assets to the Borrower or any Subsidiary, (iv) guarantee the Obligations, other than prohibitions or restrictions existing under or by reason of (A) customary nonassignment provisions entered into in the ordinary course of business and consistent with past practices and (B) purchase money obligations for property acquired in the ordinary course of business, so long as such obligations are permitted under this Agreement, (v) dividend or distribute to the Borrower or any Subsidiary amounts equal to all state and federal income tax expenses incurred by the Regulated Insurance Subsidiaries, or (vi) conduct business in the ordinary course in the jurisdictions in which such Regulated Insurance Subsidiary conducts its Insurance Business, including, without limitation, as set forth on Schedule 3.26, other than, in the case of each of clause (i) through clause (vi), prohibitions or restrictions existing under or by reason of (A) this Agreement or the other Loan Documents, (B) Requirements of Law or (C) as set forth on Schedule 3.08(b).

     SECTION 3.09. Litigation; Compliance with Laws. (a) There are no actions, investigations, suits or proceedings at law or in equity or by or before any arbitrator or Governmental Authority now pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower or any Subsidiary or any business, property or rights of any such person (i) that involve any Loan Document or the Transactions or (ii) except as set forth on Schedule 3.09, as to which there is a reasonable possibility of an adverse determination and that, if adversely determined, could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect.

     (b) None of the Borrower or any of the Subsidiaries or any of their respective material properties or assets is in violation of, nor will the continued operation of their material properties and assets as currently conducted violate, any law, rule or regulation (including any zoning, building, Environmental Law, ordinance, code or approval or any building permits) or any restrictions of record or agreements affecting the Mortgaged Property, or is in default with respect to any judgment, writ, injunction, decree or order of any Governmental Authority, where such violation or default, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect.

     (c) Certificates of occupancy, if any, and permits are in effect for each Mortgaged Property as currently constructed, and true and complete copies of such certificates of

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occupancy, if any, have been delivered to the Collateral Agent as mortgagee with respect to each Mortgaged Property.

     SECTION 3.10. Agreements. (a) None of the Borrower or any of the Subsidiaries is a party to any agreement or instrument, or subject to any corporate restriction, that, individually or in the aggregate, has resulted or could reasonably be expected to result in a Material Adverse Effect.

     (b) None of the Borrower or any of the Subsidiaries is in default in any manner under any provision of any indenture or other agreement or instrument evidencing Indebtedness, or any other material agreement or instrument to which it is a party or by which it or any of its properties or assets are or may be bound where such default, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. No Default has occurred and is continuing.

     SECTION 3.11. Federal Reserve Regulations. (a) None of the Borrower or any of the Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of buying or carrying Margin Stock.

     (b) No part of the proceeds of any Loan or any Letter of Credit will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, for purchasing or carrying Margin Stock or for the purpose of purchasing, carrying or trading in any securities under such circumstances as to involve the Borrower in a violation of Regulation X or to involve any broker or dealer in a violation of Regulation T. No Indebtedness being reduced or retired out of the proceeds of any Loans or Letters of Credit was or will be incurred for the purpose of purchasing or carrying any Margin Stock. Following the application of the proceeds of the Loans and the Letters of Credit, Margin Stock will not constitute more than 25% of the value of the assets of the Borrower and the Subsidiaries. None of the transactions contemplated by this Agreement will violate or result in the violation of any of the provisions of the Regulations of the Board, including Regulation T, U or X. If requested by any Lender or the Administrative Agent, the Borrower will furnish to the Administrative Agent and each Lender a statement to the foregoing effect in conformity with the requirements of FR Form G-3 or FR Form U-1 referred to in Regulation U.

     SECTION 3.12. Investment Company Act. None of the Borrower or any of the Subsidiaries is an “investment company” as defined in, or subject to regulation under, the Investment Company Act of 1940, as amended.

     SECTION 3.13. Use of Proceeds. The Borrower will use the proceeds of the Term Loans solely to pay the Acquisition Consideration. The Borrower will use the proceeds of the Revolving Loans and the Swingline Loans to pay fees and expenses related to the Transactions and, from time to time, for general corporate purposes, including, without limitation payments in accordance with Section 6.06(a)(iii). The Borrower will request the issuance of Letters of Credit solely to support payment obligations incurred in the ordinary course of business by the Borrower and its Subsidiaries.

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     SECTION 3.14. Tax Returns. Each of the Borrower and each of the Subsidiaries has timely filed or timely caused to be filed all federal, material state, material local and material foreign tax returns or materials required to have been filed by it and all such tax returns are correct and complete in all material respects. (a) Each of the Borrower and each of the Subsidiaries has timely paid or timely caused to be paid all Taxes due and payable by it and all assessments received by it, except Taxes that are being contested in good faith by appropriate proceedings and for which the Borrower or such Subsidiary as applicable, shall have set aside on its books adequate reserves in accordance with GAAP, (b) each of the Borrower and each of the Subsidiaries has made adequate provision in accordance with GAAP for all Taxes not yet due and payable and (c) no Tax Lien has been filed, and to the knowledge of the Borrower and each of the Subsidiaries, no claim is being asserted, with respect to any Tax except, in the case clauses (a), (b) and (c) with respect to such taxes and Liens that do not exceed $2,500,000 in the aggregate at any time outstanding. None of the Borrower or any of the Subsidiaries (a) intends to treat the Loans or any of the transactions contemplated by any Loan Document or the Acquisition as being a “reportable transaction” (within the meaning of Treasury Regulation Section 1.6011-4) or (b) is aware of any facts or events that would result in such treatment.

     SECTION 3.15. No Material Misstatements; Acquisition Documentation. (a) The Borrower has disclosed to the Arranger, the Administrative Agent and the Lenders all agreements, instruments and corporate or other restrictions to which the Borrower or any of the Subsidiaries is subject, and all other matters known to any of them, that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. None of (i) the Confidential Information Memorandum or (ii) any other information, report, financial statement, exhibit or schedule furnished by or on behalf of the Borrower or any Subsidiary to the Arranger, the Administrative Agent or any Lender for use in connection with the transactions contemplated by the Loan Documents or in connection with the negotiation of any Loan Document or included therein or delivered pursuant thereto, when taken as a whole, contained, contains or will contain any material misstatement of fact or omitted, omits or will omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were, are or will be made, not misleading; provided that to the extent any such information, report, financial statement, exhibit or schedule was based upon or constitutes a forecast or projection, the Borrower represents only that it acted in good faith and utilized assumptions believed by it to be reasonable at the time (it being understood that projections are subject to significant uncertainty and contingencies many of which are beyond the control of the Borrower and that no assurances can be given that such projections will be realized).

     (b) As of the Closing Date, the representations and warranties of the applicable Loan Parties and their Affiliates set forth in the Acquisition Documentation are true and correct in all material respects.

     SECTION 3.16. Employee Benefit Plans. Each of the Borrower and each of its ERISA Affiliates is in compliance in all material respects with the applicable provisions of ERISA and the Tax Code and the regulations and published interpretations thereunder. No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events, could reasonably be expected to result in material liability of the Borrower or any of its ERISA Affiliates. The present value of all benefit liabilities under each Benefit Plan (based on the assumptions used for purposes of Statement of Financial Accounting

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Standards No. 87) did not, as of the last annual valuation date applicable thereto, exceed by more than $1,000,000 the fair market value of the assets of such Benefit Plan, and the present value of all benefit liabilities of all underfunded Benefit Plans (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the last annual valuation dates applicable thereto, exceed by more than $1,000,000 the fair market value of the assets of all such underfunded Benefit Plans.

     SECTION 3.17. Environmental Matters. (a) Except as set forth in Schedule 3.17 and except with respect to any other matters that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, none of the Borrower or any of the Subsidiaries:

     (i) has failed to comply with any Environmental Law or to take, in a timely manner, all actions necessary to obtain, maintain, renew and comply with any Environmental Permit, and all such Environmental Permits are in full force and effect and not subject to any administrative or judicial appeal;

     (ii) has become a party to any governmental, administrative or judicial proceeding commenced pursuant to any Environmental Law or possesses knowledge of any such proceeding that has been threatened under Environmental Law;

     (iii) has received notice of, become subject to, or is aware of any facts or circumstances that could form the basis for, any Environmental Liability other than those which have been fully and finally resolved and for which no obligations remain outstanding;

     (iv) possesses knowledge that any Mortgaged Property (A) is subject to any Lien, restriction on ownership, occupancy, use or transferability imposed pursuant to Environmental Law or (B) contains or previously contained Hazardous Materials of a form or type or in a quantity or location that could reasonably be expected to result in any Environmental Liability;

     (v) possesses knowledge that there has been a Release or threat of Release of Hazardous Materials at or from the Mortgaged Properties (or from any facilities or other properties formerly owned, leased or operated by the Borrower or any of the Subsidiaries) in violation of, or in amounts or in a manner that could give rise to liability under, any Environmental Law;

     (vi) has generated, treated, stored, transported, or Released Hazardous Materials from the Mortgaged Properties (or from any facilities or other properties formerly owned, leased or operated by the Borrower or any of the Subsidiaries) in violation of, or in a manner or to a location that could give rise to liability under, any Environmental Law;

     (vii) is aware of any facts, circumstances, conditions or occurrences in respect of any of the facilities and properties owned, leased or operated that could (A) form the basis of any action, suit, claim or other judicial or administrative proceeding relating to liability under or noncompliance with Environmental Law on the part of the Borrower or

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any of the Subsidiaries or (B) or interfere with or prevent continued compliance with Environmental Laws by the Borrower or the Subsidiaries; or

     (viii) has pursuant to any order, decree, judgment or agreement by which it is bound or has assumed the Environmental Liability for any Person.

     SECTION 3.18. Insurance. Schedule 3.18 sets forth a true, complete and correct description of all insurance maintained by or on behalf of the Borrower and the Subsidiaries as of the Closing Date. As of the Closing Date, such insurance is in full force and effect and all premiums have been duly paid. The Borrower and the Subsidiaries are insured by financially sound and reputable insurers and such insurance is in such amounts and covering such risks and liabilities (and with such deductibles, retentions and exclusions) as are in accordance with normal and prudent industry practice.

     SECTION 3.19. Security Documents. (a) The Guarantee and Collateral Agreement is effective to create in favor of the Collateral Agent, for the ratable benefit of the Secured Parties, a legal, valid, binding and enforceable security interest in the Collateral described therein and proceeds thereof and (i) in the case of the Pledged Collateral, upon the earlier of (A) when such Pledged Collateral is delivered to the Collateral Agent and (B) when financing statements in appropriate form are filed in the offices specified on Schedule 3.19(a) and (ii) in the case of all other Collateral described therein (other than Intellectual Property Collateral), when financing statements in appropriate form are filed in the offices specified on Schedule 3.19(a), the Guarantee and Collateral Agreement shall constitute a fully perfected Lien on, and security interest in, all right, title and interest of the Secured Parties in such Collateral and proceeds thereof, as security for the Obligations, in each case prior and superior to the rights of any other person (except, in the case of all Collateral other than Pledged Collateral, with respect to Liens expressly permitted by Section 6.02).

     (b) Each Intellectual Property Security Agreement is effective to create in favor of the Collateral Agent, for the ratable benefit of the Secured Parties, a legal, valid, binding and enforceable security interest in the Intellectual Property Collateral described therein and proceeds thereof. When each Intellectual Property Security Agreement is filed in the United States Patent and Trademark Office and the United States Copyright Office, respectively, together with financing statements in appropriate form filed in the offices specified in Schedule 3.19(a), such Intellectual Property Security Agreement shall constitute a fully perfected Lien on, and security interest in, all right, title and interest of the grantors thereunder in the Intellectual Property Collateral and proceeds thereof, as security for the Obligations, in each case prior and superior in right to any other person (except with respect to Liens expressly permitted by Section 6.02) (it being understood that subsequent recordings in the United States Patent and Trademark Office and the United States Copyright Office may be necessary to perfect a lien on registered trademarks, trademark applications and copyrights acquired by the grantors after the date hereof).

     (c) Each of the Mortgages is effective to create in favor of the Collateral Agent, for the ratable benefit of the Secured Parties, a legal, valid, binding and enforceable Lien on, and security interest in, all of the Loan Parties’ right, title and interest in and to the Mortgaged Property thereunder and proceeds thereof, and when the Mortgages are filed in the offices

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specified on Schedule 3.19(c), each such Mortgage shall constitute a fully perfected Lien on, and security interest in, all right, title and interest of the grantors thereof in such Mortgaged Property and proceeds thereof, as security for the Obligations, in each case prior and superior in right to any other person (except with respect to Liens expressly permitted by Section 6.02).

     SECTION 3.20. Location of Real Property. Schedule 3.20 lists completely and correctly as of the Closing Date all Real Property and the addresses thereof, indicating for each parcel whether it is owned or leased, including in the case of leased Real Property, the landlord name, lease date and lease expiration date. The Borrower and the Subsidiaries own in fee or have valid leasehold interests in, as the case may be, all the real property set forth on Schedule 3.20.

     SECTION 3.21. Labor Matters. As of the Closing Date, there are no strikes, lockouts or slowdowns against the Borrower or any Subsidiary pending or, to the knowledge of the Borrower, threatened. Except to the extent any of the following could not reasonably be expected to have a Material Adverse Effect, (a) the hours worked by and payments made to employees of the Borrower and the Subsidiaries have not been in violation of the Fair Labor Standards Act or any other applicable Federal, state, local or foreign law dealing with such matters and (b) payments due from the Borrower or any Subsidiary, or for which any claim may be made against the Borrower or any Subsidiary, on account of wages and employee health and welfare insurance and other benefits, have been paid or accrued as a liability on the books of the Borrower or such Subsidiary. The consummation of the Transactions will not give rise to any right of termination or right of renegotiation on the part of any union under any collective bargaining agreement to which the Borrower or any Subsidiary is bound.

     SECTION 3.22. Liens. There are no Liens of any nature whatsoever on any of the properties or assets of the Borrower or any of the Subsidiaries (other than Liens expressly permitted by Section 6.02).

     SECTION 3.23. Intellectual Property. Each of the Borrower and each of the Subsidiaries owns, or is licensed to use, all trademarks, tradenames, copyrights, patents and other intellectual property material to its business, and the use thereof by the Borrower and the Subsidiaries does not infringe upon the rights of any other person, except for any such infringements that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect.

     SECTION 3.24. Solvency. Immediately after the consummation of the Transactions to occur on the Closing Date and immediately following the making of each Loan (or other extension of credit hereunder) and after giving effect to the application of the proceeds of each Loan (or other extension of credit hereunder), (a) the fair value of the assets of the Loan Parties, taken as a whole, will exceed its debts and liabilities, subordinated, contingent or otherwise; (b) the present fair saleable value of the property of the Loan Parties, taken as a whole, will be greater than the amount that will be required to pay the probable liability of its debts and other liabilities, subordinated, contingent or otherwise, as such debts and other liabilities become absolute and matured; (c) the Loan Parties, taken as a whole, will be able to pay its debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured; and (d) the Loan Parties, taken as a whole, will not have

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unreasonably small capital with which to conduct the business in which it is engaged as such business is now conducted and is proposed to be conducted following the Closing Date.

     SECTION 3.25. Acquisition Documentation. The Acquisition Documentation listed on Schedule 3.25 constitutes all of the material agreements, instruments and undertakings to which the Borrower or any of the Subsidiaries is bound or by which any of their respective property or assets is bound or affected relating to, or arising out of, the Acquisition. None of such material agreements, instruments or undertakings has been amended, supplemented or otherwise modified in any manner materially adverse to the Agent or the Lenders, and all such material agreements, instruments and undertakings are in full force and effect. Neither of the Borrower or, to the best of the Borrower’s knowledge, USAgencies is in default under any of the Acquisition Documentation as of the Closing Date and neither of the Borrower or, to the best of the Borrower’s knowledge, USAgencies has the right to terminate any of the Acquisition Documentation.

     SECTION 3.26. Permits. (a) Each Loan Party has obtained and holds all Permits required in respect of all Real Property and for any other property otherwise operated by or on behalf of, or for the benefit of, such person and for the operation of each of its businesses as presently conducted and as proposed to be conducted, (b) all such Permits are in full force and effect, and each Loan Party has performed and observed all requirements of such Permits, (c) no event has occurred that allows or results in, or after notice or lapse of time would allow or result in, revocation or termination by the issuer thereof or in any other impairment of the rights of the holder of any such Permit, (d) no such Permits contain any restrictions, either individually or in the aggregate, that are materially burdensome to any Loan Party, or to the operation of any of its businesses or any property owned, leased or otherwise operated by such person and (e) the Borrower has no knowledge or reason to believe that any Governmental Authority is considering limiting, suspending, revoking or renewing on materially burdensome terms any such Permit. Schedule 3.26 lists, with respect to each Regulated Insurance Subsidiary, as of the Closing Date, all of the jurisdictions in which such Regulated Insurance Subsidiary holds Permits (including, without limitation Permits from Insurance Regulators and any other Permits necessary to transact Insurance Business), and indicates (i) the line or lines of insurance in which each such Regulated Insurance Subsidiary is permitted to be engaged with respect to each license therein listed. (ii) the expiration of such license, and (iii) the status of any renewal thereof.

     SECTION 3.27. Reinsurance Agreements. There are no material liabilities outstanding as of the Closing Date under any Reinsurance Agreement. Each Reinsurance Agreement is in full force and effect. No Regulated Insurance Subsidiary or any other party is in breach of or default under any such Reinsurance Agreement, except any such breach or default which could not reasonably be expected to have a Material Adverse Effect. Borrower has no reason to believe that the financial condition of any other party to any such Reinsurance Agreement is impaired such that a default thereunder by such party could reasonable be anticipated and expected to have a Material Adverse Effect. Each Reinsurance Agreement is qualified under all applicable Requirements of Law to receive the statutory credit assigned to such Reinsurance Agreement in the relevant annual statement or quarterly statement at the time prepared. Each person to whom any Regulated Insurance Subsidiary has ceded any material liability pursuant to any Reinsurance Agreement on the Closing Date (other than any such person

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that is the Borrower or a Subsidiary thereof in respect of which no such representation shall be required) has a rating of “B++” or better by A.M. Best.

     SECTION 3.28. Premium Finance Agreements. The forms of Premium Finance Agreement furnished to Lender by LIFCO, copies of which are attached hereto as Exhibits K-1, K-2 and K-3, are forms which are currently outstanding and/or which are currently being used to evidence the financing of all current, new and renewal insurance premiums produced by USCasualty in Louisiana and USDirect in Illinois and Alabama. Exhibit K1 is the form currently being used by LIFCO on behalf of USCasualty in Louisiana, Exhibit K2 is the form currently being used by LIFCO on behalf of USDirect in Illinois, and Exhibit K3 is the form currently being used by LIFCO on behalf of USDirect in Alabama. No subsidiary of Borrower (including any Premium Finance Co.) provides premium financing to policyholders of any Regulated Insurance Subsidiary other than pursuant to a Premium Finance Agreement in the form of Exhibit K1, K2 or K3. No Regulated Insurance Subsidiary has any Installment Agreements outstanding as of the Closing Date. Borrower shall notify Lender in writing of any changes to the forms of Premium Finance Agreements being used by Borrower or any of its Subsidiaries on behalf of its Regulated Insurance Subsidiaries to the extent of any material changes to the forms.

     SECTION 3.29. Senior Indebtedness. All Obligations of the Borrower and each of its Subsidiaries constitute “Senior Indebtedness” under the Subordinated Debt and “Senior Indebtedness” (or such similar term utilized to define or describe any prior-ranking senior Indebtedness for purposes of the subordination provisions set forth therein) under the Qualified Additional Subordinated Debt.

     SECTION 3.30. Closing Date Inactive Subsidiaries. As of the Closing Date, each of Instant Auto Insurance Agency of Arizona, Inc., Instant Auto Insurance Agency of Colorado, Inc., Instant Auto Insurance Agency of Indiana, Inc., Instant Auto Insurance Agency of New Mexico, Inc. and Affirmative Insurance Services of Pennsylvania, Inc. conducts no operations and has no assets and no liabilities, in each case, individually or in the aggregate, with a fair market value in excess of $500,000.

ARTICLE IV.

Conditions of Lending

     The obligations of the Lenders to make Loans hereunder and the obligations of the Issuing Bank to issue Letters of Credit are subject to the satisfaction (or waiver in accordance with Section 9.08) of the following conditions:

     SECTION 4.01. All Credit Events. On the date of each Borrowing, including each Borrowing of a Swingline Loan, and on the date of each issuance, amendment, extension or renewal of a Letter of Credit (each such event being called a “Credit Event”):

     (a) The Administrative Agent shall have received a notice of such Borrowing as required by Section 2.03 (or such notice shall have been deemed given in accordance with Section 2.03) or, in the case of the issuance, amendment, extension or renewal of a Letter of Credit, the Issuing Bank and the Administrative Agent shall have received a notice requesting the issuance, amendment, extension or renewal of such Letter of Credit

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as required by Section 2.23(b) or, in the case of the Borrowing of a Swingline Loan, the Swingline Lender and the Administrative Agent shall have received a notice requesting such Swingline Loan as required by Section 2.22(b).

     (b) In the case of each Credit Event (other than Credit Events occurring on the Closing Date), the representations and warranties set forth in the Loan Documents shall be true and correct in all material respects on and as of the date of such Credit Event, with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date (in which case such representations and warranties shall be true and correct in all material respects as of such earlier date).

     (c) At the time of and immediately after such Credit Event, no Event of Default or Default shall have occurred and be continuing

     Each Credit Event shall be deemed to constitute a joint and several representation and warranty by the Borrower on the date of such Credit Event as to the matters specified in paragraphs (b) and (c) of this Section 4.01.

     SECTION 4.02. First Credit Event. On the Closing Date:

     (a) The Administrative Agent shall have received, on behalf of itself, the Lenders and the Issuing Bank, a favorable written opinion of (i) McDermott Will & Emery LLP, counsel for the Borrower and the Subsidiaries, substantially to the effect set forth in Exhibit J, and (ii) each special and local counsel to the Borrower and the Subsidiaries as the Administrative Agent may reasonably request, in each case (A) dated the Closing Date, (B) addressed to the Administrative Agent, the Issuing Bank, the Arranger and the Lenders and (C) covering such matters relating to the Loan Documents and the Transactions as the Administrative Agent shall reasonably request and which are customary for transactions of the type contemplated herein, and the Borrower and the Subsidiaries hereby request such counsel to deliver such opinions.

     (b) The Administrative Agent shall have received (i) a copy of the certificate or articles of incorporation or other formation documents, including all amendments thereto, of each Loan Party, certified as of a recent date by the Secretary of State of the state of its organization, and a certificate as to the good standing of each Loan Party as of a recent date, from such Secretary of State; (ii) a certificate of the Secretary or Assistant Secretary of each Loan Party dated the Closing Date and certifying (A) that attached thereto is a true and complete copy of the by-laws, operating agreement or similar document of such Loan Party as in effect on the Closing Date and at all times since a date prior to the date of the resolutions described in clause (B) below, (B) that attached thereto is a true and complete copy of resolutions duly adopted by the Board of Directors, managers or members, as applicable, of such Loan Party authorizing the execution, delivery and performance of the Loan Documents to which such person is a party, in the case of the Borrower, the borrowings hereunder, in the case of each Loan Party, the granting of the Liens contemplated to be granted by it under the Security Documents and, in the case of each Subsidiary Guarantor, the Guaranteeing of the Obligations as

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contemplated by the Guarantee and Collateral Agreement, and that such resolutions have not been modified, rescinded or amended and are in full force and effect, (C) that the certificate or articles of incorporation or other formation documents of such Loan Party have not been amended since the date of the last amendment provided to the Administrative Agent and (D) as to the incumbency and specimen signature of each officer executing any Loan Document or any other document delivered in connection herewith on behalf of such Loan Party; (iii) a certificate of another officer as to the incumbency and specimen signature of the Secretary or Assistant Secretary executing the certificate pursuant to (ii) above; and (iv) such other documents as the Administrative Agent, the Issuing Bank or the Lenders may reasonably request.

     (c) The Administrative Agent shall have received a certificate, dated the Closing Date and signed by a Financial Officer of the Borrower, confirming compliance with the conditions precedent set forth in paragraphs (b) and (c) of Section 4.01.

     (d) The Administrative Agent shall have received (i) this Agreement, executed and delivered by a duly authorized officer of each of the Borrower, (ii) the Guarantee and Collateral Agreement, executed and delivered by a duly authorized officer of each of the Borrower and each Subsidiary Guarantor, (iii) a Mortgage covering each of the Mortgaged Properties, executed and delivered by a duly authorized officer of each Loan Party thereto, (iv) the Intellectual Property Security Agreements, executed and delivered by a duly authorized officer of each Loan Party thereto, (v) if requested by any Lender pursuant to Section 2.04, a promissory note or notes conforming to the requirements of such Section and executed and delivered by a duly authorized officer of the Borrower and (vi) a Lender Addendum executed and delivered by each Lender and accepted by the Borrower.

     (e) The Collateral Agent, for the ratable benefit of the Secured Parties, shall have been granted on the Closing Date first priority perfected Liens on the Collateral (subject, in the case of all Collateral other than Pledged Collateral, only to Liens expressly permitted by Section 6.02) and customary Guarantees from the Subsidiary Guarantors and shall have received such other reports, documents and agreements as the Collateral Agent shall reasonably request and which are customarily delivered in connection with security interests in real property assets. The Pledged Collateral shall have been duly and validly pledged under the Guarantee and Collateral Agreement to the Collateral Agent, for the ratable benefit of the Secured Parties, and certificates representing such Pledged Collateral, accompanied by instruments of transfer and stock powers endorsed in blank, shall be in the actual possession of the Collateral Agent.

     (f) The Collateral Agent shall have received a duly executed Perfection Certificate dated on or prior to the Closing Date. The Collateral Agent shall have received the results of a recent Lien and judgment search in each relevant jurisdiction with respect to the Borrower and those of the Subsidiaries that shall be Subsidiary Guarantors or shall otherwise have assets that are included in the Collateral, and such search shall reveal no Liens on any of the assets of the Borrower or any of such Subsidiaries except, in the case of Collateral other than Pledged Collateral, for Liens expressly permitted by Section 6.02 and except for Liens to be discharged on or prior to

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the Closing Date pursuant to documentation reasonably satisfactory to the Collateral Agent.

     (g) The Acquisition and the Acquisition Transactions shall be consummated simultaneously with the closing of the Facility hereunder in accordance with applicable law and on the terms described in the term sheets to the Commitment Letter; the Purchase Agreement and all other related documentation shall be reasonably satisfactory to the Administrative Agent; the Administrative Agent shall be reasonably satisfied with the capitalization and structure of the Borrower after giving effect to the Transactions.

     (h) After giving effect to the Transactions and the other transactions contemplated hereby, Borrower and its Subsidiaries shall have outstanding no Indebtedness or preferred stock other than (i) the Loans and other extensions of credit hereunder, (ii) the Subordinated Debt and (iii) other limited Indebtedness to be agreed upon by the Borrower and the Administrative Agent. The Borrower shall have repaid all amounts outstanding under the Existing Credit Facilities, if any. The Administrative Agent shall have received satisfactory evidence that (i) the Existing Credit Facilities shall have been terminated, all amounts then due and payable or to become due and payable (other than indemnification obligations not yet having been requested) thereunder shall have been paid in full and all commitments and reimbursement obligations thereunder shall have been terminated and (ii) reasonably satisfactory arrangements shall have been made for the termination of all Liens granted in connection therewith, in each case on terms and conditions satisfactory to the Administrative Agent.

     (i) The Administrative Agent shall have received (i) the financial statements described in Section 3.05 and (ii) U.S. GAAP unaudited consolidated balance sheets and related statements of income, stockholders’ equity and cash flows of the Borrower for (A) each subsequent fiscal quarter ended 30 days before the Closing Date and (B) each fiscal month after the most recent 2006 fiscal quarter for which financial statements were received by the Administrative Agent as described above and ended 30 days before the Closing Date.

     (j) The Agent shall be reasonably satisfied that (a) the Borrower’s consolidated pro forma Cash Flow for the four-fiscal quarter period most recently ended prior to the Closing Date (i) prepared in accordance with Regulation S-X under the Securities Act of 1933, as amended, to give pro forma effect to the Transactions as if they had occurred at the beginning of such four-fiscal quarter period and (ii) in the event that such four-fiscal quarter period includes the quarter ended December 31, 2005, excluding for purposes of this calculation (x) $5,400,000 of severance expense and IT system write-off expense incurred during the fourth fiscal quarter of 2005 and (y) $4,300,000 of losses incurred at USAgencies’s Regulated Insurance Subsidiaries related to Hurricane Katrina (such consolidated pro forma Cash Flow, “Pro Forma Cash Flow”), shall not be less than $60,200,000 and (b) the ratio of Total Debt of the Borrower and its consolidated subsidiaries on the Closing Date to Pro Forma Cash Flow shall be no more than 4.60 to 1.0.

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     (k) The Administrative Agent shall have received projections of the Borrower and its subsidiaries for the years 2006 through 2013 and for the quarters beginning with the fourth fiscal quarter of 2006 and through the fourth fiscal quarter of 2008, in form and substance reasonably satisfactory to the Administrative Agent (the “Projections”).

     (l) The Administrative Agent shall have received a certificate from the chief financial officer of the Borrower certifying that the Borrower and each of the Subsidiary Guarantors, after giving effect to the Transactions and the other transactions contemplated hereby, are solvent.

     (m) All material governmental and third party consents and approvals with respect to the Transactions and the other transactions contemplated hereby to the extent required shall have been obtained, all applicable appeal periods shall have expired and there shall be no litigation, governmental, administrative or judicial action, actual or threatened in writing, that could reasonably be expected to restrain, prevent or impose materially burdensome conditions on the Transactions or the other transactions contemplated hereby.

     (n) The Administrative Agent shall have received at least five days prior to the Closing Date all documentation and other information required by bank regulatory authorities under applicable “know your customer” and anti-money laundering rules and regulations, including the U.S.A. Patriot Act.

     (o) The Administrative Agent shall have received in respect of each Mortgaged Property a mortgagee’s title insurance policy (or policies) or marked up unconditional binder for such insurance. Each such policy shall (i) be in an amount equal to the fair market value of such property or, with respect to Mortgaged Property acquired after the Closing Date, equal to 115% of the fair market value of the Mortgaged Property, (ii) be issued at ordinary rates; (iii) insure that the Mortgage insured thereby creates a valid first Lien on, and security interest in, such Mortgaged Property free and clear of all defects and encumbrances, except as disclosed therein; (iv) name the Collateral Agent, for the benefit of the Secured Parties, as the insured thereunder; (v) be in the form of ALTA Loan Policy - 1970 Form B (Amended 10/17/70 and 10/17/84) (or equivalent policies), if available; (vi) contain such endorsements and affirmative coverage as the Administrative Agent may reasonably request in form and substance acceptable to the Administrative Agent, including (to the extent applicable with respect to such Mortgaged Property and available in the jurisdiction in which such Mortgaged Property is located), the following endorsements: variable rate; survey; comprehensive; zoning (ALTA 3.1 with parking added); first loss, last dollar and tie-in; access; separate tax parcel; usury; doing business; subdivision; environmental protection lien; CLTA 119.2 and CLTA 119.3 (for leased Mortgaged Property, only); contiguity; and such other endorsements as the Administrative Agent shall reasonably require in order to provide insurance against specific risks identified by the Administrative Agent in connection with such Mortgaged Property; and (vii) be issued by title companies satisfactory to the Administrative Agent (including any such title companies acting as co-insurers or reinsurers, at the option of the Administrative Agent) (in each such case, a “Title Insurance Company”). The Administrative Agent shall have received evidence satisfactory to it that all premiums in

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respect of each such policy, all charges for mortgage recording tax, and all related expenses, if any, have been paid. The Administrative Agent shall have received a copy of all recorded documents referred to, or listed as exceptions to title in, the title policy or policies referred to above and a copy of all other material documents affecting the Mortgaged Property.

     (p) If requested by the Administrative Agent, the Administrative Agent shall have received (i) a policy of flood insurance that (A) covers any parcel of improved Mortgaged Property that is located in a flood zone, (B) is written in an amount not less than the outstanding principal amount of the indebtedness secured by such Mortgage that is reasonably allocable to such Mortgaged Property or the maximum limit of coverage made available with respect to the particular type of property under the National Flood Insurance Act of 1968, whichever is less, and (C) has a term ending not later than the Term Loan Maturity Date and (ii) confirmation that the Borrower has received the notice required pursuant to Section 208(e)(3) of Regulation H of the Board.

     (q) The Administrative Agent and the Title Insurance Company shall have received maps or plans of an as-built survey (in each case, a “Survey”) of the sites of the owned Mortgaged Property intended to be subject to a Mortgage hereunder certified to the Administrative Agent and the Title Insurance Company in a manner satisfactory to them, dated not more than 60 days prior to the Closing Date by an independent professional licensed land surveyor satisfactory to the Administrative Agent and the Title Insurance Company, which maps or plans and the surveys on which they are based shall be made in accordance with the Minimum Standard Detail Requirements for Land Title Surveys jointly established and adopted by the American Land Title Association and the American Congress on Surveying and Mapping in 1997 or 1999 and meeting the accuracy requirements as defined therein. Without limiting the generality of the foregoing, each Survey shall (i) be a current “as-built” survey showing the location of any adjoining streets (including their widths and any pavement or other improvements), easements (including the recorded information with respect to all recorded instruments), the mean high water base line or other legal boundary lines of any adjoining bodies of water, fences, zoning or restriction setback lines, rights-of-way, utility lines to the points of connection and any encroachments; (ii) locate all means of ingress and egress, certifying the amount of acreage and square footage, indicate the address of the Mortgaged Property, contain the legal description of the Mortgaged Property, and also contain a location sketch of the Mortgaged Property; (iii) show the location of all improvements as constructed on the Mortgaged Property, all of which shall be within the boundary lines of the Mortgaged Property and conform to all applicable zoning ordinances, set-back lines and restrictions; (iv) indicate the location of any improvements on the Mortgaged Property with the dimensions in relations to the lot and building lines; (v) show measured distances from the improvements to be set back and specified distances from street or Mortgaged Property lines in the event that deed restrictions, recorded plats or zoning ordinances require same; (vi) designate all courses and distances referred to in the legal description, and indicate the names of all adjoining owners on all sides of the Mortgaged Property, to the extent available; and (vii) indicate the flood zone designation, if any, in which the Mortgaged Property is located. The legal description of the applicable Mortgaged Property shall be shown on the face of each survey or affixed

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thereto, and the same shall conform to the legal description contained in the title policy described above.

     (r) The Administrative Agent shall have received estoppel certificates from the landlord with respect to each leased Material Real Property, confirming the nonexistence of any default thereunder and certain other information with respect to such lease, each of the foregoing in form and substance reasonably satisfactory to the Administrative Agent and the Collateral Agent. In the event that Administrative Agent has determined that a recorded memorandum of lease or an amendment of lease is necessary or appropriate in order to make any leased Material Real Property mortgageable, or to grant the leasehold lender customary lender protections, then the Administrative Agent shall have received evidence of such recordation or a copy of such fully executed and binding lease amendment.

     (s) The Administrative Agent shall have received a copy of each Reinsurance Agreement and Retrocession Agreement to which Borrower or any of its Subsidiaries is a party or it or its property is subject.

     (t) The representations and warranties contained in Article 3 of the Purchase Agreement shall be true and correct and the conditions in Article 7.1(a) of the Purchase Agreement shall be satisfied (but, in each case, only with respect to representations and warranties that are material to the interests of the Lenders), and the representations and warranties made in Sections 3.01(b) and 3.01(d), 3.02(a), 3.03, 3.11 and 3.12 shall be true and correct.

     (u) No event, change or condition shall have occurred since December 31, 2005, that has caused, or could reasonably be expected to cause, a Closing Date Material Adverse Effect.

ARTICLE V.

Affirmative Covenants

     The Borrower covenants and agrees with each Lender that so long as this Agreement shall remain in effect and until the Commitments have been terminated and the principal of and interest on each Loan, all Fees and all other expenses or amounts payable under any Loan Document (other than obligations for taxes, costs, indemnifications, reimbursements, damages and other contingent liabilities in respect of which no claim or demand for payment has been made or, in the case of indemnification, no notice has been given) shall have been paid in full and all Letters of Credit have been canceled or have expired and all amounts drawn thereunder have been reimbursed in full, the Borrower will, and will cause each of the Subsidiaries to:

     SECTION 5.01. Existence; Businesses and Properties. (a) Do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence, except as otherwise expressly permitted under Section 6.05.

     (b) Do or cause to be done all things necessary to obtain, preserve, renew, extend and keep in full force and effect the rights, licenses, permits, franchises, authorizations, patents,

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copyrights, trademarks and trade names material to the conduct of its business; maintain and operate such business in substantially the manner in which it is presently conducted and operated; comply in all material respects with all applicable laws, rules, regulations and decrees and orders of any Governmental Authority, whether now in effect or hereafter enacted; comply with the terms of, or enforce its rights under, each material lease of real property and each other material agreement so as to not permit any material uncured default on its part to exist thereunder, and except where the failure to do so could not have a material impact on the Borrower and its Subsidiaries taken as a whole; and at all times maintain and preserve all property material to the conduct of such business and keep such property in good repair, working order and condition (except in respect of ordinary wear and tear and casualty) and from time to time make, or cause to be made, all needful and proper repairs, renewals, additions, improvements and replacements thereto necessary in order that the business carried on in connection therewith may be properly conducted at all times.

     SECTION 5.02. Insurance. Keep its insurable properties adequately insured at all times by financially sound and reputable insurers; maintain such other reasonably satisfactory insurance, to such extent and against such risks (and with such deductibles, retentions and exclusions), including fire and other risks insured against by extended coverage, as is prudent in the reasonable business judgment of the Borrower, including public liability insurance against claims for personal injury or death or property damage occurring upon, in, about or in connection with the use of any properties owned, occupied or controlled by it and maintain such other insurance as may be required by law.

     SECTION 5.03. Obligations and Taxes. Pay its Indebtedness and other obligations promptly and in accordance with their terms and pay and discharge promptly when due all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or in respect of its property, before the same shall become delinquent or in default, as well as all lawful claims for labor, materials and supplies or otherwise that, if unpaid, might give rise to a Lien (other than a Lien permitted by Section 6.02 of this Agreement) upon such properties or any part thereof; provided, however, that such payment and discharge shall not be required with respect to any such tax, assessment, charge, levy or claim so long as the validity or amount thereof shall be contested in good faith by appropriate proceedings and the Borrower or the applicable Subsidiary shall have set aside on its books adequate reserves with respect thereto in accordance with GAAP and such contest operates to suspend collection of the contested obligation, tax, assessment or charge and enforcement of a Lien and, in the case of a Mortgaged Property, there is no risk of forfeiture of such property.

     SECTION 5.04. Financial Statements, Reports, etc. In the case of the Borrower, furnish to the Administrative Agent who will deliver to each Lender:

     (a) (i) within 90 days after the end of each fiscal year, its consolidated balance sheet and related statements of income, stockholders’ equity and cash flows showing the financial condition of the Borrower and its consolidated Subsidiaries as of the close of such fiscal year and the results of its operations and the operations of such Subsidiaries during such year, together with comparative figures for the immediately preceding fiscal year, all audited by KPMG or other independent public accountants of recognized national standing and accompanied by an opinion of such accountants (which shall not be

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qualified in any material respect) to the effect that such consolidated financial statements fairly present in all material respects the financial condition and results of operations of the Borrower and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied; and (ii) as soon as available and in any event within 60 days (or, in the case of any audited statements and risk-based capital reports required to be delivered pursuant to this clause (ii), 180 days) after the close of each fiscal year of each Regulated Insurance Subsidiary, the annual statement of such Regulated Insurance Subsidiary (prepared in accordance with SAP) for such fiscal year and as filed with the Insurance Regulators of the state in which such Regulated Insurance Subsidiary is domiciled (together with any certifications or statements of such Regulated Insurance Subsidiary relating to such annual statement and any audited statements and risk-based capital reports, in each case which are required by such Insurance Regulators);

     (b) (i) within 45 days after the end of each of the first three fiscal quarters of each fiscal year, its consolidated balance sheet and related statements of income, stockholders’ equity and cash flows showing the financial condition of the Borrower and its consolidated Subsidiaries as of the close of such fiscal quarter and the results of its operations and the operations of such Subsidiaries during such fiscal quarter and the then elapsed portion of the fiscal year, and comparative figures for the same periods in the immediately preceding fiscal year, all certified by one of its Financial Officers as fairly presenting in all material respects the financial condition and results of operations of the Borrower and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments and the absence of footnotes; and (ii) as soon as available and in any event within 60 days after the close of each of the first three quarterly accounting periods in each fiscal year of each Regulated Insurance Subsidiary, quarterly financial statements of such Regulated Insurance Company (prepared in accordance with SAP) for such quarterly accounting period as filed with the Insurance Regulators of the state in which such Regulated Insurance Subsidiary is domiciled (together with any certifications or statements of such Regulated Insurance Subsidiary relating to such quarterly financial statements which are required by such Insurance Regulators);

     (c) within 30 days after the end of the first two fiscal months of each fiscal quarter, its consolidated balance sheet and related statements of income and cash flows showing the financial condition of the Borrower and its consolidated Subsidiaries during such fiscal month and the then elapsed portion of the fiscal year, all certified by one of its Financial Officers as fairly presenting in all material respects the financial condition and results of operations of the Borrower and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments and the absence of footnotes;

     (d) concurrently with any delivery of financial statements under paragraph (a) or (b) above, (i) a certificate of the Financial Officer certifying such statements (i) certifying that no Event of Default or Default has occurred or, if such an Event of Default or Default has occurred, specifying the nature and extent thereof and any corrective action taken or proposed to be taken with respect thereto and (ii) setting forth computations in reasonable detail satisfactory to the Administrative Agent demonstrating

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compliance with the covenants contained in Sections 6.11, 6.12, 6.13, 6.14, 6.15 and 6.16, and, in the case of a certificate delivered with the financial statements required by paragraph (a) above, setting forth the Borrower’s calculation of Excess Cash Flow and (ii) the related unaudited consolidating financial statements reflecting the adjustments necessary to eliminate the accounts of Premium Finance Co. (if any) from such consolidated financial statements;

     (e) concurrently with any delivery of financial statements under paragraph (a) above, a certificate of the accounting firm that reported on such financial statements stating whether they obtained knowledge during the course of their examination of such financial statements of any Event of Default or Default with respect to Sections 6.11, 6.12, 6.13, 6.14, 6.15 or 6.16 (which certificate may be limited to the extent required by generally accepted accounting rules or guidelines);

     (f) at least 90 days after the end of each fiscal year of the Borrower, a detailed consolidated budget for the fiscal year following such fiscal year then ended (including a projected consolidated balance sheet and related statements of projected operations and cash flows as of the end of and for such following fiscal year and setting forth the assumptions used for purposes of preparing such budget) and, promptly when available, any significant revisions of such budget;

     (g) promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials filed by the Borrower or any Subsidiary with the Securities and Exchange Commission, or any Governmental Authority succeeding to any or all of the functions of said Commission, or with any national securities exchange, or distributed to its shareholders, as the case may be;

     (h) promptly after the receipt thereof by the Borrower or any of the Subsidiaries, a copy of any “management letter” (whether in final or draft form) received by any such person from its certified public accountants and the management’s response thereto;

     (i) promptly following receipt or as promptly as reasonably practicable following the request of the Administrative Agent or the Required Lenders, a report prepared by an independent actuarial consulting firm of recognized professional standing reasonably satisfactory to the Administrative Agent and the Required Lenders reviewing the adequacy of reserves of each Regulated Insurance Subsidiary determined in accordance with SAP, which firm shall be provided access to or copies of all reserve analyses and valuations relating to the insurance business of each Regulated Insurance Subsidiary in the possession of or available to the Borrower or its Subsidiaries; provided that no request may be made pursuant to this clause (i) unless there shall have occurred and be continuing an Event of Default;

     (j) promptly (i) after receipt thereof, copies of all regular and periodic reports of examinations (including, without limitation, triennial examinations and annual risk adjusted capital reports) of any Regulated Insurance Subsidiary, delivered to such person by any Insurance Regulators, insurance commission or similar regulatory authority,

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(ii) after receipt thereof, written notice of any assertion by any Insurance Regulators or any governmental agency or agencies substituted therefor, as to a violation of any Requirement of Law by any Regulated Insurance Subsidiary which could reasonably be expected to have a Material Adverse Effect, (iii) after receipt thereof, a copy of any notice of termination, cancellation or recapture of any Reinsurance Agreement or Retrocession Agreement to which a Regulated Insurance Subsidiary is a party to the extent such termination or cancellation is likely to have a Material Adverse Effect, (iv) after receipt thereof, copies of any notice of actual suspension, termination or revocation of any material license of any Regulated Insurance Subsidiary by any Insurance Regulators, including any request by an Insurance Regulators which commits a Regulated Insurance Subsidiary to take or refrain from taking any action or which otherwise affects the authority of such Regulated Insurance Subsidiary to conduct its business and (v) an in any event within 30 Business Days after Borrower or any of its Subsidiaries obtains knowledge thereof, notice of any actual changes in the insurance Requirements of Laws enacted in any state in which any Regulated Insurance Subsidiary is domiciled which would reasonably be expected to have a Material Adverse Effect;

     (k) concurrently with any delivery of financial statements under paragraph (a) or (b) above, (i) in connection with the termination of each Reinsurance Agreement and Retrocession Agreement (other than with respect to any such agreement with the Borrower or any Subsidiary thereof), a copy of the slip or other document, agreement or correspondence with each reinsurer, retrocessionaire, reinsurance broker or agent which will amend, restate or supersede such terminating Reinsurance Agreement or Retrocession Agreement, and (ii) in connection with the execution of any Reinsurance Agreement and Retrocession Agreement, a copy of each such Reinsurance Agreement and Retrocession Agreement (other than with respect to any such agreement with the Borrower or any Subsidiary thereof), certified to be complete and correct by an authorized Signatory of the Regulated Insurance Subsidiary a party to such agreement acceptable to Administrative Agent;

     (l) concurrently with any delivery of financial statements under paragraph (a) or (b) above, a copy of (i) each A.M. Best report, if any, with respect to Borrower of any of its Subsidiaries, and (ii) all correspondence from A.M. Best to Borrower or any of its Subsidiaries the contents of which (A) relate to a probable downgrade of the A.M. Best rating of any Regulated Insurance Subsidiary or (B) describe or relate to a circumstance that would reasonably be expected to have a Material Adverse Effect; and

     (m) promptly, from time to time, such other information regarding the operations, business affairs and financial condition of the Borrower or any Subsidiary, or compliance with the terms of any Loan Document, as the Administrative Agent or any Lender may reasonably request.

     SECTION 5.05. Litigation and Other Notices. Furnish to the Administrative Agent (who will deliver to the Issuing Bank and each Lender) prompt written notice of the following:

     (a) any Event of Default or Default, specifying the nature and extent thereof and the corrective action (if any) taken or proposed to be taken with respect thereto;

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     (b) the filing or commencement of, or any threat or notice of intention of any person to file or commence, any action, suit or proceeding, whether at law or in equity or by or before any arbitrator or Governmental Authority, against the Borrower or any Subsidiary that could reasonably be expected to result in a Material Adverse Effect;

     (c) the occurrence of any ERISA Event described in clause (b) of the definition thereof or any other ERISA Event that, alone or together with any other ERISA Events that have occurred, could reasonably be expected to result in liability of the Borrower and the Subsidiaries in an aggregate amount exceeding $2,500,000; and

     (d) any development that has resulted in, or could reasonably be expected to result in, a Material Adverse Effect.

     SECTION 5.06. Information Regarding Collateral. (a) Furnish to each of the Administrative Agent and the Collateral Agent prompt written notice of any change (i) in any Loan Party’s corporate name or in any trade name used to identify it in the conduct of its business or in the ownership of its properties, (ii) in the location of any Loan Party’s chief executive office, its principal place of business, any office in which it maintains books or records relating to Collateral owned by it or any office or facility at which Collateral owned by it is located (including the establishment of any such new office or facility), (iii) in any Loan Party’s identity or corporate structure or (iv) in any Loan Party’s Federal Taxpayer Identification Number. The Borrower agrees not to effect or permit any change referred to in the preceding sentence unless all filings have been made under the UCC or otherwise and all other actions have been taken that are required in order for the Collateral Agent to continue at all times following such change to have a valid, legal and perfected security interest in all the Collateral. The Borrower also agrees promptly to notify each of the Administrative Agent and the Collateral Agent if any material portion of the Collateral is damaged or destroyed.

     (b) In the case of the Borrower, each year, at the time of delivery of the annual financial statements with respect to the preceding fiscal year pursuant to Section 5.04(a), deliver to the Administrative Agent a certificate of a Financial Officer setting forth the information required pursuant to Section I of the Perfection Certificate or confirming that there has been no change in such information since the date of the Perfection Certificate delivered on the Closing Date or the date of the most recent certificate delivered pursuant to this Section.

     SECTION 5.07. Maintaining Records; Access to Properties and Inspections; Environmental Assessments. (a) Keep proper books of record and account in which full, true and correct entries in conformity with GAAP and all requirements of law are made of all dealings and transactions in relation to its business and activities. The Borrower will, and will cause each of its subsidiaries to, permit any representatives designated by the Administrative Agent or any Lender to visit and inspect the financial records and the properties of the Borrower, as the case may be, or any of its subsidiaries at reasonable times and as reasonably requested, and to make extracts from and copies of such financial records, and permit any representatives designated by the Administrative Agent or any Lender to discuss the affairs, finances and condition of the Borrower, as the case may be, or any of its subsidiaries with the officers thereof and independent accountants therefore, provided that a member of management of the applicable Loan Party shall be afforded a reasonable opportunity to be present at any meeting with such

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accountants, provided further, that so long as no Event of Default or Default has occurred and is continuing, there shall be no more than three visits in the aggregate by the Administrative Agent, Lenders, or their representatives per calendar year (or such additional number of visits as any of the Administrative Agent or Lenders may reasonably request provided such additional visits are coordinated with the Administrative Agent so as to reasonably minimize the burden imposed on each Loan Party and its Subsidiaries) and such visits shall be limited to normal business hours.

     (b) At its election, the Administrative Agent or any Lender may, at its own cost and expense, retain an independent engineer or environmental consultant to conduct an environmental assessment of any Mortgaged Property or facility of any Loan Party. The Borrower shall, and shall cause each of the Subsidiaries to, cooperate in the performance of any such environmental assessment and permit any such engineer or consultant designated by the Administrative Agent or such Lender to have full access to each property or facility at reasonable times and after reasonable advance notice to the Borrower of the plans to conduct such an environmental assessment. Environmental assessments conducted under this paragraph shall be limited to visual inspections of the Mortgaged Property or facility, interviews with representatives of the Loan Parties or facility personnel, and review of applicable records and documents pertaining to the property or facility.

     (c) In the event that the Administrative Agent or any Lender shall have reason to believe that Hazardous Materials have been Released on or from any Mortgaged Property or other facility of the Borrower or the Subsidiaries or that any such property or facility is not being operated in material compliance with applicable Environmental Law, the Administrative Agent may, at its election and after reasonable advance notice to the Borrower, retain an independent engineer or other qualified environmental consultant to evaluate whether Hazardous Materials are present in the soil, groundwater, or surface water at such Mortgaged Property or facility or whether the facilities or properties are being operated and maintained in material compliance with applicable Environmental Laws. Such environmental assessments may include detailed visual inspections of the Mortgaged Property or facility, including any and all storage areas, storage tanks, drains, dry wells and leaching areas, and the taking of soil samples, surface water samples and groundwater samples as well as such other reasonable investigations or analyses as are necessary. The scope of any such environmental assessments under this paragraph shall be within the reasonable discretion of the Administrative Agent. The Borrower shall, and shall cause each of the Subsidiaries to, cooperate in the performance of any such environmental assessment and permit any such engineer or consultant designated by the Administrative Agent to have full access to each property or facility at reasonable times and after reasonable advance notice to the Borrower of the plans to conduct such an environmental assessment. All environmental assessments conducted pursuant to this paragraph shall be at the Borrower’s sole cost and expense.

     SECTION 5.08. Use of Proceeds. Use the proceeds of the Loans and request the issuance of Letters of Credit only for the purposes set forth in Section 3.13.

     SECTION 5.09. Additional Collateral, etc. (a) With respect to any Collateral acquired after the Closing Date or, in the case of inventory or equipment, any material Collateral moved after the Closing Date by the Borrower or any other Loan Party (other than any Collateral described in paragraphs (b), (c), (d) (e) or (f) of this Section) as to which the Collateral Agent,

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for the benefit of the Secured Parties, does not have a first priority perfected security interest, promptly (and, in any event, within 10 days following the date of such acquisition) (i) execute and deliver to the Administrative Agent and the Collateral Agent such amendments to the Guarantee and Collateral Agreement or such other Security Documents as the Collateral Agent deems necessary or advisable to grant to the Collateral Agent, for the benefit of the Secured Parties, a security interest in such Collateral and (ii) take all actions necessary or advisable to grant to, or continue on behalf of, the Collateral Agent, for the benefit of the Secured Parties, a perfected first priority security interest in such Collateral, including the filing of UCC financing statements in such jurisdictions as may be required by the Guarantee and Collateral Agreement or by law or as may be requested by the Administrative Agent or the Collateral Agent.

     (b)   With respect to any fee interest in any Collateral consisting of Material Real Property or any lease of Collateral consisting of Material Real Property acquired or leased after the Closing Date by the Borrower or any other Loan Party, promptly (and, in any event, within 10 days following the date of such acquisition) (i) execute and deliver a first priority Mortgage in favor of the Collateral Agent, for the benefit of the Secured Parties, covering such real property and complying with the provisions herein and in the Security Documents, (ii) provide the Secured Parties with title and extended coverage insurance in an amount at least equal to the purchase price of such Material Real Property (or such other amount as the Administrative Agent shall reasonably specify), Surveys, and if applicable, flood insurance, lease estoppel certificates, memoranda or amendments, all in accordance with the standards for deliveries contemplated on the Closing Date, as described in Sections 4.02(o) through (r) hereof, (iii) if requested by the Administrative Agent, deliver to the Administrative Agent and the Collateral Agent legal opinions relating to the matters described above, which opinions shall be in form and substance, and from counsel, reasonably satisfactory to the Administrative Agent and the Collateral Agent and (iv) deliver to the Administrative Agent a notice identifying, and upon the Administrative Agent’s request, provide a copy of, the consultant’s reports, environmental site assessments or other documents, if any, relied upon by the Borrower or any other Loan Party to determine that any such real property included in such Collateral does not contain Hazardous Materials of a form or type or in a quantity or location that could reasonably be expected to result in a material Environmental Liability.

     (c)   With respect to any Subsidiary (other than an Excluded Foreign Subsidiary, any Regulated Insurance Subsidiary, any Qualified Insurance Holding Company any TruPS Business Trust or a Premium Finance Co.) created or acquired after the Closing Date (which, for the purposes of this paragraph, shall include any existing Subsidiary that ceases to be an Excluded Foreign Subsidiary or a Regulated Insurance Subsidiary or ceases to meet the requirement of being a Qualified Insurance Holding Company, TruPS Business Trust or a Premium Finance Co. at any time after the Closing Date) by the Borrower or any of the Subsidiaries, promptly (and, in any event, within 10 days following such creation or the date of such acquisition) (i) execute and deliver to the Administrative Agent and the Collateral Agent such amendments to the Guarantee and Collateral Agreement as the Administrative Agent or the Collateral Agent deems necessary or advisable to grant to the Collateral Agent, for the benefit of the Secured Parties, a valid, perfected first priority security interest in the Equity Interests in such new Subsidiary that are owned by the Borrower or any of the Subsidiaries, (ii) deliver to the Collateral Agent the certificates, if any, representing such Equity Interests, together with undated stock powers, in blank, executed and delivered by a duly authorized officer of the Borrower or such Subsidiary, as

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the case may be, (iii) cause such new Subsidiary (A) to become a party to the Guarantee and Collateral Agreement (and provide Guarantees of the Obligations) and the Intellectual Property Security Agreements and (B) to take such actions necessary or advisable to grant to the Collateral Agent, for the benefit of the Secured Parties, a perfected first priority security interest in the Collateral described in the Guarantee and Collateral Agreement and the Intellectual Property Security Agreement with respect to such new Subsidiary, including the recording of instruments in the United States Patent and Trademark Office and the United States Copyright Office and the filing of UCC financing statements in such jurisdictions as may be required by the Guarantee and Collateral Agreement, the Intellectual Property Security Agreement or by law or as may be requested by the Administrative Agent or the Collateral Agent and (iv) if requested by the Administrative Agent, deliver to the Administrative Agent and the Collateral Agent legal opinions relating to the matters described above, which opinions shall be in form and substance, and from counsel, reasonably satisfactory to the Administrative Agent and the Collateral Agent.

     (d)   With respect to any Excluded Foreign Subsidiary created or acquired after the Closing Date by the Borrower or any of its Domestic Subsidiaries, promptly (and, in any event, within 10 days following such creation or the date of such acquisition) (i) execute and deliver to the Administrative Agent and the Collateral Agent such amendments to the Guarantee and Collateral Agreement as the Administrative Agent or the Collateral Agent deems necessary or advisable in order to grant to the Collateral Agent, for the benefit of the Secured Parties, a perfected first priority security interest in the Equity Interests in such new Excluded Foreign Subsidiary that is owned by the Borrower or any of its Domestic Subsidiaries (provided that in no event shall more than 65% of the total outstanding voting Equity Interests in any such new Excluded Foreign Subsidiary be required to be so pledged), (ii) if certificated, deliver to the Collateral Agent the certificates representing such Equity Interests, together with undated stock powers, in blank, executed and delivered by a duly authorized officer of the Borrower or such Domestic Subsidiary, as the case may be, and take such other action as may be necessary or, in the opinion of the Administrative Agent or the Collateral Agent, desirable to perfect the security interest of the Collateral Agent thereon and (iii) if requested by the Administrative Agent, deliver to the Administrative Agent and the Collateral Agent legal opinions relating to the matters described above, which opinions shall be in form and substance, and from counsel, reasonably satisfactory to the Administrative Agent and the Collateral Agent.

     (e)   With respect to any Regulated Insurance Subsidiary, Premium Finance Co. or TruPS Business Trust created or acquired after the Closing Date by the Borrower or any of its Domestic Subsidiaries, promptly (and, in any event, within 10 days following such creation or the date of such acquisition) (i) execute and deliver to the Administrative Agent and the Collateral Agent such amendments to the Guarantee and Collateral Agreement as the Administrative Agent or the Collateral Agent deems necessary or advisable in order to grant to the Collateral Agent, for the benefit of the Secured Parties, a perfected first priority security interest in the Equity Interests in such new Regulated Insurance Subsidiary, Premium Finance Co. or TruPS Business Trust that is owned by the Borrower or any of its Domestic Subsidiaries provided that such security interest shall remain limited by and subject to any and all Requirements of Law as further set forth in the Guarantee and Collateral Agreement, (ii) if certificated, deliver to the Collateral Agent the certificates representing such Equity Interests, together with undated stock powers, in blank, executed and delivered by a duly authorized officer of the Borrower or such Domestic Subsidiary, as the case may be, and take such other

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action as may be necessary or, in the opinion of the Administrative Agent or the Collateral Agent, desirable to perfect the security interest of the Collateral Agent thereon and (iii) if requested by the Administrative Agent, deliver to the Administrative Agent and the Collateral Agent legal opinions relating to the matters described above, which opinions shall be in form and substance, and from counsel, reasonably satisfactory to the Administrative Agent and the Collateral Agent.

     (f)   With respect to any Qualified Insurance Holding Company created or acquired after the Closing Date by the Borrower or any of the Subsidiaries, promptly (and, in any event, within 10 days following such creation or the date of such acquisition) (i) execute and deliver to the Administrative Agent and the Collateral Agent such amendments to the Guarantee and Collateral Agreement as the Administrative Agent or the Collateral Agent deems necessary or advisable in order to grant to the Collateral Agent, for the benefit of the Secured Parties, a perfected first priority security interest in the Equity Interests in such new Qualified Insurance Holding Company that is owned by the Borrower or any of its Domestic Subsidiaries provided that such security interest shall remain limited by and subject to any and all Requirements of Law as further set forth in the Guarantee and Collateral Agreement, (ii) if certificated, deliver to the Collateral Agent the certificates, if any, representing such Equity Interests, together with undated stock powers, in blank, executed and delivered by a duly authorized officer of the Borrower or such Subsidiary, as the case may be, (iii) cause such new Subsidiary (A) to become a party to the Guarantee and Collateral Agreement (and provide Guarantees of the Obligations) and the Intellectual Property Security Agreements and (B) to take such actions necessary or advisable to grant to the Collateral Agent, for the benefit of the Secured Parties, a perfected first priority security interest in the Collateral described in the Guarantee and Collateral Agreement and the Intellectual Property Security Agreement with respect to such new Subsidiary, including the recording of instruments in the United States Patent and Trademark Office and the United States Copyright Office and the filing of UCC financing statements in such jurisdictions as may be required by the Guarantee and Collateral Agreement, the Intellectual Property Security Agreement or by law or as may be requested by the Administrative Agent or the Collateral Agent and (iv) if requested by the Administrative Agent, deliver to the Administrative Agent and the Collateral Agent legal opinions relating to the matters described above, which opinions shall be in form and substance, and from counsel, reasonably satisfactory to the Administrative Agent and the Collateral Agent.

     SECTION 5.10.   Further Assurances. From time to time duly authorize, execute and deliver, or cause to be duly authorized, executed and delivered, such additional instruments, certificates, financing statements, agreements or documents, and take all such actions (including filing UCC and other financing statements), as the Administrative Agent or the Collateral Agent may reasonably request, for the purposes of implementing or effectuating the provisions of this Agreement and the other Loan Documents, or of more fully perfecting or renewing the rights of the Administrative Agent, the Collateral Agent and the Secured Parties with respect to the Collateral (or with respect to any additions thereto or replacements or proceeds or products thereof or with respect to any other property or assets hereafter acquired by the Borrower or any Subsidiary which may be deemed to be part of the Collateral) pursuant hereto or thereto. Upon the exercise by the Administrative Agent, the Collateral Agent or any Lender of any power, right, privilege or remedy pursuant to this Agreement or the other Loan Documents which requires any consent, approval, recording, qualification or authorization of any Governmental

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Authority, the Borrower will execute and deliver, or will cause the execution and delivery of, all applications, certifications, instruments and other documents and papers that the Administrative Agent, the Collateral Agent or such Lender may be required to obtain from the Borrower or any of the Subsidiaries for such governmental consent, approval, recording, qualification or authorization.

     SECTION 5.11.   Interest Rate Protection. The Borrower shall ensure that for at least 2 years following the Closing Date no less than 25% of the Borrower’s long-term Indebtedness (excluding the Subordinated Debt) effectively bears interest at a fixed rate, either by its terms or through the Borrower entering into, as promptly as practicable (and in any event no later than the 120th day after the Closing Date), Hedging Agreements reasonably acceptable to the Administrative Agent.

     SECTION 5.12.   Maintain Reinsurance. Maintain such quota-share reinsurance as is prudent in the reasonable business judgment of the Borrower.

     SECTION 5.13.   Tax Sharing Arrangements. (a) With respect to USAgencies and USCasualty, maintain and act in accordance with that certain Inter-Company Tax Allocation Agreement (the “USAgencies Intercompany Tax Agreement”), dated as of August 21, 1997 by and between USAgencies and USCasualty, and shall not amend, modify or terminate the USAgencies Intercompany Tax Agreement in any way adverse to the Lenders without the prior written consent of the Lenders (other than any such amendments or modifications necessary to conform to the Affirmative Intercompany Tax Agreement in effect as of the Closing Date, as modified in accordance with Section 5.13(b)).

     (b) With respect to Borrower and its Subsidiaries, maintain and act in accordance with that certain Intercompany Tax Allocation Agreement (the “Affirmative Intercompany Tax Agreement”), effective as of January 1, 2004, by and among Borrower and each of the Subsidiaries listed on the signature pages thereto, and shall not amend, modify or terminate the Affirmative Intercompany Tax Agreement in any way adverse to the Lenders without the prior written consent of the Lenders.

     (c) Other than the USAgencies Intercompany Tax Agreement and the Affirmative Intercompany Tax Agreement, the Borrower and its Subsidiaries are not a party to any tax sharing, tax allocation or similar agreement and shall not enter into any such agreement without the prior written consent of the Lenders.

ARTICLE VI.

Negative Covenants

     The Borrower covenants and agrees with each Lender that, so long as this Agreement shall remain in effect and until the Commitments have expired, been terminated and the principal of and interest on each Loan, all Fees and all other expenses or amounts payable under any Loan Document have been paid in full and all Letters of Credit have been cancelled or have expired and all amounts drawn thereunder have been reimbursed in full, the Borrower will not, nor will it cause or permit any of the Subsidiaries to:

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     SECTION 6.01.   Indebtedness. Incur, create, assume or permit to exist any Indebtedness, except:

     (a)   Indebtedness existing on the date hereof and set forth in Schedule 6.01 and any Permitted Refinancing Indebtedness in respect of any such Indebtedness;

     (b)   Indebtedness created hereunder and under the other Loan Documents;

     (c)   unsecured intercompany Indebtedness of the Borrower and the Subsidiary Guarantors to the extent permitted by Section 6.04(a) so long as such Indebtedness is subordinated to the Obligations pursuant to an Affiliate Subordination Agreement;

     (d)   Capital Lease Obligations and Synthetic Lease Obligations of Borrower of any Subsidiary Guarantor in an aggregate principal amount, not exceeding $5,000,000 at any time outstanding;

     (e)   (i) Indebtedness of the Borrower and the Subsidiary Guarantors under the Subordinated Debt and (ii) Indebtedness of the Borrower and the Subsidiary Guarantors under the Qualified Additional Subordinated Debt, in the case of clause (ii), not to exceed a principal amount equal to $50,000,000;

     (f)   Indebtedness of any person that becomes a Subsidiary Guarantor after the date hereof; provided that (i) such Indebtedness exists at the time such persons becomes a Subsidiary and is not created in contemplation of or in connection with such person becoming a Subsidiary, (ii) immediately before and after such person becomes a Subsidiary, no Default or Event of Default shall have occurred and be continuing and (iii) the aggregate principal amount of Indebtedness permitted by this Section 6.01(f) shall not exceed $2,000,000 at any time outstanding;

     (g)   Indebtedness under performance bonds or with respect to workers’ compensation claims, in each case incurred in the ordinary course of business;

     (h)   Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently drawn against insufficient funds in the ordinary course of business; provided that such Indebtedness is promptly covered by the Borrower or any Subsidiary;

     (i)   Indebtedness of Premium Finance Co. incurred in connection with any Approved Premium Finance Facility in an aggregate principal amount not to exceed $50,000,000, provided, that for the avoidance of doubt, such Indebtedness (i) shall be secured solely by the assets of the Premium Finance Co. (which may include, without limitation, a pledge of eligible accounts receivable of the Premium Finance Co.), (ii) shall not be secured by any Equity Interests of the Borrower or any of its Subsidiaries, (iii) shall not be guaranteed by any Subsidiary of the Borrower other than in accordance with Section 6.01(j) below, and (iv) shall not be exchangeable or convertible into Indebtedness or Equity Interests of the Borrower or any of its Subsidiaries;

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     (j)   unsecured Guaranties by any Loan Party of Indebtedness incurred in accordance with Section 6.01(i) above;

     (k)   Customary indemnity obligations for the benefit of a seller or purchaser in connection with the acquisition or disposition of assets otherwise permitted by this Agreement (excluding for the avoidance of doubt, Indebtedness for borrowed money or Guarantees of the payment of borrowed money, whether in the form of a seller or purchaser note or otherwise); and

     (l)   other unsecured Indebtedness of the Borrower or the Subsidiary Guarantors in an aggregate principal amount not exceeding $5,000,000 at any time outstanding.

     SECTION 6.02.   Liens. Create, incur, assume or permit to exist any Lien on any property or assets (including Equity Interests or other securities of any person, including any Subsidiary) now owned or hereafter acquired by it or on any income or revenues or rights in respect of any thereof, except:

     (a)   Liens on property or assets of the Borrower and the Subsidiary Guarantors existing on the date hereof and set forth in Schedule 6.02; provided that such Liens shall secure only those obligations which they secure on the date hereof and refinancings, extensions, renewals and replacements thereof permitted hereunder;

     (b)   any Lien created under the Loan Documents;

     (c)   any Lien existing on any property or asset prior to the acquisition thereof by the Borrower or any Subsidiary Guarantor; provided that (i) such Lien is not created in contemplation of or in connection with such acquisition, (ii) such Lien does not apply to any other property or assets of the Borrower or any Subsidiary Guarantor and (iii) such Lien does not (A) materially interfere with the use, occupancy and operation of any Mortgaged Property, (B) materially reduce the fair market value of such Mortgaged Property but for such Lien or (C) result in any material increase in the cost of operating, occupying or owning or leasing such Mortgaged Property;

     (d)   Liens for taxes not yet due or which are being contested in compliance with Section 5.03;

     (e)   carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s or other like Liens arising in the ordinary course of business and securing obligations that are not due and payable or which are being contested in compliance with Section 5.03;

     (f)   pledges and deposits made in the ordinary course of business in compliance with workmen’s compensation, unemployment insurance and other social security laws or regulations;

     (g)   deposits to (i) secure the performance of bids, trade contracts (other than for Indebtedness), leases (other than Capital Lease Obligations), statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature

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incurred in the ordinary course of business; (ii) secure liabilities for payment of liability insurance or for reimbursement or indemnification obligations of insurance carriers; (iii) satisfy escrow obligations under reinsurance agreements; and (iv) satisfy statutory obligations to grant Liens in favor of any Insurance Regulator imposed by such Insurance Regulator, in the case of clauses (ii), (iii) and (iv) if and only (A) to the extent granted by any Regulated Insurance Subsidiary in the course of its customary and ordinary Business and (B) in any event limited to an amount not to exceed, in the aggregate at any time outstanding, $5,000,000;

     (h)   zoning restrictions, easements, rights-of-way, restrictions on use of real property and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount and do not materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the business of the Borrower or any of the Subsidiary Guarantors or the ability of the Borrower or any of the Subsidiary Guarantors to utilize such property for its intended purpose;

     (i)   purchase money security interests in real property, improvements thereto or other fixed or capital assets hereafter acquired (or, in the case of improvements, constructed) by the Borrower or any Subsidiary Guarantors; provided that (i) such security interests secure Indebtedness permitted by Section 6.01, (ii) such security interests are incurred, and the Indebtedness secured thereby is created, within 90 days after such acquisition (or construction) and (iii) such security interests do not apply to any other property or assets of the Borrower or any Subsidiary Guarantors;

     (j)   judgment Liens securing judgments not constituting an Event of Default under Article VII;

     (k)   any interest or title of a lessor or sublessor under any lease entered into by the Borrower or any of the Subsidiary Guarantor in the ordinary course of business and covering only the assets so leased;

     (l)   Liens on cash deposits and other funds maintained with a depositary institution, in each case arising in the ordinary course of business by virtue of any statutory or common law provision relating to banker’s liens; provided that (i) the applicable deposit account is not a dedicated cash collateral account and is not subject to restrictions against access by the Borrower or the Subsidiary Guarantors in excess of those set forth in regulations promulgated by the Board and (ii) the applicable deposit account is not intended by the Borrower or any of the Subsidiary Guarantor to provide collateral or security to the applicable depositary institution or any other person;

     (m)   any Lien in respect of eligible receivables or other assets of Premium Finance Co. granted by Premium Finance Co. to secure any Approved Premium Finance Facility in favor or the lenders or their agent thereunder;

     (n)   Liens deemed to exist in connection with Investments in repurchase agreements permitted under Section 6.04;

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     (o)   Liens arising from precautionary uniform commercial code financing statements regarding operating leases not constituting Indebtedness or consignments;

     (p)   Liens solely on any cash earnest money deposits made in connection with any letter of intent or purchase agreement permitted hereunder; and

     (q)   other liens securing obligations of the Borrower or the subsidiaries the aggregate principal amount of the obligations secured by which does not exceed $2,000,000 at any time outstanding.

     SECTION 6.03.   Sale and Lease-Back Transactions. Enter into any arrangement, directly or indirectly, with any person whereby it shall sell or transfer any property, real or personal or mixed, used or useful in its business, whether now owned or hereafter acquired, and thereafter rent or lease such property or other property which it intends to use for substantially the same purpose or purposes as the property being sold or transferred unless (a) the sale of such property is permitted by Section 6.05 and (b) any Capital Lease Obligations or Liens arising in connection therewith are permitted by Sections 6.01 and 6.02, respectively.

     SECTION 6.04.   Investments, Loans and Advances. Purchase, hold or acquire any Equity Interests, evidences of indebtedness or other securities of, make or permit to exist any loans or advances or capital contributions to, or make or permit to exist any investment or any other interest in, any other person (all of the foregoing, “Investments”), except:

     (a)   (i) Investments by the Borrower and the Subsidiaries existing on the date hereof in the Equity Interests of the Borrower and the Subsidiaries and (ii) additional Investments by the Borrower and the Subsidiaries in the Equity Interests of the Borrower and the whollyowned Subsidiaries of the Borrower; provided that (A) any such Equity Interests held by a Loan Party shall be pledged pursuant to the Guarantee and Collateral Agreement (subject to the limitation referred to in Sections 5.09(c), (d) and (e) in the case of any Excluded Foreign Subsidiary, Regulated Insurance Subsidiary or Premium Finance Co.), (B) the aggregate amount of Investments by Loan Parties in Subsidiaries that are either Excluded Foreign Subsidiaries or a Premium Finance Co. shall not exceed $2,000,000 at any time outstanding and (C) if such Investment shall be in the form of a loan or advance, such loan or advance shall be unsecured and subordinated to the Obligations pursuant to an Affiliate Subordination Agreement and, if such loan or advance shall be made by a Loan Party, it shall be evidenced by a promissory note pledged to the Collateral Agent for the ratable benefit of the Secured Parties pursuant to the Guarantee and Collateral Agreement;

     (b)   (i) Permitted Investments by the Borrower and its Subsidiaries (other than Regulated Insurance Subsidiaries) and (ii) investments by Regulated Insurance Subsidiaries to the extent permitted under applicable Requirements of Law;

     (c)   Investments received in connection with the bankruptcy or reorganization of, or settlement of delinquent accounts and disputes with, customers and suppliers, in each case in the ordinary course of business;

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     (d)   the Borrower and the Subsidiaries may make loans and advances in the ordinary course of business to their respective employees so long as the aggregate principal amount thereof at any time outstanding (determined without regard to any write-downs or write-offs of such loans and advances) shall not exceed $1,000,000;

     (e)   the Acquisition and Permitted Acquisitions;

     (f)   Investments existing on the date hereof and set forth on Schedule 6.04;

     (g)   extensions of trade credit in the ordinary course of business;

     (h)   Investments made as a result of the receipt of non-cash consideration from a sale, transfer or other disposition of any asset in compliance with Section 6.05;

     (i)   intercompany loans and advances to Borrower to the extent that the Subsidiaries may pay dividends to the Borrower pursuant to Section 6.06 (and in lieu of paying such dividends); provided that such intercompany loans and advances (i) shall be made for the purposes, and shall be subject to all the applicable limitations set forth in, Section 6.06 and (ii) shall be unsecured and subordinated to the Obligations pursuant to an Affiliate Subordination Agreement; and

     (j)   in addition to Investments permitted by paragraphs (a) through (i) above, additional Investments by the Borrower and the Subsidiaries so long as the aggregate amount invested, loaned or advanced pursuant to this paragraph (j) (determined without regard to any write-downs or write-offs of such investments, loans and advances) does not exceed $5,000,000 in the aggregate.

     SECTION 6.05.   Mergers, Consolidations, Sales of Assets and Acquisitions. (a) Merge into or consolidate with any other person, or permit any other person to merge into or consolidate with it, or liquidate or dissolve, or sell, transfer, lease, issue or otherwise dispose of (in one transaction or in a series of transactions) all or substantially all the assets (whether now owned or hereafter acquired) of the Borrower or less than all the Equity Interests of any Subsidiary, or purchase, lease or otherwise acquire (in one transaction or a series of transactions) all or any substantial part of the assets of any other person, except for (i) the purchase and sale by the Borrower or any Subsidiary of inventory in the ordinary course of business, (ii) the sale or discount by the Borrower or any Subsidiary in each case without recourse and in the ordinary course of business of overdue accounts receivable arising in the ordinary course of business, but only in connection with the compromise or collection thereof consistent with customary industry practice (and not as part of any bulk sale or financing transaction), (iii) any Regulated Insurance Subsidiary may (x) enter into any Insurance Contract, Reinsurance Agreement or Retrocession Agreement in the ordinary course of business in accordance with its normal underwriting, indemnity and retention policies, provided that any counterparty to any such Reinsurance Agreement or Retrocession Agreement shall have an A.M. Best financial strength rating of B++ (or equivalent rating level if A.M. Best changes its ratings methodology or designations) or better, unless such counterparty’s obligations under such Reinsurance Agreement or Retrocession Agreement are collateralized by irrevocable letters of credit and/or a trust or similar arrangement containing cash and/or marketable securities with an average quality rating of B++

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(or its equivalent) or better of which the applicable Regulated Insurance Subsidiary is the beneficiary, and (y) dispose of any assets in its investment portfolio, and (iv) if at the time thereof and immediately after giving effect thereto no Event of Default or Default shall have occurred and be continuing, (1) the merger or consolidation of any wholly owned Subsidiary into or with the Borrower in a transaction in which the Borrower is the surviving corporation, (2) the merger or consolidation of any wholly owned Subsidiary (other than any Regulated Insurance Subsidiary or any Premium Finance Co.) into or with any other wholly owned Subsidiary (other than any Regulated Insurance Subsidiary or any Premium Finance Co.) in a transaction in which the surviving entity is a wholly owned Subsidiary and no person other than the Borrower or a wholly owned Subsidiary receives any consideration (provided that if any party to any such transaction is (A) a Loan Party, the surviving entity of such transaction shall be a Loan Party, (B) a Domestic Subsidiary, the surviving entity of such transaction shall be a Domestic Subsidiary and (C) USAgencies or a Subsidiary thereof, the surviving entity shall be USAgencies or a surviving Subsidiary thereof) and (3) Permitted Acquisitions by the Borrower or any Subsidiary.

     (b)   Engage in any Asset Sale otherwise permitted under paragraph (a) above unless (i) such Asset Sale is for consideration at least 80% of which is cash (and no portion of the remaining consideration shall be in the form of Indebtedness of the Borrower or any Subsidiary), (ii) such consideration is at least equal to the fair market value of the assets being sold, transferred, leased or disposed of, (iii) the fair market value of all assets sold, transferred, leased or disposed of pursuant to this paragraph (b) shall not exceed $30,000,000 in the aggregate and (iv) such sale, transfer, lease or disposition of assets is from USAgencies or a Subsidiary thereof to the Borrower or its Subsidiaries, and the acquirer of such assets is not USAgencies or a Subsidiary thereof.

     SECTION 6.06.   Restricted Payments; Restrictive Agreements. (a) Declare or make, or agree to declare or make, directly or indirectly, any Restricted Payment (including pursuant to any Synthetic Purchase Agreement), or incur any obligation (contingent or otherwise) to do so; provided, however, that (i) any Subsidiary may declare and pay dividends or make other distributions ratably to its equity holders, (ii) so long as no Event of Default or Default shall have occurred and be continuing or would result therefrom, the Borrower may repurchase its Equity Interests owned by employees of the Borrower or the Subsidiaries or make payments to employees of the Borrower or the Subsidiaries upon termination of employment in connection with the exercise of stock options, stock appreciation rights or similar equity incentives or equity based incentives pursuant to management incentive plans or in connection with the death or disability of such employees in an aggregate amount not to exceed $1,500,000 in any fiscal year, (iii) so long as no Default or Event of Default shall have occurred or be continuing or would result therefrom, the Borrower may declare and pay dividends or make other customary distributions ratably to its equity holders consistent with past practice and in an amount not to exceed $3,000,000 in any fiscal year, and (iv) Borrower may declare and pay dividends to holders of a class of Equity Interests payable solely in Equity Interests of such class of Equity Interests held by such holders.

     (b)   Enter into, incur or permit to exist any agreement or other arrangement that prohibits, restricts or imposes any condition upon (i) the ability of the Borrower or any Subsidiary to create, incur or permit to exist any Lien upon any of its property or assets, or (ii) the ability of any Subsidiary to pay dividends or other distributions with respect to any of its

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Equity Interests or to make or repay loans or advances to the Borrower or any other Subsidiary or to Guarantee Indebtedness of the Borrower or any other Subsidiary; provided that (A) the foregoing shall not apply to restrictions and conditions imposed by law or by any Loan Document, (B) the foregoing shall not apply to customary restrictions and conditions contained in agreements relating to the sale of a Subsidiary pending such sale, provided such restrictions and conditions apply only to the Subsidiary that is to be sold and such sale is permitted hereunder, (C) the foregoing shall not apply to restrictions and conditions imposed on any Subsidiary that is not a Loan Party (other than any Premium Finance Co. and its Subsidiaries, as to which the foregoing shall apply) by the terms of any Indebtedness of such Subsidiary permitted to be incurred hereunder (other than any Approved Premium Finance Facility, as to which the foregoing shall apply), (D) clause (i) of the foregoing shall not apply to restrictions or conditions imposed by any agreement relating to secured Indebtedness permitted by this Agreement if such restrictions or conditions apply only to the property or assets securing such Indebtedness, (E) clause (i) of the foregoing shall not apply to restrictions or conditions imposed by the Subordinated Debt Documents or any restrictions or conditions no less favorable to the Borrower, its Subsidiaries and the Lenders contained in the Qualified Additional Subordinated Debt Documents and (F) clause (i) of the foregoing shall not apply to customary provisions in leases and other contracts restricting the assignment thereof.

     SECTION 6.07.   Transactions with Affiliates. Except for transactions by or among Loan Parties, sell or transfer any property or assets to, or purchase or acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates, except that (a) the Borrower or any Subsidiary may engage in any of the foregoing transactions in the ordinary course of business at prices and on terms and conditions not less favorable to the Borrower or such Subsidiary than could be obtained on an arm’s-length basis from unrelated third parties, (b) Restricted Payments may be made to the extent provided in Section 6.06, (c) Borrower and its Subsidiaries may engage in transactions with Premium Finance Co. in the ordinary course of business and on terms no less favorable to the Loan Parties than would be obtained in a comparable arm’s-length transaction with a third party who is not an Affiliate.

     SECTION 6.08.   Business of the Borrower and Subsidiaries; Limitation on Hedging Agreements. (a) With respect to Borrower, engage in any business activities or have any assets or liabilities other than its ownership of the Equity Interests in its direct whollyowned Domestic Subsidiaries (none of which shall be a Premium Finance Co.) and liabilities incidental thereto, including its liabilities pursuant to the Loan Documents.

     (b)   With respect to the Borrower and the Subsidiaries, engage at any time in any business or business activity other than the business conducted by it as of the date hereof and business activities reasonably incidental thereto.

     (c)   With respect to LIFCO, (i) directly or indirectly be merged with or into or otherwise transfer any of its assets to any Premium Finance Co. or any person that becomes a Premium Finance Co. or (ii) provide any premium financing to any persons other than customers of USAgencies or any of its Subsidiaries.

     (d)   With respect to any Premium Finance Co., (i) directly or indirectly be merged with or into or otherwise transfer any of its assets to LIFCO or any of its Subsidiaries or (ii)

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provide any premium financing to customers of USAgencies or any of its Subsidiaries or otherwise compete in the state of Louisiana with USAgencies or any of its Subsidiaries with respect to the provision of premium financing to customers of USAgencies, its Subsidiaries or any other Subsidiary of the Borrower operating under the brand or trade name of “USAgencies” or any other brand or trade name used by the Borrower or its Subsidiaries.

     (e)   Enter into any Hedging Agreement other than (a) any such agreement or arrangement entered into in the ordinary course of business and consistent with prudent business practice to hedge or mitigate risks to which the Borrower or any Subsidiary is exposed in the conduct of its business or the management of its liabilities or (b) any such agreement entered into to hedge against fluctuations in interest rates or currency incurred in the ordinary course of business and consistent with prudent business practice; provided that in each case such agreements or arrangements shall not have been entered into for speculation purposes.

     SECTION 6.09.   Other Indebtedness and Agreements; Amendments to Acquisition Documentation. (a) Permit any waiver, supplement, modification, amendment, termination or release of any indenture, instrument or agreement pursuant to which the Subordinated Debt, any Qualified Additional Subordinated Debt, any Approved Premium Financing, any other Material Indebtedness of the Borrower or any of the Subsidiaries is outstanding if the effect of such waiver, supplement, modification, amendment, termination or release would materially increase the obligations of the obligor or confer additional material rights on the holder of such Indebtedness in a manner adverse to the Borrower or any of the Subsidiaries or the Lenders.

     (b)   (i) Make any distribution, whether in cash, property, securities or a combination thereof, other than regular scheduled payments of principal and interest as and when due (to the extent not prohibited by applicable subordination provisions), in respect of, or pay, or offer or commit to pay, or directly or indirectly (including pursuant to any Synthetic Purchase Agreement) redeem, repurchase, retire or otherwise acquire for consideration, or set apart any sum for the aforesaid purposes, any Indebtedness, except (A) the payment of the Indebtedness created hereunder, (B) refinancings of Indebtedness permitted by Section 6.01, (C) payments by Premium Finance Co. of any Approved Premium Financing made in accordance with the terms of such Approved Premium Financing and (D) the payment of secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness, (ii) pay in cash any amount in respect of any Indebtedness or preferred Equity Interests that may at the obligor’s option be paid in kind or in other securities or (iii) to optionally or voluntarily redeem any Indebtedness of the Borrower or any of its Subsidiaries incurred pursuant to the issuance of any TruPS and any related TruPS instrument, at any time prior to the date that is six months after the latest of the Revolving Credit Maturity Date and the Term Loan Maturity Date, other than upon issuance of additional Qualified Additional Subordinated Debt;

     (c)   (i) Permit any waiver, supplement, modification, amendment, termination or release of, or fail to enforce strictly the terms and conditions of, any of the indemnities and licenses furnished to the Borrower and the Subsidiaries pursuant to the Acquisition Documentation such that after giving effect thereto such indemnities or licenses shall be materially less favorable to the interests of the Loan Parties or the Secured Parties with respect thereto or (ii) otherwise permit any waiver, supplement, modification, amendment, termination

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or release of, or fail to enforce strictly the terms and conditions of, any of the Acquisition Documentation except to the extent that such waiver, supplement, modification, amendment, termination or release or failure to enforce could not reasonably be expected to have a Material Adverse Effect.

     SECTION 6.10.   Capital Expenditures. Permit the aggregate amount of Capital Expenditures made by the Borrower and the Subsidiaries (other than Premium Finance Co.) in any period set forth below to exceed the amount set forth below for such period:

Fiscal Year Ending	Amount
December 31, 2007	$	7,000,000
December 31, 2008	$	7,300,000
December 31, 2009	$	7,500,000
December 31, 2010	$	7,800,000
December 31, 2011	$	8,000,000
December 31, 2012	$	8,000,000
December 31, 2013	$	8,000,000

; provided, however, (x) if the aggregate amount of permitted Capital Expenditures set forth above in respect of any fiscal year commencing with the fiscal year ending on December 31, 2008, shall be less than the maximum amount of Capital Expenditures permitted under this Section 6.10 for such fiscal year (before giving effect to any carryover), then an amount of such shortfall not exceeding 50% of such maximum amount may be added to the amount of Capital Expenditures permitted under this Section 6.10 for the immediately succeeding (but not any other) fiscal year and (y) in determining whether any amount is available for carryover, the amount expended in any fiscal year shall first be deemed to be from the amount allocated to such fiscal year (before giving effect to any carryover), provided further, that Borrower shall be allowed to expend an amount up to $35,000,000 in the aggregate during the period beginning on January 1, 2007 and ending on December 31, 2008 (the “Permitted IT Capital Expenditures”), in addition to the aggregate amounts of permitted Capital Expenditures set forth above in the fiscal years commencing on January 1, 2007 and January 1, 2008, respectively, in connection with the upgrade of its information technology infrastructure by Accenture or another technology services provider reasonably acceptable to the Administrative Agent.

     SECTION 6.11.   Interest Coverage Ratio. Permit the Interest Coverage Ratio during any period set forth below to be less than the ratio set forth opposite such period below:

Four Fiscal Quarters Ended	Ratio
March 31, 2007		3.00:1.00
June 30, 2007		3.00:1.00
September 30, 2007		3.00:1.00
December 31, 2007		3.00:1.00
March 31, 2008		3.25:1.00
June 30, 2008		3.25:1.00
September 30, 2008		3.50:1.00

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Four Fiscal Quarters Ended	Ratio
December 31, 2008		3.50:1.00
March 31, 2009		4.00:1.00
June 30, 2009		4.00:1.00
September 30, 2009		4.00:1.00
December 31, 2009		4.00:1.00
March 31, 2010		4.50:1.00
June 30, 2010		4.50:1.00
September 30, 2010		4.50:1.00
December 31, 2010		4.50:1.00
March 31, 2011		4.50:1.00
June 30, 2011		4.50:1.00
September 30, 2011		4.50:1.00
December 31, 2011		4.50:1.00
March 31, 2012		4.50:1.00
June 30, 2012		4.50:1.00
September 30, 2012		4.50:1.00
December 31, 2012		4.50:1.00
March 31, 2013		4.50:1.00
June 30, 2013		4.50:1.00
September 30, 2013		4.50:1.00
December 31, 2013		4.50:1.00

     SECTION 6.12.   Leverage Ratio. Permit the Leverage Ratio during any period set forth below to be greater than the ratio set forth opposite such period below:

Four Fiscal Quarters Ended	Ratio
March 31, 2007		4.25:1.00
June 30, 2007		4.25:1.00
September 30, 2007		4.00:1.00
December 31, 2007		4.00:1.00
March 31, 2008		3.75:1.00
June 30, 2008		3.75:1.00
September 30, 2008		3.25:1.00
December 31, 2008		3.25:1.00
March 31, 2009		3.00:1.00
June 30, 2009		3.00:1.00
September 30, 2009		2.75:1.00
December 31, 2009		2.75:1.00
March 31, 2010		2.50:1.00
June 30, 2010		2.50:1.00
September 30, 2010		2.00:1.00
December 31, 2010		2.00:1.00
March 31, 2011		2.00:1.00
June 30, 2011		2.00:1.00
September 30, 2011		2.00:1.00

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Four Fiscal Quarters Ended	Ratio
December 31, 2011		2.00:1.00
March 31, 2012		2.00:1.00
June 30, 2012		2.00:1.00
September 30, 2012		2.00:1.00
December 31, 2012		2.00:1.00
March 31, 2013		2.00:1.00
June 30, 2013		2.00:1.00
September 30, 2013		2.00:1.00
December 31, 2013		2.00:1.00

     SECTION 6.13.   Minimum Risk-Based Capital Ratio. The Borrower will not permit the Risk-Based Capital Ratio for any Regulated Insurance Subsidiary determined on an individual basis calculated as of the last day of any fiscal year to be less than 250%, provided that if any such person fails to maintain such Risk-Based Capital Ratio as of the last day of any fiscal year the Borrower shall nevertheless be deemed to be in compliance with this Section 6.13, and no Default or Event of Default shall exist, so long as (i) the Combined Risk-Based Capital Ratio for all Regulated Insurance Subsidiaries as of the last day of such fiscal year is at least 275% and (ii) the Risk-Based Capital Ratio of each Regulated Insurance Subsidiary determined on an individual basis as of the last day of such fiscal year is at least 200%.

     SECTION 6.14.   Combined Ratio. Borrower shall not permit the Combined Ratio of any Regulated Insurance Subsidiary to be greater than 105% at any time.

     SECTION 6.15.   Fixed Charge Coverage Ratio. From and after any Increased Amount Date in respect of which any Primary New Revolving Loan Commitments have become effective in accordance with Section 2.24 hereof, Borrower shall not permit the Fixed Charge Coverage Ratio to be less than 1.50 to 1.00 as at the last day of any fiscal year of Borrower (for the avoidance of doubt, as such covenant may be waived, amended or modified by the Required Revolving Credit Lenders in accordance with the final “provided further” clause contained in Section 9.08(b) hereof).

     SECTION 6.16.   Consolidated Net Worth. From and after any Increased Amount Date in respect of which any Primary New Revolving Loan Commitments have become effective in accordance with Section 2.24 hereof, Borrower shall not permit Consolidated Net Worth to be less than $195,000,000 at any time (for the avoidance of doubt, as such covenant may be waived, amended or modified by the Required Revolving Credit Lenders in accordance with the final “provided further” clause contained in Section 9.08(b) hereof).

     SECTION 6.17.   Fiscal Year. With respect to the Borrower or USAgencies, change its fiscal year-end to a date other than December 31.

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ARTICLE VII.

Events of Default

     In case of the happening of any of the following events (“Events of Default”):

     (a)   any representation or warranty made or deemed made in or in connection with any Loan Document or the Borrowings or issuances of Letters of Credit hereunder, or any representation, warranty, statement or information contained in any report, certificate, financial statement or other instrument furnished in connection with or pursuant to any Loan Document, shall prove to have been false or misleading in any material respect when so made, deemed made or furnished;

     (b)   default shall be made in the payment of any principal of any Loan or the reimbursement with respect to any L/C Disbursement when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or by acceleration thereof or otherwise;

     (c)   default shall be made in the payment of any interest on any Loan or L/C Disbursement or any Fee or any other amount (other than an amount referred to in (b) above) due under any Loan Document, when and as the same shall become due and payable, and such default shall continue unremedied for a period of five Business Days;

     (d)   default shall be made in the due observance or performance by the Borrower or any Subsidiary of any covenant, condition or agreement contained in Section 5.01(a), 5.02, 5.05 or 5.08 or in Article VI;

     (e)   default shall be made in the due observance or performance by the Borrower or any Subsidiary of any covenant, condition or agreement contained in any Loan Document (other than those specified in clauses (b), (c) or (d) above) and such default shall continue unremedied for a period of 30 days;

     (f)   (i) the Borrower or any Subsidiary shall (i) fail to pay any principal or interest, regardless of amount, due in respect of any Subordinated Debt, any Qualified Additional Subordinated Debt, any Approved Premium Financing or any other Material Indebtedness, when and as the same shall become due and payable, or (ii) any other event or condition occurs that results in any Subordinated Debt, any Qualified Additional Subordinated Debt, any Approved Premium Finance Facility or any other Material Indebtedness becoming due prior to its scheduled maturity or that enables or permits (with or without the giving of notice, the lapse of time or both) the holder or holders of any Subordinated Debt, any Qualified Additional Subordinated Debt, any Approved Premium Financing or any other Material Indebtedness or any trustee or agent on its or their behalf to cause any Material Indebtedness to become due, or to require the prepayment, repurchase, redemption or defeasance thereof, prior to its scheduled maturity; provided that this clause (ii) shall not apply to secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness;

     (g)   an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of the Borrower or any

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Subsidiary, or of a substantial part of the property or assets of the Borrower or a Subsidiary, under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal, state or foreign bankruptcy, insolvency, receivership or similar law, (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any Subsidiary or for a substantial part of the property or assets of the Borrower or a Subsidiary or (iii) the winding-up or liquidation of the Borrower or any Subsidiary; and such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered;

     (h)   the Borrower or any Subsidiary shall (i) voluntarily commence any proceeding or file any petition seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal, state or foreign bankruptcy, insolvency, receivership or similar law, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or the filing of any petition described in (g) above, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any Subsidiary or for a substantial part of the property or assets of the Borrower or any Subsidiary, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors, (vi) become unable, admit in writing its inability or fail generally to pay its debts as they become due or (vii) take any action for the purpose of effecting any of the foregoing;

     (i)   one or more judgments for the payment of money in an aggregate amount in excess of $2,500,000 or other judgments that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect shall be rendered against the Borrower, any Subsidiary or any combination thereof and the same shall remain undischarged for a period of 30 consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to levy upon assets or properties of the Borrower or any Subsidiary to enforce any such judgment;

     (j)   an ERISA Event described in clause (b) of the definition thereof shall have occurred or any other ERISA Event shall have occurred that, when taken together with all other such ERISA Events, could reasonably be expected to result in liability of the Borrower and its ERISA Affiliates in an aggregate amount exceeding $2,500,000;

     (k)   any Guarantee under the Guarantee and Collateral Agreement for any reason shall cease to be in full force and effect (other than in accordance with its terms), or any Guarantor shall deny that it has any further liability under its Guarantee (other than as a result of the discharge of such Guarantor in accordance with the terms of the Loan Documents);

     (l)   any Lien purported to be created under any Security Document shall cease to be, or shall be asserted by the Borrower or any other Loan Party not to be, a valid, perfected and, with respect to the Secured Parties, first priority (except as otherwise expressly provided in this Agreement or such Security Document) Lien on any material Collateral covered thereby, except to the extent that any such loss of perfection or priority results from the failure of the Collateral Agent to maintain possession of certificates representing Equity Interests pledged under the Guarantee and Collateral Agreement; or

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     (m)   there shall have occurred a Change in Control;

then, and in every such event (other than an event with respect to the Borrower described in paragraph (g) or (h) above), and at any time thereafter during the continuance of such event either or both of the following actions may be taken: (i) the Administrative Agent may, and at the request of the Majority Facility Lenders with respect to the Revolving Credit Facility shall, by notice to the Borrower, terminate forthwith the Revolving Credit Commitments and the Swingline Commitment and (ii) the Administrative Agent may, and at the request of the Required Lenders shall, declare the Loans then outstanding to be forthwith due and payable in whole or in part, whereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of the Borrower accrued hereunder and under any other Loan Document, shall become forthwith due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by the Borrower, anything contained herein or in any other Loan Document to the contrary notwithstanding, and the Administrative Agent and the Collateral Agent shall have the right to take all or any actions and exercise any remedies available to a secured party under the Security Documents or applicable law or in equity; and in any event with respect to the Borrower described in paragraph (g) or (h) above, the Revolving Credit Commitments and the Swingline Commitment shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of the Borrower accrued hereunder and under any other Loan Document, shall automatically become due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by the Borrower, anything contained herein or in any other Loan Document to the contrary notwithstanding, and the Administrative Agent and the Collateral Agent shall have the right to take all or any actions and exercise any remedies available to a secured party under the Security Documents or applicable law or in equity.

ARTICLE VIII.

The Agents and the Arranger

     Each of the Lenders and the Issuing Bank hereby irrevocably appoints each of the Administrative Agent and the Collateral Agent (for purposes of this Article VIII, the Administrative Agent and the Collateral Agent are referred to collectively as the “Agents”) its agent and authorizes the Agents to take such actions on its behalf, including the execution of the other Loan Documents, and to exercise such powers as are delegated to such Agent by the terms of the Loan Documents, together with such actions and powers as are reasonably incidental thereto. Without limiting the generality of the foregoing, the Agents are hereby expressly authorized by the Lenders to execute any and all documents (including releases and the Security Documents) with respect to the Collateral and the rights of the Secured Parties with respect thereto, as contemplated by and in accordance with the provisions of this Agreement and the Security Documents.

     Each bank serving as an Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not an Agent, and such bank and its Affiliates may accept deposits from, lend money to and generally

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engage in any kind of business with the Borrower or any Subsidiary or any of their respective Affiliates as if it were not an Agent hereunder.

     No Agent shall have any duties or obligations except those expressly set forth in the Loan Documents. Without limiting the generality of the foregoing, (a) no Agent shall be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing, (b) no Agent shall have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated by the Loan Documents that such Agent is required to exercise in writing as directed by the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.08), and (c) except as expressly set forth in the Loan Documents, no Agent shall have any duty to disclose, nor shall it be liable for the failure to disclose, any information relating to the Borrower or any of the Subsidiaries or any of their respective Affiliates that is communicated to or obtained by the bank serving as an Agent or any of its Affiliates in any capacity. No Agent shall be liable for any action taken or not taken by it with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.08) or in the absence of its own gross negligence or willful misconduct. No Agent shall be deemed to have knowledge of any Default unless and until written notice thereof is given to such Agent by the Borrower or a Lender, and no Agent shall be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with any Loan Document, (ii) the contents of any certificate, report or other document delivered thereunder or in connection therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth in any Loan Document, (iv) the validity, enforceability, effectiveness or genuineness of any Loan Document or any other agreement, instrument or document, (v) the creation, perfection or priority of Liens on the Collateral or the existence of the Collateral or (vi) the satisfaction of any condition set forth in Article IV or elsewhere in any Loan Document, other than to confirm receipt of items expressly required to be delivered to such Agent.

     Each Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing believed by it to be genuine and to have been signed or sent by the proper person. Each Agent may also rely upon any statement made to it orally or by telephone and believed by it to have been made by the proper person, and shall not incur any liability for relying thereon. Each Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts.

     Each Agent may perform any and all its duties and exercise its rights and powers by or through any one or more sub-agents appointed by it. Each Agent and any such sub-agent may perform any and all its duties and exercise its rights and powers by or through their respective Related Parties. The exculpatory provisions of the preceding paragraphs shall apply to any such sub-agent and to the Related Parties of each Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Agent.

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     Subject to the appointment and acceptance of a successor Agent as provided in this paragraph, each Agent may resign at any time by notifying the Lenders, the Issuing Bank and the Borrower. Upon any such resignation, the Required Lenders shall have the right, with the consent (not to be unreasonably withheld or delayed) of the Borrower, to appoint a successor; provided that during the existence and continuance of an Event of Default no such consent of the Borrower shall be required. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Agent gives notice of its resignation, then the retiring Agent may, on behalf of the Lenders and the Issuing Bank, appoint a successor Agent which shall be a bank with an office in New York, New York, or an Affiliate of any such bank. Upon the acceptance of its appointment as Agent hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. The fees payable by the Borrower to a successor Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor. After an Agent’s resignation hereunder, the provisions of this Article and Section 9.05 shall continue in effect for the benefit of such retiring Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while acting as Agent. In addition, notwithstanding the effectiveness of a resignation by the Administrative Agent hereunder, (a) the retiring Administrative Agent may, in its sole discretion, continue to provide the services of the Administrative Agent solely with respect to administering, collecting and delivering any payments of principal, interest, fees, premium or other amounts in respect of the Loans and maintaining the books and records relating thereto (such Administrative Agent acting in such capacity, the “Paying Agent”), (b) the term “Administrative Agent” when used in connection with any such functions shall be deemed to mean such retiring Administrative Agent in its capacity as the Paying Agent and (c) such retiring Administrative Agent shall, in its capacity as the Paying Agent, continue to be vested with and enjoy all of the rights and benefits of an Administrative Agent hereunder.

     The Arranger, in its capacity as such, shall have no duties or responsibilities, and shall incur no liability, under this Agreement or any other Loan Document.

     Each Lender acknowledges that it has, independently and without reliance upon the Agents, the Arranger or any Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Agents, the Arranger or any Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement or any other Loan Document, any related agreement or any document furnished hereunder or thereunder.

     To the extent required by any applicable law, the Administrative Agent may withhold from any interest payment to any Lender an amount equivalent to any applicable withholding tax. If the Internal Revenue Service or any other Governmental Authority asserts a claim that the Administrative Agent did not properly withhold tax from amounts paid to or for the account of any Lender because the appropriate form was not delivered or was not properly executed or because such Lender failed to notify the Administrative Agent of a change in circumstance which rendered the exemption from, or reduction of, withholding tax ineffective or for any other

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reason, such Lender shall indemnify the Administrative Agent fully for all amounts paid, directly or indirectly, by the Administrative Agent as tax or otherwise, including any penalties or interest and together with all expenses (including legal expenses, allocated internal costs and out-of-pocket expenses) incurred.

ARTICLE IX.

Miscellaneous

     SECTION 9.01.   Notices. (a) Except in the case of notices and other communications expressly permitted to be given by telephone (and subject to paragraph (b) of this Section 9.01), notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by fax, as follows:

     (i) if to the Borrower or any other Loan Party, to the Borrower at Affirmative Insurance Holdings, Inc., Attention of Joseph Fisher, 150 Harvester Drive, Burr Ridge, IL 60527 (Tel. No. (708) 233-7080) (Fax No. (708) 233-7013) (e-mail: joseph.fisher@affirmativeinsurance.com) and to Affirmative Insurance Holdings, Inc., Attention of Mark E. Pape, 4450 Sojourn Drive, Suite 500, Addison, TX 75001 (e-mail: mark.pape@affirmativeinsurance.com);

     (ii) if to the Administrative Agent or the Collateral Agent, to Credit Suisse, Eleven Madison Avenue, New York, NY 10010, Attention of Agency Group (Fax No. (212) 325-8304); and

     (iii) if to a Lender, to it at its address (or fax number) set forth in the Lender Addendum or the Assignment and Acceptance pursuant to which such Lender shall have become a party hereto or set forth in its Administrative Questionnaire.

All such notices and other communications (i) sent by hand or overnight courier service, or mailed by certified or registered mail, shall be deemed to have been given when received or (ii) sent by fax shall be deemed to have been given when sent and when receipt has been confirmed by telephone; provided that if not given during normal business hours for the recipient, shall be deemed to have been given at the opening of business on the next Business Day for the recipient.

     (b) Notices and other communications to the Lenders hereunder may be delivered or furnished by electronic communications (including e-mail and internet or intranet websites) pursuant to procedures approved by the Administrative Agent; provided that the foregoing shall not apply to notices to any Lender pursuant to Article II if such Lender has notified the Administrative Agent that it is incapable of receiving notices under such Article by electronic communication. The Administrative Agent or the Borrower (on behalf of the Loan Parties) may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it; provided that approval of such procedures may be limited to particular notices or communications. All such notices and other communications (i) sent to an e-mail address shall be deemed received upon the sender’s receipt of an acknowledgement from the intended recipient (such as by the “return receipt requested”

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function, return e-mail or other written acknowledgment); provided that if not given during the normal business hours of the recipient, such notice or communication shall be deemed to have been given at the opening of business on the next Business Day for the recipient, and (ii) posted to an internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its e-mail address as described in the foregoing clause (b)(i) of notification that such notice or communication is available and identifying the website address therefor.

     (c) Any party hereto may change its address or fax number for notices and other communications hereunder by notice to the other parties hereto in accordance with the provisions hereof.

     SECTION 9.02.   Survival of Agreement. All covenants, agreements, representations and warranties made by the Loan Parties in the Loan Documents and in the certificates or other documents delivered in connection with or pursuant to this Agreement or any other Loan Document shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery of the Loan Documents and the making of any Loans and the issuance of any Letters of Credit, regardless of any investigation made by any such other party or on its behalf and notwithstanding that any such other party may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any Fee or any other amount payable under this Agreement or any other Loan Document is outstanding and unpaid or any Letter of Credit is outstanding and so long as the Commitments have not expired or terminated. The provisions of Sections 2.14, 2.16, 2.20 and 9.05 and Article VIII shall survive and remain operative and in full force and effect regardless of the expiration or termination of this Agreement (or any provisions hereof), the consummation of the transactions contemplated hereby, the repayment of any Loan, the expiration or termination of the Commitments, the expiration of any Letter of Credit, the invalidity or unenforceability of any provision of this Agreement or any other Loan Document or any investigation made by or on behalf of the Administrative Agent, the Collateral Agent, the Arranger, any Lender or the Issuing Bank.

     SECTION 9.03.   Binding Effect. This Agreement shall become effective when it shall have been executed by each of the parties hereto and when the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto.

     SECTION 9.04.   Successors and Assigns. (a) Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the permitted successors and assigns of such party; and all covenants, promises and agreements by or on behalf of the Borrower, the Administrative Agent, the Collateral Agent, the Issuing Bank or the Lenders that are contained in this Agreement shall bind and inure to the benefit of their respective successors and assigns.

     (b)   Each Lender may assign to one or more assignees all or a portion of its interests, rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it); provided, however, that (i) the Administrative Agent must give its prior written consent to such assignment (which consent shall not be unreasonably

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withheld or delayed), (ii) in the case of any assignment of a Revolving Credit Commitment, each of the Issuing Bank, the Swingline Lender and the Borrower must give its prior written consent to such assignment (which consent shall not be unreasonably withheld or delayed); provided that the consent of the Borrower shall not be required to any such assignment during the continuance of any Default or in connection with the initial syndication of the Facility, (iii) the amount of the Commitment of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall not be less than $1,000,000 in the case of Term Loans and $5,000,000 in the case of Revolving Loans (or, if less, the entire remaining amount of such Lender’s Commitment) and shall be in an amount that is an integral multiple of $1,000,000 (or the entire remaining amount of such Lender’s Commitment) (it being understood and agreed that, with respect to any Lender that is an investment fund, such Lender and any other one or more investment funds that invest in commercial loans and that is or are managed or advised by the same investment advisor as such Lender or by an Affiliate of such Lender shall be deemed to be a single Lender for purpose of calculating such minimum thresholds), (iv) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment Agreement via an electronic settlement system acceptable to the Administrative Agent (or, if previously agreed with the Agent, manually), and shall pay to the Administrative Agent a processing and recordation fee of $3,500 (which fee may be waived or reduced in the sole discretion of the Administrative Agent) and (v) the assignee, if it shall not be a Lender immediately prior to the assignment, shall deliver to the Administrative Agent an Administrative Questionnaire and applicable tax forms. Upon acceptance and recording pursuant to paragraph (e) of this Section 9.04, from and after the effective date specified in each Assignment and Acceptance, (A) the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement and (B) the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender’s rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.14, 2.16, 2.20 and 9.05, as well as to any Fees accrued for its account and not yet paid).

     (c)   By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the assignee thereunder shall be deemed to confirm to and agree with each other and the other parties hereto as follows: (i) such assigning Lender warrants that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim and that its Term Loan Commitment and Revolving Credit Commitment, and the outstanding balances of its Term Loans and Revolving Loans, in each case without giving effect to assignments thereof which have not become effective, are as set forth in such Assignment and Acceptance, (ii) except as set forth in (i) above, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement, or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement, any other Loan Document or any other instrument or document furnished pursuant hereto, or the financial condition of the Borrower or any Subsidiary or the performance or observance by the Borrower or any Subsidiary of any of its obligations under this Agreement, any other Loan Document or any other instrument or document furnished pursuant hereto; (iii) such assignee represents and warrants that it is

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legally authorized to enter into such Assignment and Acceptance; (iv) such assignee confirms that it has received a copy of this Agreement, together with copies of the most recent financial statements referred to in Section 3.05(a) or delivered pursuant to Section 5.04 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (v) such assignee will independently and without reliance upon the Administrative Agent, the Collateral Agent, the Arranger, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (vi) such assignee appoints and authorizes the Administrative Agent and the Collateral Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent and the Collateral Agent, respectively, by the terms hereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all the obligations which by the terms of this Agreement are required to be performed by it as a Lender.

     (d)   The Administrative Agent, acting for this purpose as an agent of the Borrower, shall maintain at one of its offices in The City of New York a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the “Register”). The entries in the Register shall be conclusive and the Borrower, the Administrative Agent, the Issuing Bank, the Collateral Agent and the Lenders may treat each person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower, the Issuing Bank, the Collateral Agent and any Lender, at any reasonable time and from time to time upon reasonable prior notice.

     (e)   Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee, an Administrative Questionnaire and all applicable tax forms completed in respect of the assignee (unless the assignee shall already be a Lender hereunder) and the written consent of the Swingline Lender, the Issuing Bank and the Administrative Agent to such assignment, the Administrative Agent shall promptly (i) accept such Assignment and Acceptance and (ii) record the information contained therein in the Register. No assignment shall be effective unless it has been recorded in the Register as provided in this paragraph (e).

     (f)   Each Lender may without the consent of the Borrower, the Swingline Lender, the Issuing Bank or the Administrative Agent sell participations to one or more banks or other entities in all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans); provided, however, that (i) such Lender’s obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the participating banks or other entities shall be entitled to the benefit of the cost protection provisions contained in Sections 2.14, 2.16 and 2.20 to the same extent as if they were Lenders (but, with respect to any particular participant, to no greater extent than the Lender that sold the participation to such participant) and (iv) the Borrower, the Administrative Agent, the Issuing Bank and the Lenders shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement, and such Lender shall retain the sole right to

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enforce the obligations of the Borrower relating to the Loans or L/C Disbursements and to approve any amendment, modification or waiver of any provision of this Agreement (other than amendments, modifications or waivers decreasing any fees payable hereunder or the amount of principal of or the rate at which interest is payable on the Loans, extending any scheduled principal payment date or date fixed for the payment of interest on the Loans, increasing or extending the Commitments or releasing any Guarantor or all or any substantial part of the Collateral).

     (g)   Any Lender or participant may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 9.04, disclose to the assignee or participant or proposed assignee or participant any information relating to the Borrower furnished to such Lender by or on behalf of the Borrower; provided that, prior to any such disclosure of information designated by the Borrower as confidential, each such assignee or participant or proposed assignee or participant shall execute an agreement whereby such assignee or participant shall agree (subject to customary exceptions) to preserve the confidentiality of such confidential information on terms no less restrictive than those applicable to the Lenders pursuant to Section 9.16.

     (h)   Any Lender may at any time assign all or any portion of its rights under this Agreement to secure extensions of credit to such Lender or in support of obligations owed by such Lender; provided that no such assignment shall release a Lender from any of its obligations hereunder or substitute any such assignee for such Lender as a party hereto.

     (i)   Notwithstanding anything to the contrary contained herein, any Lender (a “Granting Lender”) may grant to a special purpose funding vehicle (an “SPC”), identified as such in writing from time to time by the Granting Lender to the Administrative Agent and the Borrower, the option to provide to the Borrower all or any part of any Loan that such Granting Lender would otherwise be obligated to make to the Borrower pursuant to this Agreement; provided that (i) nothing herein shall constitute a commitment by any SPC to make any Loan and (ii) if an SPC elects not to exercise such option or otherwise fails to provide all or any part of such Loan, the Granting Lender shall be obligated to make such Loan pursuant to the terms hereof. The making of a Loan by an SPC hereunder shall utilize the Commitment of the Granting Lender to the same extent, and as if, such Loan were made by such Granting Lender. Each party hereto hereby agrees that no SPC shall be liable for any indemnity or similar payment obligation under this Agreement (all liability for which shall remain with the Granting Lender). In furtherance of the foregoing, each party hereto hereby agrees (which agreement shall survive the termination of this Agreement) that, prior to the date that is one year and one day after the payment in full of all outstanding commercial paper or other senior indebtedness of any SPC, it will not institute against, or join any other person in instituting against, such SPC any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings under the laws of the United States or any State thereof. In addition, notwithstanding anything to the contrary contained in this Section 9.04, any SPC may (i) with notice to, but without the prior written consent of, the Borrower and the Administrative Agent and without paying any processing fee therefor, assign all or a portion of its interests in any Loans to the Granting Lender or to any financial institutions (consented to by the Borrower and Administrative Agent) providing liquidity and/or credit support to or for the account of such SPC to support the funding or maintenance of Loans and (ii) disclose on a confidential basis any non-public information

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relating to its Loans to any rating agency, commercial paper dealer or provider of any surety, guarantee or credit or liquidity enhancement to such SPC.

     (j)   The Borrower shall not assign or delegate any of its rights or duties hereunder without the prior written consent of the Administrative Agent, the Issuing Bank and each Lender, and any attempted assignment without such consent shall be null and void.

     SECTION 9.05.   Expenses; Indemnity. (a) The Borrower agrees to pay all out-of-pocket costs and expenses incurred by the Administrative Agent, the Collateral Agent, the Arranger, the Issuing Bank and the Swingline Lender in connection with the syndication of the credit facilities provided for herein and the preparation and administration of this Agreement and the other Loan Documents or in connection with any amendments, modifications or waivers of the provisions hereof or thereof (whether or not the transactions hereby or thereby contemplated shall be consummated) or incurred by the Administrative Agent, the Collateral Agent, the Arranger, the Issuing Bank or any Lender in connection with the enforcement or protection of its rights in connection with this Agreement and the other Loan Documents or in connection with the Loans made or Letters of Credit issued hereunder, including in each case the fees, disbursements and other charges of Latham & Watkins LLP, counsel for the Administrative Agent and the Collateral Agent, and, in connection with any such enforcement or protection, the reasonable fees, disbursements and other charges of any counsel for the Administrative Agent, the Collateral Agent, the Arranger, the Issuing Bank or any Lender.

     (b)   The Borrower agrees to indemnify the Administrative Agent, the Collateral Agent, the Arranger, each Lender, the Issuing Bank and each Related Party of any of the foregoing persons (each such person being called an “Indemnitee”) against, and to hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related costs and expenses, including reasonable counsel fees, disbursements and other charges, incurred by or asserted against any Indemnitee arising out of, in any way connected with, or as a result of (i) the execution or delivery of this Agreement or any other Loan Document or any agreement or instrument contemplated thereby, the performance by the parties thereto of their respective obligations thereunder or the consummation of the Transactions and the other transactions contemplated thereby, (ii) the use of the proceeds of the Loans or issuance of Letters of Credit, (iii) any claim, litigation, investigation or proceeding relating to any of the foregoing, whether or not any Indemnitee is a party thereto, or (iv) any actual or alleged presence or Release of Hazardous Materials on any property owned or operated by the Borrower or any of the Subsidiaries, or any Environmental Liability related in any way to the Borrower or any of the Subsidiaries; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related costs and expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from primarily the gross negligence or willful misconduct of such Indemnitee (and, upon any such determination, any indemnification payments with respect to such losses, claims, damages, liabilities or related costs and expenses previously received by such Indemnitee shall be subject to reimbursement by such Indemnitee).

     (c)   To the extent that the Borrower fails to pay any amount required to be paid by it to the Administrative Agent, the Collateral Agent, the Arranger, the Issuing Bank or the Swingline Lender under paragraph (a) or (b) of this Section, each Lender severally agrees to pay

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to the Administrative Agent, the Collateral Agent, the Arranger, the Issuing Bank or the Swingline Lender, as the case may be, such Lender’s pro rata share (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount; provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent, the Collateral Agent, the Arranger, the Issuing Bank or the Swingline Lender in its capacity as such. For purposes hereof, a Lender’s “pro rata share” shall be determined based upon its share of the sum of the Aggregate Revolving Credit Exposure, outstanding Term Loans and unused Commitments at the time.

     (d)   To the extent permitted by applicable law, the Borrower shall not assert, and it hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement or any agreement or instrument contemplated hereby, the Transactions, any Loan or Letter of Credit or the use of the proceeds thereof.

     (e)   The provisions of this Section 9.05 shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the Transactions or the other transactions contemplated hereby, the repayment of any of the Loans, the expiration of the Commitments, the expiration of any Letter of Credit, the invalidity or unenforceability of any term or provision of this Agreement or any other Loan Document, or any investigation made by or on behalf of the Administrative Agent, the Collateral Agent, the Arranger, any Lender or the Issuing Bank. All amounts due under this Section 9.05 shall be payable on written demand therefor.

     SECTION 9.06.   Right of Setoff. If an Event of Default shall have occurred and be continuing, each Lender is hereby authorized at any time and from time to time, except to the extent prohibited by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the Borrower against any of and all the obligations of the Borrower now or hereafter existing under this Agreement and other Loan Documents held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement or such other Loan Document and although such obligations may be unmatured. The rights of each Lender under this Section 9.06 are in addition to other rights and remedies (including other rights of setoff) which such Lender may have.

     SECTION 9.07.   Applicable Law. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (OTHER THAN LETTERS OF CREDIT AND AS EXPRESSLY SET FORTH IN OTHER LOAN DOCUMENTS) SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. EACH LETTER OF CREDIT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED IN ACCORDANCE WITH, THE LAWS OR RULES DESIGNATED IN SUCH LETTER OF CREDIT, OR IF NO SUCH LAWS OR RULES ARE DESIGNATED, THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS MOST RECENTLY PUBLISHED AND IN EFFECT, ON THE DATE SUCH LETTER OF CREDIT WAS ISSUED, BY THE INTERNATIONAL CHAMBER OF COMMERCE (THE “UNIFORM CUSTOMS”)

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AND, AS TO MATTERS NOT GOVERNED BY THE UNIFORM CUSTOMS, THE LAWS OF THE STATE OF NEW YORK.

     SECTION 9.08.   Waivers; Amendment. (a) No failure or delay of the Administrative Agent, the Collateral Agent, any Lender or the Issuing Bank in exercising any power or right hereunder or under any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent, the Collateral Agent, the Issuing Bank and the Lenders hereunder and under the other Loan Documents are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of this Agreement or any other Loan Document or consent to any departure by the Borrower or any other Loan Party therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) below, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances.

     (b)   Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Borrower and the Required Lenders; provided, however, that no such agreement shall (i) decrease the principal amount of, or extend the maturity of or any scheduled principal payment date or date for the payment of any interest on any Loan or any date for reimbursement of an L/C Disbursement, or waive or excuse any such payment or any part thereof, or decrease the rate of interest on any Loan or L/C Disbursement, without the prior written consent of each Lender affected thereby, (ii) increase or extend the Commitment or decrease or extend the date for payment of any Fees of any Lender without the prior written consent of such Lender, (iii) amend or modify the pro rata requirements of Section 2.17, the provisions of Section 9.04(j), the provisions of this Section or the definition of the term “Required Lenders,” or release any Guarantor, without the prior written consent of each Lender, (iv) amend or modify the definition of the term “Majority Facility Lenders” without the prior written consent of each Lender affected thereby, (v) release all or any substantial part of the Collateral without the prior written consent of each Lender, (vi) change the provisions of any Loan Document in a manner that by its terms adversely affects the rights in respect of payments due to Lenders holding Loans of one Class differently from the rights of Lenders holding Loans of any other Class without the prior written consent of Lenders holding a majority in interest of the outstanding Loans and unused Commitments of each adversely affected Class or (vii) modify the protections afforded to an SPC pursuant to the provisions of Section 9.04(i) without the written consent of such SPC; provided further that no such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent, the Collateral Agent, the Issuing Bank or the Swingline Lender hereunder or under any other Loan Document without the prior written consent of the Administrative Agent, the Collateral Agent, the Issuing Bank or the Swingline Lender, as applicable; provided further that on or prior to the date upon which, in accordance with Article VII hereof, any Loans then outstanding shall have been declared to be forthwith due and payable in whole or in part, Sections 6.15 and 6.16 may be waived, amended or modified (in each case in a manner such that the foregoing Sections shall be no more onerous to the Borrower and its

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Subsidiaries than the existing provisions contained therein) pursuant to an agreement or agreements in writing entered into by the Borrower and the Required Revolving Credit Lenders.

     SECTION 9.09.   Interest Rate Limitation. Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to any Loan or participation in any L/C Disbursement, together with all fees, charges and other amounts which are treated as interest on such Loan or participation in such L/C Disbursement under applicable law (collectively the “Charges”), shall exceed the maximum lawful rate (the “Maximum Rate”) which may be contracted for, charged, taken, received or reserved by the Lender holding such Loan or participation in accordance with applicable law, the rate of interest payable in respect of such Loan or participation hereunder, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Loan or participation but were not payable as a result of the operation of this Section 9.09 shall be cumulated and the interest and Charges payable to such Lender in respect of other Loans or participations or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Federal Funds Effective Rate to the date of repayment, shall have been received by such Lender.

     SECTION 9.10.   Entire Agreement. This Agreement, the Fee Letter and the other Loan Documents constitute the entire contract between the parties relative to the subject matter hereof. Any other previous agreement among the parties with respect to the subject matter hereof is superseded by this Agreement and the other Loan Documents. Nothing in this Agreement or in the other Loan Documents, expressed or implied, is intended to confer upon any person (other than the parties hereto and thereto, their respective successors and assigns permitted hereunder (including any Affiliate of the Issuing Bank that issues any Letter of Credit) and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent, the Collateral Agent, the Arranger, the Issuing Bank and the Lenders ) any rights, remedies, obligations or liabilities under or by reason of this Agreement or the other Loan Documents.

     SECTION 9.11.   WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 9.11.

     SECTION 9.12.   Severability. In the event any one or more of the provisions contained in this Agreement or in any other Loan Document should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby (it being

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understood that the invalidity of a particular provision in a particular jurisdiction shall not in and of itself affect the validity of such provision in any other jurisdiction). The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions.

     SECTION 9.13.   Counterparts. This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original but all of which when taken together shall constitute a single contract, and shall become effective as provided in Section 9.03. Delivery of an executed signature page to this Agreement or of a Lender Addendum by facsimile transmission shall be as effective as delivery of a manually signed counterpart of this Agreement.

     SECTION 9.14.   Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement.

     SECTION 9.15.   Jurisdiction; Consent to Service of Process. (a) The Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the exclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the other Loan Documents, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Administrative Agent, the Collateral Agent, the Arranger, the Issuing Bank or any Lender may otherwise have to bring any action or proceeding relating to this Agreement or the other Loan Documents against the Borrower or its properties in the courts of any jurisdiction.

     (b)   The Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the other Loan Documents in any New York State or Federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

     (c)   Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.01. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law.

     SECTION 9.16.   Confidentiality. Each of the Administrative Agent, the Collateral Agent, the Issuing Bank and the Lenders agrees to maintain the confidentiality of the Information, except that Information may be disclosed (a) to its and its Affiliates’ officers, directors, employees and agents, including accountants, legal counsel and other advisors (it being

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understood that the persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority or quasi-regulatory authority (such as the National Association of Insurance Commissioners), (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) in connection with the exercise of any remedies hereunder or under the other Loan Documents or any suit, action or proceeding relating to the enforcement of its rights hereunder or thereunder, (e) subject to an agreement containing provisions substantially the same as those of this Section 9.16, to (i) any actual or prospective assignee of or participant in any of its rights or obligations under this Agreement and the other Loan Documents or (ii) any actual or prospective counterparty (or its advisors) to any swap or derivative transaction relating to the Borrower or any Subsidiary or any of their respective obligations, (f) with the consent of the Borrower or (g) to the extent such Information becomes publicly available other than as a result of a breach of this Section 9.16. For the purposes of this Section, “Information” shall mean all information received from the Borrower and related to the Borrower or its business, other than any such information that was available to the Administrative Agent, the Collateral Agent, the Issuing Bank or any Lender on a nonconfidential basis prior to its disclosure by the Borrower; provided that, in the case of Information received from the Borrower after the date hereof, such information is clearly identified at the time of delivery as confidential. Any person required to maintain the confidentiality of Information as provided in this Section 9.16 shall be considered to have complied with its obligation to do so if such person has exercised the same degree of care to maintain the confidentiality of such Information as such person would accord its own confidential information. Notwithstanding any other express or implied agreement, arrangement or understanding to the contrary, each of the parties hereto agrees that each other party hereto (and each of its employees, representatives or agents) are permitted to disclose to any persons, without limitation, the tax treatment and tax structure of the Loans and the other transactions contemplated by the Loan Documents and all materials of any kind (including opinions and tax analyses) that are provided to the Loan Parties, the Lenders, the Arranger or any Agent related to such tax treatment and tax aspects. To the extent not inconsistent with the immediately preceding sentence, this authorization does not extend to disclosure of any other information or any other term or detail not related to the tax treatment or tax aspects of the Loans or the transactions contemplated by the Loan Documents.

     SECTION 9.17.   Delivery of Lender Addenda. Each initial Lender shall become a party to this Agreement by delivering to the Administrative Agent a Lender Addendum duly executed by such Lender, the Borrower and the Administrative Agent.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written.

AFFIRMATIVE INSURANCE HOLDINGS, INC., as Borrower
By:	/s/ Mark E. Pape
	Name:	Mark E. Pape
	Title:	Chief Financial Officer and Executive Vice President
CREDIT SUISSE, CAYMAN ISLANDS BRANCH, as Administrative Agent, Collateral Agent, Issuing Bank and Swingline Lender
By:	/s/ John D. Toronto
	Name:	John D. Toronto
	Title:	Director
By:	/s/ Denise L. Alvarez
	Name:	Denise L. Alvarez
	Title:	Associate

Exhibit A

Administrative Questionnaire

I. Borrower Name: Affirmative Insurance Holdings, Inc.

II. Legal Name of Lender for Signature Page:

III. Name of Lender for any eventual tombstone:

IV. Legal Address:

V. Contact Information:

	Credit Contact	Operations Contact	Legal Counsel
Name:
Title:
Address:
Telephone:
Facsimile:
Email: Address:

VI. Lender’s Wire Payment Instructions:

Pay to:
	(Name of Lender)
	(ABA#)	(City/State)
	(Account #)	(Account Name)

Please return this form, by fax, to the attention of “Credit Suisse, Agency Group” fax (212) 325-8304, no later than 5:00 p.m. New York City time, on [          ], 2007.

Exhibit A

Administrative Questionnaire

Borrower Name: Affirmative Insurance Holdings, Inc.

VII. Organizational Structure:

Foreign Branch, organized under which laws etc.

Lender’s Tax ID:

Tax withholding Form Attached (For Foreign Buyers)
[   ]    Form W-9
[   ]    Form W-8
[   ]    Form 4224 effective:
[   ]    Form 1001
[   ]    W/Hold                     % Effective
[___]  Form 4224 on file with Administrative Agent from previous current year’s transaction

VIII. Payment Instructions:

Servicing Site:

Pay To:

IX. Name of Authorized Officer:

Name:

Signature:

Date:

A-2

Exhibit A

Administrative Questionnaire

X. Institutional Investor Sub-Allocations

Institution Legal

Fund Manager:

Sub-Allocations:

Exact Legal
Name	Sub-	Direct Signer to
(for	Allocation	Credit	Purchase by	Date of Post
documentation	(Indicate	Agreement	Assignment	Closing
purposes)	US$)	(Yes / No)	(Yes / No)	Assignment
1.
2.
3.
4.
5.
6.
7.
Total

Special Instructions

A-3

Exhibit B

AFFIRMATIVE INSURANCE HOLDINGS, INC.

FORM OF AFFILIATE SUBORDINATION AGREEMENT

AFFILIATE SUBORDINATION AGREEMENT dated as of [     ], 200___ (this “Agreement”), among the subordinated lenders listed on Schedule 1 hereto (each a “Subordinated Lender” and collectively, the “Subordinated Lenders”), AFFIRMATIVE INSURANCE HOLDINGS, INC.(“Borrower”) and each Subsidiary listed on Schedule 2 hereto (together with the Borrower, each a “Subordinated Borrower” and collectively, the “Subordinated Borrowers”) and CREDIT SUISSE, CAYMAN ISLANDS BRANCH, in its capacity as administrative agent (the “Administrative Agent”) under the Credit Agreement (as defined below), for the benefit of the Lenders (as defined in the Credit Agreement referred to below).

Reference is made to the Credit Agreement dated as of January 31, 2007 (as amended, supplemented, replaced or otherwise modified from time to time, the “Credit Agreement”), among the Borrower, the Lenders from time to time party thereto, the Administrative Agent, and other parties thereto.

Terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement. All references to articles, sections, exhibits and schedules shall be deemed references to articles and sections of, and exhibits and schedules to, this Agreement, unless the context shall otherwise require.

The ability under the Credit Agreement of any Subordinated Borrower to incur Indebtedness to any Subordinated Lender is conditioned upon the execution and delivery by such Subordinated Lender and each Subordinated Borrower of an agreement in the form hereof pursuant to which such Subordinated Lender agrees to subordinate its rights with respect to the Subordinated Obligations (as defined below) to the rights of the Senior Lenders (as defined below) under the Credit Agreement, all on the terms set forth herein.

Accordingly, each Subordinated Lender, each Subordinated Borrower and the Administrative Agent, on behalf of itself and each Senior Lender (and each of their respective successors or assigns), hereby agrees as follows:

SECTION 1. Subordination. (a) Each Subordinated Lender hereby agrees that all its right, title and interest in and to the Subordinated Obligations shall be subordinate and junior in right of payment to the rights of the Lenders and the Agents (each, as defined in the Credit Agreement and collectively, the “Senior Lenders”) in respect of the Obligations of the Borrower arising under the Credit Agreement and the other Loan Documents, including the payment of principal, premium (if any), interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Borrower or any Subsidiary whether or not a claim for post-filing interest is allowed or allowable in any such proceeding), fees, charges, expenses, indemnities, reimbursement obligations, Guarantees and all other amounts payable thereunder or in respect thereof (collectively, the “Senior Obligations.”). For purposes hereof, “Subordinated Obligations” means all obligations of each Subordinated Borrower to each Subordinated Lender in respect of loans, advances, extensions of credit or other Indebtedness, including in respect of principal, premium (if any), interest, fees, charges, expenses, indemnities, reimbursement obligations and other amounts payable in respect thereof.

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(b) Each Subordinated Borrower and each Subordinated Lender agrees (in each case solely with respect to the Subordinated Obligations in respect of which it is the obligor or obligee, as the case may be, and solely with respect to each Subordinated Borrower or Subordinated Lender that is its counterparty on such Subordinated Obligations) that no payment (whether directly, by purchase, redemption or exercise of any right of setoff or otherwise) in respect of the Subordinated Obligations, whether as principal, interest or otherwise, and whether in cash, securities or other property, shall be made by or on behalf of any Subordinated Borrower or received, accepted or demanded, directly or indirectly, by or on behalf of any Subordinated Lender at any time when an Event of Default exists as defined under the Credit Agreement and the Borrower has received a written notice from the Administrative Agent prohibiting any further payment in respect of the Subordinated Obligations so long as any such Event of Default is continuing (provided that such notice shall not be required to be given (and no such payment may be made) if the Event of Default is of the type set forth in clauses (b), (c), (g) or (h) of Article VII of the Credit Agreement).

(c) Upon any distribution of the assets of any Subordinated Borrower or upon any dissolution, winding up, liquidation or reorganization of any Subordinated Borrower, whether in bankruptcy, insolvency, reorganization, arrangement or receivership proceedings or otherwise, or upon any assignment for the benefit of creditors or any other marshalling of the assets and liabilities of any Subordinated Borrower, or otherwise:

     (i) the Senior Lenders shall first be entitled to receive indefeasible payment in full in cash of the Senior Obligations (whenever arising) (other than indemnification obligations and other contingent obligations not then due and payable) before any Subordinated Lender shall be entitled to receive any payment on account of the Subordinated Obligations of such Subordinated Borrower, whether of principal, interest or otherwise; and

     (ii) any payment by, or on behalf of, or distribution of the assets of, such Subordinated Borrower of any kind or character, whether in cash, securities or other property, to which any Subordinated Lender would be entitled except for the provisions of this Section 1 shall be paid or delivered by the person making such payment or distribution (whether a trustee in bankruptcy, a receiver, custodian or liquidating trustee or otherwise) directly to the Administrative Agent, for the benefit of the Senior Lenders (pro rata, in accordance with the respective amounts of the Senior Obligations owed to each of the Senior Lenders), until the indefeasible payment in full of all Senior Obligations (other than indemnification obligations and other contingent obligations not then due and payable).

At any time when an Event of Default exists under the Credit Agreement, each Subordinated Lender agrees not to ask, demand, sue for or take or receive from any Subordinated Borrower in cash, securities or other property or by setoff, purchase or redemption (including, without limitation, from or by way of collateral), payment of all or any part of the Subordinated Obligations and agrees that in connection with any proceeding involving any Subordinated Borrower under any bankruptcy, insolvency, reorganization, arrangement, receivership or similar law (i) the Administrative Agent is irrevocably authorized and empowered (in its own name or in the name of such Subordinated Lender or otherwise), but shall have no obligation, to demand, sue for, collect and receive every payment or distribution referred to in the preceding sentence

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and give acquittance therefor and to file claims and proofs of claim and take such other action (including, without limitation, voting the applicable Subordinated Obligations and enforcing any security interest or other Lien securing payment of such Subordinated Obligations) as the Administrative Agent may deem necessary or advisable for the exercise or enforcement of any of the rights or interest of the Senior Lenders and (ii) such Subordinated Lender shall duly and promptly take such action as the Administrative Agent may request to (A) collect amounts in respect of the applicable Subordinated Obligations for the account of the Senior Lenders and to file appropriate claims or proofs of claim in respect of such Subordinated Obligations, (B) execute and deliver to the Administrative Agent such irrevocable powers of attorney, assignments or other instruments as the Administrative Agent may request in order to enable the Administrative Agent to enforce any and all claims with respect to, and any security interests and other Liens securing payment of, the applicable Subordinated Obligations and (C) collect and receive any and all payments or distributions which may be payable or deliverable upon or with respect to the applicable Subordinated Obligations. A copy of this Agreement may be filed with any court as evidence of the Senior Lenders’ right, power and authority hereunder.

(d) In the event that any payment by, or on behalf of, or distribution of the assets of, any Subordinated Borrower of any kind or character, whether in cash, securities or other property, and whether directly, by purchase, redemption, exercise of any right of setoff or otherwise, shall be received by or on behalf of any Subordinated Lender or any Affiliate thereof at a time when such payment is prohibited by this Agreement, such payment or distribution shall be held by such Subordinated Lender or Affiliate in trust (segregated from other property of such Subordinated Lender or Affiliate) for the benefit of, and shall forthwith be paid over to, the Administrative Agent, for the benefit of the Senior Lenders (pro rata, in accordance with the respective amounts of the Senior Obligations owed to each of the Senior Lenders), until the indefeasible payment in full in cash of all Senior Obligations (other than indemnification obligations and other contingent obligations not then due and payable).

(e) Subject to the prior indefeasible payment in full in cash of the Senior Obligations (other than indemnification obligations and other contingent obligations not then due and payable), each applicable Subordinated Lender shall be subrogated to the rights of the Senior Lenders to receive payments or distributions in cash, securities or other property of each applicable Subordinated Borrower applicable to the Senior Obligations until all amounts owing on the Senior Obligations shall be indefeasibly paid in full in cash, and, as between and among a Subordinated Borrower, its creditors (other than the Senior Lenders) and the applicable Subordinated Lenders, no such payment or distribution made to the Senior Lenders by virtue of this Agreement that otherwise would have been made to any applicable Subordinated Lender shall be deemed to be a payment by the applicable Subordinated Borrower on account of the Subordinated Obligations, it being understood that the provisions of this paragraph (e) are intended solely for the purpose of defining the relative rights of the Subordinated Lenders and the Senior Lenders.

(f) Without the prior written consent of the Administrative Agent, no Subordinated Borrower shall give, or permit to be given, and no Subordinated Lender shall receive, accept or demand, (i) any security of any nature whatsoever for any Subordinated Obligations on any property or assets, whether now existing or hereafter acquired, of any Subordinated Borrower or any subsidiary of any Subordinated Borrower, unless such security shall by its terms be subject to enforcement and collection by the Administrative Agent in connection with any action in respect of enforcement or collection taken under paragraph (c) above or (ii) any Guarantee, of any nature

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whatsoever, by any Subordinated Borrower or any subsidiary of any Subordinated Borrower, of any Subordinated Obligations other than any Guarantee subordinated to the Senior Obligations on terms substantially identical to (and no less favorable in any significant respect to the Senior Lenders than) those hereof. Each Subordinated Lender agrees that all the proceeds of any such security or Guarantee shall be subject to the provisions hereof with respect to payments and other distributions in respect of the Subordinated Obligations.

(g) Each Subordinated Lender and each Subordinated Borrower agrees that all Subordinated Obligations will be evidenced solely by a single promissory note in the form attached hereto as Annex 1, and that such promissory note and any and all instruments or records now or hereafter creating or evidencing the Subordinated Obligations, whether upon refunding, extension, renewal, refinancing, replacement or otherwise, shall contain the following legend:

“Notwithstanding anything contained herein to the contrary, neither the principal of nor the interest on, nor any other amounts payable in respect of, the indebtedness created or evidenced by this instrument or record shall become due or be paid or payable, except to the extent permitted under the Affiliate Subordination Agreement dated [     ], 200___, among the Subordinated Lenders, the Subordinated Borrowers and Credit Suisse, Cayman Islands Branch, in its capacity as Administrative Agent, which Affiliate Subordination Agreement is incorporated herein with the same effect as if fully set forth herein.”

(h) Each Subordinated Lender agrees that, except for claims submitted in any proceeding contemplated by Section 1(c) hereof, it will not take any action to cause any Subordinated Obligations to become payable prior to their scheduled maturity (which, in the case of any demand notes, shall be the date demand is made thereunder) or exercise any remedies or take any action or proceeding to enforce any Subordinated Obligation if the payment of such Subordinated Obligation is then prohibited by this Agreement, and each Subordinated Lender further agrees not to file, or to join with any other creditors of any Subordinated Borrower in filing, any petition commencing any bankruptcy, insolvency, reorganization, arrangement or receivership proceeding or any assignment for the benefit of creditors against or in respect of such Subordinated Borrower or any other marshalling of the assets and liabilities of such Subordinated Borrower (provided that this prohibition shall in no event be construed so as to limit any Subordinated Lender’s right to cause any Subordinated Obligations to become payable prior to their scheduled maturity if all the outstanding Loans under the Credit Agreement have been declared due and payable prior to their scheduled maturity dates). Each Subordinated Lender further agrees, to the fullest extent permitted under applicable law, that it will not cause any Subordinated Borrower to file any such petition, commence any such proceeding or make any such assignment referred to above until all Senior Obligations have been indefeasibly paid in full in cash (other than indemnification obligations and other contingent obligations not then due and payable).

SECTION 2. Waivers and Consents. (a) Each Subordinated Lender waives the right to compel that the Collateral or any other assets of property of any Subordinated Borrower or the assets of property of any guarantor of the Senior Obligations or any other person be applied in any particular order to discharge the Senior Obligations. Each Subordinated Lender expressly waives the right to require the Senior Lenders to proceed against any Subordinated Borrower, the Collateral or any guarantor of the Senior Obligations or any other person, or to pursue any other

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remedy in any Senior Lender’s power which such Subordinated Lender cannot pursue and which would lighten such Subordinated Lender’s burden, notwithstanding that the failure of any Senior Lender to do so may thereby prejudice such Subordinated Lender. Each Subordinated Lender agrees that it shall not be discharged, exonerated or have its obligations hereunder to the Senior Lenders reduced by any Senior Lender’s delay in proceeding against or enforcing any remedy against any Subordinated Borrower, the Collateral or any guarantor of the Senior Obligations or any other person; by any Senior Lender releasing any Subordinated Borrower, the Collateral or any other guarantor of the Senior Obligations or any other person from all or any part of the Senior Obligations; or by the discharge of any Subordinated Borrower, the Collateral or any guarantor of the Senior Obligations or any other person by an operation of law or otherwise, with or without the intervention or omission of a Senior Lender. Any Senior Lender’s vote to accept or reject any plan of reorganization relating to any Subordinated Borrower, the Collateral, or any guarantor of the Senior Obligations or any other person, or any Senior Lender’s receipt on account of the Senior Obligations other than the indefeasible payment in full in cash thereof of any cash, securities or other property distributed in any bankruptcy, reorganization, or insolvency case, shall not discharge, exonerate, or reduce the obligations of any Subordinated Lender hereunder to the Senior Lenders.

(b) Each Subordinated Lender waives all rights and defenses arising out of an election of remedies by the Senior Lenders, even though that election of remedies, including, without limitation, any nonjudicial foreclosure with respect to security for the Senior Obligations, has impaired the value of such Subordinated Lender’s rights of subrogation, reimbursement or contribution against any Subordinated Borrower or any other guarantor of the Senior Obligations or any other person. Each Subordinated Lender expressly waives any rights or defenses it may have by reason of protection afforded to any Subordinated Borrower or any other guarantor of the Senior Obligations or any other person with respect to the Senior Obligations pursuant to any anti-deficiency laws or other laws of similar import which limit or discharge the principal debtor’s indebtedness upon judicial or nonjudicial foreclosure of real property or personal property Collateral for the Senior Obligations.

(c) Each Subordinated Lender agrees that, without the necessity of any reservation of rights against it, and without notice to or further assent by it, any demand for payment of any Senior Obligations made by a Senior Lender may be rescinded in whole or in part by the Senior Lender, and any Senior Obligation may be continued, and the Senior Obligations, or the liability of the applicable Subordinated Borrower or any other guarantor or any other party upon or for any part thereof, or any Collateral or Guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, modified, accelerated, compromised, waived, surrendered, or released by the Senior Lenders, in each case without notice to or further assent by any Subordinated Lender, which will remain bound under this Agreement and without impairing, abridging, releasing or affecting the subordination and other agreements provided for herein.

(d) Each Subordinated Lender waives any and all notice of the creation, renewal, extension or accrual of any of the Senior Obligations and notice of or proof of reliance by the Senior Lenders upon this Agreement. The Senior Obligations, and any of them, shall be deemed conclusively to have been created, contracted or incurred and the consent given to create the obligations of each Subordinated Borrower in respect of the Subordinated Obligations in reliance upon this Agreement, and all dealings between each Subordinated Borrower and the Senior Lenders shall

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be deemed to have been consummated in reliance upon this Agreement. Each Subordinated Lender acknowledges and agrees that the Senior Lenders have relied upon the subordination and other agreements provided for herein in consenting to the Subordinated Obligations. Each Subordinated Lender waives notice of or proof of reliance on this Agreement and protest, demand for payment and notice of default.

SECTION 3. Transfers. Each Subordinated Lender shall not sell, assign or otherwise transfer or dispose of, in whole or in part, all or any part of the Subordinated Obligations or any interest therein to any other person (a “Transferee”) or create, incur or suffer to exist any security interest, Lien, charge or other encumbrance whatsoever upon all or any part of the Subordinated Obligations or any interest therein in favor of any Transferee unless (i) such action is made expressly subject to this Agreement and (ii) the Transferee, expressly acknowledges to the Administrative Agent, by a writing in form and substance reasonably satisfactory to the Administrative Agent, the subordination and other agreements provided for herein and in such writing agrees to be bound by all of the terms of this Agreement, including, without limitation, this Section 3, as if such person were a Subordinated Lender.

SECTION 4. Senior Obligations Unconditional. All rights and interests of the Senior Lenders hereunder, and all agreements and obligations of the Subordinated Lenders and the Subordinated Borrowers hereunder, shall remain in full force and effect irrespective of:

     (a) any lack of validity or enforceability of the Credit Agreement or any other Loan Document;

     (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the Senior Obligations, or any amendment or waiver or other modification, whether by course of conduct or otherwise, of, or consent to departure from, the Credit Agreement or any other Loan Document;

     (c) any exchange, release or nonperfection of any Lien in any collateral, or any release, amendment, waiver or other modification, whether in writing or by course of conduct or otherwise, of, or consent to departure from, any Guarantee of any of the Senior Obligations; or

     (d) any other circumstances that might otherwise constitute a defense available to, or a discharge of, any Subordinated Borrower in respect of the Senior Obligations, or of the Subordinated Lender or any Subordinated Borrower in respect of this Agreement.

SECTION 5. Representations and Warranties. Each Subordinated Lender represents and warrants to the Administrative Agent, for the benefit of the Senior Lenders, that:

     (a) It has the power and authority to execute and deliver and to perform its obligations under this Agreement and has taken all necessary action to authorize its execution, delivery and performance of this Agreement.

     (b) This Agreement has been duly executed and delivered by such Subordinated Lender and constitutes a legal, valid and binding obligation of such Subordinated Lender, enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency,

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reorganization, moratorium or other laws affecting creditors’ rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law.

     (c) The execution, delivery and performance of this Agreement will not violate any provision of any requirement of law applicable to such Subordinated Lender or of any contractual obligation of such Subordinated Lender.

     (d) No consent or authorization of filing with, or other act by or in respect of, any Governmental Authority, is required in connection with the execution, delivery or performance of this Agreement, except as may be required by the Insurance Laws.

SECTION 6. Waiver of Claims. (a) To the maximum extent permitted by law, each Subordinated Lender waives any claim it might have against any Senior Lender with respect to, or arising out of, any action or failure to act or any error of judgment, negligence, or mistake or oversight whatsoever on the part of any Senior Lender or its directors, officers, employees, agents or Affiliates with respect to any exercise of rights or remedies under the Loan Documents or any transaction relating to the Collateral. Neither the Senior Lenders nor any of their respective directors, officers, employees, agents or Affiliates shall be liable for failure to demand, collect or realize upon any of the Collateral or any Guarantee or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of any Subordinated Borrower or any Subordinated Lender or any other person or to take any other action whatsoever with regard to the Security Documents, including, without limitation, the Guarantee and Collateral Agreement, or any part thereof.

(b) Each Subordinated Lender, for itself and on behalf of its successors and assigns, hereby waives any and all now existing or hereafter arising rights it may have to require the Senior Lenders to marshal assets for the benefit of such Subordinated Lender, or to otherwise direct the timing, order or manner of any sale, collection or other enforcement of the Collateral or enforcement of the Loan Documents. The Senior Lenders are under no duty or obligation, and each Subordinated Lender hereby waives any right it may have to compel the Senior Lenders, to pursue any guarantor or other person who may be liable for the Senior Obligations, or to enforce any Lien or security interest in any Collateral.

(c) Each Subordinated Lender hereby waives and releases all rights which a guarantor or surety with respect to the Senior Obligations could exercise.

(d) Each Subordinated Lender hereby waives any duty on the part of the Senior Lenders to disclose to it any fact known or hereafter known by the Senior Lenders relating to the operation or financial condition of any Subordinated Borrower or any guarantor of the Senior Obligations, or their respective businesses. Each Subordinated Lender enters into this Agreement based solely upon its independent knowledge of the applicable Subordinated Borrower’s results of operations, condition (financial or otherwise) and business and the Subordinated Lender assumes full responsibility for obtaining any further or future information with respect to the applicable Subordinated Borrower or its results of operations, condition (financial or otherwise) or business.

SECTION 7. Further Assurances. Each Subordinated Lender and each Subordinated Borrower, at their own expense and at any time from time to time, upon the written request of the Administrative Agent shall promptly and duly execute and deliver such further instruments and documents and take such further actions as the Administrative Agent reasonably may request for

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the purposes of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted.

SECTION 8. Expenses; Indemnification. (a) Each Subordinated Borrower shall pay or reimburse the Administrative Agent and the Senior Lenders, upon demand, for all their reasonable costs and expenses in connection with the enforcement or preservation of any rights under this Agreement, including, without limitation, reasonable fees and disbursements of counsel to the Administrative Agent and the Senior Lenders.

(b) The Subordinated Borrowers shall, and jointly and severally agree to, pay, indemnify, and hold the Administrative Agent and the Senior Lenders harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions (whether sounding in contract, tort or on any other ground), judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the failure of such Subordinated Borrower or any applicable Subordinated Lender to perform any of its obligations arising out of or relating to this Agreement; provided that such indemnity shall not, as to any such Indemnitee, be available to the extent that such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from primarily the gross negligence, willful misconduct or bad faith of such Indemnitee.

SECTION 9. Provisions Define Relative Rights. This Agreement is intended solely for the purpose of defining the relative rights of the Senior Lenders on the one hand and the Subordinated Lenders and the Subordinated Borrowers on the other, and no other person shall have any right, benefit or other interest under this Agreement.

SECTION 10. Powers Coupled with an Interest. All powers, authorizations and agencies contained in this Agreement are coupled with an interest and are irrevocable until the Senior Obligations are indefeasibly paid in full in cash.

SECTION 11. Notices. All notices, requests and demands to or upon any party hereto shall be in writing and shall be given in the manner provided in Section 9.01 of the Credit Agreement.

SECTION 12. Counterparts. This Agreement may be executed by one or more of the parties on any number of separate counterparts, each of which shall constitute an original, but all of which taken together shall be deemed to constitute but one instrument. Delivery of an executed signature page to this Agreement by facsimile transmission shall be as effective as delivery of a manually signed counterpart of this Agreement.

SECTION 13. Severability. In case any one or more of the provisions contained in this Agreement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby (it being understood that the invalidity of a particular provision hereof in a particular jurisdiction shall not in and of itself affect the validity of such provision in any other jurisdiction). The parties hereto shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions.

SECTION 14. Integration. This Agreement represents the agreement of the Subordinated Borrowers, the Subordinated Lenders and the Senior Lenders with respect to the subject matter hereof and there are no promises or representations by any Subordinated Borrower, any

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Subordinated Lender or the Senior Lenders relative to the subject matter hereof not reflected herein.

SECTION 15. Amendments in Writing; No Waiver; Cumulative Remedies. (a) None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except by a written instrument executed by the Administrative Agent, each affected Subordinated Borrower and each affected Subordinated Lender; provided that any provision of this Agreement may be waived by the Senior Lenders in a letter or agreement executed by the Required Lenders and each affected Subordinated Lender.

(b) No failure to exercise, nor any delay in exercising, on the part of the Senior Lenders, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege.

(c) The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law.

SECTION 16. Section Headings. The section headings used in this Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof.

SECTION 17. Successors and Assigns. (a) This Agreement shall be binding upon the successors and assigns of each of the Subordinated Borrowers and each of the Subordinated Lenders and shall inure to the benefit of the Senior Lenders and their respective successors and assigns.

(b) Notwithstanding the provisions of Section 17(a) above, nothing herein shall be construed to limit or relieve the obligations of any Subordinated Lender pursuant to Section 3 of this Agreement, and no Subordinated Lender shall assign its obligations hereunder to any person (except as otherwise specifically permitted under Section 3 of this Agreement); any such assignment other than as specifically permitted under Section 3 shall be void.

SECTION 18. Governing Law; Jurisdiction; Consent to Service of Process. (a) THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.

(b) Each Subordinated Lender hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the other Loan Documents, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Administrative Agent, the Collateral Agent, the Syndication Agent, the Documentation Agent, the Arranger, the Issuing Bank or any Lender may otherwise have to bring any action or proceeding relating to this Agreement or the other Loan Documents against any Subordinated Lender or its properties in the courts of any jurisdiction.

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(c) Each Subordinated Lender hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the other Loan Documents in any New York State or Federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

(d) Each Subordinated Lender hereby irrevocably consents to service of process in the manner provided for notices in Section 11 hereof. Nothing in this Agreement, the Credit Agreement or any other Loan Document will affect the right of any party to this Agreement to serve process in any other manner permitted by law.

SECTION 19. Waiver Of Jury Trial. Each party hereto hereby waives, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in respect of any litigation directly or indirectly arising out of, under or in connection with this agreement or any of the other loan documents. each party hereto (a) certifies that no representative, agent or attorney of any other party has represented, expressly or otherwise, that such other party would not, in the event of litigation, seek to enforce the foregoing waiver and (b) acknowledges that it and the other parties hereto have been induced to enter into this agreement and the other loan documents, as applicable, by, among other things, the mutual waivers and certifications in this Section 19.

SECTION 20. Additional Subordinated Lenders. Upon execution and delivery by the Administrative Agent and a Subsidiary of an instrument substantially in the form of Annex 2 attached hereto, such Subsidiary shall become a Subordinated Lender and a Subordinated Borrower hereunder with the same force and effect as if originally named as a Subordinated Lender and a Subordinated Borrower herein. The execution and delivery of any such instrument shall not require the consent of any other Subordinated Lender or Subordinated Borrower hereunder. The rights and obligations of each Subordinated Borrower and each Subordinated Lender herein shall remain in full force and effect notwithstanding the addition of any Subordinated Lender and Subordinated Borrower as a party to this Agreement.

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     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written.

AFFIRMATIVE INSURANCE HOLDINGS, INC., as Subordinated Lender and Subordinated Borrower,
By:
	Name:
	Title:
[NAME OF SUBSIDIARY], as Subordinated Lender and Subordinated Borrower,
By:
	Name:
	Title:
CREDIT SUISSE, CAYMAN ISLANDS BRANCH, as Administrative Agent,
By:
	Name:
	Title:

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Schedule 1 to
Affiliate Subordination Agreement

SUBORDINATED LENDERS

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Schedule 2 to
Affiliate Subordination Agreement

SUBORDINATED BORROWERS

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Annex 1 to
Affiliate Subordination Agreement

INTERCOMPANY SUBORDINATED DEMAND PROMISSORY NOTE

Note Number: 1 Dated: [     ], 200___

     FOR VALUE RECEIVED, Affirmative Insurance Holdings, Inc., and each of its respective subsidiaries (collectively, the “Group Members” and each, a “Group Member”) which is a party to this intercompany subordinated demand promissory note (the “Promissory Note”) promises to pay to the order of such other Group Member as makes loans to such Group Member (each Group Member which borrows money pursuant to this Promissory Note is referred to herein as a “Payor” and each Group Member which makes loans and advances pursuant to this Promissory Note is referred to herein as a “Payee”), on demand, in lawful money of the United States of America, in immediately available funds and at the appropriate office of the Payee, the aggregate unpaid principal amount of all loans and advances heretofore and hereafter made by such Payee to such Payor and any other indebtedness now or hereafter owing by such Payor to such Payee as shown either on Schedule A attached hereto (and any continuation thereof) or in the books and records of such Payee. The failure to show any such Indebtedness or any error in showing such Indebtedness shall not affect the obligations of any Payor hereunder. Capitalized terms used herein but not otherwise defined herein shall have the meanings given such terms in the Credit Agreement dated as of January 31, 2007 (as amended, supplemented, replaced or otherwise modified from time to time, the “Credit Agreement”), among Affirmative Insurance Holdings, Inc., the Lenders from time to time party thereto, Credit Suisse, Cayman Islands Branch, as administrative agent (in such capacity, the “Administrative Agent”) and as collateral agent (in such capacity, the “Collateral Agent”), and the other parties thereto.

     The unpaid principal amount hereof from time to time outstanding shall bear interest at a rate equal to the rate as may be agreed upon from time to time by the relevant Payor and Payee or, at the Administrative Agent’s option following the occurrence and during the continuation of a Default, at the rate per annum then applicable to ABR Loans, plus 2% per annum. Interest shall be due and payable on the last day of each month commencing after the date hereof or at such other times as may be agreed upon from time to time by the relevant Payor and Payee. Upon demand for payment of any principal amount hereof, accrued but unpaid interest on such principal amount shall also be due and payable. Interest shall be paid in lawful money of the United States of America and in immediately available funds. Interest shall be computed for the actual number of days elapsed on the basis of a year consisting of 365 days.

     Each Payor and any endorser of this Promissory Note hereby waives presentment, demand, protest and notice of any kind. No failure to exercise, and no delay in exercising, any rights hereunder on the part of the holder hereof shall operate as a waiver of such rights.

     This Promissory Note has been pledged by each Payee to the Administrative Agent, for the benefit of the Secured Parties, as security for such Payee’s obligations, if any, under the applicable loan agreements, indentures or other agreements to which such Payee is a party. Each Payor acknowledges and agrees that the Administrative Agent and the other Secured Parties may

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exercise all the rights of the Payees under this Promissory Note and will not be subject to any abatement, reduction, recoupment, defense, setoff or counterclaim available to such Payor.

     Notwithstanding anything contained herein to the contrary, neither the principal of nor the interest on, nor any other amounts payable in respect of, the indebtedness created or evidenced by this instrument or record shall become due or be paid or payable, except to the extent permitted under the Affiliate Subordination Agreement dated [ ], 200___, among the Subordinated Lenders, the Subordinated Borrowers and Credit Suisse, Cayman Islands Branch, in its capacity as Administrative Agent, which Affiliate Subordination Agreement is incorporated herein with the same effect as if fully set forth herein.

     Notwithstanding anything to the contrary contained herein, in any other agreement or in any such promissory note or other instrument, this Promissory Note (i) replaces and supersedes any and all promissory notes or other instruments which create or evidence any loans or advances made on or before the date hereof by any Group Member to any other Group Member, and (ii) without the written consent of the Administrative Agent, shall not be deemed replaced, superseded or in any way modified by any promissory note or other instrument entered into on or after the date hereof which purports to create or evidence any loan or advance by any Group Member to any other Group Member.

     THIS PROMISSORY NOTE AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS PROMISSORY NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.

     From time to time after the date hereof, additional subsidiaries of the Group Members may become parties hereto by executing a counterpart signature page to this Promissory Note (each additional subsidiary, an “Additional Payor”). Upon delivery of such counterpart signature page to the Payees, notice of which is hereby waived by the other Payors, each Additional Payor shall be a Payor and shall be as fully a party hereto as if such Additional Payor were an original signatory hereof. Each Payor expressly agrees that its obligations arising hereunder shall not be affected or diminished by the addition or release of any other Payor hereunder. This Promissory Note shall be fully effective as to any Payor that is or becomes a party hereto regardless of whether any other Person becomes or fails to become or ceases to be a Payor hereunder.

     This Promissory Note may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.

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     IN WITNESS WHEREOF, each Payor has caused this Promissory Note to be executed and delivered by its proper and duly authorized officer as of the date set forth above.

AFFIRMATIVE INSURANCE HOLDINGS, INC.
By:
	Name:
	Title:
[NAME OF SUBSIDIARY]
By:
	Name:
	Title:

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SCHEDULE A

TRANSACTIONS
ON
INTERCOMPANY SUBORDINATED DEMAND PROMISSORY NOTE

					Outstanding
					Principal
				Amount of	Balance
			Amount of	Principal	from Payor
	Name of	Name of	Advance	Paid This	to Payee	Notation Made
Date	Payor	Payee	This Date	Date	This Date	By

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ENDORSEMENT

     FOR VALUE RECEIVED, each of the undersigned does hereby sell, assign and transfer to                      all of its right, title and interest in and to the Intercompany Subordinated Demand Promissory Note, dated [          ], 200___ (as amended, supplemented, replaced or otherwise modified from time to time, the “Promissory Note”), made by Affirmative Insurance Holdings, Inc., and each of its respective subsidiaries or any other person that is or becomes a party thereto, and payable to the undersigned. This endorsement is intended to be attached to the Promissory Note and, when so attached, shall constitute an endorsement thereof.

     The initial undersigned shall be the Group Members (as defined in the Promissory Note) party to the Affiliate Subordination Agreement on the date of the Promissory Note. From time to time after the date thereof, additional subsidiaries of the Group Members shall become parties to the Promissory Note (each, an “Additional Payee”) and a signatory to this endorsement by executing a counterpart signature page to the Promissory Note and to this endorsement. Upon delivery of such counterpart signature page to the Payors, notice of which is hereby waived by the other Payees, each Additional Payee shall be a Payee and shall be as fully a Payee under the Promissory Note and a signatory to this endorsement as if such Additional Payee were an original Payee under the Promissory Note and an original signatory hereof. Each Payee expressly agrees that its obligations arising under the Promissory Note and hereunder shall not be affected or diminished by the addition or release of any other Payee under the Promissory Note or hereunder. This endorsement shall be fully effective as to any Payee that is or becomes a signatory hereto regardless of whether any other Person becomes or fails to become or ceases to be a Payee to the Promissory Note or hereunder.

Dated:                     

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AFFIRMATIVE INSURANCE HOLDINGS, INC.
By:
	Name:
	Title:
[NAME OF SUBSIDIARY]
By:
	Name:
	Title:

B-19

Annex 2 to the
Affiliate Subordination Agreement

SUPPLEMENT NO. [ ] dated as of [      ] (this “Supplement”), to the Affiliate Subordination Agreement dated as of [          ], 200___ (the “Affiliate Subordination Agreement”), among the subordinated lenders named therein (the “Subordinated Lenders”), the subordinated borrowers named therein (the “Subordinated Borrowers”) and Credit Suisse, Cayman Islands Branch, as administrative agent (in such capacity, the “Administrative Agent”) for the Senior Lenders.

A. Reference is made to the Affiliate Subordination Agreement.

B. Terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Affiliate Subordination Agreement.

C. Each of the Subordinated Lenders and each of the Subordinated Borrowers have entered into the Affiliate Subordination Agreement in order to induce the Senior Lenders to make loans and other extensions of credit under the Credit Agreement and the other Loan Documents. Section 20 of the Affiliate Subordination Agreement provides that subsidiaries of Affirmative Insurance Holdings, Inc., may become Subordinated Lenders and Subordinated Borrowers under the Affiliate Subordination Agreement by execution and delivery of an instrument in the form of this Supplement. The undersigned Subsidiary (the “New Subordinated Party”) is executing this Supplement to become a Subordinated Lender and a Subordinated Borrower under the Affiliate Subordination Agreement in accordance with the terms of the Credit Agreement as consideration for loans and letters of credit previously made or issued or to be made or issued under the Credit Agreement.

Accordingly, the Administrative Agent and the New Subordinated Party agree as follows:

SECTION 1. In accordance with Section 20 of the Affiliate Subordination Agreement, the New Subordinated Party by its signature below becomes a Subordinated Lender and a Subordinated Borrower under the Affiliate Subordination Agreement with the same force and effect as if originally named therein as a Subordinated Lender and a Subordinated Borrower and the New Subordinated Party hereby (a) agrees to all the terms and provisions of the Affiliate Subordination Agreement applicable to it as a Subordinated Lender and a Subordinated Borrower thereunder and (b) represents and warrants that the representations and warranties made by it as a Subordinated Lender and a Subordinated Borrower thereunder are true and correct on and as of the date hereof except for representations and warranties which by their terms refer to a specific date. Each reference to a “Subordinated Lender” or a “Subordinated Borrower” in the Affiliate Subordination Agreement shall be deemed to include the New Subordinated Party. The Affiliate Subordination Agreement is hereby incorporated herein by reference.

SECTION 2. The New Subordinated Party represents and warrants to the Administrative Agent and the other Senior Lenders that this Supplement has been duly authorized, executed and delivered by it and constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other laws affecting creditors’ rights generally and subject to general principles of equity regardless of whether considered in a proceeding in equity or at law.

SECTION 3. This Supplement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken

B-20

together shall constitute a single contract. This Supplement shall become effective when the Administrative Agent shall have received counterparts of this Supplement that, when taken together, bear the signatures of the New Subordinated Party and the Administrative Agent. Delivery of an executed signature page to this Supplement by facsimile transmission shall be as effective as delivery of a manually signed counterpart of this Supplement.

SECTION 4. Except as expressly supplemented hereby, the Affiliate Subordination Agreement shall remain in full force and effect.

SECTION 5. THIS SUPPLEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.

SECTION 6. In case any one or more of the provisions contained in this Supplement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and in the Affiliate Subordination Agreement shall not in any way be affected or impaired thereby (it being understood that the invalidity of a particular provision hereof in a particular jurisdiction shall not in and of itself affect the validity of such provision in any other jurisdiction). The parties hereto shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions.

SECTION 7. All communications and notices hereunder shall be in writing and given as provided in Section 11 of the Affiliate Subordination Agreement. All communications and notices hereunder to the New Subordinated Party shall be given to it at the address set forth under its signature below, with a copy to the Borrower.

SECTION 8. The New Subordinated Party agrees to reimburse the Administrative Agent for its reasonable out-of-pocket expenses in connection with this Supplement, including the reasonable fees, disbursements and other charges of counsel for the Administrative Agent.

[Remainder of page intentionally left blank]

B-21

IN WITNESS WHEREOF, the New Subordinated Party and the Administrative Agent have duly executed this Supplement to the Affiliate Subordination Agreement as of the day and year first above written.

[NAME OF NEW SUBORDINATED PARTY], as New Subordinated Party
By:
	Name:
	Title:
CREDIT SUISSE, CAYMAN ISLANDS BRANCH, as Administrative Agent,
By:
	Name:
	Title:

B-22

EXHIBIT C

AFFIRMATIVE INSURANCE HOLDINGS, INC.

FORM OF ASSIGNMENT AND ACCEPTANCE

     Reference is made to the Credit Agreement dated as of January, 31 2007 (as amended, supplemented, replaced or otherwise modified from time to time, the “Credit Agreement”), among the Borrower, the Lenders from time to time party thereto, Credit Suisse, Cayman Islands Branch, as administrative agent (in such capacity, the “Administrative Agent”) and as collateral agent (in such capacity, the “Collateral Agent”), and the other parties thereto. Terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement.

     SECTION 1. The Assignor hereby sells and assigns, without recourse, to the Assignee, and the Assignee hereby purchases and assumes, without recourse, from the Assignor, effective as of the Effective Date set forth below (but not prior to the registration of the information contained herein in the Register pursuant to Section 9.04(e) of the Credit Agreement), the interests set forth below (the “Assigned Interest") in the Assignor’s rights and obligations under the Credit Agreement and the other Loan Documents, including, without limitation, the amounts and percentages set forth below of (i) the Commitments of the Assignor on the Effective Date, (ii) the Loans owing to the Assignor which are outstanding on the Effective Date and (iii) participations of the Assignor in Letters of Credit and Swingline Loans which are outstanding on the Effective Date. Each of the Assignor and the Assignee hereby makes and agrees to be bound by all the representations, warranties and agreements set forth in Section 9.04(c) of the Credit Agreement, a copy of which has been received by each such party. From and after the Effective Date (i) the Assignee shall be a party to and be bound by the provisions of the Credit Agreement and, to the extent of the interests assigned by this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and under the Loan Documents and (ii) the Assignor shall, to the extent of the interests assigned by this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement.

     SECTION 2. This Assignment and Acceptance is being delivered to the Administrative Agent together with, if the Assignee is not already a Lender under the Credit Agreement, a completed Administrative Questionnaire.

C-1

     SECTION 3. THIS ASSIGNMENT AND ACCEPTANCE SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.

Date of Assignment:

Legal Name of Assignor:

Legal Name of Assignee:

Assignee’s Address for Notices:

Effective Date of Assignment:

		Percentage Assigned of
		Applicable
		Facility/Commitment
		(set forth, to at least
		8 decimals, as a
		percentage of the
		Facility and the
		aggregate Commitments
	Principal Amount	of all Lenders
	Assigned	thereunder)
Facility/Commitment
Revolving Credit	$	%
Term Loans	$	%

[Remainder of page intentionally left blank]

C-2

The terms set forth on the foregoing pages are hereby agreed to:

	,
as Assignor
By:
	Name:
	Title:
	,
as Assignor
By:
	Name:
	Title:

Accepted^*

CREDIT SUISSE, CAYMAN ISLANDS BRANCH,
as Administrative Agent and as Swingline Lender,
By:
	Name:
	Title:
By:
	Name:
	Title:
AFFIRMATIVE INSURANCE HOLDINGS, INC.
By:
	Name:
	Title:
[Issuing Bank]
By:
	Name:
	Title:

^* To be completed to the extent consents are required under Section 9.04(b) of the Credit Agreement.

C-3

EXHIBIT D

AFFIRMATIVE INSURANCE HOLDINGS, INC.

FORM OF BORROWING REQUEST

Credit Suisse, Cayman Islands Branch as Administrative Agent for the Lenders referred to below,

Eleven Madison Avenue
New York, NY 10010

Attention of Agency Group

[Date]

Ladies and Gentlemen:

     The undersigned, Affirmative Insurance Holdings, Inc., (the “Borrower”), refers to the Credit Agreement dated as of January 31, 2007 (the “Credit Agreement”), among Affirmative Insurance Holdings, Inc., the Borrower, the Lenders from time to time party thereto, Credit Suisse, Cayman Islands Branch, as administrative agent (in such capacity, the “Administrative Agent”) and as collateral agent (in such capacity, the “Collateral Agent”), Credit Suisse Securities (USA) LLC, as sole lead arranger and sole bookrunner (the “Arranger”). Terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement. The Borrower hereby gives you notice pursuant to Section 2.03 of the Credit Agreement that it requests a Borrowing under the Credit Agreement, and in that connection sets forth below the terms on which such Borrowing is requested to be made:

(A)	Date of Borrowing (which is a Business Day)
(B)	Principal Amount of Borrowing1

¹ Not less than $100,000 and in an integral multiple of $500,000, but in any event not exceeding the available Total Revolving Credit Commitment at such time.

D-1

(C)	Type of Borrowing2
(D)	Interest Period and the last day thereof3
(E)	Funds are requested to be disbursed to the Company’s account with                      (Account No.                      ).

(signature page follows)

2	Specify Eurodollar Borrowing or ABR Borrowing.
3	Which shall be subject to the definition of “Interest Period” and Section 2.02 of the Credit Agreement and end not later than the Maturity Date (applicable for Eurodollar Borrowings only).

D-2

     The Borrower hereby represents and warrants to the Administrative Agent and the Lenders that, on the date of this Borrowing Request and on the date of the related Borrowing, the conditions to lending specified in Section 4.01 of the Credit Agreement have been satisfied.

AFFIRMATIVE INSURANCE HOLDINGS, INC.
By:
	Name:
	Title:

D-3

EXHIBIT E
Form of Guarantee and Collateral Agreement

GUARANTEE AND COLLATERAL AGREEMENT

made by

AFFIRMATIVE INSURANCE HOLDINGS, INC.,

and certain Subsidiaries of Affirmative Insurance Holdings, Inc.

in favor of

CREDIT SUISSE, CAYMAN ISLANDS BRANCH as Collateral Agent

Dated as of January __, 2007

TABLE OF CONTENTS

		Page
SECTION 1 DEFINED TERMS			1
1.1.	Definitions		1
1.2.	Other Definitional Provisions		10
SECTION 2. GUARANTEE			10
2.1.	Guarantee		10
2.2.	Rights of Reimbursement, Contribution and Subrogation		11
2.3.	Amendments, etc. with respect to the Borrower Obligations		13
2.4.	Guarantee Absolute and Unconditional		13
2.5.	Reinstatement		14
2.6.	Payments		14
SECTION 3. GRANT OF SECURITY INTEREST; CONTINUING LIABILITY UNDER PLEDGED COLLATERAL			14
SECTION 4. REPRESENTATIONS AND WARRANTIES			16
4.1.	Representations in Credit Agreement		17
4.2.	Title; No Other Liens		17
4.3.	Perfected First Priority Liens		17
4.4.	Name; Jurisdiction of Organization, etc.		17
4.5.	Inventory and Equipment		18
4.6.	Farm Products		18
4.7.	Investment Property		18
4.8.	Receivables		19
4.9.	Intellectual Property		20
4.10.	Letters of Credit and Letter of Credit Rights		22
4.11.	Commercial Tort Claims		22
4.12.	Contracts		22
4.13.	Insurance		23
4.14.	Governmental Approval; Filings		24
SECTION 5. COVENANTS			24
5.1.	Covenants in Credit Agreement		24
5.2.	Delivery and Control of Instruments, Chattel Paper, Negotiable Documents, Investment Property and Deposit Accounts		24
5.3.	Maintenance of Insurance		26
5.4.	Payment of Obligations		27
5.5.	Maintenance of Perfected Security Interest; Further Documentation		27
5.6.	Changes in Locations, Name, Jurisdiction of Incorporation, etc.		27

i

		Page
5.7.	Notices		28
5.8.	Investment Property		28
5.9.	Receivables		29
5.10.	Intellectual Property		30
5.11.	Contracts		32
5.12.	Commercial Tort Claims		33
SECTION 6. REMEDIAL PROVISIONS			33
6.1.	Certain Matters Relating to Receivables		33
6.2.	Communications with Obligors; Grantors Remain Liable		34
6.3.	Pledged Securities		34
6.4.	Proceeds to be Turned Over To Collateral Agent		35
6.5.	Application of Proceeds		36
6.6.	Code and Other Remedies		36
6.7.	Registration Rights		38
6.8.	Deficiency		39
6.9.	Executory Process		39
SECTION 7. THE COLLATERAL AGENT			40
7.1.	Collateral Agent’s Appointment as Attorney-in-Fact, etc.		40
7.2.	Duty of Collateral Agent		42
7.3.	Execution of Financing Statements		42
7.4.	Authority of Collateral Agent		43
7.5.	Appointment of Co-Collateral Agents		43
SECTION 8. MISCELLANEOUS			43
8.1.	Amendments in Writing		43
8.2.	Notices		43
8.3.	No Waiver by Course of Conduct; Cumulative Remedies		43
8.4.	Enforcement Expenses; Indemnification		44
8.5.	Successors and Assigns		44
8.6.	Set-Off		44
8.7.	Counterparts		45
8.8.	Severability		45
8.9.	Section Headings		45
8.10.	Integration		45
8.11.	APPLICABLE LAW		45
8.12.	Submission to Jurisdiction; Waivers		45
8.13.	Acknowledgments		46
8.14.	Additional Grantors		46
8.15.	Releases		46
8.16.	WAIVER OF JURY TRIAL		47

ii

		Page
Annexes, Exhibits and Schedules
Annex 1	Assumption Agreement
Exhibit A	Form of Acknowledgment and Consent
Exhibit B-1	Form of Intellectual Property Security Agreement
Exhibit B-2	Form of After Acquired Intellectual Property Security Agreement
Exhibit C	Form of Uncertificated Securities Control Agreement
Exhibit D	Form of Deposit Account Agreement
Exhibit E	Form of Securities Account Control Agreement
Exhibit F	Form of Landlord Waiver
Schedule 4.3	Perfected First Priority Liens
Schedule 4.4	Names, Jurisdiction of Organization
Schedule 4.5(a)	Inventory and Equipment
Schedule 4.7(a,b,c)	Investment Property
Schedule 4.9(a)	Owned Intellectual Property
Schedule 4.9(c)	Material Intellectual Property
Schedule 4.9(f)	Intellectual Property Proceedings
Schedule 4.9(h)	Intellectual Property Fees
Schedule 4.10	Letters of Credit and Letter of Credit Rights
Schedule 4.11	Commercial Tort Claims
Schedule 4.12(a,b)	Contracts
Schedule 8.2	Guarantor Notice Addresses

iii

Exhibit E

     GUARANTEE AND COLLATERAL AGREEMENT, dated as of January ___, 2007, made by each of the signatories hereto (together with any other entity that may become a party hereto as provided herein, the “Grantors”), in favor of CREDIT SUISSE, CAYMAN ISLANDS BRANCH as administrative agent (in such capacity and together with its successors, the “Administrative Agent”) and as collateral agent (in such capacity and together with its successors, the “Collateral Agent”) for (i) the banks and other financial institutions or entities (the “Lenders”) from time to time parties to the Credit Agreement, dated as of January ___, 2007 (as amended, supplemented or otherwise modified from time to time, the “Credit Agreement”), among AFFIRMATIVE INSURANCE HOLDINGS, INC., a Delaware corporation (“Borrower”), the Lenders party thereto, the Administrative Agent, and (ii) the other Secured Parties (as hereinafter defined).

W I T N E S S E T H:

     WHEREAS, pursuant to the Credit Agreement, the Lenders have severally agreed to make extensions of credit to the Borrower upon the terms and subject to the conditions set forth therein;

     WHEREAS, the Borrower is a member of an affiliated group of companies that includes each other Grantor;

     WHEREAS, subject to the terms and conditions of the Credit Agreement, certain Grantors may enter into one or more Hedging Agreements.

     WHEREAS, the proceeds of the extensions of credit under the Credit Agreement will be used in part to enable the Borrower to acquire all of the Equity Interests in USAgencies pursuant to the Purchase Agreement;

     WHEREAS, the Borrower and the other Grantors are engaged in related businesses, and each Grantor will derive substantial direct and indirect benefit from the making of the extensions of credit under the Credit Agreement; and

     WHEREAS, it is a condition precedent to the obligation of the Lenders to make their respective extensions of credit to the Borrower under the Credit Agreement that the Grantors shall have executed and delivered this Agreement to the Collateral Agent for the ratable benefit of the Secured Parties;

     NOW, THEREFORE, in consideration of the premises and to induce the Arrangers, the Collateral Agent and the Lenders to enter into the Credit Agreement and to induce the Lenders to make their respective extensions of credit to the Borrower thereunder, each Grantor hereby agrees with the Collateral Agent, for the ratable benefit of the Secured Parties, as follows:

SECTION 1. DEFINED TERMS

          1.1 Definitions. (a) Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement, and the following terms are used herein as defined in the New York UCC (and if defined in more than one Article of the New York UCC, such terms shall have the meanings

E-1

Exhibit E

given in Article 9 thereof): Accounts, Account Debtor, As-Extracted Collateral, Certificated Security, Chattel Paper, Commercial Tort Claim, Commodity Account, Commodity Contract, Commodity Intermediary, Documents, Deposit Account, Electronic Chattel Paper, Equipment, Farm Products, Financial Asset, Fixtures, Goods, Instruments, Inventory, Letter of Credit, Letter of Credit Rights, Money, Payment Intangibles, Securities Account, Securities Intermediary, Security, Security Entitlement, Supporting Obligations, Tangible Chattel Paper and Uncertificated Security.

          (b) The following terms shall have the following meanings:

     “Administrative Agent” shall have the meaning assigned to such term in the preamble.

     “Agreement” shall mean this Guarantee and Collateral Agreement, as the same may be amended, supplemented, replaced or otherwise modified from time to time.

     “Applicable Subsidiary” shall have the meaning assigned to such term in Section 3(a).

     “Arrangers” shall have the meaning assigned to such term in the preamble.

     “Borrower” shall have the meaning assigned to such term in the preamble.

     “Borrower Obligations” shall mean the collective reference to the unpaid principal of and interest on (including interest accruing after the maturity of the Loans and reimbursement obligations in respect of amounts drawn under Letters of Credit and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to any Grantor, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) the Loans and all other obligations and liabilities of the Grantors to the Arrangers, to any Agent or to any Lender (or, in case of Specified Hedge Agreements, any Affiliate of any Lender or any Agent or any Affiliate of any Agent), whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with the Credit Agreement, any other Loan Document, the Letters of Credit, any Specified Hedge Agreement or any other document made, delivered or given in connection herewith or therewith, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including all fees, charges and disbursements of counsel to the Arrangers, to any Agent or to any Lender that are required to be paid by any Grantor pursuant to the Credit Agreement or any other Loan Document) or otherwise; provided, that (i) obligations of the Borrower or any other Loan Party under any Specified Hedge Agreement shall be secured and guaranteed pursuant to the Security Documents only to the extent that, and for so long as the other obligations are so secured and guaranteed, (ii) any release of collateral or guarantors effected in the manner permitted by the Credit Agreement or any other Loan Document shall not require the consent of holders of obligations under Specified Hedge Agreements and (iii) the amount of secured obligations under any Specified Hedge Agreements shall not exceed the net amount, including any net termination payments, that would be

E-2

Exhibit E

required to be paid to the counterparty to such Specified Hedge Agreement on the date of termination of such Specified Hedge Agreement.

     “Business Day” shall mean any day other than a Saturday, Sunday or day on which commercial banks in New York City are authorized or required by law to close.

     “Closing Date” shall mean the date hereof.

     “Collateral Account” shall mean (i) any collateral account established by the Collateral Agent as provided in Section 6.1 or 6.4 or (ii) any cash collateral account established as provided in Section 2.23(j) of the Credit Agreement.

     “Collateral Account Funds” shall mean, collectively, the following: all funds (including all trust monies), investments (including all cash equivalents) credited to, or purchased with funds from, any Collateral Account and all certificates and instruments from time to time representing or evidencing such investments; all notes, certificates of deposit, checks and other instruments from time to time hereafter delivered to or otherwise possessed by the Collateral Agent for or on behalf of any Grantor in substitution for, or in addition to, any or all of the Pledged Collateral; and all interest, dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the items constituting Pledged Collateral.

     “Collateral Agent” shall have the meaning assigned to such term in the preamble.

     “Contracts” shall mean all contracts and agreements between any Grantor and any other person (in each case, whether written or oral, or third party or intercompany) as the same may be amended, assigned, extended, restated, supplemented, replaced or otherwise modified from time to time including (i) all rights of any Grantor to receive moneys due and to become due to it thereunder or in connection therewith, (ii) all rights of any Grantor to receive proceeds of any insurance, indemnity, warranty or guaranty with respect thereto, (iii) all rights of any Grantor to damages arising thereunder and (iv) all rights of any Grantor to terminate and to perform and compel performance of, such Contracts and to exercise all remedies thereunder.

     “Copyright Licenses” shall mean any agreement, whether written or oral, naming any Grantor as licensor or licensee (including those listed in Schedule 4.9(a) (as such schedule may be amended or supplemented from time to time)), granting any right in, to or under any Copyright, including the grant of rights to manufacture, print, publish, copy, import, export, distribute, exploit and sell materials derived from any Copyright.

     “Copyrights” shall mean (i) all copyrights arising under the laws of the United States, any other country, or union of countries, or any political subdivision of any of the foregoing, whether registered or unregistered and whether published or unpublished (including those listed in Schedule 4.9(a) (as such schedule may be amended or supplemented from time to time)), all registrations and recordings thereof, and all applications in connection therewith and rights corresponding thereto throughout the world, including all registrations, recordings and applications in the United States

E-3

Exhibit E

Copyright Office, (ii) the right to, and to obtain, all extensions and renewals thereof, and the right to sue for past, present and future infringements of any of the foregoing, (iii) all proceeds of the foregoing, including license, royalties, income, payments, claims, damages, and proceeds of suit and (iv) all other rights of any kind whatsoever accruing thereunder or pertaining thereto.

     “Credit Agreement” shall have the meaning assigned to such term in the preamble.

     “dollars” or “$” shall mean lawful money of the United States of America.

     “Excluded Assets” shall mean any lease, license, contract, property right or agreement to which any Grantor is a party or any of its rights, title or interests thereunder if and only for so long as the grant of a security interest hereunder shall constitute or result in a breach, termination or default under any such lease, license, contract, property right or agreement (other than to the extent that any such term would be rendered ineffective pursuant to Sections 9-406, 9-407, 9-408 or 9-409 of the UCC of any relevant jurisdiction or any other applicable law or principles of equity); provided, however, that such security interest shall attach immediately to any portion of such lease, license, contract, property rights or agreement that does not result in any of the consequences specified above.

     “Excluded Foreign Subsidiary Voting Stock” shall mean the voting Equity Interests in any Excluded Foreign Subsidiary.

     “General Intangibles” shall mean all “general intangibles” as such term is defined in Section 9-102(a)(42) of the New York UCC and, in any event, including with respect to any Grantor, all rights of such Grantor to receive any tax refunds, all Hedging Agreements and all contracts, agreements, instruments and indentures and all licenses, permits, concessions, franchises and authorizations issued by Governmental Authorities in any form, and portions thereof, to which such Grantor is a party or under which such Grantor has any right, title or interest or to which such Grantor or any property of such Grantor is subject, as the same may from time to time be amended, supplemented, replaced or otherwise modified, including (i) all rights of such Grantor to receive moneys due and to become due to it thereunder or in connection therewith, (ii) all rights of such Grantor to receive proceeds of any insurance, indemnity, warranty or guaranty with respect thereto, (iii) all rights of such Grantor to damages arising thereunder and (iv) all rights of such Grantor to terminate and to perform and compel performance and to exercise all remedies thereunder.

     “Grantors” shall have the meaning assigned to such term in the preamble.

     “Guarantor Obligations” shall mean with respect to any Guarantor, all obligations and liabilities of such Guarantor which may arise under or in connection with this Agreement (including Section 2) or any other Loan Document to which such Guarantor is a party, in each case whether on account of guarantee obligations, reimbursement obligations, fees, indemnities, costs, expenses or otherwise (including all fees and

E-4

Exhibit E

disbursements of counsel to any Secured Party that are required to be paid by such Guarantor pursuant to the terms of this Agreement or any other Loan Document).

     “Guarantors” shall mean the collective reference to each Grantor other than the Borrower.

     “Insurance” shall mean (i) all insurance policies covering any or all of the Pledged Collateral (regardless of whether the Collateral Agent is the loss payee thereof) and (ii) any key man life insurance policies.

     “Insurance Law” shall mean a Requirement of Law pertaining to the business of insurance and applicable to a Regulated Insurance Subsidiary.

     “Intellectual Property” shall mean the collective reference to all rights, priorities and privileges relating to intellectual property, whether arising under United States, multinational or foreign laws or otherwise, including the Copyrights, the Copyright Licenses, the Patents, the Patent Licenses, the Trademarks, the Trademark Licenses, the Trade Secrets and the Trade Secret Licenses, and all rights to sue at law or in equity for any past, present and future infringement or other impairment thereof, including the right to receive all proceeds and damages therefrom.

     “Intercompany Note” shall mean any promissory note evidencing loans made by any Grantor to any Loan Party, including any subordinated intercompany note entered into in connection with the Affiliate Subordination Agreement.

     “Investment Property” shall mean the collective reference to (i) all “investment property” as such term is defined in Section 9-102(a)(49) of the New York UCC (other than any Excluded Foreign Subsidiary Voting Stock, excluded from the definition of “Pledged Equity Interests”) including all Certificated Securities and Uncertificated Securities, all Security Entitlements, all Securities Accounts, all Commodity Contracts and all Commodity Accounts, (ii) security entitlements, in the case of any United States Treasury book-entry securities, as defined in 31 C.F.R. section 357.2, or, in the case of any United States federal agency book-entry securities, as defined in the corresponding United States federal regulations governing such book-entry securities, and (iii) whether or not otherwise constituting “investment property”, all Pledged Notes, all Pledged Equity Interests, all Pledged Security Entitlements and all Pledged Commodity Contracts.

     “Issuers” shall mean the collective reference to each issuer of a Pledged Security.

     “Lenders” shall have the meaning assigned to such term in the preamble.

     “Licensed Intellectual Property” shall have the meaning assigned to such term in Section 4.9(a).

     “Material Contract” shall mean any agreement, contract or license or other arrangement (other than an agreement, contract or arrangement representing indebtedness for borrowed money) to which any Grantor is a party that is material to the Grantors and

E-5

Exhibit E

their subsidiaries, taken as a whole, and for which breach, nonperformance, cancellation or failure to renew could reasonably be expected to have a Material Adverse Effect.

     “New York UCC” shall mean the Uniform Commercial Code as from time to time in effect in the State of New York.

     “Non-Assignable Contract” shall mean any Contract that by its terms purports to restrict or prevent the assignment thereof or granting of a security interest therein (either by its terms or by any federal or state statutory or regulatory prohibition or otherwise, irrespective of whether such prohibition or restriction is enforceable under Sections 9-407 through 9-409 of the New York UCC).

     “Obligations” shall mean (i) in the case of the Borrower, the Borrower Obligations, and (ii) in the case of each Guarantor, its Guarantor Obligations.

     “Owned Intellectual Property” shall have the meaning assigned to such term in Section 4.9(a).

     “Patent License” shall mean all agreements, whether written or oral, providing for the grant by or to any Grantor of any right to manufacture, use, import, export, distribute or sell any invention covered in whole or in part by a Patent, including any of the foregoing listed in Schedule 4.9(a) (as such schedule may be amended or supplemented from time to time).

     “Patents” shall mean (i) all letters of patent of the United States, any other country, union of countries or any political subdivision of any of the foregoing, all reissues and extensions thereof and all goodwill associated therewith, including any of the foregoing listed in Schedule 4.9(a) (as such schedule may be amended or supplemented from time to time), (ii) all applications for letters of patent of the United States or any other country or union of countries or any political subdivision of any of the foregoing and all divisions, continuations and continuations-in-part thereof, all improvements thereof, including any of the foregoing listed in Schedule 4.9(a) (as such schedule may be amended or supplemented from time to time), (iii) all rights to, and to obtain, any reissues or extensions of the foregoing and (iv) all proceeds of the foregoing, including licenses, royalties, income, payments, claims, damages and proceeds of suit.

     “person” shall mean any natural person, corporation, trust, business trust, joint venture, joint stock company, association company, limited liability company, partnership, Governmental Authority or other entity.

     “Pledged Alternative Equity Interests” shall mean all interests of any Grantor in participation or other interests in any equity or profits of any business entity and the certificates, if any, representing such interests and all dividends, distributions, cash, warrants, rights, options, instruments, securities and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such interests and any other warrant, right or option to acquire any of the foregoing; provided, however, that Pledged Alternative Equity Interests shall not include

E-6

Exhibit E

any Pledged Stock, Pledged Partnership Interests, Pledged LLC Interests or Pledged Trust Interests.

     “Pledged Collateral” shall have the meaning assigned to such term in Section 3.

     “Pledged Commodity Contracts” shall mean all commodity contracts listed on Schedule 4.7(c) (as such schedule may be amended from time to time) and all other commodity contracts to which any Grantor is party from time to time.

     “Pledged Debt Securities” shall mean all debt securities now owned or hereafter acquired by any Grantor, including the debt securities listed on Schedule 4.7(b), (as such schedule may be amended or supplemented from time to time), together with any other certificates, options, rights or security entitlements of any nature whatsoever in respect of the debt securities of any person that may be issued or granted to, or held by, any Grantor while this Agreement is in effect.

     “Pledged Equity Interests” shall mean all Pledged Stock, Pledged LLC Interests, Pledged Partnership Interests, Pledged Trust Interests and Pledged Alternative Equity Interests.

     “Pledged LLC Interests” shall mean all interests of any Grantor now owned or hereafter acquired in any limited liability company, including all limited liability company interests listed on Schedule 4.7(a) hereto under the heading “Pledged LLC Interests” (as such schedule may be amended or supplemented from time to time) and the certificates, if any, representing such limited liability company interests and any interest of such Grantor on the books and records of such limited liability company and all dividends, distributions, cash, warrants, rights, options, instruments, securities and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such limited liability company interests and any other warrant, right or option to acquire any of the foregoing.

     “Pledged Notes” shall mean all promissory notes now owned or hereafter acquired by any Grantor, including those listed on Schedule 4.7(b) (as such schedule may be amended or supplemented from time to time) and all Intercompany Notes at any time issued to or held by any Grantor.

     “Pledged Partnership Interests” shall mean all interests of any Grantor now owned or hereafter acquired in any general partnership, limited partnership, limited liability partnership or other partnership, including all partnership interests listed on Schedule 4.7(a) hereto under the heading “Pledged Partnership Interests” (as such schedule may be amended or supplemented from time to time) and the certificates, if any, representing such partnership interests and any interest of such Grantor on the books and records of such partnership and all dividends, distributions, cash, warrants, rights, options, instruments, securities and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such partnership interests and any other warrant, right or option to acquire any of the foregoing.

E-7

Exhibit E

     “Pledged Securities” shall mean the collective reference to the Pledged Debt Securities, the Pledged Notes and the Pledged Equity Interests.

     “Pledged Security Entitlements” shall mean all security entitlements with respect to the financial assets listed on Schedule 4.7(c) (as such schedule may be amended from time to time) and all other security entitlements of any Grantor.

     “Pledged Stock”: shall mean all shares of capital stock now owned or hereafter acquired by any Grantor, including all shares of capital stock listed on Schedule 4.7(a) hereto under the heading “Pledged Stock” (as such schedule may be amended or supplemented from time to time), and the certificates, if any, representing such shares and any interest of such Grantor in the entries on the books of the issuer of such shares and all dividends, distributions, cash, warrants, rights, options, instruments, securities and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares and any other warrant, right or option to acquire any of the foregoing; provided, however, that in no event shall more than 65% of the total outstanding Excluded Foreign Subsidiary Voting Stock be required to be pledged hereunder.

     “Pledged Trust Interests” shall mean all interests of any Grantor now owned or hereafter acquired in a Delaware business trust or other trust, including all trust interests listed on Schedule 4.7(a) hereto under the heading “Pledged Trust Interests” (as such schedule may be amended or supplemented from time to time) and the certificates, if any, representing such trust interests and any interest of such Grantor on the books and records of such trust or on the books and records of any securities intermediary pertaining to such interest and all dividends, distributions, cash, warrants, rights, options, instruments, securities and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such trust interests and any other warrant, right or option to acquire any of the foregoing.

     “Proceeds” shall mean all “proceeds” as such term is defined in Section 9-102(a)(64) of the New York UCC and, in any event, shall include all dividends or other income from the Investment Property, collections thereon or distributions or payments with respect thereto.

     “Qualified Counterparty” shall mean, with respect to any Specified Hedge Agreement, any counterparty thereto that, at the time such Specified Hedge Agreement was entered into, was a Lender, an Agent or an Affiliate of a Lender or an Agent.

     “Receivable” shall mean all Accounts and any other right to payment for goods or other property sold, leased, licensed or otherwise disposed of or for services rendered, whether or not such right is evidenced by an Instrument or Chattel Paper or classified as a Payment Intangible and whether or not it has been earned by performance. References herein to Receivables shall include any Supporting Obligation or collateral securing such Receivable.

E-8

Exhibit E

     “Secured Parties” shall mean, collectively, the Arrangers, the Collateral Agent, the Collateral Agent, the Syndication Agent, the Documentation Agent, the Lenders and, with respect to any Specified Hedge Agreement, any Qualified Counterparty that has agreed to be bound by the provisions of Article VIII of the Credit Agreement as if it were a Lender party thereto; provided that no Qualified Counterparty shall have any rights in connection with the management or release of any Pledged Collateral or the obligations of any Guarantor under this Agreement.

     “Securities Act” shall mean the Securities Act of 1933, as amended.

     “Specified Hedge Agreement” shall mean any Hedging Agreement (a) entered into by (i) the Borrower or any of the Subsidiaries and (ii) any Lender or any Affiliate thereof or any Agent or any Affiliate thereof, or any person that was a Lender or an Affiliate thereof or an Agent or Affiliate thereof when such Hedging Agreement was entered into as counterparty and (b) which has been designated by such Lender or Agent and the Borrower, by notice to the Collateral Agent not later than 90 days after the execution and delivery thereof by the Borrower or such Subsidiary, as a Specified Hedge Agreement; provided that the designation of any Hedging Agreement as a Specified Hedge Agreement shall not create in favor of any Lender or Affiliate thereof or any Agent or any Affiliate thereof that is a party thereto any rights in connection with the management or release of any Pledged Collateral or of the obligations of any Guarantor under this Agreement.

     “Trademark License” shall mean any agreement, whether written or oral, providing for the grant by or to any Grantor of any right in, to or under any Trademark, including any of the foregoing referred to in Schedule 4.9(a) (as such schedule may be amended or supplemented from time to time).

     “Trademarks” shall mean (i) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos and other source or business identifiers, and all goodwill associated therewith, now existing or hereafter adopted or acquired, all registrations and recordings thereof, and all applications in connection therewith, whether in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country, union of countries, or any political subdivision of any of the foregoing, or otherwise, and all common-law rights related thereto, including any of the foregoing listed in Schedule 4.9(a) (as such schedule may be amended or supplemented from time to time), (ii) the right to, and to obtain, all renewals thereof, (iii) the goodwill of the business symbolized by the foregoing, (iv) other source or business identifiers, designs and general intangibles of a like nature and (v) the right to sue for past, present and future infringements or dilution of any of the foregoing or for any injury to goodwill, and all proceeds of the foregoing, including royalties, income, payments, claims, damages and proceeds of suit.

     “Trade Secret License” shall mean any agreement, whether written or oral, providing for the grant by or to any Grantor of any right in, to or under any Trade Secret,

E-9

Exhibit E

including any of the foregoing listed in Schedule 4.9(a) (as such schedule may be amended or supplemented from time to time).

     “Trade Secrets” shall mean all trade secrets and all other confidential or proprietary information and know-how (all of the foregoing being collectively called a “Trade Secret”), whether or not reduced to a writing or other tangible form, including all documents and things embodying, incorporating or describing such Trade Secret, the right to sue for past, present and future infringements of any Trade Secret and all proceeds of the foregoing, including royalties, income, payments, claims, damages and proceeds of suit.

          1.2 Other Definitional Provisions. (a) The words “hereof”, “herein”, “hereto” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section and Schedule references are to the specific provisions of this Agreement unless otherwise specified.

          (a) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms.

          (b) Where the context requires, terms relating to the Pledged Collateral or any part thereof, when used in relation to a Grantor, shall refer to the property or assets such Grantor has granted as Pledged Collateral or the relevant part thereof.

          (c) The expressions “payment in full,” “paid in full” and any other similar terms or phrases when used herein with respect to the Borrower Obligations or the Guarantor Obligations shall mean the unconditional, final and irrevocable payment in full, in immediately available funds, of all of the Borrower Obligations or the Guarantor Obligations, as the case may be, in each case, unless otherwise specified, other than indemnification and other contingent obligations not then due and payable.

          (d) The words “include”, “includes” and “including”, and words of similar import, shall not be limiting and shall be deemed to be followed by the phrase “without limitation”.

          (e) All references to the Lenders herein shall, where appropriate, include any Lender, the Collateral Agent, the Collateral Agent or any Arranger or, in the case of any Lender or Agent, any Affiliate thereof that is a party to a Specified Hedge Agreement.

SECTION 2. GUARANTEE

          2.1 Guarantee.

          (a) Each of the Guarantors hereby, jointly and severally, unconditionally and irrevocably, guarantees to the Collateral Agent, for the ratable benefit of the Secured Parties and their respective successors, indorsees, transferees and assigns, the prompt and complete payment and performance by the Borrower when due (whether at the stated maturity, by acceleration or otherwise) of the Borrower Obligations.

E-10

Exhibit E

          (b) If and to the extent required in order for the Obligations of any Guarantor to be enforceable under applicable federal, state and other laws relating to the insolvency of debtors, the maximum liability of such Guarantor hereunder shall be limited to the greatest amount which can lawfully be guaranteed by such Guarantor under such laws, after giving effect to any rights of contribution, reimbursement and subrogation arising under Section 2.2. Each Guarantor acknowledges and agrees that, to the extent not prohibited by applicable law, (i) such Guarantor (as opposed to its creditors, representatives of creditors or bankruptcy trustee, including such Guarantor in its capacity as debtor in possession exercising any powers of a bankruptcy trustee) has no personal right under such laws to reduce, or request any judicial relief that has the effect of reducing, the amount of its liability under this Agreement, (ii) such Guarantor (as opposed to its creditors, representatives of creditors or bankruptcy trustee, including such Guarantor in its capacity as debtor in possession exercising any powers of a bankruptcy trustee) has no personal right to enforce the limitation set forth in this Section 2.1(b) or to reduce, or request judicial relief reducing, the amount of its liability under this Agreement, and (iii) the limitation set forth in this Section 2.1(b) may be enforced only to the extent required under such laws in order for the obligations of such Guarantor under this Agreement to be enforceable under such laws and only by or for the benefit of a creditor, representative of creditors or bankruptcy trustee of such Guarantor or other person entitled, under such laws, to enforce the provisions thereof.

          (c) Each Guarantor agrees that the Borrower Obligations may at any time and from time to time be incurred or permitted in an amount exceeding the maximum liability of such Guarantor under Section 2.1(b) without impairing the guarantee contained in this Section 2 or affecting the rights and remedies of any Secured Party hereunder.

          (d) The guarantee contained in this Section 2 shall remain in full force and effect until payment in full of the Obligations, notwithstanding that from time to time during the term of the Credit Agreement the Borrower may be free from any Borrower Obligations.

          (e) No payment made by the Borrower, any of the Guarantors, any other guarantor or any other person or received or collected by any Secured Party from the Borrower, any of the Guarantors, any other guarantor or any other person by virtue of any action or proceeding or any set-off or appropriation or application at any time or from time to time in reduction of or in payment of the Borrower Obligations shall be deemed to modify, reduce, release or otherwise affect the liability of any Guarantor hereunder which shall, notwithstanding any such payment (other than any payment made by such Guarantor in respect of the Borrower Obligations or any payment received or collected from such Guarantor in respect of the Borrower Obligations), remain liable for the Borrower Obligations up to the maximum liability of such Guarantor hereunder until the Borrower Obligations (other than Obligations in respect of any Specified Hedge Agreement) are paid in full, no letter of credit shall be outstanding under the Credit Agreement and all commitments to extend credit under the Credit Agreement shall have been terminated or have expired.

          2.2 Rights of Reimbursement, Contribution and Subrogation. In case any payment is made on account of the Obligations by any Grantor or is received or collected on account of the Obligations from any Grantor or its property:

E-11

Exhibit E

          (a) If such payment is made by the Borrower or from its property, then, if and to the extent such payment is made on account of Obligations arising from or relating to a Loan or other extension of credit made to the Borrower or a letter of credit issued for the account of the Borrower, the Borrower shall not be entitled (i) to demand or enforce reimbursement or contribution in respect of such payment from any other Grantor or (ii) to be subrogated to any claim, interest, right or remedy of any Secured Party against any other person, including any other Grantor or its property.

          (b) If such payment is made by a Guarantor or from its property, such Guarantor shall be entitled, subject to and upon payment in full of the Obligations, (i) to demand and enforce reimbursement for the full amount of such payment from the Borrower and (ii) to demand and enforce contribution in respect of such payment from each other Guarantor that has not paid its fair share of such payment, as necessary to ensure that (after giving effect to any enforcement of reimbursement rights provided hereby) each Guarantor pays its fair share of the unreimbursed portion of such payment. For this purpose, the fair share of each Guarantor as to any unreimbursed payment shall be determined based on an equitable apportionment of such unreimbursed payment among all Guarantors based on the relative value of their assets and any other equitable considerations deemed appropriate by a court of competent jurisdiction.

          (c) If and whenever (after payment in full of the Obligations) any right of reimbursement or contribution becomes enforceable by any Grantor against any other Grantor under Sections 2.2(a) and 2.2(b), such Grantor shall be entitled, subject to and upon payment in full of the Obligations, to be subrogated (equally and ratably with all other Grantors entitled to reimbursement or contribution from any other Grantor as set forth in this Section 2.2) to any security interest that may then be held by the Collateral Agent upon any Pledged Collateral granted to it in this Agreement. Such right of subrogation shall be enforceable solely against the Grantors, and not against the Secured Parties, and neither the Collateral Agent nor any other Secured Party shall have any duty whatsoever to warrant, ensure or protect any such right of subrogation or to obtain, perfect, maintain, hold, enforce or retain any Pledged Collateral for any purpose related to any such right of subrogation. If subrogation is demanded by any Grantor, then (after payment in full of the Obligations) the Collateral Agent shall deliver to the Grantors making such demand, or to a representative of such Grantors or of the Grantors generally, an instrument satisfactory to the Collateral Agent transferring, on a quitclaim basis without any recourse, representation, warranty or obligation whatsoever, whatever security interest the Collateral Agent then may hold in whatever Pledged Collateral may then exist that was not previously released or disposed of by the Collateral Agent.

          (d) All rights and claims arising under this Section 2.2 or based upon or relating to any other right of reimbursement, indemnification, contribution or subrogation that may at any time arise or exist in favor of any Grantor as to any payment on account of the Obligations made by it or received or collected from its property shall be fully subordinated in all respects to the prior payment in full of all of the Obligations. Until payment in full of the Obligations, no Grantor shall demand or receive any collateral security, payment or distribution whatsoever (whether in cash, property or securities or otherwise) on account of any such right or claim. If any such payment or distribution is made or becomes available to any Grantor in any bankruptcy case or receivership, insolvency or liquidation proceeding, such payment or distribution shall be delivered by the person making such payment or distribution directly to the Collateral Agent, for

E-12

Exhibit E

application to the payment of the Obligations. If any such payment or distribution is received by any Grantor, it shall be held by such Grantor in trust, as trustee of an express trust for the benefit of the Secured Parties, and shall forthwith be transferred and delivered by such Grantor to the Collateral Agent, in the exact form received and, if necessary, duly endorsed.

          (e) The obligations of the Grantors under the Loan Documents, including their liability for the Obligations and the enforceability of the security interests granted thereby, are not contingent upon the validity, legality, enforceability, collectibility or sufficiency of any right of reimbursement, contribution or subrogation arising under this Section 2.2. The invalidity, insufficiency, unenforceability or uncollectibility of any such right shall not in any respect diminish, affect or impair any such obligation or any other claim, interest, right or remedy at any time held by any Secured Party against any Guarantor or its property. The Secured Parties make no representations or warranties in respect of any such right and shall have no duty to assure, protect, enforce or ensure any such right or otherwise relating to any such right.

          (f) Each Grantor reserves any and all other rights of reimbursement, contribution or subrogation at any time available to it as against any other Grantor, but (i) the exercise and enforcement of such rights shall be subject to Section 2.2(d) and (ii) neither the Collateral Agent nor any other Secured Party shall ever have any duty or liability whatsoever in respect of any such right, except as provided in Section 2.2(c).

          2.3 Amendments, etc. with respect to the Borrower Obligations. Each Guarantor shall remain obligated hereunder notwithstanding that, without any reservation of rights against any Guarantor and without notice to or further assent by any Guarantor, any demand for payment of any of the Borrower Obligations made by any Secured Party may be rescinded by such Secured Party and any of the Borrower Obligations continued, and the Borrower Obligations, or the liability of any other person upon or for any part thereof, or any collateral security or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, increased, extended, amended, modified, accelerated, compromised, waived, surrendered or released by any Secured Party, and the Credit Agreement and the other Loan Documents and any other documents executed and delivered in connection therewith may be amended, modified, supplemented or terminated, in whole or in part, as the parties thereto may deem advisable from time to time, and any collateral security, guarantee or right of offset at any time held by any Secured Party for the payment of the Borrower Obligations may be sold, exchanged, waived, surrendered or released in each case, pursuant to and in accordance with the terms set forth in Section 9.08 of the Credit Agreement. No Secured Party shall have any obligation to protect, secure, perfect or insure any Lien at any time held by it as security for the Borrower Obligations or for the guarantee contained in this Section 2 or any property subject thereto.

          2.4 Guarantee Absolute and Unconditional. Each Guarantor waives any and all notice of the creation, renewal, extension or accrual of any of the Borrower Obligations and notice of or proof of reliance by any Secured Party upon the guarantee contained in this Section 2 or acceptance of the guarantee contained in this Section 2; the Borrower Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred, or renewed, extended, amended or waived, in reliance upon the guarantee contained in this Section 2; and all dealings between the Borrower and any of the Guarantors, on the one hand, and the Secured

E-13

Exhibit E

Parties, on the other hand, likewise shall be conclusively presumed to have been had or consummated in reliance upon the guarantee contained in this Section 2. Each Guarantor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon the Borrower or any of the Guarantors with respect to the Borrower Obligations. Each Guarantor understands and agrees that the guarantee contained in this Section 2 shall be construed as a continuing, absolute and unconditional guarantee of payment and performance without regard to (a) the validity or enforceability of the Credit Agreement or any other Loan Document, any of the Borrower Obligations or any other collateral security therefor or guarantee or right of offset with respect thereto at any time or from time to time held by any Secured Party, (b) any defense, set-off or counterclaim (other than a defense of payment or performance hereunder) which may at any time be available to or be asserted by the Borrower or any other person against any Secured Party, or (c) any other circumstance whatsoever (with or without notice to or knowledge of the Borrower or such Guarantor) which constitutes, or might be construed to constitute, an equitable or legal discharge of the Borrower for the Borrower Obligations, or of such Guarantor under the guarantee contained in this Section 2, in bankruptcy or in any other instance. When making any demand hereunder or otherwise pursuing its rights and remedies hereunder against any Guarantor, any Secured Party may, but shall be under no obligation to, make a similar demand on or otherwise pursue such rights and remedies as it may have against the Borrower, any other Guarantor or any other person or against any collateral security or guarantee for the Borrower Obligations or any right of offset with respect thereto, and any failure by any Secured Party to make any such demand, to pursue such other rights or remedies or to collect any payments from the Borrower, any other Guarantor or any other person or to realize upon any such collateral security or guarantee or to exercise any such right of offset, or any release of the Borrower, any other Guarantor or any other person or any such collateral security, guarantee or right of offset, shall not relieve any Guarantor of any obligation or liability hereunder, and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of any Secured Party against any Guarantor. For the purposes hereof “demand” shall include the commencement and continuance of any legal proceedings.

          2.5 Reinstatement. The guarantee contained in this Section 2 shall continue to be effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Borrower Obligations is rescinded or must otherwise be restored or returned by any Secured Party upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Borrower or any Guarantor, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, the Borrower or any Guarantor or any substantial part of its property, or otherwise, all as though such payments had not been made.

          2.6 Payments. Each Guarantor hereby guarantees that payments hereunder will be paid to the Collateral Agent without set-off or counterclaim in Dollars in immediately available funds at the office of the Collateral Agent as specified in the Credit Agreement.

SECTION 3. GRANT OF SECURITY INTEREST;

CONTINUING LIABILITY UNDER PLEDGED COLLATERAL

          (a) Each Grantor hereby assigns and transfers to the Collateral Agent, and hereby grants to the Collateral Agent, for the ratable benefit of the Secured Parties, a security interest in all of the personal property of such Grantor, including the following property, in each case,

E-14

Exhibit E

wherever located and now owned or at any time hereafter acquired by such Grantor or in which such Grantor now has or at any time in the future may acquire any right, title or interest (collectively, the “Pledged Collateral”), as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of such Grantor’s Obligations:

                    (i) all Accounts;

                    (ii) all As-Extracted Collateral

                    (iii) all Chattel Paper;

                    (iv) all Collateral Accounts and all Collateral Account Funds;

                    (v) all Commercial Tort Claims from time specifically described on Schedule 4.11;

                    (vi) all Contracts;

                    (vii) all Deposit Accounts;

                    (viii) all Documents;

                    (ix) all Equipment;

                    (x) all Fixtures;

                    (xi) all General Intangibles;

                    (xii) all Goods;

                    (xiii) all Instruments;

                    (xiv) all Insurance;

                    (xv) all Intellectual Property;

                    (xvi) all Inventory;

                    (xvii) all Investment Property;

                    (xviii) all Letters of Credit and Letter of Credit Rights;

                    (xix) all Money;

                    (xx) all Securities Accounts;

                    (xxi) all books, records, ledger cards, files, correspondence, customer lists, blueprints, technical specifications, manuals, computer software, computer

E-15

Exhibit E

printouts, tapes, disks and other electronic storage media and related data processing software and similar items that at any time pertain to or evidence or contain information relating to any of the Pledged Collateral or are otherwise necessary or helpful in the collection thereof or realization thereupon; and

          (xxii) to the extent not otherwise included, all other property, whether tangible or intangible, of the Grantor and all Proceeds, products, accessions, rents and profits of any and all of the foregoing and all collateral security, Supporting Obligations and guarantees given by any person with respect to any of the foregoing;

provided that, notwithstanding any other provision set forth in this Section 3, (x) this Agreement shall not, at any time, constitute a grant of a security interest in any property that is, at such time, an Excluded Asset, and (y) the Equity Interests of a Regulated Insurance Subsidiary, a Qualified Insurance Holding Company, LIFCO or any Premium Finance Co. (collectively, the “Applicable Subsidiaries”) owned directly by a Grantor shall remain limited by and subject to the requirements of any and all applicable Requirements of Law, including notice of or prior approval of (A) a merger, an acquisition or any other change in control of an Applicable Subsidiary’s Equity Interests, and (B) the transfer to a Collateral Agent of a Grantor’s right to vote, to give consents, ratifications or waivers or to take any other action with respect to the Equity Interests of any Applicable Subsidiary.

          (b) Notwithstanding anything herein to the contrary, (i) each Grantor shall remain liable for all obligations under and in respect of the Pledged Collateral and nothing contained herein is intended or shall be a delegation of duties to the Collateral Agent or any other Secured Party, (ii) each Grantor shall remain liable under and each of the agreements included in the Pledged Collateral, including any Receivables, any Contracts and any agreements relating to Pledged Partnership Interests or Pledged LLC Interests, to perform all of the obligations undertaken by it thereunder all in accordance with and pursuant to the terms and provisions thereof and neither the Collateral Agent nor any other Secured Party shall have any obligation or liability under any of such agreements by reason of or arising out of this Agreement or any other document related hereto nor shall the Collateral Agent nor any other Secured Party have any obligation to make any inquiry as to the nature or sufficiency of any payment received by it or have any obligation to take any action to collect or enforce any rights under any agreement included in the Pledged Collateral, including any agreements relating to any Receivables, any Contracts or any agreements relating to Pledged Partnership Interests or Pledged LLC Interests and (iii) the exercise by the Collateral Agent of any of its rights hereunder shall not release any Grantor from any of its duties or obligations under the contracts and agreements included in the Pledged Collateral, including any agreements relating to any Receivables, any Contracts and any agreements relating to Pledged Partnership Interests or Pledged LLC Interests.

SECTION 4. REPRESENTATIONS AND WARRANTIES

     To induce the Administrative Agent, the Collateral Agent and the Lenders to enter into the Credit Agreement and to induce the Lenders to make their respective extensions of credit to the Borrower thereunder, each Grantor hereby represents and warrants to the Secured Parties that:

E-16

Exhibit E

          4.1 Representations in Credit Agreement. In the case of each Guarantor, the representations and warranties set forth in Article III of the Credit Agreement as they relate to such Guarantor or to the Loan Documents to which such Guarantor is a party, each of which is hereby incorporated herein by reference, are true and correct, in all material respects, except for representations and warranties expressly stated to relate to a specific earlier date, in which case such representations and warranties shall be true and correct in all material respects as of such earlier date, and the Secured Parties shall be entitled to rely on each of them as if they were fully set forth herein, provided that each reference in each such representation and warranty to the Borrower’s knowledge shall, for the purposes of this Section 4.l, be deemed to be a reference to such Guarantor’s knowledge.

          4.2 Title; No Other Liens. Such Grantor owns each item of the Pledged Collateral free and clear of any and all Liens or claims, including Liens arising as a result of such Grantor becoming bound (as a result of merger or otherwise) as grantor under a security agreement entered into by another person, except for Liens expressly permitted by Section 6.02 of the Credit Agreement. No financing statement, mortgage or other public notice with respect to all or any part of the Pledged Collateral is on file or of record in any public office, except such as have been filed in favor of the Collateral Agent, for the ratable benefit of the Secured Parties, pursuant to this Agreement or as are expressly permitted by the Credit Agreement.

          4.3 Perfected First Priority Liens. The security interests granted pursuant to this Agreement (a) upon completion of the filings and other actions specified on Schedule 4.3 (all of which, in the case of all filings and other documents referred to on said Schedule, have been delivered to the Collateral Agent in duly completed and duly executed form (which shall include real estate descriptions sufficient to enable the Collateral Agent to record financing statements in the county records, in such counties identified on Schedule 4.3), as applicable, and may be filed by the Collateral Agent at any time) and payment of all filing fees, will constitute valid fully perfected security interests in all of the Pledged Collateral in favor of the Collateral Agent, for the ratable benefit of the Secured Parties, as collateral security for such Grantor’s Obligations, enforceable in accordance with the terms hereof and (b) are prior to all other Liens on the Pledged Collateral, except for Liens expressly permitted by Section 6.02 of the Credit Agreement. Without limiting the foregoing, each Grantor has taken and will take all actions that the Collateral Agent deems necessary or desirable, including those specified in Section 5.2 to (i) establish the Collateral Agent’s “control” (within the meanings of Sections 8-106 and 9-106 of the New York UCC) over any portion of the Investment Property constituting Certificated Securities, Uncertificated Securities, Securities Accounts, Securities Entitlements or Commodity Accounts (each as defined in the New York UCC), (ii) establish the Collateral Agent’s “control” (within the meaning of Section 9-104 of the New York UCC) over all Deposit Accounts, (iii) establish the Collateral Agent’s “control” (within the meaning of Section 9-107 of the New York UCC) over all Letter of Credit Rights, (iv) establish the Collateral Agent’s control (within the meaning of Section 9-105 of the New York UCC) over all Electronic Chattel Paper and (v) establish the Collateral Agent’s “control” (within the meaning of Section 16 of the Uniform Electronic Transaction Act as in effect in the applicable jurisdiction “UETA”) over all “transferable records” (as defined in UETA).

          4.4 Name; Jurisdiction of Organization, etc. On the date hereof, such Grantor’s exact legal name (as indicated on the public record of such Grantor’s jurisdiction of

E-17

Exhibit E

formation or organization), jurisdiction of organization, organizational identification number, if any, and the location of such Grantor’s chief executive office or sole place of business are specified on Schedule 4.4. Each Grantor is organized solely under the law of the jurisdiction so specified and has not filed any certificates of domestication, transfer or continuance in any other jurisdiction. Except as otherwise indicated on Schedule 4.4, the jurisdiction of each such Grantor’s organization of formation is required to maintain a public record showing the Grantor to have been organized or formed. Except as specified on Schedule 4.4, no such Grantor has changed its name, jurisdiction of organization, chief executive office or sole place of business or its corporate structure in any way (e.g. by merger, consolidation, change in corporate form or otherwise) within the past year and has not within the last five years become bound (whether as a result of merger or otherwise) as a grantor under a security agreement entered into by another person, which has not heretofore been terminated.

          4.5 Inventory and Equipment. (a) On the date hereof, the Inventory and the Equipment (other than mobile goods) that is included in the Pledged Collateral are kept at the locations listed on Schedule 4.5(a). Within the five years preceding execution of this agreement, such Grantor has not changed the location of a material portion of its Equipment and Inventory that is included in the Pledged Collateral except as otherwise disclosed on Schedule 4.5(a).

          (b) Any Inventory now or hereafter produced by any Grantor included in the Pledged Collateral have been and will be produced in material compliance with the requirements of all applicable laws and regulations, including the Fair Labor Standards Act, as amended.

          (c) none of the Inventory or Equipment that is included in the Pledged Collateral is in the possession of an issuer of a negotiable document (as defined in Section 7-104 of the New York UCC) therefor or is otherwise in the possession of any bailee or warehouseman.

          4.6 Farm Products. None of the Pledged Collateral constitutes, or is the Proceeds of, Farm Products.

          4.7 Investment Property. (a) Schedule 4.7(a) hereto (as such schedule may be amended or supplemented from time to time) sets forth under the headings “Pledged Stock,” “Pledged LLC Interests,” “Pledged Partnership Interests” and “Pledged Trust Interests,” respectively, all of the Pledged Stock, Pledged LLC Interests, Pledged Partnership Interests and Pledged Trust Interests owned by any Grantor and such Pledged Equity Interests constitute the percentage of issued and outstanding shares of stock, percentage of membership interests, percentage of partnership interests or percentage of beneficial interest of the respective issuers thereof indicated on such schedule. Schedule 4.7(b) (as such schedule may be amended or supplemented from time to time) sets forth under the heading “Pledged Debt Securities” or “Pledged Notes” all of the Pledged Debt Securities and Pledged Notes owned by any Grantor and all of such Pledged Debt Securities and Pledged Notes have been duly authorized, authenticated or issued, and delivered and are the legal, valid and binding obligation of the issuers thereof enforceable in accordance with their terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors’ rights generally and subject to general principals of equity, regardless of whether considered in a proceeding in equity or at law, and are not in default and constitute all of the issued and outstanding inter-company indebtedness evidenced by an instrument or certificated security of the respective issuers thereof

E-18

Exhibit E

owing to such Grantor. Schedule 4.7(c) hereto (as such schedule may be amended from time to time) sets forth under the headings “Securities Accounts,” “Commodities Accounts,” and “Deposit Accounts” respectively, all of the Securities Accounts, Commodities Accounts and Deposit Accounts in which each Grantor has an interest and in which the value of each such account is in excess of $100,000. Each Grantor is the sole entitlement holder or customer of each such account and no Grantor has consented to or is otherwise aware of any person having “control” (within the meanings of Sections 8-106, 9-106 and 9-104 of the New York UCC) over, or any other interest in, any Securities Account, Commodity Account, Deposit Account, in each case in which such Grantor has an interest, or any securities, commodities or other property credited thereto.

     (b) The shares of Pledged Equity Interests pledged by such Grantor hereunder constitute all of the issued and outstanding shares of all classes of Equity Interests in each Issuer owned by such Grantor or, in the case of Excluded Foreign Subsidiary Voting Stock, if less, 65% of the outstanding Excluded Foreign Subsidiary Voting Stock of each relevant Issuer.

     (c) The Pledged Equity Interests have been duly and validly issued and are fully paid and nonassessable.

     (d) The terms of any uncertificated Pledged LLC Interests and Pledged Partnership Interests expressly provide that they are securities governed by Article 8 of the Uniform Commercial Code in effect from time to time in the “issuer’s jurisdiction” of each Issuer thereof (as such term is defined in the Uniform Commercial Code in effect in such jurisdiction).

     (e) The terms of any certificated Pledged LLC Interests and Pledged Partnership Interests expressly provide that they are securities governed by Article 8 of the New York UCC.

     (f) Such Grantor is the record and beneficial owner of, and has good and marketable title to, the Investment Property and Deposit Accounts pledged by it hereunder, free of any and all Liens or options in favor of, or claims of, any other person, except Liens expressly permitted by Section 6.02 of the Credit Agreement, and there are no outstanding warrants, options or other rights to purchase, or shareholder, voting trust or similar agreements outstanding with respect to, or property that is convertible into, or that requires the issuance or sale of, any Pledged Equity Interests.

     (g) Each Issuer that is not a Grantor hereunder has executed and delivered to the Collateral Agent an Acknowledgment and Consent, in substantially the form of Exhibit A, to the pledge of the Pledged Securities pursuant to this Agreement.

     4.8 Receivables. (a) No amount payable to such Grantor under or in connection with any Receivable that is included in the Pledged Collateral is evidenced by any Instrument or Tangible Chattel Paper which has not been delivered to the Collateral Agent or constitutes Electronic Chattel Paper that has not been subjected to the control (within the meaning of Section 9-105 of the New York UCC) of the Collateral Agent to the extent required by, and in accordance with, Section 5.2 hereof.

E-19

Exhibit E

     (b) None of the obligors on any Receivables in excess of $50,000 individually or $100,000 in the aggregate that are included in the Pledged Collateral is a Governmental Authority.

     (c) Each Receivable that is included in the Pledged Collateral (i) is and will be the legal, valid and binding obligation of the Account Debtor in respect thereof, representing an unsatisfied obligation of such Account Debtor, (ii) is and will be enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors’ rights generally and subject to general principals of equity, regardless of whether considered in a proceeding in equity or at law, (iii) is not and will not be subject to any setoffs, defenses, taxes, counterclaims (except with respect to refunds, returns and allowances in the ordinary course of business with respect to damaged merchandise) and (iv) is and will be in compliance with all applicable laws and regulations.

     4.9 Intellectual Property. (a) Schedule 4.9(a) lists all Intellectual Property which is registered with a Governmental Authority or is the subject of an application for registration and all material unregistered Intellectual Property, in each case which is owned by such Grantor in its own name on the date hereof (collectively, the “Owned Intellectual Property”). Except as set forth in Schedule 4.9(a), such Grantor is the exclusive owner of the entire and unencumbered right, title and interest in and to all such Owned Intellectual Property and is otherwise entitled to use, and grant to others the right to use, all such Owned Intellectual Property subject only to the license terms of the licensing or franchise agreements referred to in paragraph (c) below. Such Grantor has a valid and enforceable right to use all Intellectual Property which it uses in its business, but does not own (collectively, the “Licensed Intellectual Property”).

     (b) On the date hereof, all Owned Intellectual Property and, to such Grantor’s knowledge, all Licensed Intellectual Property, in each case, which is material to such Grantor’s business (collectively, the “Material Intellectual Property”), is valid, subsisting, unexpired and enforceable and has not been abandoned. Neither the operation of such Grantor’s business as currently conducted or as contemplated to be conducted nor the use of the Intellectual Property in connection therewith conflicts with, infringes, misappropriates, dilutes, misuses or otherwise violates the intellectual property rights of any other person.

     (c) Except as set forth in Schedule 4.9(c), on the date hereof (i) none of the Material Intellectual Property is the subject of any licensing or franchise agreement pursuant to which such Grantor is the licensor or franchisor and (ii) there are no other agreements, obligations, orders or judgments which affect the use of any Material Intellectual Property.

     (d) The rights of such Grantor in or to the Material Intellectual Property do not conflict with or infringe upon the rights of any third party, and no claim has been asserted that the use of such Intellectual Property does or may infringe upon the rights of any third party.

     (e) To such Grantor’s knowledge, no holding, decision or judgment has been rendered by any Governmental Authority or arbitrator in the United States or outside the United States which would limit, cancel or question the validity or enforceability of, or such Grantor’s rights in, any Material Intellectual Property. Such Grantor is not aware of any uses of any item

E-20

Exhibit E

of Material Intellectual Property that could reasonably be expected to lead to such item becoming invalid or unenforceable including unauthorized uses by third parties and uses which were not supported by the goodwill of the business connected with Trademarks and Trademark Licenses.

     (f) No action or proceeding is pending, or, to such Grantor’s knowledge, threatened, on the date hereof (i) seeking to limit, cancel or question the validity of any Owned Intellectual Property, (ii) alleging that any services provided by, processes used by, or products manufactured or sold by such Grantor infringe any patent, trademark, copyright, or any other right of any other person, (iii) alleging that any Material Intellectual Property is being licensed, sublicensed or used in violation of any intellectual property or any other right of any other person, or (iv) which, if adversely determined, would have a Material Adverse Effect on the value of any Material Intellectual Property. To such Grantor’s knowledge, no person is engaging in any activity that infringes upon, or is otherwise an unauthorized use of, any Material Intellectual Property or upon the rights of such Grantor therein. Except as set forth in Schedule 4.9(f), such Grantor has not granted any license, release, covenant not to sue, non-assertion assurance, or other right to any person with respect to any part of the Material Intellectual Property. The consummation of the transactions contemplated by this Agreement (including the enforcement of remedies) will not result in the termination or impairment of any of the Material Intellectual Property.

     (g) With respect to each Copyright License, Trademark License, Trade Secret License and Patent License which relates to Material Intellectual Property or the loss of which could otherwise have a Material Adverse Effect: (i) such license is valid and binding and in full force and effect and represents the entire agreement between the respective licensor and licensee with respect to the subject matter of such license; (ii) such license will not cease to be valid and binding and in full force and effect on terms identical to those currently in effect as a result of the rights and interests granted herein, nor will the grant of such rights and interests constitute a breach or default under such license or otherwise give the licensor or licensee a right to terminate such license; (iii) such Grantor has not received any notice of termination or cancellation under such license; (iv) such Grantor has not received any notice of a breach or default under such license, which breach or default has not been cured; (v) such Grantor has not granted to any other person any rights, adverse or otherwise, under such license; and (vi) such Grantor is not in breach or default in any material respect, and no event has occurred that, with notice and/or lapse of time, would constitute such a breach or default or permit termination, modification or acceleration under such license.

     (h) Except as set forth in Schedule 4.9(h), such Grantor has performed all acts and has paid all required fees and taxes to maintain each and every item of Material Intellectual Property in full force and effect and to protect and maintain its interest therein. Such Grantor has used proper statutory notice in connection with its use of each Patent, Trademark and Copyright that is material to its business included in the Intellectual Property.

     (i) None of the Trade Secrets of such Grantor that are material to its business have been used, divulged, disclosed or appropriated to the detriment of such Grantor for the benefit of any other person; (ii) no employee, independent contractor or agent of such Grantor has misappropriated any trade secrets of any other person in the course of the performance of his or her duties as an employee, independent contractor or agent of such Grantor; and (iii) no

E-21

Exhibit E

employee, independent contractor or agent of such Grantor is in default or breach of any term of any employment agreement, non-disclosure agreement, assignment of inventions agreement or similar agreement or contract relating in any way to the protection, ownership, development, use or transfer of such Grantor’s Intellectual Property.

     (j) Such Grantor has made all filings and recordations necessary to adequately protect its interest in its Material Intellectual Property, including recordation of its interests in the Patents and Trademarks with the United States Patent and Trademark Office and in corresponding national and international patent offices, and recordation of any of its interests in the Copyrights with the United States Copyright Office and in corresponding national and international copyright offices.

     (k) Such Grantor has taken all commercially reasonable steps to use consistent standards of quality in the manufacture, distribution and sale of all products sold and provision of all services provided under or in connection with any item of Intellectual Property and has taken all steps to ensure that all licensed users of any kind of Intellectual Property use such consistent standards of quality.

     (l) No Grantor is subject to any settlement or consents, judgment, injunction, order, decree, covenants not to sue, non-assertion assurances or releases that would impair the validity or enforceability of, or such Grantor’s rights in, any Material Intellectual Property.

     4.10 Letters of Credit and Letter of Credit Rights. No Grantor is a beneficiary or assignee under any Letter of Credit other than the Letters of Credit described on Schedule 4.10 (as such schedule may be amended or supplemented from time to time). With respect to any Letters of Credit that are by their terms transferable, each Grantor has caused (or, in the case of the Letters of Credit that are specified on Schedule 4.10 on the date hereof, will use commercially reasonable efforts to cause) all issuers and nominated persons under Letters of Credit in which the Grantor is the beneficiary or assignee to consent to the assignment of such Letter of Credit to the Collateral Agent and has agreed that upon the occurrence and during the continuance of an Event of Default it shall cause all payments thereunder to be made to the Collateral Account. With respect to any Letters of Credit that are not transferable, each Grantor shall obtain (or, in the case of the Letters of Credit that are specified on Schedule 4.10 on the date hereof, use commercially reasonable efforts to obtain) the consent of the issuer thereof and any nominated person thereon to the assignment of the proceeds of the released Letter of Credit to the Collateral Agent in accordance with Section 5-114(c) of the New York UCC.

     4.11 Commercial Tort Claims. No Grantor has any Commercial Tort Claims as of the date hereof individually or in the aggregate in excess of $100,000 and, except as specifically described on Schedule 4.11 (as such schedule may be amended or supplemented from time to time), no Grantor has any Commercial Tort Claims after the date hereof individually or in the aggregate in excess of $100,000.

     4.12 Contracts.

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Exhibit E

     (a) Schedule 4.12(a) (as such schedule may be amended or supplemented form time to time) sets forth all of the Material Contracts in which such Grantor has any right or interest.

     (b) Except as set forth on Schedule 4.12(b) and provided in Sections 4.13 and 4.14 below, no Material Contract prohibits assignment or encumbrance by such Grantor or requires or purports to require consent of, or notice to, any party (other than such Grantor) to any Material Contract in connection with the execution, delivery and performance of this Agreement, including the exercise of remedies by the Collateral Agent with respect to such Material Contract, except for such consents that have been obtained and such notices that have been given.

     (c) Each Material Contract is in full force and effect and constitutes a valid and legally enforceable obligation of the Grantor party thereto and (to the best of such Grantor’s knowledge) each other party thereto, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors’ rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing.

     (d) The right, title and interest of such Grantor in, to and under the Material Contracts are not subject to any defenses, rights of recoupment or claims.

     (e) Neither such Grantor nor (to the best of such Grantor’s knowledge) any of the other parties to the Material Contracts is in default in the performance or observance of any of the terms thereof.

     (f) The right, title and interest of such Grantor in, to and under the Material Contracts are not subject to any defenses or claims.

     (g) Such Grantor has delivered to the Collateral Agent a complete and correct copy of each Material Contract, including all amendments, supplements and other modifications thereto.

     (h) No amount payable to such Grantor under or in connection with any Contract which has a value in excess of $100,000 individually or $100,000 in the aggregate is evidenced by any Instrument or Tangible Chattel Paper which has not been delivered to the Collateral Agent or constitutes Electronic Chattel Paper that is not under the control (within the meaning of Section 9-105 of the New York UCC) of the Collateral Agent.

     (i) None of the parties to any Material Contract is a Governmental Authority.

     4.13 Insurance. Subject to the provisions of 215 Ill. Comp. Stat. 5/131.4 (West 2006), La. Rev. Stat. Ann. § 22:1004 (West 2006), Mich. Comp. Laws § 500.1311 (West 2006), and N.Y. Ins. Law § 1506 (McKinney 2006), and state insurance pre-acquisition antitrust laws and regulations, and similar statutes in each of the states in which any Regulated Insurance Subsidiary is domiciled or writes business, pertaining to the notifications to and approvals by the Illinois Department of Financial and Professional Regulation, Division of Insurance, the Louisiana Department of Insurance, the Michigan Office of Financial and

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Exhibit E

Insurance Services or the New York State Insurance Department (which are the insurance regulatory authorities of the domiciliary jurisdictions of the Regulated Insurance Subsidiaries, collectively, the “Insurance Regulatory Authorities”), and similar regulatory authorities in each state in which any of the Regulated Insurance Subsidiaries writes business, required in the case of mergers, acquisitions and changes of control of insurance companies, held either directly or indirectly, and to prescribed waiting periods in connection therewith, the exercise by the Collateral Agent of its rights and remedies hereunder shall not, to the knowledge of any Grantor, contravene any Insurance Law or any contractual restriction binding on or affecting any Grantor or any of the Grantor’s properties and will not result in or require the creation of any lien, security interest or other charge or encumbrance upon or with respect to any of the Grantor’s properties.

     4.14 Governmental Approval; Filings. To the knowledge of each Grantor, no authorization or approval or other action by, and no notice to or filing with, any Governmental Authority is required either (i) for the pledge hereunder by each Grantor of, or the grant by any Grantor of the security interest created hereby in, the Pledged Collateral or (ii) except for the approval of the Insurance Regulatory Authorities under 215 Ill. Comp. Stat. 5/131.4 (West 2006), La. Rev. Stat. Ann. § 22:1004 (West 2006), Mich. Comp. Laws § 500.1311 (West 2006), and N.Y. Ins. Law § 1506 (McKinney 2006), and state insurance pre-acquisition antitrust laws and regulations, and of similar regulatory authorities under applicable statutes of each state in which any Regulated Insurance Subsidiary is domiciled or writes business, and the approval of the Louisiana Office of Financial Institutions under La. Rev. Stat. Ann. § 9:3561 (West 2006), and except as may be required by laws affecting the offering and sale of securities generally, for the exercise by the Collateral Agent of its rights and remedies hereunder.

SECTION 5. COVENANTS

     Each Grantor covenants and agrees with the Secured Parties that, from and after the date of this Agreement until the Obligations (other than Obligations in respect of any Specified Hedge Agreement) shall have been paid in full, no letter of credit issued under the Credit Agreement shall be outstanding and all commitments to extend credit under the Credit Agreement shall have expired or been terminated:

     5.1 Covenants in Credit Agreement. Each Grantor shall take, or shall refrain from taking, as the case may be, each action that is necessary to be taken or not taken, as the case may be, so that no Default or Event of Default is caused by the failure to take such action or to refrain from taking such action by such Grantor or any of its Subsidiaries.

     5.2 Delivery and Control of Instruments, Chattel Paper, Negotiable Documents, Investment Property and Deposit Accounts. (a) If any of the Pledged Collateral is or shall become evidenced or represented by any Instrument, Certificated Security, Negotiable Document or Tangible Chattel Paper, such Instrument (other than checks received in the ordinary course of business), Certificated Security, Negotiable Documents or Tangible Chattel Paper shall be, subject to any and all Requirements of Law, immediately delivered to the Collateral Agent, duly endorsed in a manner satisfactory to the Collateral Agent, to be held as Pledged Collateral pursuant to this Agreement, and all of such property owned by any Grantor as of the Closing Date shall be delivered on the Closing Date; provided, however, that, notwithstanding any

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Exhibit E

provision to the contrary contained above, for any Receivable comprising the Pledged Collateral in excess of $50,000 individually or $100,000 in the aggregate that is evidenced by, or constitutes, Chattel Paper or Instruments, such Grantor shall cause each originally executed copy thereof to be delivered to the Collateral Agent (or its agent or designee) appropriately indorsed to the Collateral Agent or indorsed in blank: (i) with respect to any such Receivable in existence on or prior to the date hereof, and (ii) with respect to any such Receivables hereafter arising, within ten (10) Business Days of such Grantor acquiring rights therein.

     (b) If any Receivable comprising the Pledged Collateral in excess of $50,000 individually or $100,000 in the aggregate is or shall become “Electronic Chattel Paper” such Grantor shall, subject to any and all Requirements of Law, ensure that (i) a single authoritative copy exists which is unique, identifiable, unalterable (except as provided in clauses (iii), (iv) and (v) of this paragraph), (ii) such authoritative copy identifies the Collateral Agent as the assignee and is communicated to and maintained by the Collateral Agent or its designee, (iii) copies or revisions that add or change the assignee of the authoritative copy can only be made with the participation of the Collateral Agent, (iv) each copy of the authoritative copy and any copy of a copy is readily identifiable as a copy and not the authoritative copy and (v) any revision of the authoritative copy is readily identifiable as an authorized or unauthorized revision.

     (c) If any Pledged Collateral is or shall become evidenced or represented by an Uncertificated Security, such Grantor shall, subject to any and all Requirements of Law, cause the Issuer thereof either (i) to register the Collateral Agent as the registered owner of such Uncertificated Security, upon original issue or registration of transfer or (ii) to agree in writing with such Grantor and the Collateral Agent that such Issuer will comply with instructions with respect to such Uncertificated Security originated by the Collateral Agent without further consent of such Grantor, such agreement to be in substantially the form of Exhibit A, and such actions shall be taken on or prior to the Closing Date with respect to any Uncertificated Securities owned as of the Closing Date by any Grantor.

     (d) Each Grantor shall maintain Securities Entitlements, Securities Accounts and Deposit Accounts with values in excess of $550,000 in the aggregate, only with financial institutions that have agreed to comply with entitlement orders and instructions issued or originated by the Collateral Agent without further consent of such Grantor, such agreement to be substantially in the form of Exhibit D or E as applicable, or in such other form as is reasonably satisfactory to the Collateral Agent; provided that notwithstanding any other provision herein or in any such agreement to the contrary, only upon and during the continuation of an Event of Default may the Collateral Agent issue entitlement orders and instructions with respect to such accounts (or otherwise apply the balance from any such accounts or instruct the bank or securities intermediary at which any account is maintained to pay the balance of any such account to or for the benefit of the Collateral Agent). Notwithstanding the foregoing, no Grantor shall hold cash in an aggregate amount greater than $50,000 in any Deposit Account unless such Deposit Account is subject to an agreement described in the foregoing sentence or is otherwise subject to customary standing instructions by such Grantor to sweep the cash balance of such account into another Deposit Account subject to such an agreement on no less frequently than a weekly basis.

     (e) Reserved.

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Exhibit E

     (f) In addition to and not in lieu of the foregoing, if any Issuer of any Investment Property is organized under the law of, or has its chief executive office in, a jurisdiction outside of the United States, each Grantor shall take such additional actions, including causing the issuer to register the pledge on its books and records, as may be necessary or advisable or as may be reasonably requested by the Collateral Agent, under the laws of such jurisdiction to insure the validity, perfection and priority of the security interest of the Collateral Agent.

     (g) In the case of any transferable Letters of Credit in excess of $100,000 individually or in the aggregate, each Grantor shall use commercially reasonable efforts to obtain the consent of any issuer thereof to the transfer of such Letter of Credit to the Collateral Agent. In the case of any other Letter of Credit Rights in excess of $100,000 individually or in the aggregate each Grantor shall use commercially reasonable efforts to obtain the consent of the issuer thereof and any nominated person thereon to the assignment of the proceeds of the related Letter of Credit in accordance with Section 5-114(c) of the New York UCC.

     5.3 Maintenance of Insurance. (a) Such Grantor will maintain, with financially sound and reputable insurance companies, insurance on all its property (including all Inventory, Equipment and Vehicles) as further set forth in the Credit Agreement; provided that in any event such Grantor will maintain, to the extent obtainable on commercially reasonable terms, (i) property and casualty insurance on all real and personal property on an all risks basis (including the perils of flood and quake and loss by fire, explosion and theft), covering the repair or replacement cost of all such property and consequential loss coverage for business interruption and extra expense (which shall include construction expenses and such other business interruption expenses as are otherwise generally available to similar businesses), and (ii) public liability insurance. All such insurance with respect to such Grantor shall be provided by insurers or reinsurers which (x) in the case of United States insurers and reinsurers, have an A.M. Best policyholders rating of not less than A- with respect to primary insurance and B+ with respect to excess insurance and (y) in the case of non-United States insurers or reinsurers, the providers of at least 80% of such insurance have either an ISI policyholders rating of not less than A, an A.M. Best policyholders rating of not less than A- or a surplus of not less than $500,000,000 with respect to primary insurance, and an ISI policyholders rating of not less than BBB with respect to excess insurance, or, if the relevant insurance is not available from such insurers, such other insurers as the Collateral Agent may approve in writing. All insurance shall (i) provide that no cancellation, material reduction in amount or material change in coverage thereof shall be effective until at least 30 days after receipt by the Collateral Agent of written notice thereof, (ii) if reasonably requested by the Collateral Agent, include a breach of warranty clause and (iii) be reasonably satisfactory in all other respects to the Collateral Agent.

     (b) Such Grantor will deliver to the Collateral Agent on behalf of the Secured Parties, (i) on the Closing Date, a certificate dated such date showing the amount and types of insurance coverage as of such date, (ii) upon request of any Secured Party from time to time, full information as to the insurance carried, (iii) promptly following receipt of notice from any insurer, a copy of any notice of cancellation or material change in coverage from that existing on the Closing Date, (iv) forthwith, notice of any cancellation or nonrenewal of coverage by such Grantor and (v) promptly after such information is available to such Grantor, full information as to any claim for an amount in excess of $250,000 with respect to any property and casualty insurance policy maintained by such Grantor. The Collateral Agent shall be named as additional

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Exhibit E

insured on all such liability insurance policies of such Grantor and the Collateral Agent shall be named as loss payee on all property and casualty insurance policies of such Grantor.

     (c) Upon the request of the Collateral Agent, the Borrower shall deliver to the Secured Parties a report of a reputable insurance broker with respect to such insurance and such supplemental reports with respect thereto as the Collateral Agent may from time to time reasonably request.

     5.4 Payment of Obligations. Such Grantor shall pay and discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all taxes, assessments and governmental charges or levies imposed upon the Pledged Collateral or in respect of income or profits therefrom, as well as all claims of any kind (including claims for labor, materials and supplies) against or with respect to the Pledged Collateral, except that no such charge need be paid if the amount or validity thereof is currently being contested in good faith by appropriate proceedings, reserves in conformity with GAAP with respect thereto have been provided on the books of such Grantor and such proceedings could not reasonably be expected to result in the sale, forfeiture or loss of any material portion of the Pledged Collateral or any interest therein.

     5.5 Maintenance of Perfected Security Interest; Further Documentation. (a) Such Grantor shall maintain each of the security interests created by this Agreement as a perfected security interest having at least the priority described in Section 4.3 and shall defend such security interest against the claims and demands of all persons whomsoever, subject to the provisions of Section 8.15.

     (b) Such Grantor shall furnish to the Secured Parties from time to time statements and schedules further identifying and describing the Pledged Collateral and such other reports in connection with the assets and property of such Grantor as the Collateral Agent may reasonably request, all in reasonable detail.

     (c) At any time and from time to time, upon the written request of the Collateral Agent, and at the sole expense of such Grantor, such Grantor shall promptly and duly authorize, execute and deliver, and have recorded, such further instruments and documents and take such further actions as the Collateral Agent may reasonably request for the purpose of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted, including, the filing of any financing or continuation statements under the Uniform Commercial Code (or other similar laws) in effect in any jurisdiction with respect to the security interests created hereby and in the case of Investment Property, Deposit Accounts and any other relevant Pledged Collateral, taking any actions necessary to enable the Collateral Agent to obtain “control” (within the meaning of the applicable Uniform Commercial Code) with respect thereto, including without limitation, executing and delivering and causing the relevant depositary bank or securities intermediary to execute and deliver a Control Agreement in the form attached hereto as C or D, as applicable.

     5.6 Changes in Locations, Name, Jurisdiction of Incorporation, etc. Such Grantor shall not, except upon, in the case of clause (i) below, 60 days’ prior written notice and, in the case of clause (ii), or (iii) below, 10 days’ prior written notice, in each case, to the

E-27

Exhibit E

Collateral Agent and delivery to the Collateral Agent of duly authorized and, where required, executed copies of (a) all additional financing statements and other documents reasonably requested by the Collateral Agent to maintain the validity, perfection and priority of the security interests provided for herein and (b) if applicable, a written supplement to Schedule 4.5(a) showing any additional location at which Inventory or Equipment (other than mobile goods) with a value in excess of $100,000 that is included in the Pledged Collateral shall be kept:

               (i) permit any of the Inventory or Equipment (other than mobile goods) to be kept at a location other than those listed on Schedule 4.5(a);

               (ii) change its legal name, jurisdiction of organization or the location of its chief executive office or sole place of business from that referred to in Section 4.4; or

               (iii) change its legal name, identity or structure to such an extent that any financing statement filed by the Collateral Agent in connection with this Agreement would become misleading.

          5.7 Notices. Such Grantor shall advise the Collateral Agent promptly, in reasonable detail, of:

          (a) any Lien (other than any Lien expressly permitted by Section 6.02 of the Credit Agreement) on any of the Pledged Collateral which would adversely affect the ability of the Collateral Agent to exercise any of its remedies hereunder; and

          (b) of the occurrence of any other event which could reasonably be expected to have a material adverse effect on the aggregate value of the Pledged Collateral or on the security interests created hereby.

          5.8 Investment Property. (a) If such Grantor shall become entitled to receive or shall receive any stock or other ownership certificate (including any certificate representing a stock dividend or a distribution in connection with any reclassification, increase or reduction of capital or any certificate issued in connection with any reorganization), option or rights in respect of the Equity Interests in any Issuer, whether in addition to, in substitution of, as a conversion of, or in exchange for, any shares of or other ownership interests in the Pledged Securities, or otherwise in respect thereof, such Grantor shall accept the same as the agent of the Secured Parties, hold the same in trust for the Secured Parties and deliver the same forthwith to the Collateral Agent in the exact form received, duly endorsed by such Grantor to the Collateral Agent, if required, together with an undated stock power or similar instrument of transfer covering such certificate duly executed in blank by such Grantor and with, if the Collateral Agent so requests, signature guaranteed, to be held by the Collateral Agent, subject to the terms hereof, as additional collateral security for the Obligations. Any sums paid upon or in respect of the Pledged Securities upon the liquidation or dissolution of any Issuer shall be paid over to the Collateral Agent to be applied by the Collateral Agent in accordance with the provisions of Section 6.5.

          (b) Without the prior written consent of the Collateral Agent, such Grantor shall not (i) vote to enable, or take any other action to permit, any Issuer to issue any stock,

E-28

Exhibit E

partnership interests, limited liability company interests or other equity securities of any nature or to issue any other securities convertible into or granting the right to purchase or exchange for any stock, partnership interests, limited liability company interests or other equity securities of any nature of any Issuer (except, in each case, pursuant to a transaction expressly permitted by the Credit Agreement), (ii) sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, any of the Investment Property or Proceeds thereof or any interest therein (except, in each case, pursuant to a transaction expressly permitted by the Credit Agreement), (iii) create, incur or permit to exist any Lien or option in favor of, or any claim of any person with respect to, any of the Investment Property or Proceeds thereof, or any interest therein, except for the security interests created by this Agreement or any Lien expressly permitted thereon pursuant to Section 6.02 of the Credit Agreement, (iv) enter into any agreement or undertaking restricting the right or ability of such Grantor or the Collateral Agent to sell, assign or transfer any of the Investment Property or Proceeds thereof or any interest therein or (v) without the prior written consent of the Collateral Agent, cause or permit any Issuer of any Pledged Partnership Interests or Pledged LLC Interests which are not securities (for purposes of the New York UCC) on the date hereof to elect or otherwise take any action to cause such Pledged Partnership Interests or Pledged LLC Interests to be treated as securities for purposes of the New York UCC; provided, however, notwithstanding the foregoing, if any issuer of any Pledged Partnership Interests or Pledged LLC Interests takes any such action in violation of the provisions in this clause (v), such Grantor shall promptly notify the Collateral Agent in writing of any such election or action and, in such event, shall take all steps necessary or advisable to establish the Collateral Agent’s “control” thereof.

     (c) In the case of each Grantor which is an Issuer, such Issuer agrees that (i) it shall be bound by the terms of this Agreement relating to the Pledged Securities issued by it and shall comply with such terms insofar as such terms are applicable to it, (ii) it shall notify the Collateral Agent promptly in writing of the occurrence of any of the events described in Section 5.8(a) with respect to the Pledged Securities issued by it and (iii) the terms of Sections 6.3(c) and 6.7 shall apply to it, mutatis mutandis, with respect to all actions that may be required of it pursuant to Section 6.3(c) or 6.7 with respect to the Pledged Securities issued by it. In addition, subject to any Requirements of Law, each Grantor which is either an Issuer or an owner of any Pledged Security hereby consents to the grant by each other Grantor of the security interest hereunder in favor of the Collateral Agent and to the transfer of any Pledged Security to the Collateral Agent or its nominee following an Event of Default and to the substitution of the Collateral Agent or its nominee as a partner, member or shareholder of the Issuer of the related Pledged Security.

     5.9 Receivables. (a) Other than in the ordinary course of business consistent with its past practice, such Grantor shall not (i) grant any extension of the time of payment of any Receivable, (ii) compromise or settle any Receivable for less than the full amount thereof, (iii) release, wholly or partially, any person liable for the payment of any Receivable, (iv) allow any credit or discount whatsoever on any Receivable or (v) amend, supplement or modify any Receivable in any manner that could adversely affect the value thereof.

     (b) Such Grantor shall deliver to the Collateral Agent a copy of each material demand, notice or document received by it that questions or calls into doubt the validity or

E-29

Exhibit E

enforceability of more than 5% of the aggregate amount of the then outstanding Receivables that are included in the Pledged Collateral.

     (c) Each Grantor shall perform and comply in all material respects with all of its obligations with respect to the Receivables.

     5.10 Intellectual Property. (a) Such Grantor (either itself or through licensees) shall (i) continue to use each Trademark material to its business on each and every trademark class of goods applicable to its current line as reflected in its current catalogs, brochures and price lists in order to maintain such Trademark in full force free from any claim of abandonment for non-use, (ii) maintain as in the past the quality of products and services offered under such Trademark and take all necessary steps to ensure that all licensed users of such Trademark maintain as in the past such quality, (iii) use such Trademark with the appropriate notice of registration and all other notices and legends required by applicable Requirements of Law, (iv) not adopt or use any mark which is confusingly similar or a colorable imitation of such Trademark unless the Collateral Agent, for the ratable benefit of the Secured Parties, shall obtain a perfected security interest in such mark pursuant to this Agreement and the Intellectual Property Security Agreement, and (v) not (and not permit any licensee or sublicensee thereof to) do any act or knowingly omit to do any act whereby such Trademark may become invalidated or impaired in any way.

     (b) Such Grantor (either itself or through licensees) shall not do any act, or omit to do any act, whereby any Patent owned by such Grantor material to its business may become forfeited, abandoned or dedicated to the public.

     (c) Such Grantor (either itself or through licensees) (i) shall employ each Copyright material to its business and (ii) shall not (and shall not permit any licensee or sublicensee thereof to) do any act or knowingly omit to do any act whereby any material portion of such Copyrights may become invalidated or otherwise impaired. Such Grantor shall not (either itself or through licensees) do any act whereby any material portion of such Copyrights may fall into the public domain.

     (d) Such Grantor (either itself or through licensees) shall not do any act that uses any Material Intellectual Property to infringe, misappropriate or violate the intellectual property rights of any other person.

     (e) Such Grantor (either itself or through licensees) shall use proper statutory notice in connection with the use of the Material Intellectual Property.

     (f) Such Grantor shall notify the Collateral Agent immediately if it knows, or has reason to know, that any application or registration relating to any Material Intellectual Property may become forfeited, abandoned or dedicated to the public, or of any adverse determination or development (including the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office, the United States Copyright Office or any court or tribunal in any country) regarding such Grantor’s ownership of, or the validity of, any Material Intellectual Property or such Grantor’s right to register the same or to own and maintain the same.

E-30

Exhibit E

     (g) Promptly upon such Grantor’s acquisition or creation of any copyrightable work, invention, trademark or other similar property that is material to the business of such Grantor, apply for registration thereof with the United states Copyright Office, the United States Patent and Trademark Office and any other appropriate office. Whenever such Grantor, either by itself or through any agent, employee, licensee or designee, shall file an application for the registration of any Intellectual Property that is material to the business of such Grantor with the United States Patent and Trademark Office, the United States Copyright Office or any similar office or agency in any other country or any political subdivision thereof, such Grantor shall report such filing to the Collateral Agent within five Business Days after the last day of the fiscal quarter in which such filing occurs. Upon request of the Collateral Agent, such Grantor shall execute and deliver, and have recorded, any and all agreements, instruments, documents, and papers as the Collateral Agent may request to evidence the Secured Parties’ security interest in any Copyright, Patent, Trademark or other Intellectual Property of such Grantor and the goodwill and general intangibles of such Grantor relating thereto or represented thereby.

     (h) Such Grantor shall take all reasonable and necessary steps, including in any proceeding before the United States Patent and Trademark Office, the United States Copyright Office or any similar office or agency in any other country or any political subdivision thereof, to maintain and pursue each application (and to obtain the relevant registration) and to maintain each registration of Intellectual Property material to its business, including the payment of required fees and taxes, the filing of responses to office actions issued by the United States Patent and Trademark Office and the United States Copyright Office, the filing of applications for renewal or extension, the filing of affidavits of use and affidavits of incontestability, the filing of divisional, continuation, continuation-in-part, reissue, and renewal applications or extensions, the payment of maintenance fees, and the participation in interference, reexamination, opposition, cancellation, infringement and misappropriation proceedings.

     (i) Such Grantor (either itself or through licensees) shall not, without the prior written consent of the Collateral Agent, discontinue use of or otherwise abandon any of its Intellectual Property, or abandon any application or any right to file an application for letters patent, trademark, or copyright, unless such Grantor shall have previously determined that such use or the pursuit or maintenance of such Intellectual Property is no longer desirable in the conduct of such Grantor’s business and that the loss thereof could not reasonably be expected to have a Material Adverse Effect and, in which case, such Grantor shall give prompt notice of any such abandonment to the Collateral Agent in accordance herewith.

     (j) In the event that any Intellectual Property material to its business is infringed, misappropriated or diluted by a third party, such Grantor shall (i) take such actions as such Grantor shall reasonably deem appropriate under the circumstances to protect such Intellectual Property and (ii) if such Intellectual Property is of material economic value, promptly notify the Collateral Agent after it learns thereof and sue for infringement, misappropriation or dilution, to seek injunctive relief where appropriate and to recover any and all damages for such infringement, misappropriation or dilution.

     (k) Such Grantor agrees that, should it obtain an ownership interest in any item of intellectual property which is not, as of the Closing Date, a part of the Intellectual Property Collateral (the “After-Acquired Intellectual Property”), (i) the provisions of Section 3 shall

E-31

Exhibit E

automatically apply thereto, (ii) any such After-Acquired Intellectual Property, and in the case of trademarks, the goodwill of the business connected therewith or symbolized thereby, shall automatically become part of the Intellectual Property Collateral, (iii) it shall give prompt (and, in any event within five Business Days after the last day of the fiscal quarter in which such Grantor acquires such ownership interest) written notice thereof to the Collateral Agent in accordance herewith, and (iv) it shall provide the Collateral Agent promptly (and, in any event within five Business Days after the last day of the fiscal quarter in which such Grantor acquires such ownership interest) with an amended Schedule 4.9(a) and take the actions specified in 5.9(m).

     (l) Such Grantor agrees to execute an Intellectual Property Security Agreement with respect to its Intellectual Property in substantially the form of Exhibit B-1 in order to record the security interest granted herein to the Collateral Agent for the ratable benefit of the Secured Parties with the United States Patent and Trademark Office, the United States Copyright Office, and any other applicable Governmental Authority.

     (m) Such Grantor agrees to execute an After-Acquired Intellectual Property Security Agreement with respect to its After-Acquired Intellectual Property in substantially the form of Exhibit B-2 in order to record the security interest granted herein to the Collateral Agent for the ratable benefit of the Secured Parties with the United States Patent and Trademark Office, the United States Copyright Office and any other applicable Governmental Authority.

     (n) Such Grantor shall take all steps reasonably necessary to protect the secrecy of all Trade Secrets material to its business, including entering into confidentiality agreements with employees and labeling and restricting access to secret information and documents.

     5.11 Contracts. (a) Such Grantor shall perform and comply in all material respects with all its obligations under the Contracts.

     (b) Such Grantor shall not amend, modify, terminate, waive or fail to enforce any provision of any Contract in any manner which could reasonably be expected to materially adversely affect the value of the Pledged Collateral or otherwise have a Material Adverse Effect.

     (c) Such Grantor shall exercise promptly and diligently each and every material right which it may have under each Material Contract (other than any right of termination).

     (d) Such Grantor shall deliver to the Collateral Agent a copy of each material demand, notice or document received by it relating in any way to any Material Contract and shall also deliver to the Collateral Agent a copy of all new Material Contracts entered into after the date hereof.

     (e) With respect to any Non-Assignable Contract that is a Material Contract as of the date hereof, each Grantor shall, within ten days of the date hereof, request in writing the consent of the counterparty or counterparties to such Non-Assignable Contract pursuant to the terms of such Non-Assignable Contract or applicable law to the assignment or granting of a security interest in such Non-Assignable Contract to the Collateral Agent for the ratable benefit of the Secured Parties and use its commercially reasonable efforts to obtain such consent as soon as practicable thereafter. No Grantor shall after the Closing Date enter into any Non-Assignable

E-32

Exhibit E

Contract that is a Material Contract unless, within 30 days, counterparties to such Non-Assignable Contract consent in writing pursuant to the terms of such Non-Assignable Contract to the assignment and granting of a security interest in such Non-Assignable Contract to the Collateral Agent for the ratable benefit of the Secured Parties.

     (f) Such Grantor shall not permit to become effective in any document creating, governing or providing for any permit, lease, license or Material Contract, a provision that would prohibit the creation or perfection of, or exercise of remedies in connection with, a Lien on such permit, lease, license or Material Contract in favor of the of the Collateral Agent for the ratable benefit of the Secured Parties unless such Grantor believes, in its reasonable judgment, that such prohibition is usual and customary in transactions of such type.

     5.12 Commercial Tort Claims. Such Grantor shall advise the Collateral Agent promptly of any Commercial Tort Claim held by such Grantor individually or in the aggregate in excess of $100,000 and shall promptly execute a supplement to this Agreement in form and substance reasonably satisfactory to the Collateral Agent to grant a security interest in such Commercial Tort Claim to the Collateral Agent for the ratable benefit of the Secured Parties.

SECTION 6. REMEDIAL PROVISIONS

     6.1 Certain Matters Relating to Receivables. (a) The Collateral Agent shall have the right (but shall in no way be obligated) to make test verifications of the Receivables that are included in the Pledged Collateral in any manner and through any medium that it reasonably considers advisable, and each Grantor shall furnish all such assistance and information as the Collateral Agent may reasonably require in connection with such test verifications. At any time and from time to time, upon the Collateral Agent’s request and at the expense of the relevant Grantor, such Grantor shall cause independent public accountants or others satisfactory to the Collateral Agent to furnish to the Collateral Agent reports showing reconciliations, aging and test verifications of, and trial balances for, the Receivables.

     (b) The Collateral Agent hereby authorizes each Grantor to collect such Grantor’s Receivables, subject to the Collateral Agent’s direction and control, and each Grantor hereby agrees to continue to collect all amounts due or to become due to such Grantor under the Receivables and any Supporting Obligation and diligently exercise each material right it may have under any Receivable and any Supporting Obligation, in each case, at its own expense; provided, however, that the Collateral Agent may curtail or terminate said authority at any time after the occurrence and during the continuance of an Event of Default. If required by the Collateral Agent at any time after the occurrence and during the continuance of an Event of Default, any payments of Receivables, when collected by any Grantor, (i) shall be forthwith (and, in any event, within two Business Days) deposited by such Grantor in the exact form received, duly endorsed by such Grantor to the Collateral Agent if required, in a Collateral Account maintained under the sole dominion and control of the Collateral Agent, subject to withdrawal by the Collateral Agent for the account of the Secured Parties only as provided in Section 6.5, and (ii) until so turned over, shall be held by such Grantor in trust for the Secured Parties, segregated from other funds of such Grantor. Each such deposit of Proceeds of Receivables shall be accompanied by a report identifying in reasonable detail the nature and source of the payments included in the deposit.

E-33

Exhibit E

     (c) At the Collateral Agent’s request, each Grantor shall deliver to the Collateral Agent all original and other documents evidencing, and relating to, the agreements and transactions which gave rise to the Receivables that are included in the Pledged Collateral, including all original orders, invoices and shipping receipts.

     6.2 Communications with Obligors; Grantors Remain Liable.

     (a) The Collateral Agent in its own name or in the name of others may at any time after the occurrence and during the continuance of an Event of Default communicate with obligors under the Receivables and parties to the Contracts to verify with them to the Collateral Agent’s satisfaction the existence, amount and terms of any Receivables or Contracts.

     (b) After the occurrence and during the continuance of an Event of Default, the Collateral Agent may at any time notify, or require any Grantor to so notify, the Account Debtor or counterparty on any Receivable or Contract of the security interest of the Collateral Agent therein. In addition, after the occurrence and during the continuance of an Event of Default, the Collateral Agent may upon written notice to the applicable Grantor, notify, or require any Grantor to notify, the Account Debtor or counterparty to make all payments under the Receivables and/or Contracts directly to the Collateral Agent;

     (c) Anything herein to the contrary notwithstanding, each Grantor shall remain liable under each of the Receivables and Contracts to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms of any agreement giving rise thereto. No Secured Party shall have any obligation or liability under any Receivable (or any agreement giving rise thereto) or Contract by reason of or arising out of this Agreement or the receipt by any Secured Party of any payment relating thereto, nor shall any Secured Party be obligated in any manner to perform any of the obligations of any Grantor under or pursuant to any Receivable (or any agreement giving rise thereto) or Contract, to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party thereunder, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times.

     6.3 Pledged Securities. (a) Unless an Event of Default shall have occurred and be continuing and the Collateral Agent shall have given notice to the relevant Grantor of the Collateral Agent’s intent to exercise its corresponding rights pursuant to Section 6.3(b), each Grantor shall be permitted to receive all cash dividends paid in respect of the Pledged Equity Interests and all payments made in respect of the Pledged Notes, in each case paid in the normal course of business of the relevant Issuer and consistent with past practice, to the extent permitted in the Credit Agreement, and to exercise all voting and corporate rights with respect to the Pledged Securities; provided, however, that no vote shall be cast or corporate or other ownership right exercised or other action taken which, in the Collateral Agent’s reasonable judgment, would impair the Pledged Collateral or which would be inconsistent with or result in any violation of any provision of the Credit Agreement, this Agreement or any other Loan Document.

E-34

Exhibit E

     (b) If an Event of Default shall occur and be continuing: (i) all rights of each Grantor to exercise or refrain from exercising the voting and other consensual rights which it would otherwise be entitled to exercise pursuant hereto shall cease and all such rights shall thereupon become vested in the Collateral Agent who shall thereupon have the sole right, but shall be under no obligation, to exercise or refrain from exercising such voting and other consensual rights and (ii) the Collateral Agent shall have the right, without notice to any Grantor, to transfer all or any portion of the Investment Property to its name or the name of its nominee or agent; provided, however, that the Collateral Agent will not have the right to vote, to give consents, ratifications or waivers or to take any other action with respect to the Equity Interests of any Applicable Subsidiary to the extent that such action would require prior regulatory approval under the applicable Requirements of Law, unless such approval shall have been granted, and, provided, further, that the right of the Collateral Agent to sell or otherwise dispose of the Equity Interests of any Applicable Subsidiary shall be subject to the Collateral Agent or the relevant Grantor obtaining, to the extent necessary under applicable Requirements of Law, the prior approval of such sale or other disposition by the Governmental Authority having jurisdiction with respect to such Applicable Subsidiary. In addition, the Collateral Agent shall have the right at any time, without notice to any Grantor, to exchange any certificates or instruments representing any Investment Property for certificates or instruments of smaller or larger denominations. In order to permit the Collateral Agent to exercise the voting and other consensual rights which it may be entitled to exercise pursuant hereto and to receive all dividends and other distributions which it may be entitled to receive hereunder each Grantor shall promptly execute and deliver (or cause to be executed and delivered) to the Collateral Agent all proxies, dividend payment orders and other instruments as the Collateral Agent may from time to time reasonably request and each Grantor acknowledges that the Collateral Agent may utilize the power of attorney set forth herein.

     (c) Each Grantor hereby authorizes and instructs each Issuer of any Pledged Securities pledged by such Grantor hereunder to (i) comply with any instruction received by it from the Collateral Agent in writing that (x) states that an Event of Default has occurred and is continuing and (y) is otherwise in accordance with the terms of this Agreement, without any other or further instructions from such Grantor, and each Grantor agrees that each Issuer shall be fully protected in so complying, and (ii) upon any such instruction following the occurrence and during the continuance of an Event of Default, pay any dividends or other payments with respect to the Investment Property, including Pledged Securities, directly to the Collateral Agent.

     6.4 Proceeds to be Turned Over To Collateral Agent. In addition to the rights of the Secured Parties specified in Section 6.1 with respect to payments of Receivables, if an Event of Default shall occur and be continuing, all Proceeds received by any Grantor consisting of cash, cash equivalents, checks and other near-cash items shall be held by such Grantor in trust for the Secured Parties, segregated from other funds of such Grantor, and shall, forthwith upon receipt by such Grantor, be turned over to the Collateral Agent in the exact form received by such Grantor (duly endorsed by such Grantor to the Collateral Agent, if required). All Proceeds received by the Collateral Agent hereunder shall be held by the Collateral Agent in a Collateral Account maintained under its sole dominion and control. All Proceeds while held by the Collateral Agent in a Collateral Account (or by such Grantor in trust for the Secured Parties) shall continue to be held as collateral security for all the Obligations and shall not constitute payment thereof until applied as provided in Section 6.5.

E-35

Exhibit E

          6.5 Application of Proceeds. At such intervals as may be agreed upon by the Borrower and the Collateral Agent, or, if an Event of Default shall have occurred and be continuing, at any time at the Collateral Agent’s election, the Collateral Agent may apply all or any part of the net Proceeds (after deducting fees and expenses as provided in Section 6.6) constituting Pledged Collateral realized through the exercise by the Collateral Agent of its remedies hereunder, whether or not held in any Collateral Account, and any proceeds of the guarantee set forth in Section 2, in payment of the Obligations in the following order:

          First, to the Collateral Agent, to pay incurred and unpaid fees and expenses of the Secured Parties under the Loan Documents;

          Second, to the Collateral Agent, for application by it towards payment of amounts then due and owing and remaining unpaid in respect of the Obligations, pro rata among the Secured Parties according to the amounts of the Obligations then due and owing and remaining unpaid to the Secured Parties;

          Third, to the Collateral Agent, for application by it towards prepayment of the Obligations, pro rata among the Lenders according to the amounts of the Obligations then held by the Lenders; and

          Fourth, any balance of such Proceeds remaining after the Obligations shall have been paid in full, no letters of credit issued under the Credit Agreement shall be outstanding and the Commitments under the Credit Agreement shall have terminated or expired shall be paid over to the Borrower or to whomsoever may be lawfully entitled to receive the same.

          6.6 Code and Other Remedies. (a) If an Event of Default shall occur and be continuing, the Collateral Agent, on behalf of the Secured Parties, may exercise, in addition to all other rights and remedies granted to them in this Agreement and in any other instrument or agreement securing, evidencing or relating to the Obligations, all rights and remedies of a secured party under the New York UCC (whether or not the New York UCC applies to the affected Pledged Collateral) or its rights under any other applicable law or in equity. Without limiting the generality of the foregoing, the Collateral Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon any Grantor or any other person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Pledged Collateral, or any part thereof, and/or may forthwith sell, lease, license, assign, give option or options to purchase, or otherwise dispose of and deliver the Pledged Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, broker’s board or office of any Secured Party or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. Each Secured Party shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Pledged Collateral so sold, free of any right or equity of redemption in any Grantor, which right or equity is hereby waived and released. Each purchaser at any such sale shall hold the property sold absolutely free from any

E-36

Exhibit E

claim or right on the part of any Grantor, and each Grantor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Each Grantor agrees that, to the extent notice of sale shall be required by law, at least ten days notice to such Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Collateral Agent shall not be obligated to make any sale of Pledged Collateral regardless of notice of sale having been given. The Collateral Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. The Collateral Agent may sell the Pledged Collateral without giving any warranties as to the Pledged Collateral. The Collateral Agent may specifically disclaim or modify any warranties of title or the like. This procedure will not be considered to adversely affect the commercial reasonableness of any sale of the Pledged Collateral. Each Grantor agrees that it would not be commercially unreasonable for the Collateral Agent to dispose of the Pledged Collateral or any portion thereof by using Internet sites that provide for the auction of assets of the types included in the Pledged Collateral or that have the reasonable capability of doing so, or that match buyers and sellers of assets. Each Grantor hereby waives any claims against the Collateral Agent arising by reason of the fact that the price at which any Pledged Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if the Collateral Agent accepts the first offer received and does not offer such Pledged Collateral to more than one offeree. Each Grantor further agrees, at the Collateral Agent’s request, to assemble the Pledged Collateral and make it available to the Collateral Agent at places which the Collateral Agent shall reasonably select, whether at such Grantor’s premises or elsewhere. The Collateral Agent shall have the right to enter onto the property where any Pledged Collateral is located and take possession thereof with or without judicial process.

     (b) The Collateral Agent shall apply the net proceeds of any action taken by it pursuant to this Section 6.6, after deducting all reasonable costs and expenses of every kind incurred in connection therewith or incidental to the care or safekeeping of any of the Pledged Collateral or in any way relating to the Pledged Collateral or the rights of the Secured Parties hereunder, including reasonable attorneys’ fees and disbursements, to the payment in whole or in part of the Obligations and only after such application and after the payment by the Collateral Agent of any other amount required by any provision of law, including Section 9-615(a) of the New York UCC, need the Collateral Agent account for the surplus, if any, to any Grantor. If the Collateral Agent sells any of the Pledged Collateral upon credit, the Grantor will be credited only with payments actually made by the purchaser and received by the Collateral Agent and applied to indebtedness of the purchaser. In the event the purchaser fails to pay for the Pledged Collateral, the Collateral Agent may resell the Pledged Collateral and the Grantor shall be credited with proceeds of the sale. To the extent permitted by applicable law, each Grantor waives all claims, damages and demands it may acquire against any Secured Party arising out of the exercise by them of any rights hereunder.

     (c) In the event of any disposition of any of the Intellectual Property, the goodwill of the business connected with and symbolized by any Trademarks subject to such Disposition shall be included, and the applicable Grantor shall supply the Collateral Agent or its designee with such Grantor’s know-how and expertise, and with documents and things

E-37

Exhibit E

embodying the same, relating to the manufacture, distribution, advertising and sale of products or the provision of services relating to any Intellectual Property subject to such disposition, and such Grantor’s customer lists and other records and documents relating to such Intellectual Property and to the manufacture, distribution, advertising and sale of such products and services.

     6.7 Registration Rights. (a) If the Collateral Agent shall determine to exercise its right to sell any or all of the Pledged Equity Interests or the Pledged Debt Securities pursuant to Section 6.6, and if in the opinion of the Collateral Agent it is necessary or advisable to have the Pledged Equity Interests or the Pledged Debt Securities, or that portion thereof to be sold, registered under the provisions of the Securities Act, the relevant Grantor shall cause the Issuer thereof to (i) execute and deliver, and cause the directors and officers of such Issuer to execute and deliver, all such instruments and documents, and do or cause to be done all such other acts as may be, in the opinion of the Collateral Agent, necessary or advisable to register the Pledged Equity Interests or the Pledged Debt Securities, or that portion thereof to be sold, under the provisions of the Securities Act, (ii) use commercially reasonable efforts to cause the registration statement relating thereto to become effective and to remain effective for a period of one year from the date of the first public offering of the Pledged Equity Interests or the Pledged Debt Securities, or that portion thereof to be sold, and (iii) make all amendments thereto and/or to the related prospectus which, in the opinion of the Collateral Agent, are reasonably necessary or advisable, all in conformity with the requirements of the Securities Act and the rules and regulations of the SEC applicable thereto. Each Grantor agrees to use commercially reasonable efforts to cause such Issuer to comply with the provisions of the securities or “Blue Sky” laws of any and all jurisdictions which the Collateral Agent shall designate and to make available to its security holders, as soon as practicable, an earnings statement (which need not be audited) which will satisfy the provisions of Section 11(a) of the Securities Act.

     (b) Each Grantor recognizes that the Collateral Agent may be unable to effect a public sale of any or all the Pledged Equity Interests or the Pledged Debt Securities, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws or otherwise, and may be compelled to resort to one or more private sales thereof to a restricted group of purchasers which will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. Each Grantor acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. The Collateral Agent shall be under no obligation to delay a sale of any of the Pledged Equity Interests or the Pledged Debt Securities for the period of time necessary to permit the Issuer thereof to register such securities for public sale under the Securities Act, or under applicable state securities laws, even if such Issuer would agree to do so.

     (c) Each Grantor agrees to use its best efforts to do or cause to be done all such other acts as may be necessary to make such sale or sales of all or any portion of the Pledged Equity Interests or the Pledged Debt Securities pursuant to this Section 6.7 valid and binding and in compliance with any and all other applicable Requirements of Law. Each Grantor further agrees that a breach of any of the covenants contained in this Section 6.7 will cause irreparable injury to the Secured Parties, that the Secured Parties have no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this Section 6.7

E-38

Exhibit E

shall be specifically enforceable against such Grantor, and such Grantor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no Event of Default has occurred and is continuing under the Credit Agreement or a defense of payment.

          6.8 Deficiency. Each Grantor shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Pledged Collateral are insufficient to pay its Obligations and the fees and disbursements of any attorneys employed by any Secured Party to collect such deficiency.

          6.9 Executory Process.

          (a) For purposes of executory process under applicable Louisiana law, each Grantor hereby acknowledges the Grantor’s Obligations, confesses judgment thereon and consents that judgment be rendered and signed, whether during the court’s term or during vacation, in favor of the Collateral Agent, for the ratable benefit of the Secured Parties, for the full amount of the Grantor’s Obligations, in principal, interest and attorneys’ fees, together with all charges and expenses whatsoever pursuant to this Agreement and any other related documents. Upon the occurrence of an Event of Default, and in addition to all of its rights, powers and remedies under this Agreement, the other related documents and applicable law, the Collateral Agent may, at its option, cause all or any part of the Collateral to be seized and sold under executory process, or under writ of fieri facias issued in execution of an ordinary judgment obtained upon the Grantor’s Obligations, without appraisement to the highest bidder, for cash or under such terms as the Collateral Agent deems acceptable. Each Grantor hereby waives all and every appraisement of the Collateral and waives and renounces the benefit of appraisement and the benefit of all laws relative to the appraisement of the Collateral seized and sold under executory or other legal process. Each Grantor agrees to waive and does hereby specifically waive:

               (i) the benefit of appraisement provided for in Articles 2332, 2336, 2723, and 2724, Louisiana Code of Civil Procedure, and all other laws conferring such benefits;

               (ii) the demand and three (3) days delay accorded by Articles 2639 and 2721, Louisiana Code of Civil Procedure;

               (iii) the notice of seizure required by Articles 2293 and 2721, Louisiana Code of Civil Procedure;

               (iv) the three (3) days delay provided by Articles 2331 and 2722, Louisiana Code of Civil Procedure;

               (v) the benefit of the other provisions of Articles 2331, 2722, and 2723, Louisiana Code of Civil Procedure;

               (vi) the benefit of the provisions of any other articles of the Louisiana Code of Civil Procedure not specifically mentioned above; and

E-39

Exhibit E

          (vii) all pleas of division and discussion with respect to the Grantor’s Obligations.

          (b) In the event the Collateral Agent elects, at its option, to enter suit via ordinaria on the Grantor’s Obligations, in addition to the foregoing confession of judgment and waivers, each Grantor hereby waives citation, other legal process and legal delays and hereby consents that judgment for the unpaid principal due on the Grantor’s Obligations, together with interest, reasonable attorneys’ fees, costs and other charges that may be due on the Grantor’s Obligations, be rendered and signed immediately.

          (c) Pursuant to the authority contained in Louisiana Revised Statutes 9:5136 through 9:5140.2, each Grantor and the Collateral Agent do hereby expressly designate the Collateral Agent or its designee to be keeper or receiver (“Keeper”) for the benefit of the Secured Parties or any assignee of the Secured Parties, such designation to take effect immediately upon any seizure of any of the Collateral under writ of executory process or under writ of sequestration or fieri facias as an incident to an action brought by the Collateral Agent. The fees of the Keeper are hereby fixed at five percent (5%) of the amount due or sued for or claimed or sought to be protected, preserved or enforced in the proceeding for the recognition of the security interest created hereby, and the payment of such fees shall be secured by the security interest in the Collateral granted in this Agreement.

SECTION 7. THE COLLATERAL AGENT

          7.1 Collateral Agent’s Appointment as Attorney-in-Fact, etc. (a) Each Grantor hereby irrevocably constitutes and appoints the Collateral Agent and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of such Grantor and in the name of such Grantor or in its own name, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Agreement, and, without limiting the generality of the foregoing, each Grantor hereby gives the Collateral Agent the power and right, on behalf of such Grantor, without notice to or assent by such Grantor, to do any or all of the following after the occurrence and during the continuance of an Event of Default:

          (i) in the name of such Grantor or its own name, or otherwise, take possession of and endorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any Receivable or Contract or with respect to any other Pledged Collateral and file any claim or take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Collateral Agent for the purpose of collecting any and all such moneys due under any Receivable or Contract or with respect to any other Pledged Collateral whenever payable;

          (ii) in the case of any Intellectual Property, execute and deliver, and have recorded, any and all agreements, instruments, documents and papers as the Collateral Agent may request to evidence the Secured Parties’ security interest in such

E-40

Exhibit E

Intellectual Property and the goodwill and general intangibles of such Grantor relating thereto or represented thereby;

               (iii) pay or discharge taxes and Liens levied or placed on or threatened against the Pledged Collateral, effect any repairs or any insurance called for by the terms of this Agreement and pay all or any part of the premiums therefor and the costs thereof;

               (iv) execute, in connection with any sale provided for in Section 6.7 or 6.8, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Pledged Collateral; and

               (v) (1) direct any party liable for any payment under any of the Pledged Collateral to make payment of any and all moneys due or to become due thereunder directly to the Collateral Agent or as the Collateral Agent shall direct; (2) ask or demand for, collect, and receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Pledged Collateral; (3) sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Pledged Collateral; (4) commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Pledged Collateral or any portion thereof and to enforce any other right in respect of any Pledged Collateral; (5) defend any suit, action or proceeding brought against such Grantor with respect to any Pledged Collateral; (6) settle, compromise or adjust any such suit, action or proceeding and, in connection therewith, give such discharges or releases as the Collateral Agent may deem appropriate; (7) assign any Copyright, Patent or Trademark (along with the goodwill of the business to which any such Copyright, Patent or Trademark pertains), throughout the world for such term or terms, on such conditions, and in such manner, as the Collateral Agent shall in its sole discretion determine; and (8) generally, sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Pledged Collateral as fully and completely as though the Collateral Agent were the absolute owner thereof for all purposes, and do, at the Collateral Agent’s option and such Grantor’s expense, at any time, or from time to time, all acts and things which the Collateral Agent deems necessary to protect, preserve or realize upon the Pledged Collateral and the Secured Parties’ security interests therein and to effect the intent of this Agreement, all as fully and effectively as such Grantor might do.

          Anything in this Section 7.1(a) to the contrary notwithstanding, the Collateral Agent agrees that, except as provided in Section 7.1(b), it will not exercise any rights under the power of attorney provided for in this Section 7.1(a) unless an Event of Default shall have occurred and be continuing.

          (b) If any Grantor fails to perform or comply with any of its agreements contained herein, the Collateral Agent, at its option, but without any obligation so to do, may perform or comply, or otherwise cause performance or compliance, with such agreement; provided, however, that unless and Event of Default has occurred and is continuing or time is of

E-41

Exhibit E

the essence, the Collateral Agent shall not exercise this power without first making demand on the Grantor and the Grantor failing to immediately comply therewith.

          (c) The expenses of the Collateral Agent incurred in connection with actions undertaken as provided in this Section 7.1, together with interest thereon at a rate per annum equal to the rate per annum at which interest would then be payable on past due Revolving Loans that are ABR Loans under the Credit Agreement, from the date of payment by the Collateral Agent to the date reimbursed by the relevant Grantor, shall be payable by such Grantor to the Collateral Agent on demand.

          (d) Each Grantor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. All powers, authorizations and agencies contained in this Agreement are coupled with an interest and are irrevocable until this Agreement is terminated and the security interests created hereby are released.

          7.2 Duty of Collateral Agent. The Collateral Agent’s sole duty with respect to the custody, safekeeping and physical preservation of the Pledged Collateral in its possession, under Section 9-207 of the New York UCC or otherwise, shall be to deal with it in the same manner as the Collateral Agent deals with similar property for its own account. Neither the Collateral Agent, nor any other Secured Party nor any of their respective officers, directors, partners, employees, agents, attorneys and other advisors, attorneys-in-fact or affiliates shall be liable for failure to demand, collect or realize upon any of the Pledged Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Pledged Collateral upon the request of any Grantor or any other person or to take any other action whatsoever with regard to the Pledged Collateral or any part thereof. The powers conferred on the Secured Parties hereunder are solely to protect the Secured Parties’ interests in the Pledged Collateral and shall not impose any duty upon any Secured Party to exercise any such powers. The Secured Parties shall be accountable only for amounts that they actually receive as a result of the exercise of such powers, and neither they nor any of their officers, directors, partners, employees, agents, attorneys and other advisors, attorneys-in-fact or affiliates shall be responsible to any Grantor for any act or failure to act hereunder, except to the extent that any such act or failure to act is found by a final and nonappealable decision of a court of competent jurisdiction to have resulted primarily from their own gross negligence or willful misconduct in breach of a duty owed to such Grantor.

          7.3 Execution of Financing Statements. Each Grantor acknowledges that pursuant to Section 9-509(b) of the New York UCC and any other applicable law, each Grantor authorizes the Collateral Agent to file or record financing or continuation statements, and amendments thereto, and other filing or recording documents or instruments with respect to the Pledged Collateral, without the signature of such Grantor, in such form and in such offices as the Collateral Agent reasonably determines appropriate to perfect or maintain the perfection of the security interests of the Collateral Agent under this Agreement. Each Grantor agrees that such financing statements may describe the collateral in the same manner as described in the Security documents or as “all assets” or “all personal property,” whether now owned or hereafter existing or acquired or such other description as the Collateral Agent, in its sole judgment, determines is necessary or advisable. A photographic or other reproduction of this Agreement shall be

E-42

Exhibit E

sufficient as a financing statement or other filing or recording document or instrument for filing or recording in any jurisdiction.

     7.4 Authority of Collateral Agent. Each Grantor acknowledges that the rights and responsibilities of the Collateral Agent under this Agreement with respect to any action taken by the Collateral Agent or the exercise or non-exercise by the Collateral Agent of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall, as between the Collateral Agent and the other Secured Parties, be governed by the Credit Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Collateral Agent and the Grantors, the Collateral Agent shall be conclusively presumed to be acting as agent for the Secured Parties with full and valid authority so to act or refrain from acting, and no Grantor shall be under any obligation, or entitlement, to make any inquiry respecting such authority.

     7.5 Appointment of Co-Collateral Agents. At any time or from time to time, in order to comply with any applicable requirement of law, the Collateral Agent may appoint another bank or trust company or one of more other persons, either to act as co-agent or agents on behalf of the Secured Parties with such power and authority as may be necessary for the effectual operation of the provisions hereof and which may be specified in the instrument of appointment (which may, in the discretion of the Collateral Agent, include provisions for indemnification and similar protections of such co-agent or separate agent).

SECTION 8. MISCELLANEOUS

     8.1 Amendments in Writing. None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except by a written instrument executed by each affected Grantor and the Collateral Agent, subject to any consents required under Section 9.08 of the Credit Agreement; provided that any provision of this Agreement imposing obligations on any Grantor may be waived by the Collateral Agent in a written instrument executed by the Collateral Agent.

     8.2 Notices. All notices, requests and demands to or upon the Collateral Agent or any Grantor hereunder shall be effected in the manner provided for in Section 9.01 of the Credit Agreement; provided that any such notice, request or demand to or upon any Guarantor shall be addressed to such Guarantor at its notice address set forth on Schedule 8.2.

     8.3 No Waiver by Course of Conduct; Cumulative Remedies. No Secured Party shall by any act (except by a written instrument pursuant to Section 8.1), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default. No failure to exercise, nor any delay in exercising, on the part of any Secured Party, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by any Secured Party of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which such Secured Party would otherwise have on any future occasion. The rights and remedies herein provided are cumulative,

E-43

Exhibit E

may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law.

     8.4 Enforcement Expenses; Indemnification. (a) Each Grantor agrees to pay or reimburse each Secured Party for all its costs and expenses incurred in collecting against such Grantor under the guarantee contained in Section 2 or otherwise enforcing or preserving any rights under this Agreement and the other Loan Documents to which such Grantor is a party, including the fees and disbursements of counsel to each Secured Party and of counsel to the Collateral Agent.

     (b) Each Grantor agrees to pay, and to hold the Secured Parties harmless from, any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to, or resulting from any delay in paying, any and all stamp, excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Pledged Collateral or in connection with any of the transactions contemplated by this Agreement.

     (c) Each Grantor agrees to pay, and to hold the Secured Parties harmless from, any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement to the extent the Borrower would be required to do so pursuant to Section 9.05 of the Credit Agreement.

     (d) The agreements in this Section shall survive repayment of the Obligations and all other amounts payable under the Credit Agreement and the other Loan Documents.

     8.5 Successors and Assigns. This Agreement shall be binding upon the successors and assigns of each Grantor and shall inure to the benefit of the Secured Parties and their successors and assigns; provided that no Grantor may assign, transfer or delegate any of its rights or obligations under this Agreement without the prior written consent of the Collateral Agent, and any attempted assignment without such consent shall be null and void.

     8.6 Set-Off. Each Grantor hereby irrevocably authorizes each Secured Party at any time and from time to time, while an Event of Default shall have occurred and be continuing, without notice to such Grantor or any other Grantor, any such notice being expressly waived by each Grantor, to set-off and appropriate and apply any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by such Secured Party to or for the credit or the account of such Grantor, or any part thereof in such amounts as such Secured Party may elect, against and on account of the obligations and liabilities of such Grantor to such Secured Party hereunder and claims of every nature and description of such Secured Party against such Grantor, in any currency, whether arising hereunder, under the Credit Agreement, any other Loan Document or otherwise, as such Secured Party may elect, whether or not any Secured Party has made any demand for payment and although such obligations, liabilities and claims may be contingent or unmatured. Each Secured Party shall notify such Grantor promptly of any such set-off and the application made by such Secured Party of the proceeds thereof,

E-44

Exhibit E

provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Secured Party under this Section are in addition to other rights and remedies (including other rights of set-off) which such Secured Party may have.

     8.7 Counterparts. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts (including by facsimile), and all of said counterparts taken together shall be deemed to constitute one and the same instrument.

     8.8 Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

     8.9 Section Headings. The Section headings used in this Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof.

     8.10 Integration. This Agreement and the other Loan Documents represent the agreement of the Grantors, the Collateral Agent and the other Secured Parties with respect to the subject matter hereof and thereof, and there are no promises, undertakings, representations or warranties by any Secured Party relative to subject matter hereof and thereof not expressly set forth or referred to herein or in the other Loan Documents.

     8.11 APPLICABLE LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.

     8.12 Submission to Jurisdiction; Waivers. Each Grantor hereby irrevocably and unconditionally:

     (a) submits for itself and its property in any legal action or proceeding relating to this Agreement and the other Loan Documents to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the Courts of the State of New York, the courts of the United States of America for the Southern District of New York, and appellate courts from any thereof;

     (b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same;

     (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to such Grantor at its address referred to in Section 8.2 or at such other address of which the Collateral Agent shall have been notified pursuant thereto;

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Exhibit E

     (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and

     (e) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this Section any special, exemplary, punitive or consequential damages.

     8.13 Acknowledgments. Each Grantor hereby acknowledges that:

     (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents to which it is a party;

     (b) no Secured Party has any fiduciary relationship with or duty to any Grantor arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between the Grantors, on the one hand, and the Secured Parties, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and

     (c) no joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among the Secured Parties or among the Grantors and the Secured Parties.

     8.14 Additional Grantors. Each Subsidiary of the Borrower that is required to become a party to this Agreement pursuant to Section 5.09 of the Credit Agreement shall become a Grantor for all purposes of this Agreement upon execution and delivery by such Subsidiary of an Assumption Agreement in the form of Annex 1 hereto.

     8.15 Releases. (a) At such time as the Loans and the other Obligations (other than Obligations in respect of any Specified Hedge Agreement) shall have been paid in full, the commitments under the Credit Agreement have been terminated or expired and no letter of credit issued under the Credit Agreement shall be outstanding, the Pledged Collateral shall be released from the Liens created hereby, and this Agreement and all obligations (other than those expressly stated to survive such termination) of the Collateral Agent and each Grantor hereunder shall terminate, all without delivery of any instrument or performance of any act by any party, and all rights to the Pledged Collateral shall revert to the Grantors. At the request and sole expense of any Grantor following any such termination, the Collateral Agent shall deliver to such Grantor any Pledged Collateral held by the Collateral Agent hereunder, and execute and deliver to such Grantor such documents as such Grantor shall reasonably request to evidence such termination.

     (b) If any of the Pledged Collateral shall be sold or otherwise disposed of by any Grantor in a transaction permitted by the Credit Agreement, then the Collateral Agent, at the request and sole expense of such Grantor, shall execute and deliver to such Grantor all releases or other documents reasonably necessary or desirable for the release of the Liens created hereby on such Pledged Collateral. At the request and sole expense of the Borrower, a Guarantor shall be released from its obligations hereunder in the event that all the Equity Interests in such Guarantor shall be sold or otherwise disposed of in a transaction permitted by the Credit Agreement; provided that the Borrower shall have delivered to the Collateral Agent, at least ten Business Days prior to the date of the proposed release, a written request for such release identifying the relevant Guarantor and the terms of the relevant sale or other disposition in

E-46

Exhibit E

reasonable detail, including the price thereof and any expenses incurred in connection therewith, together with a certification by the Borrower stating that such transaction is in compliance with the Credit Agreement and the other Loan Documents.

     (b) Each Grantor acknowledges that it is not authorized to file any financing statement or amendment or termination statement with respect to any financing statement originally filed in connection herewith without the prior written consent of the Collateral Agent, subject to such Grantor’s rights under Section 9-509(d)(2) of the New York UCC.

     8.16 WAIVER OF JURY TRIAL. EACH GRANTOR AND THE COLLATERAL AGENT HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN.

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Exhibit E

     IN WITNESS WHEREOF, each of the undersigned has caused this Guarantee and Collateral Agreement to be duly executed and delivered as of the date first above written.

[INSERT GRANTORS]

By:                                        

Name:

Title:

E-48

Exhibit E

CREDIT SUISSE, CAYMAN ISLANDS BRANCH,

as Administrative Agent and Collateral Agent

By:                                                            
Name:
Title:

By:                                                            
Name:
Title:

E-49

Exhibit F

[INSERT LENDER NAME]

LENDER ADDENDUM

     Reference is made to the Credit Agreement dated as of January 31, 2007 the “Credit Agreement”), among Affirmative Insurance Holdings, Inc., the Borrower, the Lenders from time to time party thereto, Credit Suisse, Cayman Islands Branch, as administrative agent (in such capacity, the “Administrative Agent”) and as collateral agent (in such capacity, the “Collateral Agent”), and the other parties thereto. Terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement.

     Upon execution and delivery of this Lender Addendum by the parties hereto as provided in Section 9.17 of the Credit Agreement, the undersigned hereby becomes a Lender thereunder having the Commitments set forth in Schedule 1 hereto, effective as of the Closing Date.

     THIS LENDER ADDENDUM SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.

     This Lender Addendum may be executed by one or more of the parties hereto on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed signature page hereof by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof.

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F-1

     IN WITNESS WHEREOF, the parties hereto have caused this Lender Addendum to be duly executed and delivered by their proper and duly authorized officers as of this ǵ Ƿ day of ǵ Ƿ, 200ǹǹǹ.

                                                            
Name of Lender

By:
   Name:
   Title:

F-2

Accepted and agreed:

AFFIRMATIVE INSURANCE HOLDINGS, INC.,

By:                                        
      Name:
      Title:

CREDIT SUISSE, CAYMAN ISLANDS BRANCH
as Administrative Agent,

By:                                        
      Name:
      Title:

F-3

Schedule 1 to
Lender Addendum

COMMITMENTS AND NOTICE ADDRESS

1.	Name of Lender: Notice Address:
	Attention: Telephone: Facsimile:
2.	Revolving Credit Commitment:

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EXHIBIT G — FORM OF MARTGAGE

PREPARED BY, AND WHEN
RECORDED RETURN TO:

Latham & Watkins LLP
633 W. Fifth Street, Suite 4000
Los Angeles, California 90071
Attn: Kim N. A. Boras, Esq.

(above for recorder’s use only)

Mortgage

EXHIBIT G — FORM OF MARTGAGE

FEE AND LEASEHOLD MORTGAGE,	*	UNITED STATES OF AMERICA
SECURITY AGREEMENT, ASSIGNMENT OF RENTS AND	*
LEASES AND FIXTURE FILING (this “Mortgage”)	*	STATE OF TEXAS
	*
	*
BY	*	PARISH/COUNTY OF DALLAS
	*
	*
USAGENGIES, L.L.C.	* *
	*
IN FAVOR OF	*
	*
	*
CREDIT SUISSE, CAYMAN ISLANDS BRANCH	*	COUNTY
	*
	*
* * * * * * * * * * * * * * * * * * * * * *

     BE IT KNOWN, that on the date set forth below, before me the undersigned Notary Public, duly commissioned and qualified, and in the presence of the undersigned competent witnesses, personally came and appeared:

     USAGENCIES, L.L.C., a Louisiana limited liability company (last four digits of Taxpayer Identification Number 2445 and Organizational No. 35192344K), whose address is 8550 United Plaza Boulevard, Suite 805, Baton Rouge, Louisiana 70809, represented herein by Mark E. Pape, its Executive Vice President, duly authorized by written consent of the holders of a majority of the Units of said limited liability company certified by a manager of the limited liability company which certified unanimous written consent is attached hereto as Exhibit A (hereinafter referred to as “Mortgagor”)

who declared as follows:

     This Mortgage is made and entered into as of January 31, 2007, by Mortgagor, in favor of CREDIT SUISSE, CAYMAN ISLANDS BRANCH whose address is Eleven Madison Avenue, New York, NY 10010, as the Collateral Agent (“Mortgagee”).

RECITALS

     A. Mortgagor is a subsidiary of Affirmative Insurance Holdings, Inc., a Delaware corporation (“Borrower”). Borrower is a party to that certain Credit Agreement, dated as of the date hereof (as may be amended, supplemented, extended, restated or otherwise modified from time to time, the “Credit Agreement”), among Borrower, Mortgagee as the Administrative Agent and Collateral Agent, each Lender from time to time a party thereto (collectively, the “Lenders”), and the other parties thereto. Unless otherwise defined, capitalized terms are used in this Mortgage as they are defined in the Credit Agreement.

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     B. Pursuant to the terms of the Credit Agreement, the Lenders have made loans available to Borrower in the aggregate principal amount of $220,000,000.

     C. Mortgagor is the 100% fee simple owner of Parcels A through E and G of certain real property more particularly described on Exhibit B attached hereto (all of the real property described on Exhibit B being hereinafter referred to as the “Property”). Pursuant to that certain Lease of Air Space dated May 28, 1986 from the City of Baton Rouge and the Parish of East Baton Rouge to Goudchaux/Maison Blanche, Inc., which was recorded as Original 858, Bundle 9837 of the records of the East Baton Rouge Parish Clerk of Court (the “Clerk’s Records”), as assigned to Renaissance Park, LLC pursuant to a certain Assignment and Assumption of Air Space Leases dated September 20, 2004 and recorded as Original 797, Bundle 11655 of the Clerk’s Records, and as further assigned to Mortgagor pursuant to a certain Assignment and Assumption of City/Parish Air Space Lease dated November 10, 2005 and recorded as Original 440, Bundle 11784 of the Clerk’s Records (as it has heretofore been assigned and may heretofore have been or hereafter be amended, supplemented, extended, restated or otherwise modified from time to time, the “Subject Lease”), Mortgagor holds leasehold title in and to Parcel F of the Property (the “Leased Property”).

     D. The Credit Agreement requires that the obligations of Borrower under the Credit Agreement and the other Loan Documents be secured by liens and security interests covering, among other things, Mortgagor’s interest in the Property and the Subject Lease. In connection therewith, Mortgagor is executing and delivering this Mortgage in accordance with the Credit Agreement.

AGREEMENT

     NOW, THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Mortgagor hereby agrees as follows:

     All of the following property constitutes and is collectively called herein the “Collateral”:

     All of MORTGAGOR’S RIGHT, TITLE AND INTEREST in the Property, including the leasehold estate in the Leased Property created by the Subject Lease, whether now owned or hereafter acquired;

     TOGETHER WITH any greater or additional estate in the Leased Property as hereafter may be acquired by Mortgagor;

     TOGETHER WITH all right, title and interest of Mortgagor in and to the following, whether now owned or hereafter acquired: (a) all improvements (including, without limitation, all infrastructure improvements and public improvements) now or hereafter attached to or placed, erected, constructed or developed on the Property or otherwise affixed thereto in such manner that such items are not deemed to be personal property under the laws of the State of Louisiana (collectively, the “Improvements”); (b) any and all fixtures, furnishings, equipment, machinery, furniture, and other items of tangible personal property now or hereafter located on the Property or in the Improvements or used in connection with the development, construction,

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use, occupancy, operation and maintenance of all or any part of the Property or the Improvements, including construction equipment, machinery, signs, artwork, furnishings, specialized fixtures, furnishings and equipment relating to Mortgagor’s ownership, operation and/or development of the Property, and all renewals of or replacements or substitutions for any of the foregoing, whether or not the same are or shall be attached to the Property or Improvements (the “FF&E” and together with the Property, and Improvements, the “Project”); (c) all water and water rights, timber, crops, and mineral interests pertaining to the Property; (d) all building materials and equipment now or hereafter delivered to and intended to be installed in or on the Property or the Improvements; and all plans and specifications for the Improvements; (e) any contracts relating to the Property, the Improvements or the FF&E (including all construction related agreements, license agreements, service agreements, maintenance agreements, management agreements and other agreements relating to the development of the Property); (f) all deposits, bank accounts, financial assets, funds, instruments, investment property, notes or chattel paper arising from or by virtue of any transactions related to the Property, the Improvements or the FF&E; (g) to the extent assignable, all community facilities districts or any similar public financing vehicles which related to the Property or the Improvements (or future Improvements) and any reimbursement rights of Mortgagor relating thereto; (h) to the extent assignable, any documents, contract rights, accounts, commitments, construction contracts, architectural agreements, and general intangibles (including trademarks, trade names and symbols) arising from or by virtue of any transactions related to the Property, the Improvements or FF&E; (i) to the extent assignable, all permits, approvals (including, without limitation, approved preliminary and final subdivision plats), licenses, franchises, certificates and all other rights, privileges and entitlements (“Permits”) obtained now or in the future in connection with the Property, the Improvements and the FF&E; (j) all proceeds arising from or by virtue of the sale, lease or other disposition of the Property, the Improvements or the FF&E; (k) all proceeds (including premium refunds) of each policy of insurance relating to the Property, the Improvements or the FF&E; (l) all proceeds from the taking or condemnation of any of the Property, the Improvements, the FF&E or any rights appurtenant thereto by right of eminent domain or by private or other purchase in lieu thereof, including change of grade of streets, curb cuts or other rights of access, for any public or quasi-public use under any law; (m) all streets, roads, public places, servitudes, easements and rights-of-way, existing or proposed, public or private, adjacent to or used in connection with, belonging or pertaining to the Property; (n) all of the leases, rents, royalties, bonuses, issues, profits, revenues or other benefits of the Property, the Improvements or the FF&E, including cash or securities deposited pursuant to leases to secure performance by the lessees of their obligations thereunder; (o) all fees, charges, accounts and/or other payments for the use or occupancy of any portion of the Improvements; (p) all rights, hereditaments and appurtenances pertaining to the foregoing; (q) all patents, trademarks, tradenames, copyrights and other intellectual property rights and privileges obtained or hereafter acquired in connection with the Property, the Improvements and the FF&E and, with respect to trademark and service mark applications that are so called “intent-to-use” applications, together with the entire business or portion thereof to which such applications pertain as required by 15 U.S.C. Section 1060; (r) all assignments, modifications, extensions and renewals of the Subject Lease and all credits, deposits, options, privileges and rights of Mortgagor under the Subject Lease, including, but not limited to, rights of first refusal, if any, and the right, if any, to renew or extend the Subject Lease for a succeeding term or terms; and (s) other interests of every kind and character that Mortgagor now has or at any time hereafter acquires in and to the

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Property, Improvements, and FF&E described herein and in and to all other real property, personal property and other property that is used or useful in connection therewith, including rights of ingress and egress and all reversionary rights or interests of Mortgagor with respect to such property.

     With respect to the proceeds referred to in Sections (j), (k) and (l) above (collectively, the “Proceeds”), this Mortgage is a collateral assignment thereof pursuant to Louisiana Revised Statutes § 9:5386 et seq., whether such Proceeds or any of them now exist or arise in the future, and Mortgagor does hereby irrevocably make, constitute, and appoint Mortgagee and the agents of Mortgagee as the true and lawful mandataries and attorneys-in-fact of Mortgagor to carry out and enforce all of Mortgagor’s rights, title, and interest in and to any or all of the Proceeds hereby collaterally assigned. The collateral assignment herein made of the Proceeds shall not be construed as imposing upon Mortgagee any obligations with respect thereto unless and until Mortgagee shall become the absolute owner thereof and Mortgagor shall have been wholly dispossessed thereof.

     Notwithstanding anything herein to the contrary, in no event shall the security interest granted hereunder attach to (i) any lease, license, contract right, property right or agreement to which Mortgagor is a party or any of its rights or interests thereunder if and for so long as the grant of such security interest shall constitute or result in (A) the abandonment, invalidation or unenforceability of any right, title or interest of Mortgagor therein or (B) in a breach or termination pursuant to the terms of, or a default under, any such lease, license, contract, property rights or agreement (other than to the extent that any such term would be rendered ineffective pursuant to Sections 9-406, 9-407, 9-408 or 9-409 of the UCC (or any successor provision or provisions) of any relevant jurisdiction or any other Applicable Law or principles of equity); provided, however, that such security interest shall attach immediately at such time as the condition causing such abandonment, invalidation, unenforceability, breach, termination, other restriction or assignment shall be remedied and, to the extent severable, shall attach immediately to any portion of such lease, license, contract, property rights or agreement that does not result in any of the consequences specified in (A) or (B) of this clause (i) including any proceeds of such lease, license, contract, property rights or agreement; or (ii) any Permit, if and for so long as the grant of such security interest shall constitute or result in (A) the abandonment, invalidation or unenforceability of any right, title or interest of Mortgagor therein, (B) a violation of, or termination pursuant to, the terms of such Permit, or (C) a violation of any applicable law; provided, however, that such security interest shall attach immediately at such time as the condition causing such abandonment, invalidation, unenforceability, violation, termination, other restriction or assignment shall be remedied and, to the extent severable, shall attach immediately to any portion of such Permit that does not result in any of the consequences specified in (A) or (B) of this clause (ii).

     Mortgagor, in order to secure the Secured Obligations (as defined below) up to the Maximum Amount (as defined below), does hereby:

     E. Mortgage and collaterally assign and grant a security interest in, and confirm unto Mortgagee, WITH POWER OF SALE, all of Mortgagor’s right, title and interest in and to the Collateral that constitutes immovable property under the laws of the State of Louisiana (the “RP

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Collateral”), TO HAVE AND TO HOLD the RP Collateral, together with the rights, privileges and appurtenances thereto belonging, unto Mortgagee and its substitutes or successors, forever to satisfy payment of the indebtedness as hereinafter set forth.

     F. Grant a security interest to Mortgagee in those portions of the Collateral that either are fixtures or are not RP Collateral under the laws of the State of Louisiana, including the UCC Collateral (as defined in Article 3 below), but subject to the rights of Mortgagee under the assignment made in the immediately following paragraph; and

     G. Absolutely and unconditionally assign and transfer to Mortgagee all of the Leases and the Rents (each as defined in Article 2 below) and other benefits derived from the Leases, whether now existing or hereafter created, all subject to the terms and conditions of the revocable license in favor of Mortgagor granted in Article 2 below:

     IN FURTHERANCE OF THE FOREGOING GRANTS (INCLUDING GRANTS OF SECURITY INTERESTS), ASSIGNMENTS AND MORTGAGES, AND TO PROTECT THE COLLATERAL AND THE SECURITY GRANTED BY THIS MORTGAGE, MORTGAGOR HEREBY WARRANTS, REPRESENTS, COVENANTS AND AGREES AS FOLLOWS:

ARTICLE 1

SECURED OBLIGATIONS

          1.1 Credit Agreement. This Mortgage is given for the purpose of securing the total principal indebtedness of Two Hundred Twenty Million Dollars ($220,000,000) and other obligations of every type and nature of Borrower and Mortgagor, up to the Maximum Amount under (i) the Credit Agreement (including the “Obligations” as such term is defined in the Credit Agreement), (ii) this Mortgage, including, but not limited to, the payment by the Mortgagor to the Mortgagee of all sums expended or advanced by the Mortgagee pursuant to the provisions of this Mortgage, and (iii) the other Loan Documents (all such indebtedness and obligations collectively, for purposes of this Mortgage, the “Secured Obligations”). Mortgagor shall pay and perform the Secured Obligations at the times and places and in the manner specified in the Credit Agreement, any Hedge Agreements, this Mortgage and the other Loan Documents, in each case subject to any applicable grace or cure periods.

          1.2 Term of Mortgage. This Mortgage shall be effective for the period from the date of this Mortgage through the date upon which all Secured Obligations have been paid or performed in full (as the case may be) (other than indemnity obligations that survive the termination of the Loan Documents and the Hedge Agreements). Upon the payment and performance in full of the Secured Obligations, Mortgagee shall promptly execute a full satisfaction of this Mortgage in the form appropriate for recording and deliver such satisfaction to Mortgagor.

          1.3 Maximum Amount. The maximum amount of the Secured Obligations that may be outstanding at any time and from time to time that this Mortgage secures, including, without limitation, as a mortgage, as an assignment of leases and rents and as a

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security agreement shall be Four Hundred Forty Million Dollars ($440,000,000) (the “Maximum Amount”).

ARTICLE 2

ASSIGNMENT OF RENTS AND LEASES

     2.1 Assignment of Rents, Profits, etc. As further security for the Secured Obligations, all of Mortgagor’s right, title and interest in the rents, royalties, bonuses, issues, profits, revenue and income derived from the Collateral or arising from the use or enjoyment of any portion thereof or from any lease or agreement pertaining thereto, and liquidated damages following default under such leases, and all proceeds payable under any policy of insurance covering loss of rents resulting from untenantability caused by damage to any part of the Collateral, together with any and all rights that Mortgagor may have against any tenant under such leases or any subtenants or occupants of any part of the Collateral (hereinafter called the “Rents”), are hereby absolutely and unconditionally assigned to Mortgagee, to be applied by Mortgagee in payment of the Secured Obligations. Notwithstanding anything to the contrary contained herein, the assignment of Rents, as described in this Section 2.1, is, and is intended to be, an assignment made in accordance with and to the fullest extent permitted by La. R.S. §9:4401.

     2.2 Assignment of Leases. As further security for the Secured Obligations, Mortgagor hereby assigns to Mortgagee all of Mortgagor’s right, title and interest as lessor in and to all existing and future leases respecting the Property or Improvements, including subleases thereof, and any and all extensions, renewals, modifications and replacements thereof, upon any part of the Collateral (the “Leases”). Mortgagor hereby further assigns to Mortgagee all guaranties of tenants’ performance under the Leases. Notwithstanding anything to the contrary contained herein, the assignment of Leases, as described in this Section 2.2, is, and is intended to be, an assignment made in accordance with and to the fullest extent permitted by La. R.S. §9:4401.

     2.3 License. Notwithstanding the foregoing provisions and subject to the terms of the Credit Agreement, so long as no Event of Default shall exist and be continuing hereunder, Mortgagor shall have the right and license to collect, use and enjoy the Rents and other sums payable under and by virtue of any Lease, and Mortgagor shall have the right to enforce the covenants of such Leases and other agreements and arrangements, and the right to enter into, modify and terminate such Leases and other agreements and arrangements in good faith (subject to the terms of the Credit Agreement). Upon the occurrence of an Event of Default and during the continuance thereof, such license in favor of Mortgagor shall automatically and immediately terminate upon notice to Mortgagor, and Mortgagee shall be entitled thereupon to receive and collect the Rents personally or through an agent or a receiver so long as any such Event of Default shall exist and during pendency of any foreclosure proceedings.

     2.4 Representations and Warranties Concerning Leases and Rents. Mortgagor represents and warrants that:

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               (a) Mortgagor has good and marketable title to the Leases and Rents hereby assigned (except for such defects in such rights that would not reasonably be expected, alone or in the aggregate, to have a Material Adverse Effect) and authority to assign them, and no other person or entity has any right, title or interest therein (other than Permitted Encumbrances);

               (b) the Leases are subordinate to this Mortgage in all respects; and

               (c) no Rents have been or will be assigned, mortgaged or pledged, except to the extent permitted by the terms of the Credit Agreement.

2.5 Mortgagor’s Covenants of Performance. In addition to the obligations which Mortgagor has with respect to Leases under the Credit Agreement, Mortgagor covenants and agrees to:

               (a) defend, at Mortgagor’s expense, any proceeding, legal or otherwise, pertaining to the Leases, including, if Mortgagee so requests, any such proceeding to which Mortgagee is a party;

               (b) neither create nor permit any encumbrance upon its interest as lessor of the Leases, except this Mortgage and any other encumbrances permitted by this Mortgage or the Credit Agreement; and

               (c) cause all Leases hereafter entered into by Mortgagor to expressly provide that if Mortgagee forecloses under this Mortgage, then the tenant shall attorn to Mortgagee or its assignee and the Lease will remain in full force and effect in accordance with its terms notwithstanding such foreclosure.

2.6 Representations and Warranties and Covenants Concerning the Subject Lease. Mortgagor represents, warrants and covenants that:

               (a) the Subject Lease is unmodified and in full force and effect;

               (b) all rent and other charges in the Subject Lease have been paid to the extent they are payable to the date hereof;

               (c) Mortgagor enjoys the quiet and peaceful possession of the Leased Property;

               (d) Mortgagor is not in default under any of the terms of the Subject Lease and there are no circumstances which, with the passage of time or the giving of notice or both, would constitute an event of default thereunder;

               (e) the lessor under the Subject Lease is not in default under any of the terms or provisions thereof on the part of the lessor to be observed or performed;

               (f) Mortgagor shall promptly pay, when due and payable, the rent and other charges payable pursuant to the Subject Lease, and will timely perform and observe all of

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the other terms, covenants and conditions required to be performed and observed by Mortgagor as lessee under the Subject Lease and shall do all things necessary to preserve and to keep unimpaired its rights thereunder;

          (g) Mortgagor shall, immediately following the receipt thereof, deliver a copy of any notice of default, notice claiming a default or notice of lessor’s intention to exercise any remedy reserved to lessor under the Subject Lease given to Mortgagor by the lessor pursuant to the Subject Lease and promptly notify Mortgagee in writing of any default by the lessor in the performance or observance of any of the terms, covenants or conditions on the part of the lessor to be performed or observed thereunder;

          (h) Mortgagor shall not, without the prior written consent of Mortgagee (which may be granted or withheld in Mortgagee’s reasonable discretion) (i) terminate or surrender the Subject Lease other than at its stated termination date or (ii) enter into any modification of the Subject Lease which materially impairs the practical realization of the security interest granted by this Mortgage, and any such attempted termination, modification or surrender without Mortgagee’s written consent shall be void.

          (i) Mortgagor shall, within thirty (30) days after written request from Mortgagee, use reasonable efforts to obtain from the lessor and deliver to Mortgagee a certificate setting forth the name of the tenant under the Subject Lease and stating that the Subject Lease is in full force and effect, is unmodified or, if the Subject Lease has been modified, the date of each modification (together with copies of each such modification), that no notice of termination thereon has been served on Mortgagor, stating that to the best of lessor’s knowledge, no default or event which with notice or lapse of time (or both) would become a default is existing under the Subject Lease, stating the date to which rent has been paid, and specifying the nature of any defaults, if any, and containing such other statements and representations as may be reasonably requested by Mortgagee.

          (j) So long as any of the Secured Obligations remain unpaid or unperformed, the fee title to and the leasehold estate in the Leased Property shall not merge but shall always be kept separate and distinct notwithstanding the union of such estates in the lessor or Mortgagor, or in a third party, by purchase or otherwise;

          (k) If Mortgagor acquires the fee title or any other estate, title or interest in the property demised by the Subject Lease, or any part thereof, the lien of this Mortgage shall attach to, cover and be a lien upon such acquired estate, title or interest and the same shall thereupon be and become a part of the Collateral with the same force and effect as if specifically encumbered herein. Mortgagor agrees to execute all instruments and documents that Mortgagee may reasonably require to ratify, confirm and further evidence the lien of this Mortgage on the acquired estate, title or interest. Furthermore, Mortgagor hereby appoints Mortgagee as its true and lawful attorneyinfact to execute and deliver, following an Event of Default and during the continuance thereof, all such instruments and documents in the name and on behalf of Mortgagor. This power, being coupled with an interest, shall be irrevocable as long as any portion of the Indebtedness remains unpaid; and

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                         (l) If the Subject Lease shall be terminated prior to the natural expiration of its term due to default by Mortgagor, and if, pursuant to the provisions of the Subject Lease, Mortgagee or its designee shall acquire from the lessor a new lease of the premises subject to the Subject Lease, Mortgagor shall have no right, title or interest in or to such new lease or the leasehold estate created thereby, or renewal privileges therein contained.

          2.7 Mortgagee in Possession. Mortgagee’s acceptance of this assignment shall not, prior to entry upon and taking possession of the Collateral by Mortgagee, be deemed to constitute Mortgagee a “mortgagee in possession,” nor obligate Mortgagee to appear in or defend any proceeding relating to any of the Leases or to the Collateral, take any action hereunder, expend any money, incur any expenses, or perform any obligation or liability under the Leases, or assume any obligation for any deposits delivered to Mortgagor by any lessee and not delivered to Mortgagee. Mortgagee shall not be liable for any injury or damage to person or property in or about the Collateral unless caused by the gross negligence or intentional misconduct of Mortgagee. Notwithstanding anything to the contrary contained herein, Mortgagee shall have no liability or obligation under the Subject Lease by reason of its acceptance of this Mortgage. Mortgagee shall be liable for the obligations of the tenant arising out of any Subject Lease for only that period of time for which Mortgagee is in possession of the premises demised thereunder or has acquired, by foreclosure or otherwise, and is holding all of Mortgagor’s right, title and interest therein.

          2.8 Indemnification. Mortgagor hereby indemnifies, agrees to defend, and hold Mortgagee, all agents for the Lenders, the Lenders, and any persons or entities owned or controlled by, owning or controlling, or under common control or affiliated with, Mortgagee, the directors, officers, partners, employees, attorneys, agents and representatives of each of the foregoing persons and entities, and the heirs, personal representatives, successors and assignees of each of the foregoing persons and entities (collectively, the “Indemnified Parties”) harmless from all liability, damage or expense imposed on or incurred by the Indemnified Parties from any claims under the Leases, including any claims by Mortgagor with respect to payments of Rents made directly to Mortgagee during the continuation of an Event of Default and claims by tenants for security deposits or for rental payments more than one (1) month in advance and not delivered to Mortgagee, but excluding any liability, loss or damage which may be incurred by the Indemnified Parties by reason of the Indemnified Parties’ gross negligence or willful misconduct.

          2.9 Records. If requested by Mortgagee, Mortgagor shall deliver to Mortgagee a copy of the executed originals of all Leases and, after an Event of Default, executed originals thereof in Mortgagor’s possession or control.

          2.10 Right to Rely. Mortgagor hereby authorizes and directs the tenants under the Leases to pay Rents to Mortgagee upon written demand by Mortgagee provided such demand shall be given only if an Event of Default exists and is continuing, without further consent of Mortgagor, and the tenants may rely upon any such written statement delivered by Mortgagee to the tenants (including with respect to the existence and

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continuation of an Event of Default). Any such payment to Mortgagee shall constitute payment to Mortgagor under the applicable Leases.

ARTICLE 3

SECURITY AGREEMENT AND FINANCING STATEMENT

     3.1 Security Interest and Financing Statement. This Mortgage shall also be a security agreement between Mortgagor and Mortgagee and a financing statement covering the Collateral constituting personal property or fixtures (hereinafter collectively called “UCC Collateral”) governed by the Uniform Commercial Code as adopted by the State of New York (hereinafter called the “Code”) as the same may be more specifically set forth in any financing statements delivered in connection with this Mortgage, and as further security for the payment and performance of the Secured Obligations, Mortgagor hereby grants to Mortgagee a security interest in such portion of the Collateral. In addition to Mortgagee’s other rights hereunder, Mortgagee shall have all rights of a secured party under the Code. Mortgagor shall bear all costs of filing financing statements, continuation and change statements, including all Code searches. If Mortgagee should dispose of any of the Collateral comprising the UCC Collateral pursuant to the Code after the occurrence and during the continuation of an Event of Default, ten (10) days’ prior written notice by Mortgagee to Mortgagor shall be deemed to be reasonable notice; provided, however, Mortgagee may dispose of such property in accordance with the foreclosure procedures of this Mortgage in lieu of proceeding under the Code. Mortgagee may from time to time file financing statements (without the separate authorization or signature of Mortgagor) and may execute and deliver all continuation statements, termination statements, amendments, partial releases, or other instruments relating to all financing statements by and between Mortgagor and Mortgagee.

     3.2 Notice of Changes. Mortgagor shall not, voluntarily or involuntarily, change its name, identity or legal structure, unless Mortgagor shall have given to Mortgagee prior written notice of any such proposed change and shall have delivered to Mortgagee, prior to or concurrently with the occurrence of any such change, all additional financing statements or other documents that may be required to perfect, protect and preserve Mortgagee’s security interest with respect to any Collateral described or referred to herein, all in form and substance reasonably satisfactory to Mortgagee.

     3.3 Fixtures. The Property is specifically described on Exhibit B attached hereto. Some of the items of the Collateral described herein constitute property that is or will become fixtures related to the Property, and it is intended that, as to those items, this Mortgage shall be effective as a financing statement filed as a fixture filing from the date of its filing for record in the real estate records where this Mortgage is recorded. For this purpose, the following information is set forth:

Name and address of Mortgagor:

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USAgencies, L.L.C.
8550 United Plaza Boulevard, Suite 805
Baton Rouge, Louisiana 70809
Attn: Mark E. Pape
Facsimile: (972) 728-6491

     Name and address of Mortgagee:

Credit Suisse, Cayman Islands Branch
Eleven Madison Avenue
New York, New York 10010
Attn: Julia Kingsbury
Facsimile: (212) 325-8304

     The record owner of the fee interest in the Property (other than the Leasehold Property), and the record owner of the leasehold interest in the Leasehold Property, is the Mortgagor.

ARTICLE 4

MORTGAGOR AND AGREEMENTS OF MORTGAGOR

     Mortgagor does hereby covenant and agree for the benefit of Mortgagee, and as expressly specified, Mortgagor does hereby warrant and represent and covenant to Mortgagee as of the date of recording this Mortgage as follows:

          4.1 Payment and Performance. Mortgagor shall make all payments on the Secured Obligations when due and shall punctually and properly perform all of Mortgagor’s covenants, obligations and liabilities under the Credit Agreement, the Hedge Agreements, this Mortgage, and the other Loan Documents, subject to any applicable cure or grace periods. Time shall be of the essence with respect to this Mortgage.

          4.2 Title to Collateral and Lien of this Mortgage. Mortgagor represents and warrants that Mortgagor holds and will maintain (subject to dispositions permitted by the Credit Agreement) (i) a good and marketable fee simple interest in the Property, other than the Leasehold Property, (ii) good and marketable leasehold interest in the Leasehold Property, (iii) good title to the Improvements thereon, (iv) good and marketable title to the FF&E. Mortgagor further represents and warrants that this Mortgage shall constitute a first priority Lien on the Property. Mortgagor will not create or suffer to exist any Lien on its interest in the Property other than Liens permitted under the Credit Agreement (the “Permitted Liens”). If the first priority Lien created by this Mortgage or any other interest of Mortgagee in the Collateral shall be endangered or shall be attacked, directly or indirectly, Mortgagor, at Mortgagor’s expense, will take all necessary and proper steps for the defense of such interest, including the employment of counsel satisfactory to Mortgagee, the prosecution or defense of litigation, and the compromise or discharge of claims made against such interest.

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          4.3 Taxes on Mortgage. If at any time any law shall be enacted imposing or authorizing the imposition of any tax, assessment or other fees upon this Mortgage, or upon any rights, titles, liens or security interests created hereby, Mortgagor shall pay all such taxes, assessments or other fees prior to delinquency except to the extent any such tax, assessment or fee is being Properly Contested as permitted by the Credit Agreement. If it is unlawful for Mortgagor to pay such taxes, assessments or other fees, then Mortgagor agrees to promptly reimburse Mortgagee for the amounts incurred by Mortgagee to pay such taxes, assessments or other fees.

          4.4 Statements by Mortgagor. At the request of Mortgagee, Mortgagor shall furnish promptly a written statement or affidavit, in such form as may be reasonably required by Mortgagee, to confirm the unpaid principal balance of each of the Loans and that there are no offsets or defenses against full payment of the alleged Loans and performance of the terms of the Credit Agreement or, if there are any such offsets or defenses, specifying them.

                         (a) Repair, Waste, Alterations, etc. Mortgagor shall take all commercially reasonable actions required to keep the Property, Improvements and FF&E in good operating order, repair and condition, ordinary wear and tear excepted, and shall not commit or permit any waste thereof. Mortgagor shall not suffer any lien of mechanics or materialmen to be perfected by the filing of any lawsuit therefor respecting any part of the Collateral, except for Permitted Encumbrances. If Mortgagor shall fail to discharge any such lien that has become final by judgment, then, in addition to any other right or remedy of Mortgagee, Mortgagee may, but shall not be obligated to, discharge the same, either by paying the amount claimed to be due, or by procuring the discharge of such lien by depositing in court a bond for the amount claimed, or otherwise giving security for such claim, or by taking such action as may be prescribed by law. Mortgagor shall have the right from time to time at its sole cost and expense to make additions, alterations and changes, whether structural or non-structural (hereinafter collectively referred to as “Alterations”) in or to the Collateral; provided, however, that in all cases Mortgagor shall comply with the other provisions of this Mortgage, the Credit Agreement, the Collateral Documents and in all material respects with applicable law, and all Alterations to any buildings included in the Collateral shall be located wholly within the boundary lines of the Property. Notwithstanding anything herein to the contrary, Mortgagor shall have the right to remove and replace FF&E as Mortgagor may deem appropriate in the ordinary course of Mortgagor’s business and as otherwise permitted under the Credit Agreement (including Section 6.05 thereof) or, in connection with the Leased Property, under the Subject Lease.

          4.5 Hold Harmless. Mortgagor shall indemnify Mortgagee hereunder to the extent set forth in Section 9.2B of the Credit Agreement. The provisions of this Section 4.5 shall survive the payment in full of the Secured Obligations and the release of this Mortgage as to events occurring and causes of action arising before such payment and release.

          4.6 Further Assurances. At Mortgagee’s request, Mortgagor shall execute, acknowledge, deliver, and record such further instruments and do such further acts as

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may be necessary, desirable or proper to carry out the purposes of this Mortgage and to subject to the liens and security interests created thereby, any property intended by the terms thereof to be covered thereby, including specifically but without limitation any renewals, additions, substitutions, replacements, improvements or appurtenances to the Collateral.

     4.7 Recording and Filing. Mortgagor shall cause this Mortgage and any related financing statements and all amendments, supplements and extensions thereto and substitutions therefor to be recorded, filed, re-recorded and refiled, as necessary to carry out the purpose of this Mortgage and the Credit Agreement, and shall pay all such recording, filing, re-recording and refiling fees, title insurance premiums and other charges.

     4.8 Payment of Debts. Mortgagor shall promptly pay when due all its obligations regarding the ownership and operation of the Collateral except any such obligations which are being Properly Contested in good faith by appropriate proceedings and as to which Mortgagor shall have set aside adequate reserves in accordance with GAAP and to the extent required by the terms of the Credit Agreement or the other Collateral Documents.

     4.9 Environmental Compliance. Mortgagor shall promptly take any and all necessary remedial action in connection with the presence, handling, storage, use, disposal, transportation or Release or threatened Release of any Hazardous Materials on, under or affecting any Real Property Asset in order to comply in all material respects with all applicable Environmental Laws and Governmental Authorizations. In the event the Mortgagor undertakes any Cleanup action with respect to the presence, Release or threatened Release of any Hazardous Materials on or affecting any Real Property Asset, Mortgagor shall conduct and complete such Cleanup action in material compliance with all applicable Environmental Laws, and in accordance with the policies, orders and directives of all federal, state and local governmental authorities except when, and only to the extent that, the Mortgagor’s liability for such presence, handling, storage, use, disposal, transportation or Release or threatened Release of any Hazardous Materials is being Properly Contested.

     4.10 Enforceability. This Mortgage constitutes a legal, valid and binding obligation of Mortgagor, enforceable against Mortgagor in accordance with its terms, except as enforceability may be limited by the effect of applicable bankruptcy, insolvency, reorganization, moratorium or, other similar laws affecting creditors’ rights generally or the application of equitable principles.

     4.11 No Violation; No Consents. The execution, delivery and performance of this Mortgage by Mortgagor will not violate, conflict with or constitute a breach of any of the terms or provisions of, or a default under (or an event that, with notice or the lapse of time, or both, would constitute a default), or require consent under, or result in the imposition of a lien on any properties of Mortgagor or an acceleration of indebtedness pursuant to: (i) Mortgagor’s operating agreement or other organizational documents, (ii) any bond, debenture, note, credit agreement, mortgage, Mortgage or other agreement or

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instrument to which Mortgagor is a party or by which Mortgagor or Mortgagor’s property is or may be bound, (iii) any statute, rule or regulation applicable to Mortgagor, or any of its assets or properties, or (iv) any judgment, order or decree of any court or governmental agency or authority having jurisdiction over Mortgagor, or any of its assets or properties except for those which, in the case of clauses (ii), (iii) and (iv) only, could not reasonably be expected to have a Material Adverse Effect. No consent, approval, authorization or other action by, or order of, or filing, registration, qualification, license or permit of or with, any court or governmental agency, body or administrative agency is required for the execution, delivery and performance by Mortgagor of this Mortgage other than those which already have been obtained and delivered to Mortgagee. No consents or waivers from any other person or entity are required for the execution, delivery and performance by Mortgagor of this Mortgage, other than those which already have been obtained and delivered to Mortgagee.

          4.12 Security Interest. The Collateral is owned or, as to the Leased Property, leased solely by Mortgagor. As of the date hereof, (i) Mortgagee has either filed or caused to be filed or submitted for filing all financing statements and other instruments necessary to perfect its security interest in the Collateral (other than the RP Collateral) (ii) Mortgagee’s security interests in the Collateral (other than the RP Collateral) are valid first priority Liens and, upon the filings referenced in clause (i) above, will be perfected, (iii) there are no other liens on the Collateral or any portion thereof except for the Permitted Encumbrances, and (iv) no effective financing statement or similar instrument exists or is on file in any public office with respect to the Collateral, except for financing statements filed in connection with the Credit Agreement.

          4.13 Disposition of Collateral. Mortgagor will not sell, transfer, assign, pledge, collaterally assign, exchange or otherwise dispose of the Collateral, except as expressly permitted by the Credit Agreement. If the Collateral, or any part thereof, is sold, transferred, assigned, exchanged, or otherwise disposed of in violation of these provisions, the security interests of Mortgagee shall continue in such Collateral or part thereof notwithstanding such sale, transfer, assignment, exchange or other disposition.

ARTICLE 5

EVENTS OF DEFAULT

     The occurrence of any one of the following shall be a default hereunder (“Event of Default”):

          5.1 Nonperformance of Covenants under this Mortgage. Mortgagor fails to perform or observe any covenant or agreement contained in this Mortgage and such failure continues for thirty (30) days after written notice of non-performance thereof from Mortgagee.

          5.2 False Representation. Any representation or warranty in this Mortgage is false, misleading or erroneous in any material respect when made.

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          5.3 Events of Default under the Credit Agreement. The occurrence of any Event of Default under the Credit Agreement, as the term “Event of Default” is defined thereunder. Mortgagor acknowledges that this provision has the effect of cross-defaulting this Mortgage with various collateral, guaranty and other documents respecting the Credit Agreement.

          5.4 Transfer of the Property. Any transfer of Mortgagor’s interest with respect to all or any part of the Property, Improvements or FF&E other than dispositions expressly permitted under the Loan Documents.

          5.5 Performance of Defaulted Acts. From and after the occurrence and during the continuance of an Event of Default, Mortgagee may, but need not, make any payment or perform any act herein required of Mortgagor in any form and manner deemed expedient, including making full or partial payments of principal or interest on prior encumbrances, if any, making rental payments and purchasing, discharging, compromising or settling any tax lien or other prior lien or title or claim thereof, or redeeming from any tax sale or forfeiture affecting the Collateral or contesting any tax or assessment. All moneys paid for any of the purposes herein authorized and all expenses paid or incurred in connection therewith, including reasonable attorneys’ fees, shall be included among the Secured Obligations and shall be due and payable upon demand and with interest thereon from the date of such payment or expense at the rate of interest payable after default under the terms of the Credit Agreement. Inaction of Mortgagee shall never be considered as a waiver of any right accruing to it hereunder on account of any default on the part of Mortgagor. Mortgagee, making any payment hereby authorized relating to taxes or assessments, may do so according to any bill, statement or estimate procured from the appropriate public office without inquiry into the accuracy of such bill, statement or estimate or into the validity of any tax, assessment, sale, forfeiture, tax lien or title or claim thereof.

ARTICLE 6

REMEDIES

          6.1 Exercise of Specific Remedies. Upon the occurrence of any of Event of Default, and during the continuation thereof, Mortgagee shall be entitled to exercise all rights and remedies of a mortgagee or secured party under the laws of the State of Louisiana (“Louisiana Law”), including, without limitation, the following rights and remedies:

                         (a) Mortgagee may deem the Secured Obligations immediately due and payable without notice or declaration to the Mortgagor and without presentment, demand or other notice of any kind, all of which are hereby waived by Mortgagor.

                         (b) Mortgagee shall have the right to foreclose this Mortgage by judicial procedure as provided by Louisiana Law, whether ordinary or executory, for the foreclosure of mortgages on real property. For the purposes of foreclosure under Louisiana executory process procedures, Mortgagor hereby acknowledges the Secured Obligations and

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confesses judgment in favor of Mortgagee for the full and true sum of the Secured Obligations. Furthermore, any and all declarations of fact made by authentic act before a notary public in the presence of two witnesses by a person declaring that such facts lie within his or its knowledge, shall constitute authentic evidence of such facts for the purpose of executory process. The Mortgagor specifically agrees that such an affidavit by a representative of Mortgagee as to the existence, amount, terms and maturity of the secured indebtedness and of a default hereunder shall constitute authentic evidence of such facts for the purpose of executory process.

          (c) Mortgagee shall, to the extent permitted by Louisiana Law, have the right and power, but not the obligation, with or without the appointment of a keeper, to enter upon and take immediate possession of the RP Collateral or any part thereof, to exclude Mortgagor therefrom, to hold, use, operate, manage and control such real property, to make all such repairs, replacements, alterations, additions and improvements to the same as Mortgagee may deem proper, and to demand, collect and retain the Rents as provided in Article 2 hereof.

          (d) Mortgagors agree that, in the event the Collateral, or any part thereof, is seized as an incident to an action for the recognition or enforcement of this Mortgage by executory process, ordinary process, sequestration, writ of fieri facias or otherwise, the court issuing any such order shall, if petitioned for by Mortgagee, direct the applicable sheriff to appoint as a keeper of the Property, Mortgagee or any agent designated by Mortgagee or any person named by Mortgagee at the time such seizure is effected. This designation is pursuant to Louisiana Revised Statutes 9:5131 through 9:5135 and 9:5136 through 9:5140.2, as the same may be amended, and Mortgagee shall be entitled to all the rights and benefits afforded thereunder. It is hereby agreed that the keeper shall be entitled to receive reasonable compensation in addition to its costs and expenses incurred in the administration or preservation of said Property, Collateral or RP Collateral. The designation of keeper made herein shall not be deemed to require Mortgagee to provoke the appointment of such a keeper.

          (e) Mortgagee shall have all of the rights and remedies of a secured creditor and Mortgagee granted by New York Law, including the Code, as more particularly provided in Article 3 above and shall, to the extent permitted by New York Law and, solely with respect to the Leased Property, the Subject Lease as affected by that certain Landlord Estoppel and Agreement executed by the landlord under the Subject Lease, have the right and power, but not the obligation, to take possession of the UCC Collateral, and for that purpose Mortgagee may enter upon the Property on which any or all of the UCC Collateral is located and take possession of and operate such UCC Collateral or remove the same therefrom. After the occurrence and during the continuation of an Event of Default, Mortgagee may require Mortgagor to assemble the UCC Collateral and make it available to Mortgagee at a place to be designated by Mortgagee which is reasonably convenient to both parties.

          (f) Mortgagee, in its sole discretion, may elect to treat the fixtures constituting a part of the Improvements as either RP Collateral or UCC Collateral and proceed to exercise such rights and remedies as apply to such type of collateral, subject, solely with respect to the Leased Property, to the provisions of the Subject Lease as affected by that certain Landlord Estoppel and Agreement executed by the landlord under the Subject Lease.

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          (g) Mortgagee may exercise the power of sale granted by this Mortgage and, subject to the mandatory requirements of Louisiana Law, may sell or have sold the RP Collateral or interests therein or any part thereof at one or more public sales, as an entirety or in parcels, at such place or places and otherwise in such manner and upon such notice as may be required by Louisiana Law, by this Mortgage or, in the absence of any such requirement, as Mortgagee may deem appropriate. Mortgagor shall make a conveyance to the purchaser or purchasers thereof without, to the extent permitted by Louisiana Law, any warranties express or implied. Mortgagee may postpone the sale of such RP Collateral or interests therein or any part thereof by public announcement at the time and place of such sale, and from time to time thereafter may further postpone such sale by public announcement made at the time of sale fixed by the preceding postponement. Sale of a part of the RP Collateral or interests therein or any defective or irregular sale hereunder will not exhaust the power of sale, and sales may be made from time to time until all such property is sold without defect or irregularity or the Secured Obligations are paid in full. Mortgagee shall have the right to appoint one or more attorney(s)-in-fact to act in conducting the foreclosure sale and executing a deed to the purchaser. It shall not be necessary for any of the Collateral at any such sale to be physically present or constructively in the possession of Mortgagee and Mortgagor shall deliver all of the Collateral to the purchaser at such sale. If it should be impossible or impracticable to take actual delivery of the Collateral, then the title and right of possession to the Collateral shall pass to the purchaser at such sale as completely as if the same had been actually present and delivered.

          (h) Mortgagee (or any successor to Mortgagee) shall have the right to become the purchaser at any sale made pursuant to the provisions of this Article 6 and shall have the right to credit upon the amount of the bid made therefor the amount payable to it out of the net proceeds of such sale. All other sales shall be, to the extent permitted by Louisiana Law, on a cash basis. Mortgagor does hereby ratify and confirm all legal acts that Mortgagee may do in carrying out the provisions of this Mortgage.

          (i) Any sale of the Collateral or any part thereof pursuant to the provisions of this Article 6 will operate to divest all right, title, interest, claim and demand of Mortgagor in and to the property sold and will be a perpetual bar against Mortgagor and all persons claiming by or through or under Mortgagor, subject to Louisiana Law. Mortgagee is hereby irrevocably appointed the true and lawful attorney-in-fact of the Mortgagor, in the Mortgagor’s name and stead, for the purpose of effectuating any such sale, to execute and deliver all necessary deeds, conveyances, assignments, bills of sale and other instruments with power to substitute one or more persons with like power. Nevertheless, if requested by Mortgagee so to do, Mortgagor shall join in the execution, acknowledgment and delivery of all proper conveyances, assignments and transfers of the property so sold. Any purchaser at a foreclosure sale will receive possession of the property purchased at the earliest time permitted under the Louisiana Law, and Mortgagor agrees that if Mortgagor retains possession of the property or any part thereof subsequent to such sale, Mortgagor will be considered a tenant at sufferance of the purchaser, and will, if Mortgagor remains in possession after demand to remove, be guilty of forcible detainer and will be subject to eviction and removal, forcible or otherwise, with or without process of law, and all damages to Mortgagor by reason thereof are hereby expressly waived by Mortgagor, to the extent permitted by Louisiana Law.

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                         (j) Mortgagee, at its option, is authorized to cause foreclosure of this Mortgage subject to the rights of any tenants under Leases, and the failure to make any such tenants parties to any such foreclosure proceedings and to foreclose their rights will not be, nor be asserted to be by Mortgagor, a defense at any proceedings instituted by Mortgagee to collect the Secured Obligations.

          6.2 Cost and Expenses. All costs and expenses (including reasonable attorneys’ fees and legal expenses, title premiums, title report and work charges, filing fees, and mortgages, mortgage registration, transfer, stamp and other excise taxes, if any) incurred by Mortgagee in perfecting, protecting or enforcing its rights hereunder, whether or not an Event of Default shall have occurred, shall be a demand obligation of Mortgagor to Mortgagee, as applicable, and shall bear interest if unpaid commencing thirty (30) days following demand (except if an Event of Default exists and is continuing in which case interest shall begin to accrue immediately upon the incurrence of such cost or expense) at the highest rate then applicable under the Credit Agreement with respect to the Secured Obligations, all of which shall be part of the Secured Obligations.

          6.3 Application of Proceeds. The proceeds of any sale of the Collateral or any part thereof made pursuant to this Article 6 shall be applied in accordance with the terms of the Credit Agreement and the Security Documents, including but not limited to Section 6.5 of the Guarantee and Collateral Agreement.

          6.4 Combination of Remedies. From and after the occurrence and during the continuance of an Event of Default, Mortgagee may, at its option, in such order, and utilizing such combinations of remedies with respect to the Collateral and the other property of Mortgagor encumbered by a Collateral Document as Mortgagee shall so elect, pursue its remedies against (a) the Collateral, individually, or any other property of a Loan Party encumbered by a Collateral Document, individually, (b) the Collateral and any combination of the other property of a Loan Party encumbered by a Collateral Document, (c) the Collateral and all of the other property of Mortgagor and any other Loan Party encumbered by a Collateral Document, or (d) all or any combination of the other property of Mortgagor and the other Loan Parties encumbered by a Collateral Document, in separate proceedings or in one proceeding in any order which Mortgagee deems appropriate, all to the fullest extent permitted under Louisiana Law.

          6.5 Advice of Counsel; Waivers. Mortgagor acknowledges that it is aware of and has had the advice of counsel of its choice with respect to its rights, under Louisiana Law, with respect to this Mortgage, the Secured Obligations and the Collateral. Except to the extent expressly set forth in the Credit Agreement or any other Loan Document, Mortgagor hereby agrees that Mortgagor shall not at any time hereafter have or assert, and hereby waive to the extent permitted under Louisiana Law, any right under any law pertaining to: marshalling, whether of assets or liens, the sale of property in the inverse order of alienation, the administration of estates of decedents, valuation, stay, extension, reinstatement, redemption, subrogation, or abatement, suspension, deferment, diminution or reduction of any of the Secured Obligations (including setoff), now or hereafter in force. Mortgagor hereby further waives (i) in favor of Mortgagee any and all homestead

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exemptions and other exemptions of seizure or otherwise to which the Mortgagor is or may be entitled under the constitution and statutes of the State of Louisiana insofar as the Collateral is concerned and (ii) (a) the benefit of appraisement as provided in Louisiana Code of Civil Procedure Articles 2332, 2336, 2723, 2724, and all other laws conferring the same; (b) the demand and three (3) days’ delay according by Louisiana Code of Civil Procedure Article 2721; (c) the notice of seizure required by Louisiana Code of Civil Procedure Articles 2293 and 2721; (d) the three (3) days’ delay provided by Louisiana Code of Civil Procedure Articles 2331 and 2722; and (e) the benefit of the other provisions of Louisiana Code of Civil Procedure Articles 2331, 2722 and 2723, not specifically mentioned above.

ARTICLE 7

GENERAL PROVISIONS

     7.1 Mortgagor. This Mortgage and all provisions hereof shall extend to and be binding upon Mortgagor and all persons claiming under or through Mortgagor. Whenever in this Mortgage there is reference made to any of the parties hereto, such reference shall be deemed to include, wherever applicable, a reference to the heirs, executors and administrators or successors and assigns (as the case may be) of such party. Mortgagor’s successors and assigns shall include a receiver, trustee or debtor-in-possession of or for Mortgagor. Mortgagee’s assigns and successors shall include any successor Collateral Agent under the Credit Agreement.

     7.2 Cumulative Rights Waiver; Modifications. Each and every right, power and remedy hereby granted to Mortgagee shall be cumulative and not exclusive, and each and every right, power and remedy, whether specifically hereby granted or otherwise existing, may be exercised from time to time and as often and in such order as may be deemed expedient by Mortgagee and the exercise of any such right, power or remedy will not be deemed a waiver of the right to exercise, at the same time or thereafter, any other right, power or remedy. No delay or omission by Mortgagee in the exercise of any right, power or remedy will impair any such right, power or remedy or operate as a waiver thereof or of any other right, power or remedy then or thereafter existing. Any and all covenants of Mortgagor in this Mortgage may from time to time, by instrument in writing signed by Mortgagee, be waived to such extent and in such manner as Mortgagee may desire, but no such waiver will ever affect or impair the rights of Mortgagee hereunder, except to the extent specifically stated in such written instrument. All changes to and modifications of this Mortgage must be in writing and signed by Mortgagor and Mortgagee.

     7.3 Additional Documents. Mortgagor agrees that upon request of Mortgagee it will from time to time execute, acknowledge and deliver all such additional instruments and will do or cause to be done all such further acts and things as may be reasonably necessary fully to effectuate the intent of this Mortgage.

     7.4 Notices. All notices and other communications under this Mortgage shall be in writing, except as otherwise provided in this Mortgage. A notice, if in writing, shall

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be considered as properly given if given in accordance with the provisions of the Credit Agreement.

     7.5 Choice of Law. Without regard to principles of conflicts of law, this Mortgage shall be construed under and governed by the laws of the State of New York applicable to contracts made and to be performed entirely within such state and the laws of the United States of America. Notwithstanding the foregoing: (i) Louisiana Law shall govern with respect to procedural and substantive matters relating to the creation, perfection, priority and enforcement of the liens created by this Mortgage on the RP Collateral and (ii), if upon judicial foreclosure and sale in accordance with Louisiana Law a deficiency exists, Mortgagor agrees that Mortgagee shall have the right to seek a deficiency judgment against Mortgagor. The terms and provisions set forth in Exhibit C attached hereto are hereby incorporated by reference as though fully set forth herein. In the event of any conflict between the terms and provisions contained in the body of this Mortgage and terms and provisions set forth in Exhibit C, the terms and provisions set forth in Exhibit C shall govern and control.

     7.6 Time of Essence. Time is of the essence of this Mortgage and of every part hereof of which time is an element.

     7.7 Severability. If any provision hereof or of any of the other documents constituting, evidencing or creating all or any part of the Secured Obligations is invalid or unenforceable in any jurisdiction, the other provisions hereof or of said documents shall remain in full force and effect in such jurisdiction. The invalidity of any provision of this Mortgage in any jurisdiction will not affect the validity or enforceability of any such provision in any other jurisdiction. If any lien, encumbrance or security interest evidenced or created by this Mortgage is invalid or unenforceable, in whole or in part, as to any part of the Secured Obligations, or is invalid or unenforceable, in whole or in part, as to any part of the Collateral, such portion, if any, of the Secured Obligations as is not secured by all of the Collateral hereunder shall be paid prior to the payment of the portion of the Secured Obligations secured by all of the Collateral, and all payments made on the Secured Obligations (including cash and/or property received in connection with sales of Collateral pursuant to Article 3 hereof) shall, unless prohibited by applicable law or unless Mortgagee, in its sole and absolute discretion, otherwise elects, be deemed and considered to have been first paid on and applied to payment in full of the unsecured or partially secured portion of the Secured Obligations, and the remainder to the secured portion of the Secured Obligations.

     7.8 Mortgagee’s Powers. Without affecting the liability of any other person liable for the payment of any Obligation herein mentioned, and without affecting the lien or charge of this Mortgage upon any portion of the Collateral not then or theretofore released as security for the full amount of all unpaid Secured Obligations, Mortgagee may, from time to time and without notice, (a) release any persons liable, (b) extend the maturity or alter any of the terms of any such Obligation, (c) permit the issuance of additional Loans and/or indebtedness under the Credit Agreement, (d) grant other indulgences, (e) release or reconvey, or cause to be released or reconveyed at any time at

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Mortgagee’s option any parcel, portion or all of the Collateral, (f) take or release any other or additional security for any obligation herein mentioned, or (g) make compositions or other arrangements with Mortgagor in relation thereto.

     7.9 Enforceability of Mortgage. This Mortgage is deemed to be and may be enforced from time to time as an assignment, chattel mortgage, contract, mortgage, deed to secure debt, fixture filing, real estate mortgage, or security agreement, and from time to time as any one or more thereof, as is appropriate and permitted under applicable law. A carbon, photographic or other reproduction of this Mortgage or any financing statement in connection herewith shall be sufficient as a financing statement for any and all purposes to the fullest extent permitted under applicable law.

     7.10 Captions. The captions or headings at the beginning of Articles and Sections hereof are for the convenience of the parties and are not part of this Mortgage.

     7.11 Attorneys’ Fees. In connection with any enforcement of its rights under this Mortgage (and in addition to all rights for fees and costs provided for under the Credit Agreement), Mortgagor promises to pay all costs of enforcement and collection, including reasonable attorneys’ fees, whether or not such enforcement and collection includes the filing of a lawsuit.

     7.12 Relationship of Parties. The relationship between Mortgagor and Mortgagee is that of borrower and lender only and neither Mortgagor nor Mortgagee is, nor shall it hold itself out to be, the agent, employee, joint venturer or partner of the other.

     7.13 Collateral Agent. The Collateral Agent will hold all items of Collateral at any time received under this Mortgage or the other Loan Documents in accordance with the terms of the Credit Agreement. It is expressly understood and agreed that the obligations of Mortgagee in its capacity as the Collateral Agent (and holder of the Collateral and interests therein and with respect to the disposition thereof) are only those expressly set forth in the Credit Agreement.

     7.14 Waiver of Jury Trial. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE LOAN DOCUMENTS BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.

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     7.15 Credit Agreement Controlling. In the event that any of the terms or provisions contained herein are inconsistent with the terms and provisions in the Credit Agreement, the terms and provisions of the Credit Agreement shall govern and control.

[SIGNATURE PAGE FOLLOWS.]

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Exhibit G

     THUS DONE AND PASSED in                     ,                    , on the ___ day of                       2007, in the presence of the undersigned competent witnesses, who hereunto sign their names with Mortgagor and me, Notary, after due reading of the whole.

WITNESSES:	MORTGAGOR:
Name:	USAGENGIES, L.L.C., a Louisiana limited
	liability company
	By:
Name:	Name:

_____________________________________________
                           NOTARY PUBLIC

Name: __________________________________________
Notary ID/Bar Roll No. ____________________________
My Commission Expires ___________________________

H-1

EXHIBIT A

Resolutions

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2

EXHIBIT B

Legal Description of the Real Property

Parcel A

(1) That certain portion of former North 15^th Street which lies between Lots 7, 8, 9 and a portion of Lot 10, Square 17 or 75 of the Suburb Waller Subdivision on the West and Lots 1, 12 and a portion of Lot 11, Square 20 or 76 of the Buhler Town subdivision on the East, commencing at the intersection of the South right-of-way line of Main Street with the inside face of the curb of the portion of the former North 15^th Street which is 13.15 feet east from the Northeast corner of Lot 7, Square 17 or 75, Suburb Waller; thence southerly a distance of 240 feet; thence easterly, perpendicular to the South right-of-way line of Main Street, 37.46 feet to a point and corner on the East right-of-way line of former North 15^th Street; thence northerly along the East right-of-way line of former North 15^th Street a distance of 240 feet to the intersection of the South right-of-way line of Main Street with the East right-of-way line of former North 15^th Street; thence westerly along the South right-of-way line of Main Street, 36.84 feet to the point of beginning, as more particularly shown by a survey dated October 20, 2005 by Evans-Graves Engineers, Inc. entitled “Map Showing Survey of All of SQ. 20 or 76, All of SQ. 21 or 77 and Lots 1 Thru 4, A Portion of Lot 5 and Lots 6, 7, 11 & 12, and Lots A & B, SQ. 24 or 78, Buhler Town and Portion of Former North 15^th Street and Former North 16^th Street Right-Of-Ways, Located in the Original City of Baton Rouge, T7S-R1W, Greensburg Land District, East Baton Rouge Parish, Louisiana for USAgencies, L.L.C.”

(2) Lots 1 through 12, Square 20 or 76, Buhler Town, Lots 1 through 12, Square 21 or 77, Buhler Town and an undesignated parcel of ground (which is a portion of former North 16^th Street lying between the South boundary line of Main Street and the North boundary line of Laurel Street) situated between the East side of Lots 5, 6, and 7 of Square 20 or 76, Buhler Town and the West side of Lots 1, 11 and 12 of Square 21 or 77, Buhler Town, said lots and undesignated parcel being bounded on the North by Main Street, on the East by 17^th Street, on the South by Laurel Street and on the West by 15^th Street (and the portion of the former North 15^th Street) as shown on a survey dated October 20, 2005 by Evans-Graves Engineers, Inc. entitled “Map Showing Survey of All of SQ. 20 or 76, All of SQ. 21 or 77 and Lots 1 Thru 4, A Portion of Lot 5 and Lots 6, 7, 11 & 12, and Lots A & B, SQ. 24 or 78, Buhler Town and Portion of Former North 15^th Street and Former North 16^th Street Right-Of-Ways, Located in the Original City of Baton Rouge, T7S-R1W, Greensburg Land District, East Baton Rouge Parish, Louisiana for USAgencies, L.L.C.”

Parcel B

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Lots 1, 2, 3, 4, 5, 6, 8, 9, 10, 11 and 12, Square 22 or 90, Buhler Town, City of Baton Rouge, East Baton Rouge Parish, Louisiana, as shown on a survey dated October 20, 2005 by Evans-Graves Engineers, Inc. entitled “Map Showing Survey of Lots 1 Thru 6, and Lots 8 Thru 12, SQ. 22 or 90, Buhler Town, Located in the Original City of Baton Rouge, T7S-R1W, Greensburg Land District, East Baton Rouge Parish, Louisiana for USAgencies, L.L.C.”

Parcel C

Lots 1, 2, 3, 4, 6 and 7, Lots A and B of a resubdivision of Lots 8, 9 and 10, Lots 11 and 12, and the West 2 feet, 10 inches of Lot 5, Square 24 or 78, Buhler Town, City of Baton Rouge, East Baton Rouge Parish, Louisiana, as shown on a Plot Plan and Survey of the Subdivision of Lots 8, 9, 10 of Square 24 or 78 Buhler Town in the City of Baton Rouge, Louisiana, into Lots ‘A’ & ‘B’” dated March 11, 1958 and recorded as Original 55, Bundle 4148, official records of East Baton Rouge Parish, Louisiana; and as shown by Survey dated October 20, 2005 by Evans-Graves Engineers, Inc. entitled, “Map Showing Survey of All of SQ. 20 or 76, All of SQ. 21 or 77 and Lots 1 Thru 4, A Portion of Lot 5 and Lots 6, 7, 11 & 12, and Lots A & B, SQ. 24 or 78, Buhler Town and Portion of Former North 15^th Street and Former North 16^th Street Right-Of-Ways, Located in the Original City of Baton Rouge, T7S-R1W, Greensburg Land District, East Baton Rouge Parish, Louisiana for USAgencies, L.L.C.”

Parcel D

The South 112 feet of Lot 1, the South 112 feet of Lot 2 and the South 112 feet of the West 6 feet of Lot 3, the East 51 feet of Lot 3, and Lots 4, 5 and 6 of Square 3 or 301 of Gusman Town & Lefever Town, City of Baton Rouge, East Baton Rouge Parish, Louisiana, as shown on a survey dated October 20, 2005 by Evans-Graves Engineers, Inc. entitled “Map Showing Survey of A Portion of Lots 1 Thru 3 and Lots 4, 5, & 6, SQ. 3 or 301, Lefever Town, Located in the Original City of Baton Rouge, T7S-R1W, Greensburg Land District, East Baton Rouge Parish, Louisiana for USAgencies, L.L.C.”

Parcel E

Private Air Space Servitude for Bridge (“Overhead Walk”) connecting the Buildings situated on Square 20 or 76, Buhler Town and Square 17 or 75 Suburb Waller, over and across a portion (which portion is designated by the cross-hatched area on the Survey referenced below) of strip of land which lies between the asphalt paving on former North 15^th Street and the building on Square 17 or 75, Suburb Waller, located on Lots 5, 6, 7, 11 and 12 and the East 150 feet of Lots 8 and 9 and the North 40 feet of Lot 10, square 17 or 75, Suburb Waller, City of Baton Rouge, which strip of land has a width of approximately 13.30 feet on the south and 13.15 feet on the North and a length of 240 feet, as more particularly shown by a

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survey dated October 20, 2005, by Evans-Graves Engineers, Inc. entitled “Map Showing Survey of All of SQ. 20 or 76, All of SQ. 21 or 77 and Lots 1 Thru 4, A Portion of Lot 5 and Lots 6, 7, 11 & 12, and Lots A & B, SQ. 24 or 78, Buhler Town and Portion of Former North 15^th Street and Former North 16^th Street Right-Of-Ways, Located in the Original City of Baton Rouge, T7S-R1W, Greensburg Land District, East Baton Rouge Parish, Louisiana for USAgencies, L.L.C.” created by Agreement of Private Air Servitude filed in the records of East Baton Rouge Parish, Louisiana as Original 447, Bundle 11784.

Parcel F

Leasehold Interest under a Lease of Air Space dated May 28, 1986 from the City of Baton Rouge and the Parish of East Baton Rouge to Goudchaux/Maison Blanche, Inc. covering the following described property for a term of 99 years commencing on March 1, 1986 and ending on February 28, 2085, which was recorded as Original 858, Bundle 9837 of the records of East Baton Rouge Parish Clerk of Court:

A certain portion or envelope of air space (“Space”) hereinafter described, being immediately contiguous and adjacent to the East line of Lot 5, Square 21 (77) Devall Town, more particularly described as follows:

Commencing in a horizontal plane above North 17^th Street at an elevation of 70.4 feet above mean sea level (determined by a reference to East Baton Rouge Parish Benchmark PBM Post Office-38, copper disk in front of City Club Building (Old Post Office), East Baton Rouge elevation — 58.081 feet above mean sea level and extending upward to 74.5 feet above mean sea level with reference to the same point, and located horizontally as follows: from the Northeast corner of Lot 5, Square 21 (77) Devall Town, southerly along the lot line (right of way line), 50 feet, 6 inches to POINT OF BEGINNING, thence continue southerly along the lot line (right of way line), 42 feet, 6 inches, then almost across the street to a point 51 feet, 6 inches east of the east line of Lot 5 and 78 feet, 0 inches, south of the South right-of-way line of Main Street; thence Northerly parallel to the West right-of-way line of North 17^th Street, 42 feet, 6 inches, then return across the street to POINT OF BEGINNING, and extending down from the air space envelope into the ground below, two supporting columns on the East side of the street, each not more than 12.56 square feet in area, and not less than 14 feet 6 inches outside of the presently paved roadway, and one additional column, of similar dimension and similarly located, but free standing, all as shown on the plan recorded as Original 858, Bundle 9837 of the official records of the East Baton Rouge Clerk of Court.

Said Lease of Air Space was assigned to Renaissance Park, LLC by Exchange Support Services, Inc. pursuant to one certain Assignment and

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Assumption of Air Space Leases dated September 20, 2004 filed and recorded with the Clerk and Recorder of East Baton Rouge Parish as Original 797, Bundle 11655 on September 30, 2004; and further assigned to USAgencies, L.L.C. by Assignment and Assumption of City/Parish Air Space Lease dated November 10, 2005 filed and recorded with the Clerk and Recorder of East Baton Rouge Parish as Original 440, Bundle 11784 on November 14, 2005.

Parcel G

Together with all buildings and improvements situated on the lots, parcels of ground and air space described above, including the enclosed Overhead Walk that connects the Buildings situated on Square 20 or 76, Buhler Town and Square 17 or 75, Suburb Waller, excluding, however any rights appurtenant to the four-story building located on Square 17, Suburb Waller (“Renaissance Park West”) or appurtenant to the parking areas located on Square 18, Suburb Waller, and on Lots 2, 3, 4 and 5 of Square 19, Buhler Town.

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EXHIBIT C

Local Law Provisions

     Section 1.1 Certificates. The production of mortgage, conveyance, tax research or other certificates is waived by consent, and Mortgagee and Mortgagor agree to hold each of the above-referenced Notaries Public harmless for any failure to procure and attach same.

     Section 1.2 No Paraph. For purposes of La. R.S. § 9:5556 and other applicable law, the parties declare that none of the indebtedness secured by this Mortgage and no note or other written obligation evidencing the same has been “paraphed” for identification with this Mortgage.

     Section 1.3 Multiple Originals. Mortgagor authorizes Mortgagee to file multiple originals, photocopies, carbon copies, or facsimile copies of this Mortgage or financing statements with the appropriate filing officer in the State of Louisiana pursuant to the provisions of the Code.

     Section 1.4 Taxpayer Identification Number. The last four digits of Mortgagor’s taxpayer identification number is accurately set out in the appearance captions of this Mortgage. Mortgagor will not change its taxpayer identification number or its name, identity or corporate structure so that any financing statement filed in connection herewith may become seriously misleading unless and until it notifies Mortgagee in writing and executes all new appropriate financing statements or other such documents as Mortgagee may require, with Mortgagor being required to pay the cost of such documentation and the filing thereof as provided above.

     Section 1.5 Certain Louisiana References. Each reference to a “lien” will include a reference to a “privilege,” “mortgage,” “collateral assignment” and/or “security interest,” as appropriate. Each reference to an “easement” or “easements” will include a reference to a “servitude” or “servitudes.” Each reference to a county will include a reference to a Louisiana parish. The terms “land,” “real property,” and “real estate” will mean “immovable property” as that term is used in the Louisiana Civil Code. The term “personal property” will mean “movable property” as that term is used in the Louisiana Civil Code. The term “intangible” will mean “incorporeal” as that term is used in the Louisiana Civil Code. Reference to “receiver” shall be deemed to be a keeper appointed by Mortgagee as provided herein. The term “fee estate” or “fee simple title” will mean “full ownership interest” as that term is used in the Louisiana Civil Code. The term “condemnation” will include “expropriation” as that term is used in Louisiana law. The term “conveyance in lieu of foreclosure” or “action in lieu thereof” will mean “giving in payment” as that term is used in the Louisiana Civil Code and “dation en paiment.” The term “joint and several” will mean “solidary” as that term is used in the Louisiana Civil Code.

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Exhibit H
Form of Perfection Certificate

PRE-CLOSING UCC DILIGENCE CERTIFICATE

          In connection with that certain Guarantee and Collateral Agreement, dated as of January ___, 2007 (the “Guarantee and Collateral Agreement”), by and among Affirmative Insurance Holdings, Inc. (“Borrower”), certain subsidiaries of the Borrower (together with the Borrower, the “Grantors”) and Credit Suisse, Cayman Islands Branch (“CS”), as Administrative Agent and Collateral Agent (the “Collateral Agent”), each Grantor hereby certifies as follows:

I. Current Information

     A. Legal Names, Organizations, Jurisdictions of Organization and Organizational Identification Numbers. The full and exact legal name⁴ (as it appears in each respective certificate or articles of incorporation, limited liability membership agreement or similar organizational documents, in each case as amended to date), the type of organization, the jurisdiction of organization (or formation, as applicable), and the organizational identification number (not tax i.d. number) of each Grantor are as follows:⁵

	Type of
	Organization (e.g. corporation,	Jurisdiction of	Organizational	Federal Tax
	limited liability company, limited	Organization/	Identification	Identification
Name of Grantor	partnership)	Formation	Number	Number

1.	It is crucial that the full and exact name of each Grantor is given. Even seemingly minor errors such as substituting “n.a.” for “national association” or “inc.” for “incorporated” may be seriously misleading in many states.
2	If a Grantor does not have an organizational identification number or a federal tax identification number, please indicate “none.”

H-1

Exhibit H

     B. Chief Executive Offices and Mailing Addresses. The chief executive office address and the preferred mailing address (if different than chief executive office or residence) of each Grantor are as follows:

	Address of Chief Executive Office	Mailing Address (if different than
Name of Grantor	(or for natural persons, residence)	CEO or residence)

     C. Changes in Names, Jurisdiction of Organization or Corporate Structure.

          Except as set forth below, no Grantor has changed its name, jurisdiction of organization or its corporate structure in any way (e.g. by merger, consolidation, change in corporate form, change in jurisdiction of organization or otherwise) within the past one (1) year:

Grantor Date of Change Description of Change

     D. Prior Addresses.

          Except as set forth below, no Grantor has changed its chief executive office, or principal residence if a particular Grantor is a natural person, within the past one (1) year:

Grantor Prior Address/City/State/Zip Code

     E. Acquisitions of Equity Interests or Assets.

          Except as set forth below, no Grantor has acquired the equity interests of another entity or substantially all the assets of another entity within the past one (1) year:

Grantor Date of Acquisition Description of Acquisition

II. ADDITIONAL INFORMATION.

H-2

Exhibit H
Form of Perfection Certificate

Tangible Personal Property. Set forth below are all the locations where any Grantor currently maintains or has maintained any material amount (fair market value of $10,000 or more) of its tangible personal property (including goods, inventory and equipment) of such Grantor (whether or not in the possession of such Grantor) within the past one (1) year:

Grantor Address/City/State/Zip Code County

H-3

Exhibit H
Form of Perfection Certificate

III. MISCELLANEOUS

     A. Authority to File Financing Statements. Each of the undersigned, hereby authorizes each of the Collateral Agents to file financing or continuation statements, and amendments thereto, in all jurisdictions and with all filing offices as each Collateral Agent may determine, in its sole discretion, are necessary or advisable to perfect the security interest granted or to be granted to such Collateral Agent under the Guarantee and Collateral Agreements. Such financing statements may describe the collateral in the same manner as described in the Guarantee and Collateral Agreements or may contain an indication or description of collateral that describes such property in any other manner as such Collateral Agent may determine, in its sole discretion, is necessary, advisable or prudent to ensure the perfection of the security interest in the collateral granted to such Collateral Agent, including, without limitation, describing such property as “all assets” or “all personal property.”

H-4

Exhibit H
Form of Perfection Certificate

     IN WITNESS WHEREOF, the undersigned hereto has caused this Pre-Closing UCC Diligence Certificate to be executed as of the date first written above by its officer thereunto duly authorized.

[GRANTOR(S)]

By:                                        
Name:
Title:

H-5

Exhibit H
Form of Perfection Certificate

Appendix A
to Pre-Closing UCC Diligence Certificate

INVESTMENT RELATED PROPERTY

1. Securities. Set forth below is a list of all equity interests owned by a Grantor together with the type of organization which issued such equity interests (e.g. corporation, limited liability company, partnership or trust):

				Total		Certificate No.
		Type of	# of	Shares	% of Interest	(if uncertificated,
Grantor	Issuer	Organization	Shares Owned	Outstanding	Pledged	please indicate so)	Par Value

2. Securities Accounts. Set forth below is a list of all securities accounts in which any Grantor customarily maintains securities or other assets having an aggregate value in excess of $10,000:

		Name & Address of
Grantor	Type of Account	Financial Institutions

H-6

Exhibit H
Form of Perfection Certificate

3. Deposit Accounts. Set forth below is a list of all bank accounts (checking, savings, money market or the like) in which any Grantor customarily maintains in excess of $10,000:

		Name & Address of
Grantor	Type of Account	Financial Institutions

4. Instruments. Set forth below is a list of all instruments owed to any Grantor in the principal amount of greater than $10,000:

		Principal Amount
Grantor	Issuer of Instrument	of Instrument	Maturity Date

H-7

Exhibit H
Form of Perfection Certificate

Appendix B
to Pre-Closing UCC Diligence Certificate

INTELLECTUAL PROPERTY

1. Set forth below is a list of all copyrights, patents and trademarks and other intellectual property owned or used, or hereafter adopted, held or used, by a Grantor:

Grantor Copyrights Filing Date Status Registration No.

Grantor Patents Filing Date Status Registration No.

Grantor Trademarks Filing Date Status Registration No.

H-8

Exhibit H
Form of Perfection Certificate

Appendix C
to Pre-Closing UCC Diligence Certificate

INVENTORY AND EQUIPMENT

1. Inventory and Equipment. Set forth below are all the locations where any Grantor currently maintains any material amount (aggregate fair market value of $10,000 or more) of inventory and equipment of such Grantor (whether or not in the possession of such Grantor):

			Description of
Grantor	Address/City/State/Zip Code	County	Assets and Value

2. Warehousemen and bailees. Except as set forth below, no persons (including warehousemen and bailees) other than a Grantor have possession of any material amount (fair market value of $10,000 or more) of assets of any Grantor:

			Description of
Grantor	Address/City/State/Zip Code	County	Assets and Value

H-9

Exhibit H
Form of Perfection Certificate

Appendix D
to Pre-Closing UCC Diligence Certificate

REAL ESTATE RELATED UCC COLLATERAL

1. Fixtures. Set forth below are all the locations where any Grantor owns or leases any real property:

			Owned
Grantor	Address/City/State/Zip Code	County	or Leased

2. “As Extracted” Collateral. Set forth below are all the locations where any Grantor owns, leases or has an interest in any wellhead or minehead:

Grantor Address/City/State/Zip Code County

3. Timber to be Cut. Set forth below are all locations where any Grantor owns goods that are timber to be cut:

Grantor Address/City/State/Zip Code County

H-10

Exhibit H
Form of Perfection Certificate

Appendix E
to Pre-Closing UCC Diligence Certificate

NAMES

1. Trade Names.

          Current Names. Set forth below is each trade name or assumed name currently used by any Grantor or by which any Grantor is known or is transacting any business:

Grantor Trade/Assumed Name

          Past Names. Set forth below is each trade name or assumed name used by any Grantor during the past one (1) year or by which any Grantor has been known or has transacted any business during the past one (1) year other than the names identified in Section I.A. of this Pre-Closing UCC Diligence Certificate:

Grantor Trade/Assumed Name

H-11

Exhibit H
Form of Perfection Certificate

Appendix F
to Pre-Closing UCC Diligence Certificate

COMMERCIAL TORT CLAIMS

Set forth below is a true and correct list of all Commercial Tort Claims (as defined in the Guarantee and Collateral Agreements) held by each Grantor, including a brief description thereof.

H-12

Exhibit H
Form of Perfection Certificate

Appendix G
to Pre-Closing UCC Diligence Certificate

LETTER OF CREDIT RIGHTS

Set forth below is a true and correct list of all Letters of Credit issued in favor of each Grantor, as beneficiary thereunder.

H-13

Exhibit H
Form of Perfection Certificate

Appendix H
to Pre-Closing UCC Diligence Certificate

MOTOR VEHICLES

     Set forth below is a true and correct list of all motor vehicles (covered by certificates of title or ownership) valued at over $50,000 and owned by each Grantor, and the owner and approximate value of such motor vehicles.

Motor Vehicle Owner Approximate Value

H-14

Exhibit I

FORM OF NON BANK CERTIFICATE

     Reference is made to the Credit Agreement dated as of January 31, 2007 (the “Credit Agreement”), among Affirmative Insurance Holdings, Inc., the Borrower, the Lenders from time to time party thereto, Credit Suisse, Cayman Islands Branch, as administrative agent and as collateral agent, and the other parties thereto. Pursuant to Section 2.20(d) of the Credit Agreement, the undersigned hereby certifies that it is not a “bank” or other Person described in Section 881(c)(3) of the Internal Revenue Code of 1986, as amended.

[NAME OF LENDER]
By:
	Name:
	Title:

I-1

Exhibit J

FORM OF LEGAL OPINION

     Formation/Requisite Power

     a. Affirmative Insurance Holdings, Inc., and each Subsidiary Guarantor that is a [corporation][limited liability company][limited partnership] formed or organized under the laws of the State of Delaware (each, a “Delaware Guarantor”) is a corporation duly formed or organized and is validly existing under the laws of the State of Delaware with all necessary [corporate][limited liability company][limited partnership] power and authority to own its properties and conduct its business as presently conducted and as proposed to be conducted and to enter into each Loan Document to which it is a party, perform its obligations thereunder, borrow any amounts specified therein and give any guarantee contemplated thereby. Affirmative Insurance Holdings, Inc., and each Subsidiary Guarantor is in good standing under the laws of the State of Delaware and is qualified to do business in each jurisdiction where the nature of its business requires such qualification.

     b. Each Subsidiary Guarantor that is a [corporation][limited liability company] formed or organized under the laws of the State of [                    ] (each, a “[                      ] Guarantor”) is a [corporation][limited liability company] duly formed or organized and is validly existing under the laws of the State of [                    ] with all necessary [corporate][limited liability company] power and authority to own its properties and conduct its business as presently conducted and as proposed to be conducted and enter into each Loan Document to which it is a party, perform its obligations thereunder, borrow any amounts specified therein and give any guarantee contemplated thereby. Each [                    ] Guarantor is in good standing under the laws of the State of [                     ] and is qualified to do business in each jurisdiction where the nature of its business requires such qualification.

     Due Authorization

     The execution, delivery and performance by Affirmative Insurance Holdings, Inc., and each Subsidiary Guarantor of each Loan Document to which it is a party, including, without limitation, the borrowings, issuances of letters of credit, guarantees and uses of proceeds thereunder and the creation of the security interests contemplated thereby have all been duly authorized by all necessary corporate, limited liability company or limited partnership action, as applicable, and, if necessary, all stockholder, member or partner action of Affirmative Insurance Holdings, Inc., and each Subsidiary Guarantor, as applicable.

     Due Execution and Delivery

     Each Loan Document to which Affirmative Insurance Holdings, Inc., or any Subsidiary Guarantor is a party has been duly executed and delivered by Affirmative Insurance Holdings, Inc., or such Subsidiary Guarantor, as applicable.

     Enforceability

     Each Loan Document to which Affirmative Insurance Holdings, Inc., or any Subsidiary Guarantor is a party constitutes a legally valid and binding obligation of ANR Affirmative Insurance Holdings, Inc., or such Subsidiary Guarantor, as applicable, enforceable against Affirmative Insurance Holdings, Inc., or such Subsidiary Guarantor, as applicable, in accordance with its terms.

     No Conflicts; Consents

     a. The execution and delivery by Affirmative Insurance Holdings, Inc., and each Subsidiary Guarantor of each Loan Document to which it is a party and the consummation of the transactions contemplated thereby, the granting of the Liens under the Security Documents and the performance by each Affirmative Insurance Holdings, Inc., and each Subsidiary Guarantor of its respective obligations under the Loan Documents to which such it is a party, the borrowings, issuances of letters of credit, guarantees and uses of proceeds thereunder and the creation of the security interests contemplated thereby, do not (a) conflict with, result in a breach of or

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violate any of the terms, conditions or provisions of any of Affirmative Insurance Holdings, Inc., or any Subsidiary Guarantor’s by-laws, limited liability company agreement, partnership agreement, certificate of incorporation, articles of incorporation or any other governing or constituent documents (collectively, the “Governing Documents”), (b) result in the breach of or a default under or result in the ability to terminate or accelerate any outstanding obligations under any agreement identified to us by Affirmative Insurance Holdings, Inc., as being material to the conduct of its or its subsidiaries business (each, a “Material Agreement”), (c) violate any federal or state law, statute, rule or regulation applicable to any of Affirmative Insurance Holdings, Inc., or any Subsidiary Guarantor or their properties, including, without limitation, Regulations T, U or X of the Board of Governors of the Federal Reserve System, assuming Affirmative Insurance Holdings, Inc., complies with the provisions of the Loan Documents relating to the use of proceeds, (d) contravene any orders, writs, injunctions, decrees or arbitral awards that are binding upon Affirmative Insurance Holdings, Inc., or any Subsidiary Guarantor or its properties or assets (each, an “Applicable Order”), (e) result in, or require, the creation of or imposition of any Lien (other than the lien of the Security Documents), upon or with respect to any of the properties or assets now owned or hereafter acquired by Affirmative Insurance Holdings, Inc., or any Subsidiary Guarantor, or (f) require any consents, approvals, authorizations, registrations, declarations or filings to be obtained by Affirmative Insurance Holdings, Inc., or any Subsidiary Guarantor under any federal or state law, statute, rule, or regulation applicable to Affirmative Insurance Holdings, Inc., or any Subsidiary Guarantor or their properties or under the Governing Documents or under any Material Agreement, in each case, that have not already been obtained or made.

     Investment Company Act Compliance

     None of Affirmative Insurance Holdings, Inc., or any Subsidiary Guarantor is an “investment company”, or a company “controlled” by and “investment company” as such terms are defined in the Investment Company Act of 1940, as amended.

     Validity of Security Interest in Article 9 Collateral

     The provisions of each Security Document are effective to create valid security interests in favor of the Collateral Agent, for the benefit of the Secured Parties, in that portion of the Collateral and the Mortgaged Properties described in the Guarantee and Collateral Agreement, each Mortgage and each Intellectual Property Security Agreement, respectively, in each case to the extent such Collateral is subject to Article 9 of the UCC (the “Collateral”) as security for the payment, to the extent set forth in each such Security Document of the Obligations of the relevant Loan Party to the Secured Parties under the Loan Documents.

     Perfection of Security Interest in Pledged Collateral

     a. Upon delivery of the certificates representing the Pledged Securities to the Collateral Agent in the State of New York pursuant to the Guarantee and Collateral Agreement with undated transfer powers duly endorsed in blank by an effective endorsement, the security interests in such Pledged Securities in favor of the Collateral Agent, for the benefit of the Secured Parties, will be perfected. No other security interest in the Pledged Securities is equal or prior to the security interest of the Collateral Agent, for the benefit of the Secured Parties.

     b. Upon delivery of that portion of the Pledged Collateral consisting of the collateral that constitutes “instruments” within the meaning of Section 9-102(a)(47) of the [___] UCC (the “Pledged Notes”) to the Collateral Agent in the State of New York pursuant to the Guarantee and Collateral Agreement, the security interests in favor of the Collateral Agent, for the benefit of the Secured Parties, will be perfected. No other security interest in the Pledged Notes is equal or prior to the security interest of the Collateral Agent, for the benefit of the Secured Parties, assuming the Collateral Agent takes possession of the Pledged Notes in good faith and without knowledge that its security interest in the Pledged Notes violates the rights of another secured party.

     [Perfection of Security Interest in Accounts

     a. The provisions of the Control Agreements are effective under the [                    ] UCC to perfect the security interest in favor of the Collateral Agent, for the benefit of the Secured Parties, in that portion of the

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Pledged Collateral consisting of Deposit Account[s] maintained with                      (the “Depositary Bank”) described in each such Control Agreement (the “Deposit Account[s]”).

     b. The provisions of the Securities Account Control Agreements are effective under the [                    ] to perfect the security interest in favor of the Collateral Agent, for the benefit of the Secured Parties, in that portion of the Pledged Collateral consisting of Securities Account[s] maintained with                      (the “Securities Intermediary”) described in such Securities Account Control Agreement (the “Securities Account[s]”). The Collateral Agent’s security interest in the Securities Account[s] has priority over any other security interest in the Securities Account[s] granted by Affirmative Insurance Holdings, Inc., or any Subsidiary Guarantor assuming no other secured party has control of, and the absence of any other control agreement with respect to, the Securities Account[s]. We express no opinion as to the priority of any security interest in the Securities Account as against any other security interest in favor of the Securities Intermediary.]

     Appropriateness of Financing Statements

     Each Financing Statement is in appropriate form for filing in the office of the [Secretary of State][relevant central filing authority] of the State of [                    ]. Upon the proper filing of each such Financing Statement in the office of the [Secretary of State][relevant central filing authority] of the State of [                    ], the security interest in favor of the Collateral Agent, for the benefit of the Secured Parties, in the collateral described in each such Financing Statement will be perfected to the extent a security interest in such collateral can be perfected under the provisions of the [                    ] UCC by the filing of a financing statement in the State of [                    ].

     Litigation

     There is no action, suit or proceeding before or by any court, arbitrator or governmental agency, body or official, now pending or, to the best of our knowledge, threatened, to Affirmative Insurance Holdings, Inc., or any Subsidiary Guarantor is a party or to which the business, assets or property of any of them is subject which is not disclosed in the Loan Documents, which (a) involves the Loan Documents or the transactions contemplated thereby or (b) could reasonably be expected to cause a Material Adverse Effect.

     Ownership Matters

     There are to the best of our knowledge, no outstanding subscriptions, options, warrants, calls, rights, repurchase rights, or other agreements or commitments of any nature relating to any of the Pledged Securities or restricting the transfer thereof or voting thereunder and each of the shares constituting Pledged Securities have been duly authorized and issued, are fully paid and non-assessable and are free and clear of all liens.

     Real Estate and Local Permitting Opinions

     [Form opinions for real estate and local permitting matters will be provided under separate cover.]

     Insurance / Regulatory Matters

     [Form opinions for federal regulatory matters will be provided under separate cover.]

J-3

EXHIBIT K-1

CONTRACT INCLUDING INSURANCE PREMIUM FINANCE AGREEMENT

PROMISSORY NOTE, TRUTH IN LENDING DISCLOSURES AND SECURITY AGREEMENT

BORROWER:

ADDRESS:

E-MAIL:

Address for Notices:

Use this address for all notices required by law. Use this address to communicate with me until I tell you in writing that I want you to use another address, which I will specify. I promise to tell you in writing if I change my address, my e-mail address, or my telephone number. In the event no address is specified, the mailing address shown above will be used as the default. I understand that you may also use other addresses to communicate with me when formal notice is not necessary, or if you are unable to contact me at the address, I have provided. However, I understand that you are not obliged to do so. If I wish to communicate with you about this Contract, I agree to use the address written after CREDITOR” below.

NO AGENT: USAgencies Casualty Insurance Company, Inc. issued the insurance Policy. The Insurance Company sells directly to customers and does not use agents.

INSURANCE POLICY DESCRIPTION:            Insurance Company:                USAgencies Direct Insurance Company, Inc.

Policy No.:
Policy Period:      through

TOTAL COST OF OBTAINING THE INSURANCE COVERAGE: The cost of obtaining the insurance coverage is itemized on the Declarations Page of Policy No. ___, Issued by the Insurance Company. This Declarations Page is incorporated into and made part of this Contract by reference.

DISCLOSURES REQUIRED UNDER THE FEDERAL TRUTH IN LENDING ACT

CREDITOR: LIFCO, L.L.C., Post Office Drawer 98515, Baton Rouge, Louisiana 70884-8515

ITEMIZATION OF AMOUNT FINANCED:

(1) New Premium and Fees	$	0.00
(2) (Less) Premium and Fees Down	$	0.00
(3) Amount Paid to Insurance Co.	$	0.00
(4) Previous Account Balance	$	0.00
(5) Interest Accrued	$	0.00
(6)  Deferred Fees Collected	$	0.00
(7) Origination Fee	$	0.00
(8) (Less) Prepaid Origination Fee	$	0.00
(9) Amount Financed (3 plus 4-7, minus 8)	$	0.00

K-1-1

ANNUAL PERCENTAGE RATE	FINANCE CHARGE		AMOUNT FINANCED		TOTAL OF PAYMENTS
The cost of my loan as a yearly rate	The dollar amount my loan will cost me		The amount of credit provided to me or on my behalf		The amount I will have paid after I have made all payments as scheduled
0.00%	$	0.00	$	0.00	$	0.00

Payment Schedule: My loan is repayable as follows: equal monthly installments in the amount of $0.00 beginning on ___, through ___, with 1 final payment of 0.00, due on ___.

Late Charges: If a payment is more than 10 days late. I will be charged 5% of the delinquent amount or $5.00, whichever is greater. Prepayment: If I pay my loan off early, I may be entitled to a refund of part of the finance charge.

Security Interest: My loan is secured by the insurance policy purchased with the loan proceeds, as wall as proceeds of the policy.

Contract Reference: I should look to the Contract for further information about non-payment, default, your right to accelerate the maturity of the obligation, and prepayment rebates and penalties.

PROMISSORY NOTE

Promise to Pay: I promise to pay to your order, at your address, the sum of dollars ($0.00) consisting of principal and precomputed interest at the rate of 0.00% per annum, payable in equal installments of $0.00, due on the day of each month, commencing on ___, with one final installment due on.

     Late Charges: If I fail to pay any installment within ten days of its due date, I agree to pay you a late charge of 5% of the delinquent amount or $5.00 whichever is greater. A late charge will also be assessed if the policy is canceled due to insufficient funds.

     Default and Acceleration: If I fail to pay one installment and it remains unpaid for ten days or more after the due date, this Promissory Note will be in default and you may cancel my Insurance Policy. If two or more installments are in default for ten days or more, you may accelerate the maturity of this Promissory note, which means that I must pay all outstanding amounts immediately. After making any rebate required by law, you may then convert this Promissory Note into a simple interest transaction.

     Additional Interest: If you accelerate the maturity of this Promissory Note or if it remains unpaid after the final installment is due, then, for a period of one (1) year after maturity, I agree to pay additional Interest on the unpaid balance (after any applicable rebate) at the interest rate shown above. After that, I agree to pay interest at the rate of 18% per annum, until this Promissory Note is paid in full.

     Rebate: I may prepay this Promissory Note in full at any time. If I prepay in full, or if you accelerate the maturity of this Promissory Note, l may be entitled to a refund of part of the finance charge as determined by the simple Interest method. The $25.00 Origination Fee I paid when I first made my loan is earned when my loan is closed and will not be rebated.

     Attorney’s Fees: If you refer this Promissory Note to any attorney for collection, I agree to pay attorney’s fees in an amount equal to 25% of the unpaid debt owed to you.

     Unpaid Check Charges: If I pay by check and my check is returned because I stopped payment, or because there were insufficient funds in my account, I will pay you an additional amount, equal to 5% of the amount of my dishonored check, or $15.00, whichever is less.

     Non-negotiable: This Promissory Note is not negotiable.

     Waivers: I waive demand for payment, notice of protest and of non-payment, and all defenses of division and discussion. My liability under this Promissory Note is “in solido” with the liability of any other person who may be liable. Discharge or release of any specific right, or of any security given to secure payment, will not affect the remainder of my obligation.

K-1-2

Signature Lines on Second Page

SECURITY AGREEMENT

     In order to secure payment of any amounts that I may owe you under this Contract, I give you a security interest in my Insurance Policy, including (but not limited to) any right to a refund of premiums or any amount the Insurance Company might otherwise owe me for losses covered by my insurance Policy. You may apply any money you receive from my Insurance policy to pay any debt owed to you under this Contract, including any amount due under the Promissory Note, the $25.00 Cancellation Fee described below, attorney fees, or any deferred charges. Even though you have the right to be paid from proceeds of the Insurance Policy, I remain personally liable to pay you these amounts until everything is paid.

Signature Lines Below

LIENHOLDERS AND OTHERS ENTITLED TO NOTICE OF CANCELLATION:

Signature Lines Below

POWER OF ATTORNEY

     I give you a power of attorney. If I fail to pay even one installment on the Promissory Note, I authorize you to cancel my Insurance Policy and any endorsements listed on this Contract or in any amendments to this Contract, including amendments you make pursuant to this Power of Attorney. I give a power of attorney to notify my Insurance Company and any persons entitled to notice and to tell them that my Insurance Policy is cancelled. After payment of all amounts due to you under this Contract, I also give you power of attorney to pay to the Insurance Company (or allow the Insurance Company to retain) any unearned premiums or other amounts which the Insurance Company may otherwise owe me, in order to purchase as much continued coverage under the Insurance Policy as such funds permit, until such time as I prove to the Insurance Company that I have purchased replacement insurance, as required by law or as required by any other person entitled to the benefit of coverage. I may not revoke this power of attorney while my Promissory Note remains unpaid and until I have provided such replacement Insurance.

Signature Lines Below

ADDITIONAL CONTRACT TERMS

     Pronouns and Headings: This Contract uses the words “I”, “me”, and “my”, which refer to the Insured who is signing this Contract. The words “you”, “your”, and “yours” refer to the Creditor. The headings in this Contract are only for convenience and do not completely summarize the provisions which follow them.

     Changes to Insurance Policy: If in the future I request any change to my Insurance Policy and if the change is accepted by the Insurance Company and it makes an endorsement to the Insurance Policy, the new Declaration Page containing the requested endorsement will automatically become a part of and incorporated into this Contract by reference. I further authorize you to adjust the balance due you and the related remaining payments under my original Insurance Premium Finance Contract together with any modifications thereto without obtaining an amended, signed contract from me.

     No Reliance on Anything Not Written in this Contract: No employee of LIFCO or USAgencies told me that this Contract includes anything not written in this Contract.

K-1-3

     Use of Proceeds: I have borrowed from you the Amount Financed. This money will be used to pay the premium on the Insurance Policy and for the other purposes stated in the section entitled “Itemization of Amount Financed.”

     Cancellation Fee: If you cancel the Insurance Policy after my default, I agree to pay you a cancellation fee of $25.00. This fee is different than the Origination Fee which is described elsewhere in this Contract.

     Deferred Charges: You, in your absolute discretion, may choose to defer my obligation to pay late charges, the Cancellation Fee or any other amount which I may owe you under this Contract. I understand that you are not waiving your right to collect such fees, but only deferring the time for payment. I understand that you do not waive any such charges or release me from my obligation to pay them, unless you specifically tell me in writing that you are doing so.

     Louisiana Consumer Credit Law: You and I agree that this Contract is governed by the Louisiana Consumer Credit Law.

     Receipt of Copy of Contract: I have received a copy of this contract.

     Electronic Collection of Checks: I authorize you to electronically collect any check I give you. You may at your option electronically collect a check, either the first time you present it for payment, or if a check is returned because of insufficient funds and you re-present it. in the case of a returned check, my account may be debited for any applicable fees as stated in the Unpaid Check Charges section of the Promissory Note. If a check is collected electronically, you will send the check amount, routing and account numbers to my bank. Because this information is sent electronically, my bank account can be debited as early as the same day you receive the check. If a check is collected electronically, I authorize you to destroy the original and maintain an image in your records. I understand that my bank will not return the canceled check to me, but will show the transaction on my bank account statement.

     Reading and Understanding: I have read everything in this Contract (which consists of 2 pages). Before signing this Contract, I understood it or I obtained someone’s help so I could understand.

Borrower

Date

     Accepted by:                                                             , LIFCO Representative, on:

K-1-4

EXHIBIT K-2

INSURANCE PREMIUM FINANCE CONTRACT
COMBINATION PROMISSORY NOTE, TRUTH IN LENDING
DISCLOSURE STATEMENT AND SECURITY AGREEMENT
Illinois Premium Finance Regulation — Precomputed Interest

Date: THIS NOTE IS NON-NEGOTIABLE

BUYER:
	(Print full Name)	(Street No.)	(City)	(County)	(State)	(Zip)
Co-BUYER:
	(Print full Name)	(Street No.)	(City)	(County)	(State)	(Zip)
AGENT:	USAgencies Management Services   8550 United Plaza Blvd., Suite 805   Baton Rouge   Baton Rouge LA           70809
	(Print full Name)	(Street No.)	(City)	(County)	(State)	(Zip)

LENDER: LIFCO, L.L.C., 8550 United Plaza Blvd. Suite 804, Baton Rouge, LA 70809

I have obtained a loan from you to finance the purchase of the following insurance policies:

	Insurance Co.	Coverage	Policy Period	Premium
0	USAgencies Direct		From:
	Insurance Company		To:

(1) Previous Amount Financed:	$	0.00	(5) Principal Paid:	$	0.00
(2) New Premium:	$	0.00	(6) Premium Down:	$	0.00
(3) Interest Accrued:	$	0.00
(4) Deferred Fees Collected:	$	0.00	(7) Total (1 through 4 minus 5 through 6 equals 7):	$	0.00

DISCLOSURE REQUIRED UNDER THE FEDERAL TRUTH IN LENDING ACT

ANNUAL PERCENTAGE RATE:	FINANCE CHARGE:		Amount Financed:		Total of Payments:
The cost of my loan as a yearly rate.	The dollar amount my loan will cost me.		The amount of credit provided to me or on my behalf.		The amount I will have paid after I have made all payments as scheduled.
0.00%	$	0.00	$	0.00	$	0.00

     Payment Schedule: My loan is repayable as follows:

Number of Payments	Amount		When Payments Are Due
0    equal installment payments	$	0.00	Monthly beginning on _____
One final payment	$	0.00	Due on ____

Late Charges: If a payment is more than 5 days late, I will be charged 5% of the delinquent amount, not less than $1.00.

Prepayment: If I pay my loan off early, I will not be entitled to a refund of any part of the finance charges.

Security: My loan is secured by the insurance policies being purchased with the loan proceeds.

Contract Reference: I should look to my Note for additional information about non-payment, default, your right to accelerate payment and prepayment rebates.

Itemization of the Amount Financed

(1) Amount Paid to Insurance Company:	$	0.00	(3) (less) Prepaid Finance Fee:	$	0.00
(2) Additional Fee Financed:	$	0.00	(4) Amount Financed (Sum of 1 and 2, minus 3):	$	0.00

PROMISSORY NOTE (“Note”)

Promise to Pay: I promise to pay to the order of the above named Lender at Lender’s address or at any of the USAgencies sales offices the sum of (0.00), consisting of principal and precomputed interest, payable in accordance with the Payment Schedule indicated above.

Late Charges: If I fail to pay any payment under this Note within five days of when due, I agree to pay you a late charge in an amount equal to no less than $1 nor more than 5% of the installment in default.

Default and Acceleration: You have the right, at your option, to Insist on immediate payment in full (to accelerate the maturity) of the Note If I fail to make any payment under this Note when due.

Additional Promissory Note Terms and Conditions and Security Agreement Continued on Page 2

Note Rate: 0.00%

I (We) acknowledge receipt of a completed copy of this Disclosure Statement, Promissory Note (as continued on page 2) and Security Agreement (on page 2) and agree to their terms. I authorized you to make disbursements as itemized above.

  Buyer   Co-Buyer

Promissory Note — Additional Terms and Conditions Continued from Page 1

Rebate Upon Prepayment: I may prepay this Note in full at any time. I understand that I am not entitled to a refund of any part of the finance charge.

Additional Interest: If you accelerate payment under this Note for any reason and file suit against me, or If the Note remains unpaid after its final payment date, I agree to pay additional interest on the unpaid balance 0 the Note after applying the amount of unearned premium returned from the insurance company at the Note Rate shown above.

Attorney’s Fees: If you hove to sue me, or if you refer this Note to an attorney for collection, I agree to pay reasonable attorney’s fees In an amount equal IC 25% of the unpaid debt owed to you under this Note.

NSF Check Charges: In the event that I make any payment on this Note by check and my check is returned to you unpaid due to non-sufficient funds in m deposit account, I agree to pay you an additional NSF Check Charge of $15 plus any actual expenses Incurred In connection with the dishonored check.

Reinstatement Charge: I may request you to ask the insurance company to reinstate my policy, subject to all terms and conditions set forth by the Insurance company. If the insurance company agrees to reinstate my policy, I agree to pay my original monthly payment, the subsequent late charge, end the $25.OC reinstatement charge. By my fulfilling all of the conditions set forth in this paragraph, you can conclude that it Is my intention to have my policy reinstated.

Endorsements: I may request changes to my insurance policy during its term. If the changes ace accepted by the insurer, I authorize you to adjust this balance due you and the related remaining payments under my original insurance Premium Finance Contract together with any modifications thereto without obtaining en amended, signed contract from me.

     If the premium increases, you will loan me the additional premium amount plus the additional finance charges allowed by Illinois law and Increase my payments equally over the remaining number of payments. If the premium decreases, you wilt decrease my payments by the amount of the decreased premium equally over the remaining number of payments. I understand that you will provide me with a document in the form of the Insurance Premium Finance Contract showing the change in my balance and the change in the remaining payments. Further, I understand that my debt to you equals the sum of the remaining payments on the original Contract and all endorsements thereto.

     Your records show that I owe payments of 0 each.

Governing Law: This Note is subject to the Illinois Premium Finance Regulation.

General Provisions: I. as well as all other persons signing this Contract as a Guarantor, waive demand for payment and notice of protest and non-payment and all pleas of division and discussion, and agree that our liability under this Note shall be “joint, several and solitary” with each other. We further agree that discharge or release of any party or collateral securing this Note, extension of time for payment, or delay in enforcing any rights granted to you, will not cause you to lone any of your rights.

     This Instrument is non-negotiable In form but may be pledged as collateral security, If so pledged, any payment made to the Lender either of principal or of interest, upon the debt evidenced by this obligation, shall be considered and construed as a payment on this instrument, the same as though it were still in the possession and under the control of the Lender named herein; and the pledges holding this instrument as collateral security hereby makes said Lender its agent to accept arid receive payments hereon, whether of principal or of interest.

     Paragraph headings are for convenient reference and are not to be construed as a complete summary of each paragraph. In this Contract (Note and Security Agreement), the words “I”, “me”, “my”, “we”, “us”, and “our” mean each person signing this Contract as a buyer, co-buyer or guarantor. The words “you”, “your”, and “yours” mean the Lender named in the Contract.

Signature Lines on Page 1

SECURITY AGREEMENT

     To secure repayment of my Note (and other amounts that I may owe you under this Contract), I am giving you a security interest in my insurance policies described In this Contract, including but not limited to any rights which I may have to return premiums and payments for losses under my policies.

     If should default under my Note, I authorize you, or my Agent on your behalf, to cancel my insurance policies and to notify my insurance company o companies of the cancellation. I am giving you a power of attorney to do this, which I may not revoke while my Note remains unpaid.

     You may apply any funds which you receive from my insurance company or companies to the payment of my Note in principal, Interest, and late charge provided above, returning any excess funds to me. If the amount of funds you receive are not sufficient to satisfy payment under my Note In full, I will remain personally liable to you for the difference.

Signature Lines on Page 1

Guaranty

I (We) jointly, severally, and solidarity unconditionally guarantee payment of the above Note and all substitutions, refinancings, and renewals thereof and agree to at of the Contract’s terms and conditions.

  Guarantor    Guarantor

  Date   Authorized Representative

EXHIBIT K-3

CONTRACT INCLUDING INSURANCE PREMIUM FINANCE AGREEMENT
PROMISSORY NOTE, TRUTH IN LENDING DISCLOSURES AND SECURITY AGREEMENT

BORROWER:

ADDRESS:

E-MAIL:

Address for
Notices:

Use this address for all notices required by law. Use this address to communicate with me until I tell you in writing that I want you to use another address, which I will specify. I promise to tell you in writing if I change my address, my e-mail address, or my telephone number. In the event no address is specified, the mailing address shown above will be used as the default. I understand that you may also use other addresses to communicate with me when formal notice is not necessary, or if you are unable to contact me at the address, I have provided. However, I understand that you are not obliged to do so. If I wish to communicate with you about this Contract, I agree to use the address written after CREDITOR” below.

NO AGENT: USAgencies Casualty Insurance Company, Inc. issued the insurance Policy. The Insurance Company sells directly to customers and does not use agents.

INSURANCE POLICY DESCRIPTION:            Insurance Company:           USAgencies Casualty Insurance Company, Inc.

Policy No.:
Policy Period:      through

TOTAL COST OF OBTAINING THE INSURANCE COVERAGE: The cost of obtaining the insurance coverage is itemized on the Declarations Page of Policy No. ___, Issued by the Insurance Company. This Declarations Page is incorporated into and made part of this Contract by reference.

DISCLOSURES REQUIRED UNDER THE FEDERAL TRUTH IN LENDING ACT

CREDITOR: LIFCO, L.L.C., Post Office Drawer 98515, Baton Rouge, Louisiana 70884-8515

ITEMIZATION OF AMOUNT FINANCED:

(1) New Premium and Fees	$	0.00
(2) (Less) Premium and Fees Down	$	0.00
(3) Amount Paid to Insurance Co.	$	0.00
(4) Previous Account Balance	$	0.00
(5) Interest Accrued	$	0.00
(6)  Deferred Fees Collected	$	0.00
(7) Origination Fee	$	0.00
(8) (Less) Prepaid Origination Fee	$	0.00
(9) Amount Financed (3 plus 4-7, minus 8)	$	0.00

ANNUAL PERCENTAGE RATE	FINANCE CHARGE		AMOUNT FINANCED		TOTAL OF PAYMENTS
The cost of my loan as a yearly rate	The dollar amount my loan will cost me		The amount of credit provided to me or on my behalf		The amount I will have paid after I have made all payments as scheduled
0.00%	$	0.00	$	0.00	$	0.00

Payment Schedule: My loan is repayable as follows: equal monthly installments in the amount of $0.00 beginning on ___, through ___, with 1 final payment of 0.00, due on                     .

Late Charges: If a payment is more than 10 days late. I will be charged 5% of the delinquent amount or $5.00, whichever is greater. Prepayment: If I pay my loan off early, I may be entitled to a refund of part of the finance charge.

Security Interest: My loan is secured by the insurance policy purchased with the loan proceeds, as wall as proceeds of the policy.

Contract Reference: I should look to the Contract for further information about non-payment, default, your right to accelerate the maturity of the obligation, and prepayment rebates and penalties.

PROMISSORY NOTE

Promise to Pay: I promise to pay to your order, at your address, the sum of dollars ($0.00) consisting of principal and precomputed interest at the rate of 0.00% per annum, payable in equal installments of $0.00, due on the day of each month, commencing on ___, with one final installment due on.

     Late Charges: If I fail to pay any installment within ten days of its due date, I agree to pay you a late charge of 5% of the delinquent amount or $5.00 whichever is greater. A late charge will also be assessed if the policy is canceled due to insufficient funds.

     Default and Acceleration: If I fail to pay one installment and it remains unpaid for ten days or more after the due date, this Promissory Note will be in default and you may cancel my Insurance Policy. If two or more installments are in default for ten days or more, you may accelerate the maturity of this Promissory note, which means that I must pay all outstanding amounts immediately. After making any rebate required by law, you may then convert this Promissory Note into a simple interest transaction.

     Additional Interest: If you accelerate the maturity of this Promissory Note or if it remains unpaid after the final installment is due, then, for a period of one (1) year after maturity, I agree to pay additional Interest on the unpaid balance (after any applicable rebate) at the interest rate shown above. After that, I agree to pay interest at the rate of 18% per annum, until this Promissory Note is paid in full.

     Rebate: I may prepay this Promissory Note in full at any time. If I prepay in full, or if you accelerate the maturity of this Promissory Note, l may be entitled to a refund of part of the finance charge as determined by the simple Interest method. The $25.00 Origination Fee I paid when I first made my loan is earned when my loan is closed and will not be rebated.

     Attorney’s Fees: If you refer this Promissory Note to any attorney for collection, I agree to pay attorney’s fees in an amount equal to 25% of the unpaid debt owed to you.

     Unpaid Check Charges: If I pay by check and my check is returned because I stopped payment, or because there were insufficient funds in my account, I will pay you an additional amount, equal to 5% of the amount of my dishonored check, or $15.00, whichever is less.

     Non-negotiable: This Promissory Note is not negotiable.

     Waivers: I waive demand for payment, notice of protest and of non-payment, and all defenses of division and discussion. My liability under this Promissory Note is “in solido” with the liability of any other person who may be liable. Discharge or release of any specific right, or of any security given to secure payment, will not affect the remainder of my obligation.

Signature Lines on Second Page

SECURITY AGREEMENT

     In order to secure payment of any amounts that I may owe you under this Contract, I give you a security interest in my Insurance Policy, including (but not limited to) any right to a refund of premiums or any amount the Insurance Company might otherwise owe me for losses covered by my insurance Policy. You may apply any money you receive from my Insurance policy to pay any debt owed to you under this Contract, including any amount due under the Promissory Note, the $25.00 Cancellation Fee described below, attorney fees, or any deferred charges. Even though you have the right to be paid from proceeds of the Insurance Policy, I remain personally liable to pay you these amounts until everything is paid.

Signature Lines Below

LIENHOLDERS AND OTHERS ENTITLED TO NOTICE OF CANCELLATION:

Signature Lines Below

POWER OF ATTORNEY

     I give you a power of attorney. If I fail to pay even one installment on the Promissory Note, I authorize you to cancel my Insurance Policy and any endorsements listed on this Contract or in any amendments to this Contract, including amendments you make pursuant to this Power of Attorney. I give a power of attorney to notify my Insurance Company and any persons entitled to notice and to tell them that my Insurance Policy is cancelled. After payment of all amounts due to you under this Contract, I also give you power of attorney to pay to the Insurance Company (or allow the Insurance Company to retain) any unearned premiums or other amounts which the Insurance Company may otherwise owe me, in order to purchase as much continued coverage under the Insurance Policy as such funds permit, until such time as I prove to the Insurance Company that I have purchased replacement insurance, as required by law or as required by any other person entitled to the benefit of coverage. I may not revoke this power of attorney while my Promissory Note remains unpaid and until I have provided such replacement Insurance.

Signature Lines Below

ADDITIONAL CONTRACT TERMS

     Pronouns and Headings: This Contract uses the words “I”, “me”, and “my”, which refer to the Insured who is signing this Contract. The words “you”, “your”, and “yours” refer to the Creditor. The headings in this Contract are only for convenience and do not completely summarize the provisions which follow them.

     Changes to Insurance Policy: If in the future I request any change to my Insurance Policy and if the change is accepted by the Insurance Company and it makes an endorsement to the Insurance Policy, the new Declaration Page containing the requested endorsement will automatically become a part of and incorporated into this Contract by reference. I further authorize you to adjust the balance due you and the related remaining payments under my original Insurance Premium Finance Contract together with any modifications thereto without obtaining an amended, signed contract from me.

     No Reliance on Anything Not Written in this Contract: No employee of LIFCO or USAgencies told me that this Contract includes anything not written in this Contract.

     Use of Proceeds: I have borrowed from you the Amount Financed. This money will be used to pay the premium on the Insurance Policy and for the other purposes stated in the section entitled “Itemization of Amount Financed.”

     Cancellation Fee: If you cancel the Insurance Policy after my default, I agree to pay you a cancellation fee of $25.00. This fee is different than the Origination Fee which is described elsewhere in this Contract.

     Deferred Charges: You, in your absolute discretion, may choose to defer my obligation to pay late charges, the Cancellation Fee or any other amount which I may owe you under this Contract. I understand that you are not waiving your right to collect such fees, but only deferring the time for payment. I understand that you do not waive any such charges or release me from my obligation to pay them, unless you specifically tell me in writing that you are doing so.

     Louisiana Consumer Credit Law: You and I agree that this Contract is governed by the Louisiana Consumer Credit Law.

     Receipt of Copy of Contract: I have received a copy of this contract.

     Electronic Collection of Checks: I authorize you to electronically collect any check I give you. You may at your option electronically collect a check, either the first time you present it for payment, or if a check is returned because of insufficient funds and you re-present it. in the case of a returned check, my account may be debited for any applicable fees as stated in the Unpaid Check Charges section of the Promissory Note. If a check is collected electronically, you will send the check amount, routing and account numbers to my bank. Because this information is sent electronically, my bank account can be debited as early as the same day you receive the check. If a check is collected electronically, I authorize you to destroy the original and maintain an image in your records. I understand that my bank will not return the canceled check to me, but will show the transaction on my bank account statement.

     Reading and Understanding: I have read everything in this Contract (which consists of 2 pages). Before signing this Contract, I understood it or I obtained someone’s help so I could understand.

Borrower

Date

Accepted by: ___, LIFCO Representative, on:

SCHEDULE 1.01(a)

MORTGAGED PROPERTIES

Affirmative Mortgaged Property

None.

USAgencies Mortgaged Property

Renaissance Park East, 1500 Main Street, Baton Rouge, Louisiana, East Baton Rouge Parish.

SCHEDULE 1.01(b)

SUBSIDIARY GUARANTORS

Affirmative Subsidiary Guarantors

1.	Affirmative Management Services, Inc.
2.	Affirmative Property Holdings, Inc.
3.	Affirmative Services Retail, Inc.
4.	Affirmative Services, Inc.
5.	Affirmative Insurance Group, Inc.
6.	Affirmative Underwriting Services, Inc.
7.	A-Affordable Managing General Agency, Inc.
8.	Affirmative Insurance Services of South Carolina, Inc.
9.	Affirmative Insurance Services of Illinois, Inc.
10.	Affirmative Insurance Services of Texas, Inc.
11.	American Agencies Insurance Services of Louisiana, Inc.
12.	American Agencies Investments, Inc.
13.	Space Coast Holdings, Inc.
14.	Affirmative Insurance Services of Pennsylvania, Inc.
15.	Affirmative Insurance Services of Florida, Inc.
16.	Affirmative Retail, Inc.
17.	A-Affordable Insurance Agency, Inc.
18.	Driver’s Choice Insurance Agencies, Inc.
19.	Driver’s Choice Insurance Services, LLC
20.	Fed USA Retail, Inc.
21.	Instant Auto Insurance Agency of Arizona, Inc.
22.	Instant Auto Insurance Agency of Colorado, Inc.
23.	Instant Auto Insurance Agency of Indiana, Inc.
24.	Instant Auto Insurance Agency of New Mexico, Inc.
25.	InsureOne Independent Insurance Agency, LLC
26.	Yellow Key Insurance Agency, Inc.
27.	Affirmative Franchising Group, Inc.
28.	Fed USA Franchising Group, Inc.
29.	Fed USA Franchising, Inc.
30.	Affirmative Alternative Distribution, Inc.
31.	Affirmative Premium Finance Holdings, Inc.

USAgencies Subsidiary Guarantors

1.	USAgencies, L.L.C.
2.	LIFCO, L.L.C.
3.	USAgencies Management Services, Inc.

SCHEDULE 3.08(a)

SUBSIDIARIES

		Borrower’s Percentage of Ownership
	Jurisdiction of	Interest in Subsidiary			Loan Party
Legal Name	Incorporation/Formation	(direct and indirect)			Y/N
Affirmative Management Services, Inc.	Texas		100	%	Y
Affirmative Property Holdings, Inc.	Texas		100	%	Y
Affirmative Services Retail, Inc.	Texas		100	%	Y
Affirmative Services, Inc.	Texas		100	%	Y
Affirmative Insurance Group, Inc.	Texas		100	%	Y
Affirmative Insurance Company	Illinois		100	%	N
Insura Property and Casualty Insurance Company	Illinois		100	%	N
Affirmative Insurance Company of Michigan	Michigan		100	%	N
Affirmative Underwriting Services, Inc.	Texas		100	%	Y
A-Affordable Managing General Agency, Inc.	Texas		100	%	Y
Affirmative Insurance Services of South Carolina, Inc.	South Carolina		100	%	Y
Affirmative Insurance Services of Illinois, Inc.	Illinois		100	%	Y
Affirmative Insurance Services of Texas, Inc.	Texas		100	%	Y
American Agencies Insurance Services of Louisiana,Inc.	Louisiana		100	%	Y
American Agencies Investments, Inc.	Delaware		100	%	Y
Space Coast Holdings, Inc.	Delaware		100	%	Y
Affirmative Insurance Services of Pennsylvania, Inc.	Pennsylvania		100	%	Y
Affirmative Insurance Services of Florida, Inc.	Florida		100	%	Y

		Borrower’s Percentage of Ownership
	Jurisdiction of	Interest in Subsidiary			Loan Party
Legal Name	Incorporation/Formation	(direct and indirect)			Y/N
Affirmative Retail, Inc.	Texas		100	%	Y
A-Affordable Insurance Agency, Inc.	Texas		100	%	Y
Driver’s Choice Insurance Agencies, Inc.	South Carolina		100	%	Y
Driver’s Choice Insurance Services, LLC	South Carolina		100	%	Y
Fed USA Retail, Inc.	Florida		100	%	Y
Instant Auto Insurance Agency of Arizona, Inc.	Arizona		100	%	Y
Instant Auto Insurance Agency of Colorado, Inc.	Colorado		100	%	Y
Instant Auto Insurance Agency of Indiana, Inc.	Indiana		100	%	Y
Instant Auto Insurance Agency of New Mexico, Inc.	New Mexico		100	%	Y
InsureOne Independent Insurance Agency, LLC	Illinois		100	%	Y
Yellow Key Insurance Agency, Inc.	Illinois		100	%	Y
Affirmative Franchising Group, Inc.	Texas		100	%	Y
Fed USA Franchising Group, Inc.	Delaware		100	%	Y
Fed USA Franchising, Inc.	Florida		100	%	Y
Affirmative Alternative Distribution, Inc.	Texas		100	%	Y
Affirmative Insurance Holdings Statutory Trust I	Delaware		100	%	Y
Affirmative Insurance Holdings Statutory Trust II	Delaware		100	%	Y
Affirmative Premium Finance Holdings, Inc.	Delaware		100	%	Y
USAgencies, L.L.C.	Louisiana		100	%	Y
USAgencies Casualty Insurance Company, Inc.	Louisiana		100	%	N

		Borrower’s Percentage of Ownership
	Jurisdiction of	Interest in Subsidiary			Loan Party
Legal Name	Incorporation/Formation	(direct and indirect)			Y/N
USAgencies Direct Insurance Company	New York		100	%	N
LIFCO, L.L.C.	Louisiana		100	%	Y
USAgencies Management Services, Inc.	Louisiana		100	%	Y

SCHEDULE 3.08(b)

DIVIDEND RESTRICTIONS

None.

SCHEDULE 3.09

LITIGATION

Affirmative Litigation

None.

USAgencies Litigation

None.

SCHEDULE 3.17

ENVIRONMENTAL MATTERS

Affirmative Environmental Matters

1. None.

USAgencies Environmental Matters

1. None.

SCHEDULE 3.18

INSURANCE

Affirmative Insurance

Policy Type	Insurance Company	Coverage Included	Expiration Date	Policy Limits	Deductible	Annual Premium
Commercial Umbrella	Hartford Casualty Ins. Co.	Excess umbrella over first layer — underlying	July 9, 2007	$15,000,000	Underlying insurance $10,000 SIR	$24,846 (includes terrorism)
Excess Liability - Excess Umbrella	Fireman’s Fund Insurance Company	Excess over second layer - - umbrella	July 9, 2007	$10,000,000 per occurrence and in the aggregate	Underlying Insurance	$13,600 (includes terrorism)
Mail Loss	Federal Insurance Company	Crime coverage related to use of mail	July 9, 2007	Registered mail or U.S. Postal Express Mail: $2,500,000		$ 1,500
				Custom designed services: $5,000,000
				Registered mail only: $250,000
				Insuring Clause I - Foreign
				Registered mail or overnight air couriers - - $10,000,000

Policy Type	Insurance Company	Coverage Included	Expiration Date	Policy Limits	Deductible	Annual Premium
				Registered mail only: $250,000
				Insuring Clause II - Domestic Only
				Not exceeding any one shipping package: $250,000
				Not exceeding to any one addressee on any one day: $2,500,000
				Overnight air couriers of U.S. postal express mail: a) non-negotiable:
				$10,000,000; b) negotiable: $250,000
Commercial Package	Hartford Casualty Ins. Co.		July 9, 2007	Property	Property: $5,000	Property:
					Earthquake: $25,000 Wind: $10,000*	$23,616.20 General Liability:
					Flood: $25,000** GL: none Employee benefits:	$28,694.56
					$1,000

Policy Type	Insurance Company	Coverage Included	Expiration Date	Policy Limits	Deductible	Annual Premium
Commercial		Commercial Auto Coverage	July 9, 2007	BI/PD liability:
Automobile (TX, IN, and IL)	Hartford Accident & Indemnity	for TX, IN, & IL garaged vehicles		$1,000,000 Physical damage: ACV	Collision — $1,000	$ 57,110
Commercial Automobile (All	Hartford Accident & Indemnity	Commercial Auto Coverage	July 9, 2007	BI/PD liability:
states other than TX, IN, and IL)		for vehicles garaged outside of TX, IN, & IL		$1,000,000 Physical damage: ACV	Collision — $1,000	$ 12,500
Workers Compensation	Hartford Underwriters Ins. Co.		July 9, 2007	Part A — statutory Part B (EL): $1,000,000	$1,000 comprehensive, $1,000 collision	$148,897.00
Commercial Crime	Indian Harbor Insurance Company	Employee dishonesty, forgery, theft, disappearance, robbery of a custodian, computer fraud, money orders, counterfeit, securities forgery, trading loss Miscellaneous professional liability coverage for insurance	July 9, 2007	$ 5,000,000	$ 100,000 $250,000 for each claim, unless	$40,000, $1,940 - surplus, $40 stamping fee
Errors & Omissions (Miscellaneous Professional)	Indian Harbor Insurance Company (XL)	company, insurance agents, employed lawyers, and franchise services	July 9, 2007	$5,000,000 pending and prior date 7/9/04	insurance agent or employed lawyers, then $10,000	$250,000, $12,125 - surplus, $250 stamping fee
Employment Practices Liability	Greenwich Insurance Company (XL)	Employment practices liability	July 9, 2007	$ 5,000,000	$150,000 per claim	$100,000

Policy Type	Insurance Company	Coverage Included	Expiration Date	Policy Limits	Deductible	Annual Premium
Fiduciary Liability	Greenwich Insurance Company (XL)	Fiduciary liability	July 9, 2007	$5,000,000 pending and prior date 7/9/04	$50,000 per claim	$ 15,000
Directors & Officers	XL Specialty Insurance Company	Management liability and company reimbursement	July 9, 2007	$20,000,000 pending and prior date 7/9/04 $10,000,000 of	$1,000,000	$400,000
Directors & Officers (Side A — DIC)	Illinois National Insurance Co.	Side A — DIC	July 9, 2007	liability in excess of $20,000,000	$ 0	$104,125

*	Applies to Houston, Galveston, Baytown, Pasedena, Beaumont, McAllen, Edinburg, Mission, Brownsville, Pharr Corpus Christi and Florida, except for 100 Rialto in Melbourne, which has a 2% wind deductible and a $500,000 flood limit, and a $500,000 flood deductible.
**	100 Rialto in Melbourne has a $500,000 flood limit, and a $500,000 flood deductible Flood deductible of $25,000 applies to those locations with a $1,000,000 limit as outlined in policy.

USAgencies Insurance

See attached.

SCHEDULE 3.19(a)

UCC FILING OFFICES

Affirmative Filing Offices

Grantor	Filing Office
Affirmative Insurance Holdings, Inc.	Secretary of State of Delaware
Affirmative Management Services, Inc.	Secretary of State of Texas
Affirmative Property Holdings, Inc.	Secretary of State of Texas
Affirmative Services Retail, Inc.	Secretary of State of Texas
Affirmative Services, Inc.	Secretary of State of Texas
Affirmative Insurance Group, Inc.	Secretary of State of Texas
Affirmative Underwriting Services, Inc.	Secretary of State of Texas
A-Affordable Managing General Agency, Inc.	Secretary of State of Texas
Affirmative Insurance Services of South Carolina, Inc.	Secretary of State of South Carolina
Affirmative Insurance Services of Illinois, Inc.	Secretary of State of Illinois
Affirmative Insurance Services of Texas, Inc.	Secretary of State of Texas
American Agencies Insurance Services of Louisiana, Inc.	East Baton Rouge Parish Clerk of Court, Louisiana
American Agencies Investments, Inc.	Secretary of State of Delaware
Space Coast Holdings, Inc.	Secretary of State of Delaware
Affirmative Insurance Services of Pennsylvania, Inc.	Secretary of State of Pennsylvania
Affirmative Insurance Services of Florida, Inc.	Secretary of State of Florida
Affirmative Retail, Inc.	Secretary of State of Texas
A-Affordable Insurance Agency, Inc.	Secretary of State of Texas
Driver’s Choice Insurance Agencies, Inc.	Secretary of State of South Carolina
Driver’s Choice Insurance Services, LLC	Secretary of State of South Carolina
Fed USA Retail, Inc.	Secretary of State of Florida
Instant Auto Insurance Agency of Arizona, Inc.	Secretary of State of Arizona
Instant Auto Insurance Agency of Colorado, Inc.	Secretary of State of Colorado
Instant Auto Insurance Agency of Indiana, Inc.	Secretary of State of Indiana
Instant Auto Insurance Agency of New Mexico, Inc.	Secretary of State of New Mexico
InsureOne Independent Insurance Agency, LLC	Secretary of State of Illinois
Yellow Key Insurance Agency, Inc.	Secretary of State of Illinois
Affirmative Franchising Group, Inc.	Secretary of State of Texas
Fed USA Franchising Group, Inc.	Secretary of State of Delaware

Grantor	Filing Office
Fed USA Franchising, Inc.	Secretary of State of Florida
Affirmative Alternative Distribution, Inc.	Secretary of State of Texas
Affirmative Insurance Holdings Statutory Trust I	Secretary of State of Delaware
Affirmative Insurance Holdings Statutory Trust II	Secretary of State of Delaware
Affirmative Premium Finance Holdings, Inc.	Secretary of State of Delaware

USAgencies Filing Offices

Grantor	Filing Office
USAgencies, L.L.C.	East Baton Rouge Parish Clerk of Court, Louisiana
LIFCO, L.L.C.	East Baton Rouge Parish Clerk of Court, Louisiana
USAgencies Management Services, Inc.	East Baton Rouge Parish Clerk of Court, Louisiana

SCHEDULE 3.19(c)

MORTGAGE FILING OFFICES

Affirmative Mortgage Filing Offices

1. Not applicable.

USAgencies Mortgage Filing Offices

1. East Baton Rouge Parish Clerk of Court, Louisiana.

SCHEDULE 3.20

OWNED AND LEASED REAL PROPERTY

Affirmative Owned and Leased Real Property

					LEASE	LEASE EXPIRATION
ADDRESS	CITY	STATE	ZIP		COMMENCEMENT	DATE	LANDLORD NAME	LANDLORD PHONE	LANDLORD ADDRESS
236 W. Lincoln Hwy.	Schererville	IN		46375	7/1/06	12/31/2006	Lincoln Ridge Plaza LLC	630-924-8401 (Kena Lacy — Asst.)	c/o Pinecrest Property Management (Mathew Vachaparambil) 672 E. Irving Park Rd. Suite 106 Roselle, IL 60172
7755 E. Washington St.	Indianapolis	IN		46219	1/1/04	12/31/2006	East Washington Plaza	317-816-4646; FAX 317-816-4656	P.O. Box 2303-130 Indianapolis, IN 46206
1298 N. Kinzie Ave.	Bradley	IL		60915	2/1/04	1/31/2007	William J. Tucker Real Estate Co.	847-917-2301; fax: 847-839-1925	William J. Tucker Jr.; William J. Tucker Real Estate Co.; A&A Bradley, LP; c/o WJT Real Estate Company; 2140 Cat Tail Run #208, Gurnee, IL 60031(new per letter dated 11/1/06) (2300 N. Barrington Road ~ Suite 457 ~ Hoffman Estates, IL, 60195)
3535 Broadway, Ste. A	Kansas City	MO		64111	2/1/04	1/31/2007	4301 Main, LLC	816-822-7788; fax 816-822-7778	c/o Del Hedgepath 5930 Ward Parkway Kansas City, MO 64113 (dhedgepath@kc.rr.com)
3184 N. Water St.	Decatur	IL		62526	2/1/06	1/31/2007	Brettwood Village LLC	312/795-2210/(217) 877-4600	Brettwood Village c/o Draper & Kramer, Retail Property Services(Joe Kunst) 33 W. Monroe St. Suite 1900 Chicago, IL 60603
1010 W. Rand Rd.	Arlington Heights	IL		60004	8/14/06	1/31/2007	Rand Management Group (John Kalyviaris)	847/438-0025	20922 N. Rand Road Kildeer, IL 60047

					LEASE	LEASE EXPIRATION
ADDRESS	CITY	STATE	ZIP		COMMENCEMENT	DATE	LANDLORD NAME	LANDLORD PHONE	LANDLORD ADDRESS
3160 W. 175th St.	Hazel Crest	IL		60429	3/1/02	2/28/2007	Ted Pyrilis	847-470-2366	5515 W. Madison Street Morton Grove, IL 60053
701 N. Lewis Ave.	Waukegan	IL		60085	3/22/04	3/21/2007	James Wolden	708-623-2695	37562 Holdridge Avenue, Waukegan, IL 60085
2834 N. Harlem	Elmwood Park	IL		60707	4/1/02	3/31/2007	Tops L.L.C.	847-674-4321; fax: 847-674-0230	TOPS, LLC c/o The Taxman Corporation 5215 Old Orchard Rd, Suite 130 Skokie, IL 60077
153 W. Roosevelt Road	Chicago	IL		60185	6/1/04	5/31/2007	Alfredo Linares		P.O. Box 1193 Chicago, IL 60690
100 W. 87th St.	Chicago	IL		60620	9/1/04	8/31/2007	Inland Commercial Property Management, Inc. (Anna Maria Bartucci)	630-218-5262 (Angela Aeschliman - - Prop Mgr)	2901 Butterfield Rd. Oakbrook, IL 60523
2601 S. Halsted St.	Chicago	IL		60608	9/1/06	8/31/2007	Kam L. Liu Realty *new payee (no longer SQY) as of 8-25-06	312-225-0200 or 630-202-9688	3119 S. Halsted Chicago, IL 60608
2423 Independence Ave.	Kansas City	MO		64124	11/1/06	10/31/2007	Melba Ah Mu	913-206-1505	2425 Independence Ave. Kansas City, MO 64124
12255 S. Western Ave.	Chicago	IL		60406	11/1/04	10/31/2007	Mer-Car Corp	773-227-2160	1410 S. Clinton Street Chicago, IL 60607
3413 B Noland Road.	Independence	MO		64133	10/15/02	11/30/2007	Gaslight Square Shopping Center	816-531-1400 (John Trevor)	c/oBlock & Company, Inc 605 W. 47th Street Kansas City, MO 64112
2599 W. Golf Rd.	Hoffman Estates	IL		60194	12/1/04	11/30/2007	Tampa Rinaldi Ranch Center LLC
1612 Mishawaka Ave.	South Bend	IN		46615	12/1/06	11/30/2007	Dan and Doris Weninger	219-633-4603	11073 Dragoon Trail Mishawaka, IN 46544
531 Roosevelt Rd.	Glen Ellyn	IL		60137	12/1/05	11/30/2007	Glen Ellyn Plaza Corporation/ Market Plaza Shopping Center	847-559-8882; FAX 847-559-9160	c/o The Shiner Group LLC 3100 Dundee #304 Northbrook, IL 60062

					LEASE	LEASE EXPIRATION
ADDRESS	CITY	STATE	ZIP		COMMENCEMENT	DATE	LANDLORD NAME	LANDLORD PHONE	LANDLORD ADDRESS
11331 S. Michigan Avenue	Chicago	IL		60628	1/1/05	12/31/2007	Candace Professional, Inc. (Reverend Gardner)	773-934-4499	11331 S. Michigan Ave, Chicago IL 60605
6462A N. Lindbergh	Florissant	MO		63031	1/1/05	12/31/2007	Keevan Development	314-921-2624	8460 N. Lindbergh, Suite 15 Florissant, MO 63031
71 A West 159th Street	Harvey	IL		60426	1/1/05	12/31/2007	Great Lakes Trust Co AT/UT Number 01-014	708-906-3300 (Cell); 708-598-0098 (home) Eddie	c/o Musa Financial Services 9147 S Oak Park Ave., Oak Lawn, IL 60453 (New as of 1/26/06)
1661 E. 80th Ave.	Merrillville	IN		46410	1/1/05	12/31/2007	Acadia Merrillville Realty, L.P.	914-288-8100 (Legal) Property Mgmt: Pete 937-312-1930	1311 Mamaroneck Ave.,Suite 260 White Plains, NY 10605
20 E. Jefferson Ave.	Naperville	IL		60540	1/1/06	12/31/2007	Naper LTD Partnership (Jon Pusateri)	Cell: 262-249-9622	P.O. Box 2195 Naperville, IL 60567-2195
327 Armour Rd.	Kansas City	MO		64116	2/1/05	1/31/2008	Revanne Partners, L.P.(Ralph E. Lewis II)	816-792-5655	c/o Prudential Cres-Commerical 7 N. Water Street Liberty, MO 64068
9238 S. Stony Island Ave.	Chicago	IL		60617	3/1/03	2/28/2008	Stephen & Sheila Hill	773-457-0126; 219-934-0520 (Sheila cell)	P.O.Box 3483 Munster, IN 46321
5 Clock Tower Plaza	Elgin	IL		60120	9/1/04	3/31/2008	Butera Finer Foods (Paul J. Butera)	847-741-1010
5811 E. Riverside Blvd.	Rockford	IL		61114	4/1/03	3/31/2008	Investquest, LLC (Dan Cataldi)	815-282-0202 or cell: 815-978-2258	5813 E. Riverside Blvd. Rockford, IL 61114
4721 S. Kingshighway	St. Louis	MO		63109	5/1/03	4/30/2008	Kenneth R. Baldridge d/b/a Baldridge Properties/KRB Properties	314-966-2300; fax — 314-966-2370	11825 Manchester St. Louis, MO 63131
3535 N. Western Ave.	Chicago	IL		60618	6/1/06	5/31/2008	Joe Hayes-Hayes Properties Inc.	773-929-7050; fax (773) 929-5049	2811 N. Mildred Chicago, IL 60657
1801 E. 71st St.	Chicago	IL		60649	6/1/05	5/31/2008	Henry English/The Black United Fund of Illinois, an ILL. Non-profit corporation	773-324-0494	1809 E. 71st Street Chicago, IL 60649

					LEASE	LEASE EXPIRATION
ADDRESS	CITY	STATE	ZIP		COMMENCEMENT	DATE	LANDLORD NAME	LANDLORD PHONE	LANDLORD ADDRESS
5174 Franklin St.	Michigan City	IN		46360	6/1/05	5/31/2008	Michigan City 421 LLC	847-674-8020; fax 847-674-8157	c/o American Asset Management Services 4711 W. Golf Rd., #1000, Skokie, IL 60076
3249 W. 26th Street	Chicago	IL		60623	8/1/04	7/31/2008	Dr. Fernando Ampuero	773-438-3010	3517 W. 26th Street Chicago, IL 60623
646 W. Lake St.	Addison	IL		60101	8/1/02	7/31/2008	John Bertakis	708-686-0600 or 708-580-6330	242 Bunting Lane Bloomingdale, IL 60108
10407 Blue Ridge Blvd.	Kansas City, MO	MO		64134	9/1/05	8/31/2008	Elaine Rosenburg d/b/a Elis Enterprises	913-814-7099/Cell:816-718-6277; fax 913-814-7290	P.O. Box 6734 Leawood, KS 66206
9257 W. Cermak Rd.	North Riverside	IL		60546	10/1/05	9/30/2008	Andrew Nguyen	913-568-2329
1119 E. Sibley Blvd.	Dolton	IL		60419	1/1/02	10/31/2008	Donald Kim/ KJZM LLC (new as of 3/08/06)	847-971-3641	PO Box 115; Lincolnshire IL 60069
8531 Page Ave.	Vinita Park	MO		63114	10/1/03	10/31/2008	I-70 Distribution Center II, L.L.C. c/o Gateway Commercial	314-863-4447 (Monica Howard/AR); fax: (314) 863-4407	c/o Gateway Commercial 100 S. Brentwood Blvd. Suite 222 St. Louis, MO 63105
								Chu Kim (Husband) Yang Kim (Wife) Work — 913-342-7873 Home - - 913-341-0626	9900 Lamar Avenue Overland Park, KS 66207
1032 Minnesota Ave.	Kansas City, KS	KS		66101	12/1/05	11/30/2008	Chu Kim and Yang Kim
4851 N. Broadway St.	Chicago	IL		60640	12/1/03	11/30/2008	Sun Development Group, L.L.C.	312-279-5323	c/o Property Solutions Group LLC 205 N. Michigan Ave., Suite 1615 Chicago, IL 60601: Kathy Staahl, Proprety Manager
4200 S. East St.	Indianapolis	IN		46227	1/1/06	12/31/2008	Tri-Land Properties, Inc.	708-531-8210	c/o Triland Properties, Inc One Westbrook Corp. Center Suite 520 Westchester, IL 60154
6804 Green Bay Rd.	Kenosha	WI		53142	2/1/06	1/31/2009	Southport Plaza L.P.	262-942-9800; fax 262-942-7023	Barbara Jaeger, Prop. Mgr. 6804 Green Bay Road Suite 111 Kenosha, WI 53142

					LEASE	LEASE EXPIRATION
ADDRESS	CITY	STATE	ZIP		COMMENCEMENT	DATE	LANDLORD NAME	LANDLORD PHONE	LANDLORD ADDRESS
539 E. Sante Fe, Ste. 2	Olathe, KS	KS		66061	2/1/06	1/31/2009	Bison Properties LLC c/o John C. Byram Jr. (new company name & address as of 4/26/06)	913-541-8888; fax 913-541-8886; e-mail: jcbyram@swbell.net	15625 W. 87 Parkway, Lenexa, KS 66219
7345 Lemont Rd.	Downer’s Grove	IL		60516	2/1/06	1/31/2009	Kimco North Trust II	516-869-9000: fax (516) 869-2584	333 New Hyde Park Rd., Ste 100, PO Box 5020, New Hyde Park, NY 11042-0020
2001 N. Knoxville Ave.	Peoria	IL		61603	3/1/04	2/28/2009	Plotkin Enterprises	P. 309-692-4510	7718 N. Harker Drive Peoria, IL 61615
5706 West Cermak	Cicero	IL		60804	3/1/06	2/28/2009	ATR Investments Cicero IO LLC	(312) 226-8022 (Alan); (312) 226-8022 (Main)	1738 W. Erie St., Chicago, IL 60622 Attn: Alan T. Rasof
2205 W. Cermak	Chicago	IL		60608	4/1/06	3/31/2009	ATR Investments LLC	(312) 226-8022 (Alan); (312) 226-8022 (Main)	1738 W. Erie St., Chicago, IL 60622 Attn: Alan T. Rasof
4614B W. Diversey Ave.	Chicago	IL		60639	5/1/06	4/30/2009	Imperial Realty Co (‘aschwartz@imperial-re alty.com’)	P. 773-736-4100; F. 773-736-4541	4747 W. Peterson Ave. Chicago, IL 60646
6419 W. North Ave.	Oak Park	IL		60302	6/1/06	5/31/2009	Property Management Services (Dick and Margaret Blaurock)	P. 708-358-1112; F. 708-358-8029	Rossell N. Shopping Center, 630 S. Wenonah, Oak Park, IL 60304 (New as of 2/20/06)
6601 N. Clark Street	Chicago	IL		60626	6/1/06	5/31/2009	ATR Investments LLC	(312) 226-8022 (Alan); (312) 226-8022 (Main)	1738 W. Erie St., Chicago, IL 60622 Attn: Alan T. Rasof
1958 Dempster St.	Evanston	IL		60202	6/1/06	5/31/2009	Evanston Plaza L.L.C.	847-215-5510 (Steve Korey direct 847-215-5394); F. 847-215-5282	c/o Joseph Freed & Assoc. 220 N. Smith St., Ste 300 Palatine, IL 60067
1155 East Ridge Road	Griffith	IN		46319	6/1/06	5/31/2009	Hanover Acquisitions, LLC c/o CB Richard Ellis South Bend	Cathy Catlin 574-237-6000; F. 574-237-6001	PO Box 540; South Bend, IN 46624 (RENT): Mailing: 202 S. Michigan Street; Suite 900; South Bend, IN 46601

					LEASE	LEASE EXPIRATION
ADDRESS	CITY	STATE	ZIP		COMMENCEMENT	DATE	LANDLORD NAME	LANDLORD PHONE	LANDLORD ADDRESS
20911 S. Cicero Ave., Unit B	Matteson	IL		60443	7/1/06	6/30/2009	Century Plaza Management of Matteson, Inc. (Paul Spiewak)	847-680-8222; Phil Spiewak at phils@century-tile.com.	747 E. Roosevelt Road Lombard, IL 60148
2109 N. Veterans Pkwy.	Bloomington	IL		61704	7/1/06	6/30/2009	M&J Wilkow LTD., an agent for M&J/JPC Retail L.P., an Illinois Limited Partnership	312/726-9622 (Janice Javors - Property Manager 312-279-5980)	c/o M&J/JPC Retail LP 180 N. Michigan Avenue Chicago, IL 60601
6438 S. Pulaski Rd.	Chicago	IL		60629	8/1/06	7/31/2009	Mr. John Zeno; Astoria Plaza, Inc.; (Zenos Investments)	P.708-372-1776; F. 708-499-0806 (zenoinvestments@aol.com)	7156 West 127th Street, #312; Palos Heights, IL 60463
4702 W. Irving Park Rd.	Chicago	IL		60641	8/1/06	7/31/2009	Keylor Management & Realty Inc. (Judy Hart)	P. 773-282-6262; F. 773-282-7351	4708 W. Irving Park Road Chicago, IL 60641
4371 S. Archer Ave.	Chicago	IL		60609	9/1/06	8/31/2009	Casas Mex USA Inc./Lourdes Casas	773-581-4100	4425 W. 63rd Street Chicago, IL 60629
3918 W. North Ave.	Chicago	IL		60647	10/1/06	9/30/2009	ATR Investments North IO LLC	(312) 226-8022 (Alan); (312) 226-8022 (Main)	1738 W. Erie St., Chicago, IL 60622 Attn: Alan T. Rasof
5620-T Crawfordsville							Bradley Operating Limited Partnership/CENTRO WATT (as of		c/o Centro Watt (formerly Heritage Realty Investment, Inc.). 131 Dartmouth Street Boston, MA 02116-5134 (Bob Pionke 847-272-9800/fax:
Rd.	Indianapolis	IN		46224	11/1/06	10/31/2009	11/7/06)	317-243-8219	847-480-1893)
1112 W. University Blvd.	Urbana	IL		61801	11/15/06	11/14/2009	Mildred Durst Trust	217-367-3600	c/o Mildred Durst 1112 W. University Avenue Urbana, IL 61801
3566A Village Ct.	Gary	IN		46408	12/1/03	11/30/2009	Bradley Operating Limited Partnership/CENTRO WATT (as of 11/7/06)	617-247-2200	c/o Centro Watt (formerly Heritage Realty Management, Inc.) 131 Dartmouth Street Boston, MA 02116-5134

					LEASE	LEASE EXPIRATION
ADDRESS	CITY	STATE	ZIP		COMMENCEMENT	DATE	LANDLORD NAME	LANDLORD PHONE	LANDLORD ADDRESS
4307 S. Ashland Ave.	Chicago	IL		60609	1/1/07	12/31/2009	Comar Properties (Lynne Chenelle, Prop. Mgr.)	630-889-9600	Corp. Office: 450 East Roosevelt Rd. Lombard, IL 60148/Rent: P.O. Box 420 Elmhurst, IL 60126
3764 N. Meridian St.	Indianapolis	IN		46208	1/1/07	12/31/2009	JR Realty c/o Ron Anderson (Meridian, Ind., office). Premant@aol.com	727-204-3027	8044 Clymer Lane, Indianapolis, IN 46250; 8014 12th Ave South, St. Petersburg, FL 33707
									c/o A&R Katz Management, Inc. 3175 Commercial Avenue, Ste 100 Northbrook, IL 60062-1923 (Abe Katz’s Assistant :
									Fran Merar 847-205-1200; fax:
1701 N. Larkin Ave	Crest Hill	IL		60435	1/1/07	12/31/2009	A&R Katz Management, Inc.	847-205-1200	847-205-1212; franm@arkatz.com)
4642 N. Illinois	Fairview Heights, IL	IL		62208	2/1/05	3/31/2010	Winchester Real Estate LLC	314-480-4120; F. 314-480-4140	c/o Lee & Assoc. of St. Louis 101 S. Hanley Rd. Suite 1150 Clayton, MO 63105
1416 E. 53rd St.	Chicago	IL		60615	4/1/05	3/31/2010	Podolsky Northstar Realty Partners, LL	P. 847-444-5700; 847-444-5702 (Fax)	2610 Lake Cook Rd., Suite 100, Riverwoods, IL 60015-3852 (NEW AS OF 6/5/06)
10253 S. Western Ave.	Chicago	IL		60643	4/15/05	4/14/2010	St. Paul Trust Co.08-9356/ Tom Morrissey	773-233-7900	10249 S. Western Chicago, IL 60643
1305 165th St.	Hammond	IN		46320	5/1/07	4/30/2010	Columbia Limited Partnership	P. 847-677-9100; F. 847-677-9106	c/o HSS Management Co. 4801 W. Golf Road, 2nd Floor Skokie, IL 60077
6218 S. Western Avenue	Chicago,	IL		60636	5/1/06	4/30/2010	ATR Investments Western LLC	(312) 226-8022 (Alan); (312) 226-8022 (Main)	1738 W. Erie St., Chicago, IL 60622 Attn: Alan T. Rasof
3431 Nameoki Rd.	Granite City	IL		62040	6/30/05	6/30/2010	Michael Margiotta (Property management) Priority Properties	Priority Properties 314-612-8081 (office); Sharon Kosyan (Accounting); 314-612-8475	1045 South Woods Mill Road, Suite One, Town & Country, MO 63017

					LEASE	LEASE EXPIRATION
ADDRESS	CITY	STATE	ZIP		COMMENCEMENT	DATE	LANDLORD NAME	LANDLORD PHONE	LANDLORD ADDRESS
15910 S. Harlem Ave.	Tinley Park	IL		60477	9/1/07	8/31/2010	Inland Commercial Property Management, Inc.	630-218-5262 (Angela Aeschliman - - Prop Mgr)	c/o Park Center Plaza 4575 Paysphere Circle Chicago, IL 60674
8809 S. Harlem Ave.	Bridgeview	IL		60455	11/1/05	10/31/2010	New Plan of IL, LLC c/o New Plan Excel Realty Trust, Inc.	212-869-3000	420 Lexington Ave., 7th Fl. NY, NY 10170
2022 1st Street	Moline	IL		61265	12/1/05	11/30/2010	City Line Meyers, LLC c/o Mid-America Asset Mgmt.	630-954-7300; fax 630-954-7306	Two Mid-America Plaza, 3rd Floor, Oakbrook Terrace, IL 60181
1728 S. 6th St.	Springfield	IL		62703	12/1/05	11/30/2010	Dowd Sullivan	217-525-2288	410 S. Grand Ave. West Springfield, IL 62704
4712 W. Cermak Rd.	Cicero	IL		60608	3/1/06	2/28/2011	Cermak Partnership (Frank Levato)	708-656-0911 or Cell: 630-935-6622	4700 W. Cermak Cicero, IL 60650
								Robert J. Lovero (atty) 708-795-9777; Yolanda Avelar/Philip Avelar 708- 681-3641	RENT: 3025 S. 24th Avenue Broadview, IL 60153 (Avelar Address) Mr. Lovero:
1515 Lake St. Space #3	Melrose Park	IL		60160	4/1/06	3/30/2011	Yolanda Avelar/ Philip Avelar	(landline) 708-267-3225 (Philip cell)	6536 W. Cermak Road, Berwyn, IL 60402
144 S. Bolingbrook Dr.	Bolingbrook	IL		60440	5/1/06	4/30/2011	Market Square	630-954-7300	c/o Mid-America Asset Management, Inc/ Two Mid America Plaza, Third Floor, Oakbrook Terrace, IL 60181; Julie Ray (630) 954-7369; Fax 630-954-7306
4747 West 79th Street	Chicago	IL			5/1/06	5/31/2011	Mitchco Development LLC; Ed Lowery	Tami Trok 312-986-6825 (senior accountant)	1455 South Michigan Avenue, Suite 100 Chicago, Illinois 60605
302 W. New Indian Trail Dr.	Aurora	IL		60506	8/1/06	7/31/2011	Old Second National Bank as Trustee (Janet S. Dee, Trust Officer)	630-906-5470	37 S. River Street Aurora, IL 60506-4172
16837 Torrence Ave.	Lansing	IL		60438	8/1/06	7/31/2011	KFS Landings LLC	847-215-5442	c/o Joseph Freed & Assoc. 220 N. Smith St., Ste 300 Palatine, IL 60067

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ADDRESS	CITY	STATE	ZIP		COMMENCEMENT	DATE	LANDLORD NAME	LANDLORD PHONE	LANDLORD ADDRESS
3623 E. State Street	Rockford	IL		61108	9/15/06	9/30/2011	Al and Anna Marie Caruana	(847) 706-9035	1439 Shiloh Road, Rockford, IL 61107
540 N. Western Ave.	Chicago	IL		60612	1/1/07	12/31/2011	ATR Investments Western IO LLC	(312) 226-8022 (Alan); (312) 226-8022 (Main)	1738 W. Erie St., Chicago, IL 60622 Attn: Alan T. Rasof
7909 Gulf Freeway	Houston	TX		77017	3/1/03	2/28/2006	FLN Investments, Inc.	Charles Miller/Broker ph 877-597-8400 cell 832-752-4500	c/o Sheila Falk 13 Waterford Oaks Lane Kemah, TX 77565
1332 S. Plano Rd Ste 700A	Plano	TX		75081	1/4/04	1/31/2007	Heritage Buckingham Place	617-247-2200; fax 617-266-0885 (Heather Blacketer — Prop Mananger 913-438-4538)	c/o Centro Watt (formerly Heritage Realty Management, Inc.) 131 Dartmouth Street Boston, MA 02116-5134
13968 Josey Lane	Farmers Branch	TX		75234	1/1/04	2/28/2007	Ford Coin Realty, L.P.	Michelle Dzmura 214-706-6955 fax 214-706-0531 dzmura@aol.com	c/o EF Properties LC; 5950 Berkshire Lane; Suite 800; Dallas, TX 75225
609 N. 10th Street	McAllen	TX		78501	8/1/03	2/28/2007	Texan Real Estate Sales		1128 W. Pecan McAllen, TX 78501
6923 Antoine Drive, Suite B	Houston	TX		77088	4/1/04	3/31/2007	Kevin Kim	713-530-3369 or 713-957-9800 Home 281-599-7949 fax 713-957-9825	6923-A Antoine Rd Houston, TX
14360 Bellaire Blvd #140	Houston	TX		77083	5/1/04	6/30/2007	Levy & Associates C/O Kagan Realty Investors, Inc.	713-748-2000	8801 Knight Road Houston, Tx 77054 Lease account # 4000-0129-04
813 W. Bedford-Euless Road	Hurst	TX		76053	7/1/04	6/30/2007	Guion Gregg, III Investments Tax Id# 46-2809426	P. 214-526-7001; F. 214-522-1628	3838 Oak Lawn Ave., Ste 1416; Dallas, TX 75219
6912 N. Freeway	Houston	TX		77076	8/1/04	7/31/2007	Aron Frank	713-622-0554 Shane Frank 713-877-9600 fax 713-877-9657 cell 713-504-7711	c/o Amco Jewelry Company 1300 Post Oak Blvd., Suite 420 Houston, TX 77056
1081 W. Main, Suite 106	Lewisville	TX		75067	11/1/04	10/31/2007	TSCA-224 LIMITED PARTNERSHIP tax ID 20-2744883	P. 972-669-8440; F. 972-783-8901 www.quine.com Nick Carrington/ Property Manager (Nick cell 972-523-8655) Brad Quine (bquine@quine.com )	c/o Quine & Associates, Inc. P.O. Box 833009 Richardson, Tx 75083-3009

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ADDRESS	CITY	STATE	ZIP		COMMENCEMENT	DATE	LANDLORD NAME	LANDLORD PHONE	LANDLORD ADDRESS
5630 Lemmon Avenue	Dallas	TX		75209	11/1/04	10/31/2007	Carlisle Interests/Prescott Interests	214-350-5555	7979 Inwood Road Suite 225 Dallas, Tx 75209
1008 NE Loop	San Antonio	TX		78209	12/15/04	12/14/2007	Chester’s Hamburger Co./ Margaret Ulrich	210-490-5400	15321 San Pedro, Ste 200 San Antonio, TX 78232
3402 Broadway	Galveston	TX		77551	2/1/05	1/31/2008	Catherine Jo Taylor	409-740-7162	#18 Campeche Estate Drive Galveston, TX 77554
119 W. Southmore	Pasadena	TX		77502	3/1/03	2/29/2008	Campbell Investment Co.	Roland Richards P. 713-472-4381; F. 713-472-4382	1313 S. Houston Road Pasadena, TX 77502
2815 N. MacArthur	Irving	TX		75060	4/1/05	3/30/2008	PNYX, Ltd (Michael Mantas)	214-727-5153	7203 J Carpenter Dallas, TX 75242
13000 Josey Lane	Farmers Branch	TX		75234	4/1/06	3/31/2008	Alamas Ventures LTD/Andres Alarcon: Rosa Diez (rosadiez@dslproperties         .com)	P. 469-233-3017; F. 972-484-4119	9628 Overlake Drive, Dallas, TX 75220 - -OR- 13000 Josey Lane, Suite 107, Farmers Branch, TX 75234
2717 61st Street	Galveston	TX		77551	4/1/05	3/31/2008	Weingarten Realty Investors	Robert Bailey P. 713-866-6074; F. 713-866-6049 Cell. 713-206-0255; rbailey@weingarten.com	PO Box 924133, Houston, TX 77024-4133
10927 Jones Road	Houston	TX		77065	4/1/05	3/31/2008	Weingarten Realty Investors	Lease # LAFFIPH01 Project # 0543	P.O. Box 924133 Houston, TX 77292-4133 Rent remit P.O. Box 200518 Houston, Tx 77216
10201 Lake June, Ste 102	Dallas	TX		75217	5/1/05	4/30/2008	King Kash Investors 1991 Limited	Larry Fellman 214-361-0793 wlfrealty@prodigy.net	c/o Fellman Realty Management 11225 Park Central Pl Dallas, TX 75230

					LEASE	LEASE EXPIRATION
ADDRESS	CITY	STATE	ZIP		COMMENCEMENT	DATE	LANDLORD NAME	LANDLORD PHONE	LANDLORD ADDRESS
									Yu Tu c/o Reliance Property Management P.O. Box 802736 Dallas, Tx 75380
1905 W. 15th Street	Plano	TX		75075	5/1/05	4/30/2008	Yu Tu c/o Reliance Property Management	P. (972) 288-7833; F. (972) 288-7890	United States of America (NEW as of 10/30/06)
650 N. MacArthur	Irving	TX		75061	5/15/03	5/15/2008	A & P Corporation (Mr. Young Ha)	214-883-2758	PO Box 701762, Dallas, TX 75370
210 Unviersity	Edinburg	TX		78539	8/1/03	7/31/2008	Dorothy Chapapas	956-581-2448	8700 N. Taylor Road McAllen, TX 78504
3522 Gus Thomasson Suite 100	Mesquite	TX		75150	9/1/05	8/31/2008	Town East Partnership Easley Waggoner	P.972-960-7742; F. 972-960-7743 e-mail: leywagg@sbcglobal.net	5939 Lindenshire Lane Dallas, Tx 75230
3538 Denton Hwy	Haltom City	TX		76117	9/1/05	8/31/2008	CA New Plan Fixed Rate Partnership, L.P. c/o New Plan Excel Realty Trust, Inc	Toni White (site property mgr) 972-668-2986 x 6525 fax 972-668-2989 twhite@newplan.com or Eddie Myers emyers@newplan.com	P.O. Box 848409 Dallas, Texas 75284-8409
									c/o Jim Boller & Associates, Inc 4455
4455 S. Padre Island Drive, Suite 9	Corpus Christi	TX		78411-5167	3/27/02	9/30/2008	Commerice Office Park I	Jim Boller 361-808-7100	SPID ste 22 Corpus Christi, Tx 78411-5148
5900 Chimney Rock, Suite Q	Houston	TX		77081	11/30/05	11/30/2008	Plaza de las Americas c/o Premier Property Services, Inc.	Jeanie Stark, Property Manager, Phone P. 713-463-9994; F. 713-463-7233	9225 Katy Freeway, Ste. 202; Houston TX 77024
1001 N. Beckley, #106-A	DeSoto	TX		75115	1/1/06	12/31/2008	MICI DeSoto I, Ltd	Sue Roamer 214-599-0631 sue@maclayproperties.com	c/o Maclay Properties Co. 3838 Oak Lawn, Ste 810 Dallas, TX 75219
112 E. Seminary Drive, Suite C	Forth Worth	TX		76115	3/1/04	2/28/2009	EES Real Estate Trust c/o Mrs. Betty Crawford	214-522-7171	Sanford Family Trusts 4516 Lovers Lane, Suite 230 Dallas, TX 75225
1418 S. Tyler St., Ste B	Harlingen	TX		78550	3/1/04	2/28/2009	STN, Inc. A Texas Corp. c/o Lee Realty	956-493-7711	2901 N. 10th Street, Suite N McAllen, TX 78501

					LEASE	LEASE EXPIRATION
ADDRESS	CITY	STATE	ZIP		COMMENCEMENT	DATE	LANDLORD NAME	LANDLORD PHONE	LANDLORD ADDRESS
2960 W. NW Hwy	Dallas	TX		75220	4/1/06	3/31/2009	Rader Properties (Homer J. Rader Jr., d/b/a Rader Properties)	P. 972-392-7500; F. 972-392-7502	12342 Inwood Rd., Dallas, TX 75244
2100 E. Beltline Road, Bldg 1	Carrollton	TX		75006	4/1/06	3/31/2009	Oahn Tran	(972) 417-1026 (Pho Express); Alternate (972) 417-1017	2012 E. Beltline Rd., Carrollton, TX 75006
7952 Camp Bowie West	Forth Worth	TX		76116	5/1/06	4/30/2009	Westside Café Development, Ltd Tracey Sanford	817-247-0854	7950 Camp Bowie West Fort Worth, TX 76116
1239 NW HWY	Garland	TX		75041	5/1/06	6/30/2009	Meadowcreek Square Shopping Center	972-931-7400	c/o Sabre Realty Management, Inc., Commercial Division, 16475 Dallas Parkway, Suite 880, Addison, TX 75001
6301 Lyons Avenue	Spring	TX		77379	6/1/06	7/31/2009	David J. Edwards	P. 281-370-1760; F. 281-370-2360 Cell. 713-907-1371; E-mail edw1760@aol.com	17602 Mellow Ridge Spring, TX 77379
3714-B West Ledbetter	Dallas	TX		75233	8/1/06	7/31/2009	Lee Widmer LL notice address: 3677 Asbury Street Dallas, TX 75205	Home 214-520-6365 Cell 214-354-5677 e-mail leewidmer@charter.net	Rent remit: c/o Gateway National Bank 6801 Gaylord Pkwy #101 Frisco, Tx 75034
815 I45 South	Conroe	TX		77301	9/1/06	8/31/2009	Conroe Central Shop Ctr. Turk Investments (Allison Coontz)	713-772-3727 fax 713-772-6301	6230 A Evergreen Houston, TX 77081
8211 C Long Point	Houston	TX		77055	7/1/04	8/31/2009	Mia Reed & Co., Capital Fund V, Ltd.	Michelle Fredericks 713-789-0890 fax 713-789-4672	NEW ADDRESS AS OF 6-28-06; 1535 West Loop South; Suite 250; Houston, TX 77027
118 E. Jefferson, Ste. 102	Dallas	TX		75203	12/1/06	11/30/2009	Guion Gregg, III Investments Tax Id# 46-2809426	Guion Gregg 214-526-7001 fax 214-522-1628 after hours 214-762-7001	3838 Oak Lawn Ave, Ste 1416 Dallas, TX 75219

					LEASE	LEASE EXPIRATION
ADDRESS	CITY	STATE	ZIP		COMMENCEMENT	DATE	LANDLORD NAME	LANDLORD PHONE	LANDLORD ADDRESS
4012 Ross Avenue	Dallas	TX		75204	12/10/04	12/9/2009	Ross Ave. Retail, LLC	David Claassen phone 214-361-8300 fax 214-361-1155	c/o David E. Claassen 8400 Westchester Suite 300 Dallas, Tx 75225
410 E. Pioneer Pkwy, #500	Grand Prairie	TX		75051	1/1/07	12/31/2009	Centerville Partners, Ltd	Jerry Head 972-840-3119 fax 903-874-4009	P.O. Box 472098 Garland, TX 75047
1006 Bay Area Blvd	Houston	TX		77058	1/1/05	12/31/2009	SW Clear Lake, LP c/o Southwestern Investment Group, LLC	Michelle Roberts 303-534-1040 fax 303-534-6700	333 W Hampden Avenue Suite 810 Englewood CO 80110
2943 S Buckner Blvd # 275	Dallas	TX		75227	2/1/07	1/31/2010	The Buckner Partnership, LP		c/o United Equities 6909 Ashcroft, Suite 200 Houston, TX 77081
								Robert Bailey 713-866-6074
1004 Federal Road	Houston	TX		77015	3/1/05	2/28/2010	Weingarten Realty Investors	fax 713-866-6049 cell 713-206-0255 rbailey@weingarten.com	P.O. Box 924133 Houston, TX 77292-4133
2208 S. Fielder, Suite 116	Arlington	TX		76013	3/1/07	2/28/2010	Grand Prairie Associates	Sue Romer 214-599-0631 sue@maclayproperties.com	3838 Oak Lawn Ave, Ste 810 Dallas, TX 75219
1201 Main Street, Ste. 2424	Dallas	TX		75202	6/16/06	7/31/2010	RAK Main Place Associates LP (owner); RAK Group LLC Management on site (Tom Ligon)	214-744-9800; fax 214-744-9810
342 FM 1960 West	Houston	TX		77090	12/1/06	11/30/2010	Weingarten Realty Investors/ Raleigh LP
								Robert Bailey 713-866-6074
5892 Eastex Freeway	Beaumont	TX		77708	11/29/05	11/30/2010	Weingarten Realty Investors	fax 713-866-6049 cell 713-206-0255 rbailey@weingarten.com	P.O. Box 924133 Houston, TX 77292-4133
6520 Skillman	Dallas	TX		75231	11/1/06	10/31/2011	Merriman Park Shopping Center	817-732-4000 Jean McCorvy/Prop Mgr fax 817-377-7729 e-mail jmccorvy@woodmont.com	c/o The Woodmont Company 2100 W. Seventh Street Fort Worth, Texas 76107
810 Broad Street, Unit 8	Sumter	SC			2/1/2005	1/31/2007	Island Investment LLC		1254 Wilson Hall Rd., Sumter SC 29150

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ADDRESS	CITY	STATE	ZIP		COMMENCEMENT	DATE	LANDLORD NAME	LANDLORD PHONE	LANDLORD ADDRESS
1836 Ashley River Road, Ste. D2 (Crossroads Center)	Charleston	SC		29223	3/1/2004	2/28/2007	Crossroads Investors Ltd.		c/o Ziff Properties 701 East Bay Street, Charleston, SC 29403
3315 Broad River Road Ste. 170 (Widewater Square)	Columbia	SC			4/30/2004	5/31/2007	MK Newmarket LLC c/o RCG Ventures		PO Box 53483 Atlanta, GA 30355: Managed by NAI Avant 803-254-0100
Northwoods Mall; 2150 Northwoods Blvd., #60	N. Charleston	SC		29406	5/1/2006	4/30/2007	North Charleston Joint Venture II, LLC		North Charleston JV II LLC; 2150 Northwoods Blvd; #60; North Charleston SC 29406-4021
246-C E. Blackstock Rd.	Spartanburg	SC			5/1/2005	4/30/2008	Rockledge Development Corp.		PO Box 170252, Spartanburg, SC 29301
215 Pelham Rd. #B108	Greenville	SC		29615	6/1/2005	5/31/2008	Regency Realty Group		121 W. Forsythe Street, Ste. 200, Jacksonville, FL 32202
7352 Notch Road (Creekside Plaza)	Columbia	SC		29223	7/15/2006	7/31/2011	First Palmer Trust c/o Hugh A. Palmer		PO Box 23489, Columbia, SC 29224-3489
4450 Sojourn Drive, Suite 500	Addison	TX		75001	3/1/00	3/31/2010	DBSI Discovery Real Estate Services	866-489-3377	DBSI Discovery Real Estate Services, 12426 W. Explorer Dr., Suite 100, Boise, Idaho 83713
1201 Main Place, Suite 2424	Dallas	TX		75202	8/1/04	7/31/2007	RAK One Main Place Associates, LP	214-744-9800	1223 Paysphere Circle, Chicago, IL 60674
100 Rialto Place #700	Melbourne	FL		32901	7/1/04	6/30/2007	Rialto LLC	321-984-2942	100 Rialto Place, Suite 450 Melbourne, FL 32901
150 Harvester Drive	Burr Ridge	IL		60527	6/1/2006	11/30/2016	BJF Estancia I, LLC	708-532-4321	150 Harvester Dr. #100 Burr Ridge, IL 60527
2360 University Drive	Coral Springs	FL		33065	1/1/1996	12/20/2000	Tye Holdings LLC dba Royal University Plaza	Howard Schachter; (954) 868-5701	2556 University Drive, Coral Springs, FL 33065
7520 E. Colonial Drive	Orlando	FL		32807	3/14/2003	3/14/2006	Orville “Butch” Crouso	321-231-0189	7465 Camford Court, Winter Park, FL 32792
3690 Davie Blvd.	Fort Lauderdale	FL		33312	1/1/2005	12/31/2006	21st Century Holdings (George Berwig)	954-308-1252	3661 Oakland Park Blvd., #300, Lauderdale Lakes, FL 33311

					LEASE	LEASE EXPIRATION
ADDRESS	CITY	STATE	ZIP		COMMENCEMENT	DATE	LANDLORD NAME	LANDLORD PHONE	LANDLORD ADDRESS
406 South State Road 7	Hollywood	FL		33021	3/1/2004	2/28/2007	Bostonian Inc. c/o Dacar Management LLC	954-927-4885	336 East Dania Beach Blvd. Dania, FL 33004
8960/62/64 Taft Street	Pembroke Pines	FL		33024	9/1/2002	8/31/2007	Pine Plaza Corp., Marant & Associates, Inc. Managing Agent.	954-434-3934 (Grant Marant 954-557-4203 Cell) Assistant: Michelle Bourst	5240 S. University Drive, Suite E-106, Davie, FL 33328
12145 Pembroke Rd. Suite 307	Pembroke Pines	FL		33025	9/1/2002	8/31/2007	PMAT Flamingo Marketplace, LLC	Mike Whelan [mailto:mhw@pmat.net] 985-847-2377 cell: 985-788-8496 (AR: Angela Pigford: 504-681-3401 or Yvonne Lockwood: 504-681-3405)	PO Box 62600, Department 1361, New Orleans, LA 70162-2600 ALSO PMAT Flamingo LLC c/o Property One, Inc. 1615 Poydras Street, Ste. 1350, New Orleans, LA 70112 (AS OF 2/9/06)
7245 NW 88th Avenue	Tamarac	FL		33321	9/1/2002	8/31/2007	Misala Inc. c/o Dacar Management LLC	P. (954) 927-4885	336 East Dania Beach Blvd. Dania, FL 33004
1501 North Main Street	Kissimmee	FL		34744	10/1/2004	9/30/2007	Tillie Baker		1503 North Main Street, Kissimmee, FL
4558 S. Semoran Blvd. #8	Orlando	FL		32822	4/1/2005	3/31/2008	Semoran Retail, Inc. c/o Stoltz Mgmt. of Delaware, Inc.	P. (610) 667-5800	725 Conshohocken State Rd., Bala Cynwyd, PN 19004
4325 S Orange Blossom Trail	Orlando	FL		32703	5/1/2005	4/30/2008	The Boswell Company	P. (404) 252-4237	80 West Wieuca Road, NW, Ste. 202A, Atlanta, GA 30342
5206 B West Colonial Dr.	Orlando	FL		32808	8/1/2005	7/31/2008	Onomea, Inc.	P. 407-299-5000 x 1189	12609 Nicolette Ct. Clermont, FL 34711
4992 W. Atlantic Blvd.	Margate	FL		33063	9/1/2003	8/31/2008	Coconut Square Realty Co., LTD,	P. 954-972-0322; F.954-972-0323	PO Box 8552 Coral Springs, FL 33075
1839 North Pine Island Rd.	Plantation	FL		33322	4/1/1994	9/30/2008	Gator Investments	P. (305) 949-9049 (Lisa in AR)	1595 NE 63rd Street, N. Miami Beach, FL 33162
8310 State Rd. 84	Davie	FL		33324	1/1/2005	12/31/2008	Arrel Enterprises, Inc./ Route 84 Associates	P. 954-474-3508 (Michael Leaventhal)	8540 State Rd. 84, Fort Lauderdale, FL 33324

					LEASE	LEASE EXPIRATION
ADDRESS	CITY	STATE	ZIP		COMMENCEMENT	DATE	LANDLORD NAME	LANDLORD PHONE	LANDLORD ADDRESS
735 E. Oakland Park Blvd.	Ft. Lauderdale	FL		33334	1/1/2006	12/31/2008	21st Century Holdings (George Berwig)	P. 954-308-1252	3661 Oakland Park Blvd., #300, Lauderdale Lakes, FL 33311
2601 Broadway, Ste 182	Rivera Beach	FL		33404	3/1/2004	2/28/2009	Cooksey & Cooksey, PA	P. 561-842-4908; F. 561-863-4677	2601 Broadway #3, Riviera Beach, FL 33404
5100 W. Commercial Blvd.	Tamarac	FL		33319	4/1/2006	3/31/2009	MicronUSA Corp. attn: Romina Traficante	(561) 305-7664 (Romina Cell)	PO Box 1875, Boca Raton, FL 33429
743 S. Orange Blossom Trail	Apopka	FL		32703	7/1/2006	6/30/2009	Janet L. Galvin; Liberty Universal Management, Inc., 314 E. Anderson Street, Orlando, FL 32801 (business contact)	P. 954-385-0001; F.516-294-3576	Ed or Scott Ross; Apopka Regional Shopping Center; 600 Old Country Road, Suite 435, Garden City, NY 11530 (RENT)
3562 South US 1	Stuart	FL		34997	11/1/2004	10/31/2009	Morris Stuart Associates LLC		350 Veterans Blvd. Rutherford, NJ 07070
15904 State Rd. #84	Sunrise	FL		33326	3/1/2007	2/28/2010	Westgate Square LLC,	P. 954-615-0615; F. 954-615-0616	15970 West State Rd. 84, #119, Sunrise, FL 33326
11707 Miracle Hills Drive	Omaha	NE		68154

USAgencies Owned and Leased Real Property

See attached.

SCHEDULE 3.25

ACQUISITION DOCUMENTATION

1. Purchase and Sale Agreement by and among the Equityholders of USAgencies, L.L.C. signatory thereto as Sellers and Affirmative Insurance Holdings, Inc. as Buyer, dated as of October 3, 2006.

2. Escrow Agreement dated as of January ___, 2007, by and among Affirmative Insurance Holdings, Inc., a Delaware corporation, the Sellers’ Committee on behalf of the Persons identified on Exhibit A thereto and The Frost National Bank, as escrow agent.

SCHEDULE 3.26

REGULATED INSURANCE SUBSIDIARY PERMITS

Affirmative Regulated Insurance Subsidiary Permits

Regulated Insurance	Jurisdiction(s) of Permits	Lines of Permitted Business
Subsidiary
Affirmative Insurance Company	Alabama	Property; Miscellaneous Casualty, Surety Including Official Surety Bonds, Marine
Affirmative Insurance Company	Arizona	Casualty without Workers’ Compensation; Property
Affirmative Insurance Company	Arkansas	Property; Casualty (Excluding Workers Compensation); Surety; Marine
Affirmative Insurance Company	California	Fire; Marine; Liability; Burglary; Automobile; Miscellaneous
Affirmative Insurance Company	Connecticut	Worker’s Compensation
Affirmative Insurance Company	Florida	Fire; Allied Lines; Farmowners Multi Peril; Homeowners Multi Peril; Commercial Multi Peril; Inland Marine; Earthquake; Other Liability; Private Passenger Auto Liability; Commercial Automobile Liability; PPA Physical Damage; Commercial Auto Physical Damage; Fidelity; Surety; Glass; Burglary and Theft; Boiler and Machinery; Livestock; Industrial Fire; Industrial Extended Coverage
Affirmative Insurance Company	Georgia	Property; Marine and Transportation; Casualty (Including Workers’ Compensation); Surety
Affirmative Insurance Company	Idaho	Casualty, Excluding Work Comp; Surety; Marine and Transportation; Property
Affirmative Insurance Company	Illinois	Class 2 (Casualty, Fidelity and Surety): Accident and Health; Vehicle; Liability; Workers’ Compensation; Burglary and Forgery; Glass; Fidelity and Surety; Miscellaneous; Other Casualty Risks; Contingent Losses; Livestock and Domestic Animals; Legal Expense Insurance Class 3 (Fire and Marine, etc.): Fire; Elements; War, Riot and Explosion; Marine and Transportation; Vehicle; Property Damage, Sprinkler Leakage

Regulated Insurance	Jurisdiction(s) of Permits	Lines of Permitted Business
Subsidiary
		and Crop; Other Fire and Marine Risks; Contingent Losses; Legal Expense Insurance
Affirmative Insurance Company	Indiana	Class II (Casualty): Accident and Health — Disability; Burglary, Theft; Glass; Boiler and Machinery; Automobile; Sprinkler; Liability; Fidelity & Surety without Bail Bonds; MiscellaneousClass III (Property): Fire, Windstorm, Hail, Loot, Riot; Sprinkler; Marine
Affirmative Insurance Company	Iowa	Fire; Extended coverage; Other allied lines; Homeowners multiple peril; Commercial multiple peril; Earthquake; Growing crops; Ocean marine; Inland marine; Accident only; Accident and health; Hospital and medical expense; Group accident and health; Non-cancellable accident and health; Liability other than auto (BI); Liability other than auto (PD); Auto liability (BI); auto liability (PD); Auto physical damage; Aircraft physical damage; Fidelity; Surety; Glass; Burglary and theft; Boiler and machinery
Affirmative Insurance Company	Kansas	Fire; Windstorm & Hail; Extended Coverage; Optional Perils; Sprinkler Leakage; Business Interruption; Earthquake; Water Damage; Inland Marine; Rain; Automobile Physical Damage; Flood; Homeowners Policies; Automobile Liability; General Liability; Fidelity, Surety & Forgery Bonds; Glass; Burglary, Theft & Robbery; Boiler & Machinery; Malpractice Liability; Cargo Liability
Affirmative Insurance Company	Kentucky	Property, Casualty (limited to vehicle, liability, burglary & theft, personal property floater, glass, boiler & machinery, leakage & fire extinguishing equipment, failure of certain institutions to record documents, automobile guaranty and miscellaneous), Surety; Marine & Transportation
Affirmative Insurance Company	Michigan	Recognition as an Accredited Reinsurer in Michigan
Affirmative Insurance Company	Mississippi	Fire and Allied Lines; Casualty/Liability; Fidelity; Surety; Boiler and Machinery; Plate Glass; Inland Marine; Auto Phy Damage/Liab; Guaranty
Affirmative Insurance Company	Missouri	Liability; Miscellaneous; Property
Affirmative Insurance Company	Nebraska	Property Insurance; Glass Insurance; Burglary and Theft Insurance; Boiler and Machinery Insurance; Liability Insurance; Vehicle Insurance; Fidelity Insurance; Surety Insurance; Marine Insurance

Regulated Insurance	Jurisdiction(s) of Permits	Lines of Permitted Business
Subsidiary
Affirmative Insurance Company	Nevada	Casualty (Excluding Workers’ Compensation) — Property
Affirmative Insurance Company	New Mexico	Property (Excluding Marine and Transportation; Casualty and Vehicle
Affirmative Insurance Company	New York	Recognition as an Accredited Reinsurer in New York
Affirmative Insurance Company	North Carolina	Fire; Extended Coverage; Commercial Water Damage; Residential Water Damage; Burglary and Theft; Glass; Boiler and Machinery; Elevator; Animal; Automobile Collision; Other Collision; Automobile Personal Injury Liability; Other Personal Injury Liability; Automobile Property Damage Liability; Other Property Damage Liability; Workmen’s Compensation & Employer’s Liability; Fidelity and Surety; Motor Vehicle and Aircraft Property Damage, Fire, Theft, Comprehensive, Collision; Inland Marine
Affirmative Insurance Company	North Dakota	Casualty; Property
Affirmative Insurance Company	Ohio	Accident & Health; Aircraft; Allied Lines; Boiler & Machinery; Burglary & Theft; Collectively Renewable A & H; Commercial Auto — Liability; Commercial Auto — No Fault; Commercial Auto — Phys. Damage; Credit Accident & Health; Earthquake; Fidelity; Financial Guaranty; Fire; Glass, Group Accident & Health; Guaranteed Renewable A & H; Inland Marine; Multiple Peril — Commercial; Multiple Peril — Farmowners; Multiple Peril - Homeowners; Noncancellable A & H; Nonrenew — State Reasons (A&H); Ocean Marine; Other Accident only; Other Liability; Private Passenger Auto - Liab.; Private Passenger Auto-Other; Private Passenger-Phys Damage; Surety; Workers Compensation
Affirmative Insurance Company	Oklahoma	Property; Casualty
Affirmative Insurance Company	Oregon	Casualty (Excluding Workers’ Compensation)
Affirmative Insurance Company	Pennsylvania	Auto Liability; Inland Marine and Physical Damage
Affirmative Insurance Company	Rhode Island	All Lines of insurance except life, annuities, title, mortgage guaranty and worker’s compensation.
Affirmative Insurance Company	South Carolina	Property; Casualty
Affirmative Insurance Company	South Dakota	Fire & Allied Lines; Inland & Ocean Marine; Bodily Injury (No Auto);

Regulated Insurance	Jurisdiction(s) of Permits	Lines of Permitted Business
Subsidiary
		Property Damage (No Auto); Bodily Injury (Auto); Property Damage (Auto); Physical Damage (Auto); Fidelity & Surety Bonds; Glass; Burglary & Theft; Boiler & Machinery; Bail Bonds
Affirmative Insurance Company	Tennessee	Property; Casualty; Surety
Affirmative Insurance Company	Texas	Automobile Liability; Automobile Physical Damage and Reinsurance on all lines authorized to be written on a direct basis
Affirmative Insurance Company	Utah	Liability; Property; Vehicle Liability
Affirmative Insurance Company	Virginia	Fire; Miscellaneous Property; Farm Multiple Peril; Homeowners Multiple Peril; Commercial Multiple Peril; Inland Marine; Workers Compensation-Employer; Liability Other Than Auto; Automobile Liability; Automobile Physical Damage; Fidelity; Surety; Glass; Burglary and Theft; Boiler and Machinery; Water Damage
Affirmative Insurance Company	Washington	Vehicle
Affirmative Insurance Company	West Virginia	Fire; Marine; Casualty; Surety
Affirmative Insurance Company	Wisconsin	Fire, inland marine, and other property insurance; Liability and incidental medical expense insurance; Automobile and aircraft insurance; Fidelity insurance; Surety insurance; Miscellaneous
		Property; Automobile Insurance — Limited; Casualty: Automobile; Casualty:
Affirmative Insurance Company of Michigan	Michigan	Liablity; Casualty: Misc — Other; Disability coverage supplemental to Auto Insurance
Insura Property & Casualty Insurance Company	Arizona	Casualty Without Workers’ Compensation; Marine and Transportation; Property; Surety; Vehicle

Regulated Insurance	Jurisdiction(s) of Permits	Lines of Permitted Business
Subsidiary
Insura Property & Casualty Insurance Company	Arkansas	Property; Casualty (Excluding Workers Compensation); Surety; Marine
Insura Property & Casualty Insurance Company	Colorado	Fidelity and Surety; General Casualty; General Property; Motor Vehicle (Casualty); Motor Vehicle (Property); Professional Malpractice;
Insura Property & Casualty Insurance Company	Connecticut	Fire, Extended Coverage, and Other Allied Lines; Homeowners Multiple Peril; Commercial Multiple Peril; Inland Marine; Workman’s Compensation; Liability other than Auto (BI and PD); Auto Liability (BI and PD); Auto Physical Damage; Glass; Burglary and Theft; Credit; Reinsurance
Insura Property & Casualty Insurance Company	Florida	Fire; Allied Lines; Farmowners Multi Peril; Homeowners Multi Peril; Commercial Multi Peril; Inland Marine; Medical Malpractice; Earthquake; Other Liability; Private Passenger Auto Liability; Commercial Automobile Liability; PPA Physical Damage; Commercial Auto Physical Damage; Fidelity; Surety; Glass; Burglary and Theft; Boiler and Machinery; Industrial Fire; Industrial Extended Coverage; Mobile Home Multi Peril; Mobile Home Physical Damage
Insura Property & Casualty Insurance Company	Georgia	Property; Marine and Transportation; Casualty (Including Workers’ Compensation); Surety
Insura Property & Casualty Insurance Company	Illinois	Class 2 (Casualty, Fidelity and Surety): Accident and Health; Vehicle; Liability; Workers’ Compensation; Burglary and Forgery; Glass; Fidelity and Surety; Miscellaneous; Other Casualty Risks; Contingent Losses; Livestock and Domestic Animals; Legal Expense InsuranceClass 3 (Fire and Marine, etc.): Fire; Elements; War, Riot and Explosion; Marine and Transportation; Vehicle; Property Damage, Sprinkler Leakage and Crop; Other Fire and Marine Risks; Contingent Losses; Legal Expense Insurance
Insura Property & Casualty Insurance Company	Indiana	Class II (Casualty): Accident and Health — Disability; Workers’ Compensation; Burglary, Theft; Glass; Boiler and Machinery; Automobile; Sprinkler; Liability; Fidelity & Surety without Bail Bonds; Miscellaneous Class III (Property): Fire, Windstorm, Hail, Loot, Riot; Sprinkler; Marine
Insura Property & Casualty Insurance Company	Iowa	Fire; Extended coverage; Other allied lines; Homeowners multiple peril; Commercial multiple peril; Earthquake; Growing crops; Ocean marine;

Regulated Insurance	Jurisdiction(s) Of Permits	Lines of Permitted Business
Subsidiary
		Inland marine; Accident only; Accident and health; Hospital and medical expense; Group accident and health; Non-cancellable accident and health; Liability other than auto (BI); Liability other than auto (PD); Auto liability (BI); auto liability (PD); Auto physical damage; Aircraft physical damage; Fidelity; Surety; Glass; Burglary and theft; Boiler and machinery
Insura Property & Casualty Insurance Company	Kansas	Fire; Windstorm & Hail; Extended Coverage; Optional Perils; Sprinkler Leakage; Business Interruption; Earthquake; Water Damage; Inland Marine; Rain; Automobile Physical Damage; Flood; Homeowners Policies; Automobile Liability; General Liability; Fidelity, Surety & Forgery Bonds; Glass; Burglary, Theft & Robbery; Boiler & Machinery; Malpractice Liability; Cargo Liability
Insura Property & Casualty Insurance Company	Kentucky	Property, Casualty (limited to vehicle, liability, workers’ compensation & employer’s liability, burglary & theft, personal property floater, glass, boiler & machinery, leakage & fire extinguishing equipment, failure of certain institutions to record documents, automobile guaranty and miscellaneous), Surety; Marine & Transportation
Insura Property & Casualty Insurance Company	Mississippi	Fire and Allied Lines; Casualty/Liability; Fidelity; Surety; Boiler and Machinery; Plate Glass; Inland Marine; Auto Phy Damage/Liab; Guaranty
Insura Property & Casualty Insurance Company	Missouri	Miscellaneous; Accident & Health; Liability; Property
Insura Property & Casualty Insurance Company	Nebraska	Property Insurance; Glass Insurance; Burglary and Theft Insurance; Boiler and Machinery Insurance; Liability Insurance; Vehicle Insurance; Fidelity Insurance; Surety Insurance; Marine Insurance
Insura Property & Casualty Insurance Company	Nevada	Casualty (Excluding Workers’ Compensation) — Property
Insura Property & Casualty Insurance Company	New Mexico	Vehicle
Insura Property & Casualty Insurance Company	North Carolina	Fire; Extended Coverage; Commercial Water Damage; Residential Water Damage; Burglary and Theft; Glass; Boiler and Machinery; Elevator; Animal; Automobile Collision; Other Collision; Automobile Personal Injury Liability; Other Personal Injury Liability; Automobile Property Damage

Regulated Insurance	Jurisdiction(s) of Permits	Lines of Permitted Business
Subsidiary
		Liability; Other Property Damage Liability; Workmen’s Compensation & Employer’s Liability; Fidelity and Surety; Motor Vehicle and Aircraft Property Damage, Fire, Theft, Comprehensive, Collision; Inland Marine; Ocean Marine; Marine Protection and Indemnity; Aircraft Voluntary Settlement
Insura Property & Casualty Insurance Company	North Dakota	Casualty; Property
Insura Property & Casualty Insurance Company	Ohio	Accident & Health; Aircraft; Allied Lines; Boiler & Machinery; Burglary & Theft; Collectively Renewable A & H; Commercial Auto — Liability; Commercial Auto — No Fault; Commercial Auto — Phys. Damage; Credit Accident & Health; Earthquake; Fidelity; Financial Guaranty; Fire; Glass, Group Accident & Health; Guaranteed Renewable A & H; Inland Marine; Multiple Peril — Commercial; Multiple Peril — Farmowners; Multiple Peril - Homeowners; Noncancellable A & H; Nonrenew — State Reasons (A&H); Ocean Marine; Other Accident only; Other Liability; Private Passenger Auto - Liab.; Private Passenger Auto-Other; Private Passenger-Phys Damage; Surety;
Insura Property & Casualty Insurance Company	Oklahoma	Property; Casualty
Insura Property & Casualty Insurance Company	Oregon	Casualty (Excluding Workers’ Compensation)
Insura Property & Casualty Insurance Company	Rhode Island	All lines of insurance except life, annuities, title and mortgage guaranty.
Insura Property & Casualty Insurance Company	South Carolina	Property; Casualty
Insura Property & Casualty Insurance Company	South Dakota	Fire & Allied Lines; Inland & Ocean Marine; Bodily Injury (No Auto); Property Damage (No Auto); Bodily Injury (Auto); Property Damage (Auto); Physical Damage (Auto); Fidelity & Surety Bonds; Glass; Burglary & Theft; Boiler & Machinery; Bail Bonds
Insura Property & Casualty Insurance Company	Tennessee	Property; Casualty; Surety
Insura Property & Casualty	Texas	Automobile — Liability and Physical Damage and Reinsurance on all lines

Regulated Insurance Subsidiary	Jurisdiction(s) of Permits	Lines of Permitted Business
Insurance Company		authorized to be written on a direct basis
Insura Property & Casualty	Utah	Liability; Property; Vehicle Liability
Insurance Company
Insura Property & Casualty Insurance		Fire; Miscellaneous Property and Casualty; Farm Multiple Peril; Homeowners Multiple Peril; Commercial Multiple Peril; Inland Marine; Workers Compensation-Employer; Liability Other Than Auto; Automobile Liability; Automobile Physical Damage; Aircraft Liability; Air Physical Damage;
Company	Virginia	Fidelity; Glass; Burglary and Theft; Boiler and Machinery; Water Damage
Insura Property & Casualty Insurance Company	Washington	Vehicle
Insura Property & Casualty Insurance Company	West Virginia	Fire; Marine; Casualty; Surety
Insura Property & Casualty Insurance Company	Wisconsin	None.

USAgencies Regulated Insurance Subsidiary Permits

Regulated Insurance Subsidiary	Jurisdiction(s) of Permits	Lines of Permitted Business
USAgencies Direct Insurance Company, Inc.	Alabama	Miscellaneous Casualty; Surety Excluding Official Surety Bonds; Marine
USAgencies Direct Insurance Company, Inc.	Arizona	Vehicle
USAgencies Direct Insurance Company, Inc.	Illinois	Class 2 (Casualty, Fidelity and Surety): Vehicle; Liability; Workers’ Compensation; Burglary and Forgery; Glass; Miscellaneous; Other Casualty Risks; Contingent Losses; Livestock and Domestic Animals; Legal Expense Insurance
		Class 3 (Fire and Marine, etc.): Marine and Transportation; Vehicle; Property Damage, Sprinkler Leakage and Crop; Other Fire and Marine Risks; Contingent Losses

Regulated Insurance Subsidiary	Jurisdiction(s) of Permits	Lines of Permitted Business
USAgencies Direct Insurance Company, Inc.	Indiana	Class II (Casualty) — Accident and Health — Disability; Workers’ Compensation; Burglary, Theft; Glass; Boiler and Machinery; Automobile; Sprinkler; Liability; Credit; Title; Fidelity & Surety-excluding bail bonds; Miscellaneous; Legal Expenses; Class III (Property) — Fire, Windstorm, Hail, Loot, Riot; Crops; Sprinkler; Marine
USAgencies Direct Insurance Company, Inc.	Iowa	Fire; Extended coverage; Other allied lines; Homeowners multiple peril (Inc. B.I.); Commercial multiple peril; Earthquake; Growing crops; Ocean marine; Inland marine; Workers’ compensation; Liability other than auto (B.I.); Liability other than auto (P.D.); Auto liability (B.I.); Auto liability (P.D.); Auto physical damage; Aircraft physical damage; Glass; Burglary and theft; Boiler and machinery
USAgencies Direct Insurance Company, Inc.	Kentucky	Multiple Line — Health; Property; Surety; Casualty; and Marine and transportation Insurance
USAgencies Direct Insurance Company, Inc.	Louisiana	Vehicle
USAgencies Direct Insurance Company, Inc.	Massachusetts	Ocean & Inland Marine
USAgencies Direct Insurance Company, Inc.	Montana	Property; Marine; Casualty (excluding Workers’ Compensation)
USAgencies Direct Insurance Company, Inc.	Nevada	Property; Casualty (excluding Workers’ Compensation)
USAgencies Direct Insurance Company, Inc.	New York	Fire; miscellaneous property; water damage; burglary and theft; glass; boiler and machinery; collision; personal injury liability; property damage liability; motor vehicle and aircraft physical damage; marine and inland marine; marine protection and indemnity
		Allied Lines; Boiler & Machinery; Burglary & Theft; Commercial Auto - Liability; Commercial Auto — No Fault; Commercial Auto — Physical

Regulated Insurance Subsidiary	Jurisdiction(s) of Permits	Lines of Permitted Business
	Oregon	Damage; Earthquake; Fidelity; Fire; Glass; Inland Marine; Multiple Peril — Commercial; Multiple Peril — Farmowners; Multiple Peril - Homeowners; Ocean Marine; Other Liability; Private Passenger Auto - Liability; Private Passenger Auto — Other; Private Passenger - Physical Damage; Surety; Workers Compensation
USAgencies Direct Insurance Company, Inc.	Oregon	Casualty (Excluding Workers’ Coompensation); Marine and Transportation
USAgencies Direct Insurance Company, Inc.	Texas	Fire; Allied Coverages; Ocean Marine; Employers’ Liability; Automobile — Liability & Physical Damage; Liability other than Automobile; Glass; Burglary & Theft; Boiler & Machinery and Reinsurance on all lines authorized to be writtenon a direct basis.
USAgencies Direct Insurance Company, Inc.	Washington	Property; Marine & Transportation; Vehicle; General Casualty
USAgencies Direct Insurance Company, Inc.	Wisconsin	Fire, inland marine, and other property insurance; Ocean marine insurance; Liability and incidental medical expense insurance; Automobile and aircraft insurance; Miscellaneous
USAgencies Casualty Insurance Company, Inc.	Louisiana	Vehicle

SCHEDULE 6.01

EXISTING INDEBTEDNESS

Affirmative Existing Indebtedness

1. None.

USAgencies Existing Indebtedness

1. USAgencies Management Services, Inc. has outstanding debt as follows:

a.	$11,517 owed to GMAC Financial Services for vehicle fleet financing.
b.	$147,412 owed to Capital One Commercial Equipment Finance (formerly Hibernia Bank) for an equipment capital lease.

SCHEDULE 6.02

EXISTING LIENS

Affirmative Existing Liens

1.	Affirmative Insurance Holdings, Inc.
	Delaware Secretary of State
	Federal Tax Liens – clear.
	UCC

				FILE
	SECURED PARTY	LIEN TYPE	FILE NUMBER	DATE	COLLATERAL
1	Dell Financial Services, L.P.	UCC-1	51175455	4/15/05	Computer equipment lease
2	Cisco Systems Capital Corporation	UCC-1	63705696	10/24/06	Equipment lease

2.	Affirmative Property Holdings, Inc.
	Texas Secretary of State
	UCC

				FILE
	SECURED PARTY	LIEN TYPE	FILE NUMBER	DATE	COLLATERAL
1	Pitney Bowes Credit Corporation	UCC-1	04-0080962978	9/8/04	Pitney Bowes equipment
2	Dell Financial Services, L.P.	UCC-1	05-0014607962	5/10/05	Computer equipment lease
3	Key Equipment Finance Inc.	UCC-1	06-0017164904	5/19/06	Equipment, inventory, etc.
4	Greater Bay Bank N.A.	UCC-1	06-0018005282	5/26/06	Copiers
5	Citicorp Vendor Finance, Inc.	UCC-1	06-0018693922	6/2/06	Equipment (various fax machines)
6	Citicorp Vendor Finance, Inc.	UCC-1	06-0030630745	9/13/06	Copiers

3.	A-Affordable Insurance Agency, Inc.
	Texas Secretary of State
	UCC

				FILE
	SECURED PARTY	LIEN TYPE	FILE NUMBER	DATE	COLLATERAL
1	Citicorp Vendor Finance, Inc.	UCC-1	01-00081647	4/27/01	Copiers lease
		Continuation	06-00130631	4/18/06
2	Citicorp Vendor Finance, Inc.	UCC-1	04-0054146953	1/14/04	Specific equipment
3	Meadow Creek Square S/C,	UCC-1	06-0016720779	5/16/06	All goods, wares,
	Ltd., Meadow Creek Square				equipment, fixtures, etc.
	S/C, G.P., LLC
		Amendment	06-00168128	5/17/06	Restated collateral

USAgencies Existing Liens

1. USAgencies, L.L.C.

State of Louisiana, East Baton Rouge Parish

UCC

	SECURED PARTY	LIEN TYPE	FILE NUMBER	FILE DATE	COLLATERAL
1	Cisco Systems Capital Corporation	UCC-1	17-1216962	6/29/01	Equipment lease
		Amendment	17-1257819	11/5/03
		Continuation	17-1295217	3/28/06
2	Citicorp Vendor Finance, Inc.	UCC-1	09-1040045	1/13/05	Copier

SCHEDULE 6.04

EXISTING INVESTMENTS

Affirmative Existing Investments

Bank Name	Beneficiary	Bank Account #	Account Name	Location	Contact Name	Contact Number
Non-Restricted Securities
UBS Financial Services, Inc.	N/A	Y1 13774	Affirmative Insurance Company	New York, NY	Hank Ludwicki		212-821-2189
UBS Financial Services, Inc.	N/A	Y1 13773	Insura Property & Casualty Insurance Company	New York, NY	Hank Ludwicki		212-821-2189
UBS Financial Services, Inc.	N/A	Y1 00880	Affirmative Insurance Company of Michigan	New York, NY	Hank Ludwicki		212-821-2189
Comerica Bank	N/A	4085000178	Affirmative Insurance Company	Detroit, MI	Ralph Johnston		313-222-9053
Comerica Bank	N/A	4085000187	Insura Property & Casualty Insurance Company	Detroit, MI	Ralph Johnston		313-222-9053
Comerica Bank	N/A	2085001302	Affirmative Insurance Company of Michigan	Detroit, MI	Ralph Johnston		313-222-9053
Frost National Bank	N/A	WA181	Affirmative Insurance Company	Fort Worth, TX	Chris Massey		817-420-5052
Frost National Bank	N/A	WA182	Insura Property & Casualty Insurance Company	Fort Worth, TX	Chris Massey		817-420-5052
Restricted Securities
Trusts:

Bank Name	Beneficiary	Bank Account #	Account Name	Location	Contact Name	Contact Number
Frost National Bank(NV)	Old American-AAF	W00015500	Affirmative Insurance Company - OACM A-Affordable Trust	Fort Worth, TX	Chris Massey		817-420-5052
Frost National Bank	Old American-AIS-SW	W00015600	Affirmative Insurance Company - OACM AIS-SW Trust	Fort Worth, TX	Chris Massey		817-420-5052
Frost National Bank	Vesta	WA570	Affirmative Insurance Company - Vesta AIC Trust	Fort Worth, TX	Chris Massey		817-420-5052
Special Deposits:
US Bank (GA)	Policyholder	61-584708200	Affirmative Insurance Company	Winston-Salem, NC	Debbie Blackburn		877-877-2143 x3
Illinois National Bank (IL)	Policyholder	155	Affirmative Insurance Company (NAIC#42609)	Springfield, IL	Cathy Suhling		217-557-4639
Century Bank (NM)	Policyholder	4955	Affirmative Insurance Company	Santa Fe, NM	Alan Snow		505-995-1210
US Bank (NC)	Policyholder	58-078477600	Affirmative Insurance Company	Winston-Salem, NC	Diane Grubbs		877-877-2143 x1
Frost National Bank	Policyholder	W00015600	Affirmative Insurance Company	Fort Worth, TX	Chris Massey		817-420-5052
US Bank (SC)	Policyholder	222-121060003300	Affirmative Insurance Company	Winston-Salem, NC	Debbie Blackburn		877-877-2143 x3
Sun Trust Bank (VA)	Policyholder	7023549	Affirmative Insurance Company	Richmond, VA	Brenda Whitener		804-782-7792
US Bank (GA)	Policyholder	61-584918600	Insura Property & Casualty Insurance Company	Winston-Salem, NC	Debbie Blackburn		877-877-2143 x3
Illinois National Bank (IL)	Policyholder	14238	Insura Property & Casualty Insurance Company	Springfield, IL	Cathy Suhling		217-557-4639
			(NAIC#38806)
US Bank (NC)	Policyholder	58-078544100	Insura Property & Casualty Insurance Company	Winston-Salem, NC	Diane Grubbs		877-877-2143
Century Bank (NM)	Policyholder	5020	Insura Property & Casualty Insurance Company	Santa Fe, NM	Alan Snow		505-995-1210
Frost National Bank	Policyholder	WA182	Insura Property & Casualty Insurance Company	Fort Worth, TX	Chris Massey		817-420-5052
(NV)
US Bank (SC)	Policyholder	222-12106000300	Insura Property & Casualty Insurance Company	Winston-Salem, NC	Debbie Blackburn		877-877-2143 x3

Bank Name	Beneficiary	Bank Account #	Account Name	Location	Contact Name	Contact Number
Sun Trust Bank (VA)	Policyholder	7022958	Insura Property & Casualty Insurance Company	Richmond, VA	Brenda Whitener		804-782-7792
JP Morgan Chase (MI)	Policyholder	341000163	Affirmative Insurance Company of Michigan	Lansing, MI	Betty Lotoszinski		517-241-9072

USAgencies Existing Investments

Deposit Accounts

					Contact
Bank Name	Bank Account #	Account Name	Location	Contact Name	Number
Capital One, N. A.	2080045355 — Operating	USAgencies Direct Insurance Company	Baton Rouge, LA	Janet Olson	(225) 381-2140
Capital One, N. A.	792086675 – Operating 2080108020 –	792086675 – Operating		Janet Olson	(225) 381-2140
	Consolidated Return Account	2080108020 – Consolidated Return Account
	792156894 – Payroll Account	792156894 – Payroll Account	Baton Rouge, LA
	8660199999 – Kiosk Account	8660199999 — Kiosk Account USAgencies Management Services, Inc
JPMorgan Chase Bank, N.A.	000000641907191 – Deposit (Sales Office)	USAgencies Management	Illinois Market P. O. Box 260180	Tine Neames	(225) 332-7782
		Services	Baton Rouge, LA 70826

Bank Name	Bank Account #	Account Name	Location	Contact Name	Number
Regions Bank	4305089786 – Deposit (Sales Office)	USAgencies Management Services	Baton Rouge, LA	Bonnie Couvillon	(225) 767-9394
Capital One, N. A.	792088139 – Operating 8649099999 – Tower key	USAgencies Casualty Insurance Company	Baton Rouge, LA	Janet Olson	(225) 381-2140
First National Bank	139539 – Deposit (Sales Office)	USAgencies Casualty Insurance Company	Crowley, LA	Diane Sarver	(337) 783-4014
JPMorgan Chase Bank, N. A	2101345508 — Deposit (Sales Office)	USAgencies Casualty Insurance Company	Baton Rouge, LA	Tine Neames	(225) 332-7782
Plaquemine Bank & Trust	119210 — Deposit (Sales Office)	USAgencies Casualty Insurance Company	Plaquemine, LA	Rhett Vaughn	(225) 687-6388
Regions Bank	4305051908 — Deposit (Sales Office)	USAgencies Casualty Insurance Company	Baton Rouge, LA	Bonnie Couvillon	(225) 767-9394
Sabine State Bank	9009760 — Deposit (Sales Office)	USAgencies Casualty Insurance Company	Many, LA	Bridget Hicks	(318) 256-7000
Winnsboro state Bank	1027158 — Deposit (Sales Office)`	USAgencies Casualty Insurance Company	Winnsboro, LA	Michael Woods	(318) 435-7535
Capital One, N.A.	792157378 – Operating 8661099999 – TowerKEY	LIFCO, L.L.C.	Baton Rouge, LA	Janet Olson	(225) 381-2140

Bank Name	Bank Account #	Account Name	Location	Contact Name	Number
First National Bank	139594 – Deposit (Sales Office)	LIFCO, L.L.C.	Crowley, LA	Diane Sarver	(337) 783-4014
JP Morgan Chanse Bank, N.A.	2102203162 — Deposit (Sales Office)	LIFCO, L.L.C.	Baton Rouge, LA	Tine Neames	(225) 332-7782
Plaquemine Bank & Trust	119474 — Deposit (Sales Office)	LIFCO, L.L.C.	Plaquemine, LA	Rhett Vaughn	(225) 687-6380
Regions Bank	4305051916 — Deposit (Sales Office)	LIFCO, L.L.C.	Baton Rouge, LA	Bonnie Couvillon	(225) 767-9394
Sabine State Bank & Trust Co.	9009779 — Deposit (Sales Office)	LIFCO, L.L.C.	Many, LA	Bridget Hicks	(318) 256-7000
Winnsboro State Bank & Trust	1027166 — Deposit (Sales Office)	LIFCO, L.L.C.	Winnsboro, LA	Michael Woods	(318) 435-7535

Special Investment Accounts

Restricted Securities Accounts

Bank Name	Bank Account #	Account Name	Location
Capital One, N.A.	710415027	USAgencies Casualty Insurance Company, Inc.	Louisiana
Capital One, N.A.	760110015	USAgencies Direct Insurance Company	Louisiana
US Bank	141049754	USAgencies Direct Insurance Company	Arizona
US Bank	141049754	USAgencies Direct Insurance Company	Arizona
Bank of New York	050261	USAgencies Direct Insurance Company	Nevada
Bank of New York	350518	USAgencies Direct Insurance Company	New York
Capital One, N.A.	710415043	USAgencies Direct Insurance Company	Ohio

EX-10.33

EXHIBIT 10.33

Execution Copy

FIRST AMENDMENT TO
CREDIT AGREEMENT AND GUARANTEE AND COLLATERAL AGREEMENT

     This FIRST AMENDMENT TO CREDIT AGREEMENT AND GUARANTEE AND COLLATERAL AGREEMENT (this “Amendment”) is dated as of March 8, 2007, and entered into by and among AFFIRMATIVE INSURANCE HOLDINGS, INC., a Delaware corporation (“Borrower”), the lenders party thereto that are party hereto (the “Required Lenders”), CREDIT SUISSE, CAYMAN ISLANDS BRANCH (“CS”), as Administrative Agent (in such capacity, “Administrative Agent”), as Collateral Agent (in such capacity, the “Collateral Agent”), as Outgoing Issuing Bank (as hereinafter defined) and as Outgoing Swingline Lender (as hereinafter defined and together with the Administrative Agent, Collateral Agent and Outgoing Issuing Bank, the “Agents”) and THE FROST NATIONAL BANK (“Frost”), as Incoming Issuing Bank (as hereinafter defined) and Incoming Swingline Lender (as hereinafter defined) (Incoming Swingline Lender, together with Incoming Issuing Bank, the “Incoming Bank”). Capitalized terms used but not defined herein having the meaning given them in Section 1 of the Credit Agreement, hereinafter defined.

Recitals

     Whereas, (i) Borrower, the Required Lenders, the Agents and the other parties thereto have entered into that certain Credit Agreement dated as of January 31, 2007 (as amended, amended and restated, extended, supplemented or otherwise modified from time to time, the “Credit Agreement”) and (ii) Borrower, certain Subsidiaries of Borrower, the Agents and the other parties thereto have entered into that certain Guarantee and Collateral Agreement dated as of January 31, 2007 (as amended, amended and restated, extended, supplemented or otherwise modified from time to time, the “Guarantee and Collateral Agreement” and together with the Credit Agreement, the “Agreements”);

     Whereas, the Borrower desires to replace CS with Frost both as Issuing Bank (CS in such capacity, the “Outgoing Issuing Bank” and Frost in such capacity, the “Incoming Issuing Bank”) and as Swingline Lender (CS in such capacity, the “Outgoing Swingline Lender” and Frost in such capacity, the “Incoming Swingline Lender”);

     Whereas, the Borrower has requested certain amendments to the Agreements;

     Whereas, the Outgoing Issuing Bank and the Outgoing Swingline Lender are willing to resign as Issuing Bank and Swingline Lender, respectively, and the Incoming Issuing Bank and the Incoming Swingline Lender are willing to accept the appointment as Issuing Bank and Swingline Lender, respectively; and

     Whereas, the Required Lenders and the Agents are willing to agree to the amendments requested by the Borrower, on the terms and conditions set forth in this Amendment;

     Now Therefore, in consideration of the premises and the mutual agreements set forth herein, the Borrower, Required Lenders and the Agents agree as follows:

     1. AMENDMENTS TO CREDIT AGREEMENT. Subject to the conditions and upon the terms set forth in this Amendment and in reliance on the representations and warranties of the Borrower set forth in this Amendment, the Credit Agreement is hereby amended as follows:

          1.1. Amendments to Section 1.01. Section 1.01 of the Credit Agreement shall be amended as follows:

          (a) The following definitions shall be added to Section 1.01 of the Credit Agreement in the appropriate alphabetical order:

          ““First Amendment” shall mean the First Amendment to Credit Agreement and Guarantee and Collateral Agreement, dated March 8, 2007, by and among the Borrower, the Required Lenders, the Agents and The Frost National Bank.”

          ““First Amendment Effective Date” shall have the meaning set forth in Section 6 of the First Amendment.”

          ““Frost” shall mean The Frost National Bank.”

          ““Zero Balance Period Commencement Date” shall have the meaning set forth in Section 2.13(a)(ii).”

          (b) The reference to “CS” in clause (a) of the first sentence of the definition of “Issuing Bank” in Section 1.01 of the Credit Agreement shall be amended by deleting the reference to “CS” and replacing such reference with the following: “Frost.”

          (c) The reference to “Credit Suisse” in the definition of “Swingline Lender” in Section 1.01 of the Credit Agreement shall be amended by deleting the reference to “Credit Suisse” and replacing such reference with the following: “Frost.”

          1.2. Amendments to Section 2.01. Section 2.01 of the Credit Agreement shall be amended by inserting the following proviso at the end of the penultimate sentence of such Section, as follows:

          “, provided that no Revolving Credit Borrowings shall be requested or made during each sixty (60) day period commencing on each Zero Balance Period Commencement Date.”

          1.3. Amendments to Section 2.13(a). Section 2.13(a) of the Credit Agreement shall be amended by inserting “(i)” following “(a)” in the first sentence of such Section and inserting the following clauses (ii) and (iii) following the new clause (i):

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          “, and (ii) on any single Business Day during each successive twelve (12) month period following the Closing Date and commencing with the twelve (12) month period starting on January 31, 2008 (each such date the “Zero Balance Period Commencement Date”), Borrower shall (A) pay all outstanding Revolving Credit Borrowings as of such date such that the outstanding principal amount of Revolving Credit Borrowings after such payment is zero and (B) concurrent with such payment, notify the Administrative Agent that such payment is being made to fulfill Borrower’s obligations under this Section 2.13(a)(ii), provided, however, that such payment and delivery of such notice must be made at least sixty (60) days prior to the end of each such twelve (12) month period.”

          1.4. Amendments to Sections 2.13(b), (c), (d), (e) and (f). Each of Sections 2.13(b), (c), (d), (e) and (f) of the Credit Agreement shall be amended by deleting the clause “prepay outstanding Term Loans in accordance with Section 2.13(g)” that appears therein and replacing it with the following: “prepay outstanding Term Loans (and, following the repayment of the Term Loans in full in cash, the Revolving Credit Loans) in accordance with Section 2.13(g).”

          1.5. Amendments to Section 2.13(g). Section 2.13(g) of the Credit Agreement shall be amended by inserting the following text after the clause “third, to prepay Revolving Loans to the full extent thereof” in the first sentence thereof: “(with a corresponding permanent decrease in the Revolving Credit Commitments)”.

          1.6. Amendments to Section 2.24(b). Section 2.24(b) of the Credit Agreement shall be amended by deleting the “and” which follows clause (vii), deleting the “.” which follows clause (viii), inserting “; and” following clause (viii) and inserting the following clause (ix) following the existing clause (viii):

          “(ix) Borrower shall have received the consent of the Required Revolving Credit Lenders, if any (such consent not to be unreasonably withheld or delayed).”

          1.7. Other Amendments. In order to correct typographical errors, those Sections of the Credit Agreement set forth in Schedule A (Typographical Corrections — Credit Agreement) shall be amended as described therein.

     2. AMENDMENTS TO GUARANTEE AND COLLATERAL AGREEMENT. Subject to the conditions and upon the terms set forth in this Amendment and in reliance on the representations and warranties of the Borrower set forth in this Amendment, the Guarantee and Collateral Agreement is hereby amended as follows:

          2.1. Amendments to Section 1.1. Section 1.1(b) of the Guarantee and Collateral Agreement shall be amended as follows:

          (a) The following definitions shall be inserted in the appropriate alphabetical order:

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          ““Cash Management Obligations” shall mean all obligations and liabilities of the Grantors and/or any Subsidiaries thereof to any Agent, Lender or any Affiliate of any Agent or Lender with respect to treasury, depositary bank and/or cash management services evidenced by written agreements entered into by and among any one or more of any of the Grantors and/or any Subsidiary thereof, on the one hand, and any Agent, Lender or any Affiliate of any Agent or Lender, on the other.”

          ““Qualified Deposit Bank” shall mean, with respect to (a) any Specified Deposit Account Control Agreement, any deposit bank party thereto that, at the time such Specified Deposit Account Control Agreement was entered into, was a Lender, an Agent or an Affiliate of a Lender or an Agent and (b) any Cash Management Obligations, any deposit bank that, at the time such Cash Management Obligations originated, was a Lender, an Agent or an Affiliate of a Lender or an Agent.”

          ““Specified Deposit Account Control Agreement” shall mean any deposit account control agreement (a) entered into by (i) the Borrower or any of the Subsidiaries in accordance with Section 5.2(d) hereof and (ii) any Lender or any Affiliate thereof or any Agent or any Affiliate thereof, or any person that was a Lender or an Affiliate thereof or an Agent or Affiliate thereof when such deposit account control agreement was entered into and (b) which has been designated by such Lender or Agent and the Borrower, by notice to the Collateral Agent not later than 90 days after the execution and delivery thereof by the Borrower or such Subsidiary, as a Specified Deposit Account Control Agreement; provided that the designation of any deposit account control agreement as a Specified Deposit Account Control Agreement shall not create in favor of any Lender or Affiliate thereof or any Agent or any Affiliate thereof that is a party thereto any rights in connection with the management or release of any Pledged Collateral or of the obligations of any Guarantor under this Agreement.”

          (b) Lines 7, 8, 12, 18 and 22 of the definition of “Borrower Obligations” in Section 1.1(b) of the Guarantee and Collateral Agreement shall be amended as follows:

     Line 7: Insert “(and, with respect to the Cash Management Obligations, any Subsidiary of any Grantor)” following “obligations and liabilities of the Grantors”.

     Line 8: Insert “Specified Deposit Account Control Agreements, and Cash Management Obligations” following “Specified Hedge Agreements”.

     Line 12: Insert “, any Specified Deposit Account Control Agreement, any Cash Management Obligations” following “Specified Hedge Agreement”.

     Line 18: Insert “, any Specified Deposit Account Control Agreement or any Cash Management Obligations” following “Specified Hedge Agreement”.

     Line 22: Insert “, any Specified Deposit Account Control Agreement or any Cash Management Obligations” following “Specified Hedge Agreements”.

          (c) The definition of “Borrower Obligations” in Section 1.1(b) of the Guarantee and Collateral Agreement shall be further amended by deleting the “and” which

4

precedes proviso (iii) in line 23 of such definition, inserting “,” following proviso (ii), deleting the “.” following existing proviso (iii) and inserting the following proviso (iv) following the existing proviso (iii):

          “; and (iv) the amount of secured obligations under any and all such Specified Deposit Account Control Agreements and Cash Management Obligations, in the aggregate, shall not, at any time, exceed $5,000,000.”

          (d) The definition of “Secured Parties” in Section 1.1(b) of the Guarantee and Collateral Agreement shall be further amended by inserting “, any Specified Deposit Account Control Agreement or any Cash Management Obligations” following the reference to “Specified Hedge Agreement” in line 3 of such definition, inserting “or Qualified Deposit Bank” following the reference to “Qualified Counterparty” in line 3 of such definition and inserting “and no Qualified Deposit Bank” following the reference to “no Qualified Counterparty” in the proviso of such definition.

          2.2. Amendments to Section 1.2(f). Section 1.2(f) of the Guarantee and Collateral Agreement shall be amended by deleting the “.” following the reference to “Specified Hedge Agreement” in line 3 of such section and inserting “or a Specified Deposit Account Control Agreement or is owed any Cash Management Obligation.” after “Specified Hedge Agreement”.

          2.3. Amendments to Section 2.1(e). Section 2.1(e) of the Guarantee and Collateral Agreement shall be amended by inserting “, any Specified Deposit Account Control Agreement or any Cash Management Obligations” following “Specified Hedge Agreement” in line 11 of such section.

          2.4. Amendments to Section 5. Section 5 of the Guarantee and Collateral Agreement shall be amended by inserting “, any Specified Deposit Account Control Agreement or any Cash Management Obligations” following “Specified Hedge Agreement” in line 3 of the lead-in to such section.

          2.5. Amendments to Section 8.15(a). Section 8.15(a) of the Guarantee and Collateral Agreement shall be amended by inserting “, any Specified Deposit Account Control Agreement or any Cash Management Obligations” following “Specified Hedge Agreement” in line 2 of such section.

          2.6. Other Amendments. In order to correct typographical errors, those Sections of the Guarantee and Collateral Agreement set forth in Schedule B (Typographical Corrections — Guarantee and Collateral Agreement) shall be amended as described therein.

     3. RESIGNATIONS AND APPOINTMENTS.

          3.1. Resignation of Issuing Bank and Swingline Lender. Notwithstanding any method or timing regarding the resignation with respect to either Issuing Bank or Swing Line Lender set forth in the Credit Agreement, CS, in its capacity as Outgoing Issuing Bank and

5

Outgoing Swingline Lender, hereby resigns as Issuing Bank and Swingline Lender under the Credit Agreement, effective as of the First Amendment Effective Date, and the parties hereto acknowledge, accept and approve such resignation (it being understood that Section 9.05 of the Credit Agreement shall continue in effect for the benefit of CS in respect of any actions taken or omitted to be taken by it as Issuing Bank and Swingline Lender under the Credit Agreement prior to the First Amendment Effective Date).

          3.2. Appointment of Issuing Bank and Swingline Lender. The Borrower hereby appoints Frost to act as “Issuing Bank” and “Swingline Lender” under the Credit Agreement, effective as of the First Amendment Effective Date. By providing its countersignature hereto, Frost, in its capacity as Incoming Issuing Bank and Incoming Swingline Lender hereby accepts, acknowledges and agrees to such appointments and shall hereby become the replacement “Issuing Bank” and the replacement “Swingline Lender” for all purposes under the Credit Agreement, effective as of the First Amendment Effective Date. All parties hereto acknowledge, accept and approve such appointments.

          3.3. Acknowledgement of CS. Upon the effectiveness of this Amendment, CS acknowledges and agrees that none of the Loan Parties have any further obligations to CS in its capacities as Issuing Bank or Swingline Lender under the Credit Agreement or any Loan Document, provided that, notwithstanding the foregoing or any future termination of the Credit Agreement, the Loan Parties shall remain obligated to CS, in its capacities as Issuing Bank and Swingline Lender, with respect to any of their ongoing indemnification obligations under the Credit Agreement.

     4. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. In order to induce the Required Lenders and the Agents to enter into this Amendment, the Borrower represents and warrants to each Lender and the Agents that the following statements are true, correct and complete:

          4.1. Power and Authority. Each of the Loan Parties has all corporate power and authority to enter into this Amendment and to carry out the transactions contemplated by, and to perform its obligations under or in respect of, the Agreements.

          4.2. Corporate Action. The execution and delivery of this Amendment and the performance of the obligations of each of the Loan Parties under or in respect of the Agreements as amended hereby have been duly authorized by all necessary corporate action on the part of each of the Loan Parties.

          4.3. No Conflict or Violation or Required Consent or Approval. The execution and delivery of this Amendment and the performance of the obligations of each of the Loan Parties under or in respect of the Agreements as amended hereby do not and will not conflict with or violate (a) any provision of the governing documents of any Loan Party or any of its Subsidiaries, (b) any provision of any law or any governmental rule or regulation applicable to any Loan Party or any of its Subsidiaries, (c) any order, judgment or decree of any court or other governmental agency binding on any Loan Party or any of its Subsidiaries, or (d) any indenture, agreement or instrument to which any Loan Party or any of its Subsidiaries is a party

6

or by which any Loan Party or any of its Subsidiaries, or any property of any of them, is bound, and do not and will not require any consent or approval of any Person.

          4.4. Execution, Delivery and Enforceability. This Amendment has been duly executed and delivered by each Loan Party which is a party thereto and are the legal, valid and binding obligations of such Loan Party, enforceable in accordance with their terms, except as enforceability may be affected by applicable bankruptcy, insolvency, and similar proceedings affecting the rights of creditors generally, and general principles of equity. The Agents’ Liens in all Collateral continue to be valid, binding and enforceable Liens which secure the Borrower Obligations.

          4.5. No Default or Event of Default. After giving effect to this Amendment, no event has occurred and is continuing or will result from the execution and delivery of this Amendment or the Consent that would constitute a Default or an Event of Default.

          4.6. No Material Adverse Effect. No event has occurred that has resulted, or could reasonably be expected to result, in a Material Adverse Effect.

          4.7. Representations and Warranties. Each of the representations and warranties contained in the Loan Documents is and will be true and correct in all material respects on and as of the date hereof and as of the effective date of this Amendment, except to the extent that such representations and warranties specifically relate to an earlier date, in which case they were true, correct and complete in all material respects as of such earlier date.

     5. CONDITIONS TO EFFECTIVENESS OF THIS AMENDMENT. This Amendment, and the consents and approvals contained herein, shall be effective only if and when signed by, and when counterparts hereof shall have been delivered to the Agents (by hand delivery, mail or telecopy) by each Loan Party, each Required Lender, the Outgoing Issuing Bank, Outgoing Swingline Lender, Incoming Issuing Bank and Incoming Swingline Lender and only if and when each of the following conditions is satisfied:

          5.1. No Default or Event of Default; Accuracy of Representations and Warranties. No Default or Event of Default shall exist and each of the representations and warranties made by the Loan Parties herein and in or pursuant to the Credit Documents shall be true and correct in all material respects as if made on and as of the date on which this Amendment becomes effective (except that any such representation or warranty that is expressly stated as being made only as of a specified earlier date shall be true and correct as of such earlier date).

          5.2. The Frost National Bank Joinder Agreement. A Joinder Agreement whereby Frost has become a Revolving Credit Lender with a Revolving Commitment of at least $15,000,000 shall have been executed and delivered by all parties thereto and shall have become effective in accordance with Section 2.24 of the Credit Agreement on or prior to March 31, 2007.

          5.3. Delivery of Documents. The Agents shall have received such additional documents as the Agents may reasonably request in connection with this Amendment.

7

     6. EFFECTIVE DATE. This Amendment shall become effective (the “First Amendment Effective Date”) on the date of the satisfaction of the conditions set forth in Section 5 of this Amendment.

     7. EFFECT OF AMENDMENT; RATIFICATION. This Amendment is a Loan Document. From and after the date on which this Amendment becomes effective, all references in the Loan Documents to the Agreements and other Loan Documents shall mean the Agreements as amended hereby. Except as expressly amended hereby or waived herein, the Agreements and the other Loan Documents, including the Liens granted thereunder, shall remain in full force and effect, and all terms and provisions thereof are hereby ratified and confirmed.

     8. MISCELLANEOUS. Each of the Loan Parties confirms that as amended hereby, each of the Loan Documents is in full force and effect, and that none of the Loan Parties has any defenses, setoffs or counterclaims to its Obligations.

     9. APPLICABLE LAW. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES THAT WOULD REQUIRE THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION.

     10. NO WAIVER. The execution, delivery and effectiveness of this Amendment does not constitute a waiver of any Default or Event of Default, amend or modify any provision of any Loan Document except as expressly set forth herein or constitute a course of dealing or any other basis for altering the Obligations of any Loan Party.

     11. COMPLETE AGREEMENT. This Amendment sets forth the complete agreement of the parties in respect of any amendment to any of the provisions of any Loan Document or any waiver thereof. The execution, delivery and effectiveness of this Fist Amendment do not constitute a waiver of any Default or Event of Default, amend or modify any provision of any Loan Document except as expressly set forth herein or constitute a course of dealing or any other basis for altering the Obligations of any Loan Party.

     12. CAPTIONS; COUNTERPARTS. The catchlines and captions herein are intended solely for convenience of reference and shall not be used to interpret or construe the provisions hereof. This Amendment may be executed by one or more of the parties to this Amendment on any number of separate counterparts (including by telecopy), all of which taken together shall constitute but one and the same instrument.

[signatures follow; remainder of page intentionally left blank]

8

          IN WITNESS WHEREOF, each of the undersigned has duly executed this First Amendment to Credit Agreement and Guarantee and Collateral Agreement as of the date set forth above.

AFFIRMATIVE INSURANCE
HOLDINGS, INC., as Borrower
By:	/s/ Mark E. Pape
	Name:  Mark E. Pape
	Title:    Chief Financial Officer and
	Executive Vice President

First Amendment to Credit Agreement

and Guarantee and Collateral Agreement

CREDIT SUISSE, CAYMAN ISLANDS
BRANCH, as Administrative Agent, Collateral
Agent	, Outgoing Issuing Bank and Outgoing
Swing	line Lender
By:	/s/ John D. Toronto
	Name: John D. Toronto
	Title: Director
By:	/s/ Denise L. Alvarez
	Name: Denise L. Alvarez
	Title: Associate

First Amendment to Credit Agreement

and Guarantee and Collateral Agreement

THE FROST NATIONAL BANK, as Incoming
Issuing Bank and Incoming Swingline Lender
By:	/s/ Stephen S. Martin
	Name: Stephen S. Martin
	Title: Vice President
	First Amendment to Credit Agreement
	and Guarantee and Collateral Agreement

SCHEDULE A
Typographical Corrections — Credit Agreement

Section of the
Credit Agreement	Typographical Correction
Section 1.01	• The following defined terms (not used in the Credit Agreement) shall be deleted: “Existing Indebtedness,” “Frost First Amendment,” “New Revolving Loan” (following the defined term “New Revolving Loan Lender”), “Senior Secured Debt,” “Trust Fund” and “Trust Preferred Notes.”
Section 1.01	• The definition of “Required Revolving Credit Lenders” shall be moved from its current position preceding the definition of “Required Minimum Percentage” to the position following the definition of “Required Payment Percentage.”
	• The reference to “Section 4.02(s)” in the definition of “Survey” shall be changed to “Section 4.02(g).”
	• The reference to “Section 4.02(q)” in the definition of “Title Insurance Company” shall be changed to “Section 4.02(o).”
Throughout	• Each reference to “Revolving Lender” in the Credit Agreement shall be replaced with “Revolving Credit Lender” and each reference to “Revolving Lenders” in the Credit Agreement shall be replaced with “Revolving Credit Lenders.”
Throughout	• Each reference to “New Revolving Commitments” in the Credit Agreement shall be changed to “New Revolving Loan Commitments.”
Section 2.24(a)(i)	• Reference to “or Eligible Assignees” in line 10 thereof shall be deleted.
Section 2.24(a)(ii)	• The ““” (quote symbol) preceding the reference to “New Revolving Loan Lender” in sub-clause (B) of such section and the “”)” following such reference shall be deleted.
Section 2.25(b)	• The reference to “Term Loan Maturity Date or the” in clause (i) of such section shall be deleted.
	• Insert “)” following the reference to “Section 4” in the last line of such section.
Section 5.09(e)	• The reference to “r” following “Premium Finance Co.” in the first line of such section shall be changed to “or.”
Section 6.01(d)	• The reference to “, when combined with the aggregate principal amount of all Indebtedness incurred pursuant to Section 6.01(d)” shall be deleted.
Section 6.06	• The reference to “Holders” in the last line of such section shall be changed to “holders.”
Section 6.08(a)	• The reference to “domestic” shall be changed to “Domestic.”
Article VII, clause (f)(ii)	• The reference to “Premium Financing Facility” shall be changed to “Premium Finance Facility.”
Section 9.05(c)	• The reference to “them” in the first line of such section shall be changed to “it.”
Section 9.05(d)	• The reference to “each” in the first line of such section shall be changed to “it.”
Section 9.08(b)	• The reference to “Section 7.01” shall be changed to “Article VII” in the third proviso of such section.

SCHEDULE B
Typographical Corrections — Guarantee and Collateral Agreement

Section
of the Credit
Agreement	Typographical Correction
Section 4.14	• Delete the “(a)” following the heading “Governmental Approval; Filings.”
Section 5.3(b)	• The reference to “Each Secured Party” in the last sentence of such section shall be changed to “The Collateral Agent.”
Section 5.6	• Insert “or” following the reference to “clause (i),” in line 3 of such section and delete “or (iv)” following the reference to “(iii)” in line 3 of such section.
Exhibit C	• Delete the existing headings “SECTION 2” through “SECTION 14” and replace each with “SECTION 1” through “SECTION 13” respectively.

EX-10.34

EXHIBIT 10.34

CONSENT TO ASSIGNMENT

     THIS CONSENT TO ASSIGNMENT (the “Consent”) is made by and among 227 MONROE STREET, INC. a Delaware corporation (“Landlord”), and Affirmative Property Holdings, Inc. (“Assignee”) and KR Callahan & Company, LLC (“Assignor”), the tenant under a Lease dated as of May 8, 2006 (which Lease as heretofore or hereafter amended is hereinafter called the “Lease”), under which Landlord leased to Assignor the premises commonly known as Suite 3880 in the building known as [the AT&T Corporate Center and located at 227 West Monroe Street] [the USG Building and located at 222 West Adams Street], in Chicago, Illinois (the “Premises”). Landlord hereby consents to the assignment by Assignor to Assignee, pursuant to an Assignment (the “Assignment”) dated as of December 1, 2006, a full and complete copy of which is attached hereto as Exhibit “A,” of the Premises, such Consent being subject to and upon the following terms and conditions, to each of which Assignor and Assignee agree:

     1. Nothing contained in this Consent shall either:

          (a) Operate as a consent to or approval or ratification by Landlord of any of the particular provisions of the Assignment or as a representation or warranty by Landlord and Landlord shall not be bound or estopped in any way by the provisions of the Assignment; or

          (b) Be construed to modify, waive, impair or affect (i) any of the provisions, covenants or conditions in the Lease, (ii) any of Assignor’s obligations under the Lease, or (iii) any rights or remedies of Landlord under the Lease or otherwise to enlarge or increase Landlord’s obligations or Assignor’s rights under the Lease or otherwise; or

          (c) Be construed to waive any present or future breach or default on the part of Assignor under the Lease. In case of any conflict between the provisions of this Consent and the provisions of the Assignment, the provisions of this Consent shall prevail unaffected by the Assignment.

     2. Assignor and Assignee each represent that, except as set forth in the Assignment, no fee, premium or other consideration is being paid or is payable to Assignor in connection with the Assignment or for the use, sale or rental of Assignor’s fixtures, leasehold improvements, equipment, furniture, or personal property. Assignor and Assignee each further represent and warrant that the Assignment is the complete, true and correct agreement between the parties. Assignor and Assignee each further represent and warrant that Assignee is financially responsible, of good reputation, and is engaged in a business which meets the standards set by Landlord for the Building and its tenants.

     3. The Assignment takes effect on December 1, 2006 (the “Effective Date”). By execution hereof, Assignee accepts the Assignment and assumes and agrees to perform, from the Effective Date, as a direct obligation to Landlord, all the provisions of the Lease.

     4. The Assignment (and all amendments and modifications thereof) shall be subject and subordinate at all times to the Lease and all of its provisions, covenants and conditions. In case of any conflict between the provisions of the Lease and the provisions of the Assignment, the provisions of the Lease shall prevail unaffected by the Assignment.

     5. Neither the Assignment nor this Consent shall release or discharge Assignor from any liability under the Lease and Assignor shall remain liable and responsible for the full performance and observance of all of the provisions, covenants and conditions set forth in the Lease to be performed and observed. Any breach or violation of any provision of the Lease by Assignee shall be deemed to be and shall constitute a default by Assignor in fulfilling such provision.

     6. As of the date hereof, Assignor and Assignee acknowledge that the Lease is in full force and effect and the Landlord is not in default in the performance of its obligations under the Lease.

     7. This consent by Landlord is not assignable and shall not be construed as a consent by Landlord to any further assignment or subletting either by Assignor or Assignee, nor shall it be construed as a waiver of any restriction in the Lease concerning further assignment or subletting. The Lease may not be assigned or sublet without the prior written consent of Landlord thereto in each instance.

     8. Landlord now holds the sum of $293,257 as a security deposit (in the form of a letter of credit issued on behalf of Assignor who hereby authorizes the continued applicability of the letter of credit on behalf of Assignee), to be applied subject to the provisions of the Lease. Assignor releases all claims to that sum, and the sum shall be held by Landlord for the benefit of Assignee, subject to the provisions of the Lease.

     9. Neither the members, partners, directors or officers of Landlord (collectively, the “Parties”) shall be liable for the performance of Landlord’s obligations under this Consent or the Lease. Assignor and Assignee, as the case may be, shall look solely to Landlord to enforce Landlord’s obligations hereunder and thereunder and shall not seek any damages against any of the Parties. The liability of Landlord for Landlord’s obligations under this Consent and the Lease shall be limited to Landlord’s interest in the Building, and Assignor and Assignee shall not look to any other property or assets of Landlord or the property or assets of any of the Parties in seeking either to enforce Landlord’s obligations under this Consent or the Lease or to satisfy a judgment for Landlord’s failure to perform such obligations.

     10. Assignor agrees that it shall pay any brokerage commissions payable in connection with the Assignment and Landlord shall have no responsibility with respect thereto. Assignor agrees to indemnify and hold harmless Landlord against and from any claims for any such brokerage commissions and all costs, expenses and liabilities in connection therewith, including, without limitation, attorneys’ fees and expenses. The provisions of this Paragraph 10 shall survive the expiration or sooner termination of the Lease.

     11. This Consent shall not be effective until Assignor shall have paid Landlord’s attorneys’ fees in connection with this Consent and the Assignment.

     12. All communication, notices and demands of any kind which a party may be required or desire to give or to serve upon another party shall be made in writing and shall be deemed to have been fully given when deposited in the United States mail, registered or certified, postage prepaid, return receipt requested, to the following addresses:

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To Landlord:	227 Monroe Street, Inc.
	c/o Tishman Speyer Properties, L.P.
	227 West Monroe Street
	Office of the Building
	Chicago, Illinois 60661
	Attn: Property Manager
	Copies to:
	Tishman Speyer Properties, L.P.
	45 Rockefeller Plaza
	New York, New York 10111
	Attn: Chief Legal Officer
	and:
	Tishman Speyer Properties, L.P.
	45 Rockefeller Plaza
	New York, New York 10111
	Attn: Chief Financial Officer
To Assignor:	KR Callahan & Company, LLC
	150 Harvester Drive #300
	Burr Ridge, IL 60527
	Attn: Kevin Callahan
To Assignee:	Affirmative Property Holdings, Inc.
	4450 Sojourn Drive #500
	Addison, TX 75001
	Attn: Chad Emmerich

     13. This Consent shall be construed in accordance with the laws of the State of California and contains the entire agreement of the parties hereto.

[Signature Page Follows]

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     IN WITNESS WHEREOF, the parties hereto have executed this Consent this 10th day of January, 2007.

LANDLORD:	ASSIGNOR:
227 MONROE STREET, INC.,	KR CALLAHAN & COMPANY, LLC,
a Delaware corporation	an Illinois limited liability company

By: Its:	/s/ David Augarten David Augarten	By: Its:	/s/ Kevin R. Callahan CEO
	Vice President

ASSIGNEE:

AFFIRMATIVE PROPERTY HOLDINGS, INC.,

a Texas corporation

By:	/s/ Chad Emmerich
Its	SVP HR & Admin

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EXHIBIT A

Assignment

ASSIGNMENT OF LEASE

     THIS ASSIGNMENT (“Assignment”) is made and entered into this 30^th day of November, 2006 by and between KR CALLAHAN & COMPANY, LLC (“Assignor”) and AFFIRMATIVE PROPERTY HOLDINGS, INC. (Assignee”).

RECITALS

     WHEREAS, Assignor, as tenant, entered into that certain Lease (the “Lease”) dated May 8, 2006 with 227 Monroe Street, Inc., as landlord, with respect to the premises commonly known as Suite 3880, 227 West Monroe Street, Chicago, Illinois 60606; and

     WHEREAS, Assignor desires to assign, and Assignee desires to accept and assume, all of Assignor’s right, title, and interest in and to the Lease.

     NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Assignor and Assignee hereby agree as follows:

     1. Assignment of Lease. Assignor hereby assigns, transfers, and sets over unto Assignee all of Assignor’s right, title, and interest in and to the Lease.

     2. Assumption of Lease. Assignee hereby accepts the foregoing assignment of the Lease and assumes all of the obligations of Assignor, as tenant, under and pursuant to the Lease.

     3. Guaranty. Affirmative Insurance Holdings, Inc. (“Affirmative”), the parent of Assignee, hereby agrees to guaranty the payment and performance of all obligations assumed by Assignor. Affirmative joins in the execution of this Assignment to confirm to Assignor and to the landlord that it is making the foregoing guaranty and to acknowledge and agree that this guaranty shall not be affected by any amendment or other modification of the Lease and shall remain in full force and effect until such time as the Lease terminates and all obligations of Assignee thereunder are satisfied or Assignee is released by Landlord, or a successor of Landlord, of all its obligations under and pursuant to the Lease.

     4. Balance of the Lease. This Assignment is subject to all of the terms and conditions of the Lease. Except as specifically assigned by Assignor to Assignee, the Lease is unmodified and in full force and effect.

     IN WITNESS WHEREOF, Assignor and Assignee have caused this Assignment to be executed as of the date first above written.

KR CALLAHAN & COMPANY, LLC		AFFIRMATIVE PROPERTY HOLDINGS, INC.
By:      Name:	/s/ Kevin R. Callahan Kevin R. Callahan	By: Name:	/s/ Chad Emmerich Chad Emmerich
Its:	CEO	Its:	SVP HR & Admin

     AFFIRMATIVE INSURANCE HOLDINGS, INC. joins in the execution of this Assignment to confirm its guaranty of all of the obligations assumed by Assignor under and pursuant to the Lease.

AFFIRMATIVE INSURANCE HOLDINGS, INC.
By:	/s/ Robert Bondi
Name:	Robert Bondi
Its:	COO

EX-10.35

EXHIBIT 10.35

LEASE

227 MONROE STREET, INC.,

a Delaware corporation,

Landlord

and

KR CALLAHAN & COMPANY, LLC,

an Illinois limited liability company,

Tenant

for

AT&T Corporate Center

227 West Monroe Street

Chicago, Illinois

May 8, 2006

TABLE OF CONTENTS

		Page
ARTICLE 1	BASIC LEASE PROVISIONS		1
ARTICLE 2	PREMISES; TERM; RENT		3
ARTICLE 3	USE AND OCCUPANCY		4
ARTICLE 4	CONDITION OF THE PREMISES		5
ARTICLE 5	ALTERATIONS		5
ARTICLE 6	REPAIRS		7
ARTICLE 7	TAXES AND OPERATING EXPENSES		8
ARTICLE 8	REQUIREMENTS OF LAW		13
ARTICLE 9	SUBORDINATION		14
ARTICLE 10	SERVICES		16
ARTICLE 11	INSURANCE; PROPERTY LOSS OR DAMAGE		19
ARTICLE 12	EMINENT DOMAIN		23
ARTICLE 13	ASSIGNMENT AND SUBLETTING		24
ARTICLE 14	ACCESS TO PREMISES		30
ARTICLE 15	DEFAULT		31
ARTICLE 16	LANDLORD’S RIGHT TO CURE; FEES AND EXPENSES		35
ARTICLE 17	NO REPRESENTATIONS BY LANDLORD; LANDLORD’S APPROVAL		36
ARTICLE 18	END OF TERM		36
ARTICLE 19	QUIET ENJOYMENT		37
ARTICLE 20	NO SURRENDER; NO WAIVER		37
ARTICLE 21	WAIVER OF TRIAL BY JURY; COUNTERCLAIM		37
ARTICLE 22	NOTICES		38
ARTICLE 23	RULES AND REGULATIONS		38
ARTICLE 24	BROKER		38
ARTICLE 25	INDEMNITY		39
ARTICLE 26	MISCELLANEOUS		40
ARTICLE 27	LETTER OF CREDIT		43
ARTICLE 28	RENEWAL OPTION		47
ARTICLE 29	TENANT’S EARLY TERMINATION RIGHT		48

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Schedule of Exhibits

Exhibit A	Floor Plan
Exhibit B	Definitions
Exhibit C	Workletter
Exhibit D	Design Standards
Exhibit E	Cleaning Specifications
Exhibit F	Rules and Regulations
Exhibit G	Form of Letter of Credit
Exhibit H	Form of SNDA

 ii

LEASE

     THIS LEASE is made as of the 8^th day of May, 2006 (“Effective Date”), between 227 MONROE STREET, INC., a Delaware corporation (“Landlord”), and KR CALLAHAN & COMPANY, LLC, an Illinois limited liability company (“Tenant”).

     Landlord and Tenant hereby agree as follows:

ARTICLE 1

BASIC LEASE PROVISIONS

PREMISES	A portion of the thirty-eighth (38th) floor of the Building known as Suite 3880, as more particularly shown on Exhibit A.
BUILDING	The building, fixtures, equipment and other improvements and appurtenances now located or hereafter erected, located or placed upon the land known as AT&T Corporate Center, 227 West Monroe Street, Chicago, Illinois.
REAL PROPERTY	The Building, together with the plot of land upon which it stands.
COMPLEX	Franklin Center, comprised of the buildings known as the AT&T Corporate Center and the USG Building, as described in Exhibit B.
DELIVERY DATE	The date of execution and delivery of this Lease by both Landlord and Tenant.
COMMENCEMENT DATE	The earlier of: (i) the date on which Tenant Substantially Completes the Initial Installations and (ii) August 1, 2006.
EXPIRATION DATE	The last day of the 120th full calendar month following the Commencement Date, or the last day of any renewal or extended term, if the Term of this Lease is extended in accordance with any express provision hereof.
TERM	The period commencing on the Commencement Date and ending on the Expiration Date.
PERMITTED USES	Executive and general offices.
TENANT’S PROPORTIONATE SHARE	0.2598%
AGREED AREA OF BUILDING	1,540,831 rentable square feet, as mutually agreed by Landlord and Tenant. The agreed area of the Building and the agreed area of the Premises have both been determined in accordance with the Standard Method for Measuring Floor Area in Office Buildings, promulgated by BOMA, ANSI/BOMA Z65.1 1996.

AGREED AREA OF	4,003 rentable square feet, as mutually agreed by Landlord and Tenant.
PREMISES

						Annual Base		Monthly Base
		Lease Year		Net Rent		Rent		Rent
FIXED RENT
	1		8/1/2006	$	25.44	$	101,836.32	$	8,486.36
	2		8/1/2007	$	26.18	$	104,802.54	$	8,733.55
	3		8/1/2008	$	26.94	$	107,855.53	$	8,987.96
	4		8/1/2009	$	27.73	$	110,997.83	$	9,249.82
	5		8/1/2010	$	28.54	$	114,232.07	$	9,519.34
	6		8/1/2011	$	29.37	$	117,560.94	$	9,796.74
	7		8/1/2012	$	30.22	$	120,987.22	$	10,082.27
	8		8/1/2013	$	31.11	$	124,513.78	$	10,376.15
	9		8/1/2014	$	32.01	$	128,143.56	$	10,678.63
	10		8/1/2015	$	32.95	$	131,879.59	$	10,989.97

ADDITIONAL RENT	All sums other than Fixed Rent payable by Tenant to Landlord under this Lease, including Tenant’s Tax Payment, Tenant’s Operating Payment, late charges, overtime or excess service charges, damages, and interest and other costs related to Tenant’s failure to perform any of its obligations under this Lease.
RENT	Fixed Rent and Additional Rent, collectively.
INTEREST RATE	The lesser of (i) 4% per annum above the then-current Base Rate, and (ii) the maximum rate permitted by applicable Requirements.
LETTER OF CREDIT	$293,257.00, subject to reduction as set forth in Section 27.5.
TENANT’S ADDRESS FOR NOTICES	Until Tenant commences business operations from the Premises:
	KR Callahan & Company, LLC
	43 Kennilworth Avenue
	Kennilworth, IL 60043
	Attn: Kevin Callahan
	Thereafter:
	KR Callahan & Company, LLC
	227 West Monroe Street, Suite 3880
	Chicago, Illinois 60661
	Attn: Kevin Callahan
	With a copy to:
	McDermott Will & Emery LLP
	227 West Monroe Street
	Chicago, Illinois 60606
	Attn: David De Yoe

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LANDLORD’S ADDRESS	227 Monroe Street, Inc.
FOR NOTICES	c/o Tishman Speyer Properties, L.P.
	227 West Monroe Street
	Office of the Building
	Chicago, Illinois 60661
	Attn: Property Manager
	Copies to:
	Tishman Speyer Properties, L.P.
	45 Rockefeller Plaza
	New York, New York 10111
	Attn: Chief Legal Officer
	and:
	Tishman Speyer Properties, L.P.
	45 Rockefeller Plaza
	New York, New York 10111
	Attn: Chief Financial Officer
TENANT’S BROKER	Bradford Allen Realty Services
LANDLORD’S AGENT	Tishman Speyer Properties, L.P. or any other person or entity designated at any time and from time to time by Landlord as Landlord’s Agent.
LANDLORD’S CONTRIBUTION	$320,240.00

     All capitalized terms used in this Lease without definition are defined in Exhibit B.

ARTICLE 2

PREMISES; TERM; RENT

     Section 2.1 Lease of Premises. Subject to the terms of this Lease, Landlord leases to Tenant and Tenant leases from Landlord the Premises for the Term. In addition, Landlord grants to Tenant the right to use, on a non-exclusive basis and in common with others, the Common Areas.

     Section 2.2 Commencement Date. Upon the Effective Date, the terms and provisions hereof shall be fully binding on Landlord and Tenant prior to the occurrence of the Commencement Date. The Term of this Lease shall commence on the Commencement Date. Unless sooner terminated or extended as hereinafter provided, the Term shall end on the Expiration Date. If Landlord does not tender possession of the Premises to Tenant on or before the Delivery Date or any other particular date, for any reason whatsoever, Landlord shall not be liable for any damage thereby, this Lease shall not be void or voidable thereby, and the Term shall not commence until the Commencement Date. Notwithstanding the foregoing, the Commencement Date shall be extended by one day for each day delivery of the Premises is

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delayed past the Delivery Date. In addition, if the Delivery Date does not occur on or before November 1, 2006 then Tenant shall have the right to terminate this Lease effective upon delivery or written notice thereof to Landlord on or before December 1, 2006, provided further, however, that Tenant shall not be entitled to so terminate this Lease if the Delivery Date occurs subsequent to November 1, 2006 but prior to delivery of such notice by Tenant. Landlord shall be deemed to have tendered possession of the Premises to Tenant upon the giving of notice by Landlord to Tenant stating that the Premises are vacant, in the condition required by this Lease and available for Tenant’s occupancy. Except as otherwise provided herein, no failure to tender possession of the Premises to Tenant on or before the Delivery Date shall affect any other obligations of Tenant hereunder. There shall be no postponement of the Commencement Date for any delay in the tender of possession to Tenant which results from any Tenant Delay.

     Section 2.3 Payment of Rent.

          (a) Tenant shall pay to Landlord, without notice or demand, and without any set-off, counterclaim, abatement or deduction whatsoever, except as may be expressly set forth in this Lease, in lawful money of the United States by wire transfer of funds into any lockbox account or accounts as designated by Landlord, (i) Fixed Rent in equal monthly installments, in advance, on the first day of each month during the Term, commencing on the Commencement Date, and (ii) Additional Rent, at the times and in the manner set forth in this Lease. Landlord shall provide the information for such lockbox account(s) pursuant to instructions separate from this Lease.

          (b) Notwithstanding anything contained herein to the contrary, but provided no Event of Default exists hereunder, Tenant’s obligations for Fixed Rent, Tenant’s Share of Operating Expenses and Tenant’s Share of Taxes shall be abated for a period of ten (10) full calendar months commencing on the Commencement Date (the “Free Rent Period”). In the event that an Event of Default shall occur prior to or during the Free Rent Period, then any current abatement shall immediately cease, any further abatement during the remainder of the Free Rent Period shall be null and void and Tenant shall thereafter pay full Fixed Rent, Tenant’s Share of Operating Expenses and Tenant’s Share of Taxes for the remainder of the Term. In the event the Lease terminates or expires at any time prior to the expiration of the Free Rent Period, Tenant shall have no claim to any payment of any unutilized abatement.

     Section 2.4 First Month’s Rent. Tenant shall pay one month’s Fixed Rent upon the execution of this Lease (“Advance Rent”) which shall be credited towards the first month’s Fixed Rent payment.

ARTICLE 3

USE AND OCCUPANCY

     Tenant shall use and occupy the Premises for the Permitted Uses and for no other purpose. Tenant shall not use or occupy or permit the use or occupancy of any part of the Premises in a manner constituting a Prohibited Use. If Tenant uses the Premises for a purpose constituting a Prohibited Use, violating any Requirement, or causing the Building or Complex to be in violation of any Requirement, then Tenant shall promptly discontinue such use upon notice of such violation. Tenant, at its expense, shall procure and at all times maintain and comply with the terms and conditions of all licenses and permits required for the lawful conduct of the Permitted Uses in the Premises.

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ARTICLE 4

CONDITION OF THE PREMISES

     Tenant has inspected the Premises and agrees (a) to accept possession of the Premises in the condition existing on the Delivery Date “as is”, and (b) that except for Landlord’s Contribution described in Exhibit C attached hereto, Landlord has no obligation to perform any work, supply any materials, incur any expense or make any alterations or improvements to prepare the Premises for Tenant’s occupancy. Any work to be performed by Tenant in connection with Tenant’s initial occupancy of the Premises shall be hereinafter referred to as the “Initial Installations”. Tenant’s occupancy of any part of the Premises shall be conclusive evidence, as against Tenant, that Tenant has accepted possession of the Premises in its then current condition and at the time such possession was taken, the Premises, the Building and Complex were in a good and satisfactory condition as required by this Lease.

ARTICLE 5

ALTERATIONS

     Section 5.1 Tenant’s Alterations.

          (a) Tenant shall not make any alterations, additions or other physical changes in or about the Premises (collectively, “Alterations”) without Landlord’s prior consent, which consent shall not be unreasonably withheld if such Alterations (i) are non-structural and do not affect any Building Systems, (ii) affect only the Premises and are not visible from outside of the Premises, (iii) do not affect the certificate of occupancy issued for the Building, the Complex or the Premises, and (iv) do not violate any Requirement. In addition, Tenant shall have the right to install, on notice to Landlord but without Landlord’s consent, a waterfall or fountain in the reception area of the Premises which may be visible from the common corridors provided, however, that Landlord’s reasonable prior approval will be required if such water feature will be connected to a water supply. Notwithstanding the foregoing, Tenant shall have the right to make decorative alterations, such as painting, wall coverings, and floor coverings (collectively, “Decorative Alterations”) without first obtaining Landlord’s consent.

          (b) Plans and Specifications. Prior to making any Alterations, Tenant, at its expense, shall (i) submit to Landlord for its approval, detailed plans and specifications (“Plans”) of each proposed Alteration (other than Decorative Alterations), and with respect to any Alteration affecting any Building System, evidence that the Alteration has been designed by, or reviewed and approved by, Landlord’s designated engineer for the affected Building System, (ii) obtain all permits, approvals and certificates required by any Governmental Authorities, (iii) furnish to Landlord duplicate original policies or certificates of worker’s compensation (covering all persons to be employed by Tenant, and Tenant’s contractors and subcontractors in connection with such Alteration), commercial general liability (including property damage coverage) and business auto insurance and Builder’s Risk coverage (as described in Article 11) all in such form, with such companies, for such periods and in such amounts as Landlord may reasonably require, naming Landlord, Landlord’s Agent, any Lessor and any Mortgagee as additional insureds, and (iv) furnish to Landlord reasonably satisfactory evidence of Tenant’s ability to complete and to fully pay for such Alterations (other than Decorative Alterations). Tenant shall give Landlord not less than 5 Business Days notice prior to performing any Decorative Alteration, which notice shall contain a description of such Decorative Alteration.

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          (c) Governmental Approvals. Tenant, at its expense, shall, as and when required, promptly obtain certificates of partial and final approval of such Alterations required by any Governmental Authority and shall furnish Landlord with copies thereof, together with “as-built” Plans for such Alterations prepared on an AutoCAD Computer Assisted Drafting and Design System (or such other system or medium as Landlord may accept), using naming conventions issued by the American institute of Architects in June, 1990 (or such other naming conventions as Landlord may accept) and magnetic computer media of such record drawings and specifications translated in DFX format or another format acceptable to Landlord.

     Section 5.2 Manner and Quality of Alterations. All Alterations shall be performed (a) in a good and workmanlike manner and free from defects, (b) substantially in accordance with the Plans, and by contractors approved by Landlord, (c) in compliance with all Requirements, the terms of this Lease and all construction procedures and regulations then prescribed by Landlord, and (d) at Tenant’s expense. All materials and equipment shall be of first quality and at least equal to the applicable standards for the Building and Complex then established by Landlord, and no such materials or equipment (other than Tenant’s Property) shall be subject to any lien or other encumbrance. Upon completion of any Alterations hereunder, Tenant shall provide Landlord with copies of all construction contracts, proof of payment for all labor and materials, and final unconditional waivers of lien from all contractors, subcontractors, materialmen, suppliers and others having lien rights with respect to such Alterations, in the form prescribed by Illinois law.

     Section 5.3 Removal of Tenant’s Property. Tenant’s Properly shall remain the property of Tenant and Tenant may remove the same at any time on or before the Expiration Date. On or prior to the Expiration Date, Tenant shall, unless otherwise directed by Landlord, at Tenant’s expense, remove any Specialty Alterations and close up any slab penetrations in the Premises. Tenant shall repair and restore, in a good and workmanlike manner, any damage to the Premises, the Building or Complex caused by Tenant’s removal of any Alterations or Tenant’s Property or by the closing of any slab penetrations, and upon default thereof, Tenant shall reimburse Landlord for Landlord’s cost of repairing and restoring such damage. Any Specialty Alterations or Tenant’s Property not so removed shall be deemed abandoned and Landlord may retain or remove and dispose of same, and repair and restore any damage caused thereby, at Tenant’s cost and without accountability to Tenant. All other Alterations shall become Landlord’s property upon termination of this Lease.

     Section 5.4 Mechanic’s Liens. Tenant, at its expense, shall discharge any lien or charge recorded or filed against the Real Property in connection with any work done or claimed to have been done by or on behalf of, or materials furnished or claimed to have been furnished to, Tenant, within 10 days after Tenant’s receipt of notice thereof by payment, filing the bond required by law or otherwise in accordance with law.

     Section 5.5 Labor Relations. Tenant shall not employ, or permit the employment of, any contractor, mechanic or laborer, or permit any materials to be delivered to or used in the Building or Complex, if, in Landlord’s sole reasonable judgment, such employment, delivery or use will interfere or cause any conflict with other contractors, mechanics or laborers engaged in the construction, maintenance or operation of the Building or Complex by Landlord, Tenant or others. If such interference or conflict occurs, upon Landlord’s request, Tenant shall cause all contractors, mechanics or laborers causing such interference or conflict to leave the Building or Complex immediately.

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     Section 5.6 Tenant’s Costs. Tenant shall pay to Landlord, upon demand, all reasonable out-of-pocket costs actually incurred by Landlord in connection with Tenant’s Alterations, including costs incurred in connection with (a) Landlord’s review of the Alterations (including review of requests for approval thereof) and (b) the provision of Building or Complex personnel during the performance of any Alteration, to operate elevators or otherwise to facilitate Tenant’s Alterations. In addition, Tenant shall pay to Landlord, upon demand, an administrative fee in an amount equal to 5% of the total cost of any Alterations. At Landlord’s request, Tenant shall deliver to Landlord reasonable supporting documentation evidencing the hard and soft costs incurred by Tenant in designing and constructing any Alterations.

     Section 5.7 Tenant’s Equipment. Tenant shall provide notice to Landlord prior to moving any heavy machinery, heavy equipment, freight, bulky matter or fixtures (collectively, “Equipment”) into or out of the Building or Complex and shall pay to Landlord any costs actually incurred by Landlord in connection therewith. If such Equipment requires special handling, Tenant agrees (a) to employ only persons holding all necessary licenses to perform such work, (b) all work performed in connection therewith shall comply with all applicable Requirements and (c) such work shall be done only during hours reasonably designated by Landlord.

     Section 5.8 Legal Compliance. The approval of Plans, or consent by Landlord to the making of any Alterations, does not constitute Landlord’s representation that such Plans or Alterations comply with any Requirements. Landlord shall not be liable to Tenant or any other party in connection with Landlord’s approval of any Plans, or Landlord’s consent to Tenant’s performing any Alterations. If any Alterations made by or on behalf of Tenant require Landlord to make any alterations or improvements to any part of the Building or Complex in order to comply with any Requirements, Tenant shall pay all costs and expenses incurred by Landlord in connection with such alterations or improvements.

     Section 5.9 Floor Load. Tenant shall not place a load upon any floor of the Premises that exceeds 50 pounds per square foot “live load”. Landlord reserves the right to reasonably designate the position of all Equipment which Tenant wishes to place within the Premises, and to place limitations on the weight thereof.

ARTICLE 6

REPAIRS

     Section 6.1 Landlord’s Repair and Maintenance. Landlord shall operate, maintain and, except as provided in Section 6.2 hereof, make all necessary repairs (both structural and nonstructural) to (i) the Building Systems and (ii) the Common Areas, in conformance with standards applicable to Comparable Buildings.

     Section 6.2 Tenant’s Repair and Maintenance. Tenant shall promptly, at its expense and in compliance with Article 5 including, without limitation, the requirement that any repairs affecting any Building System be reviewed and approved by Landlord’s designated engineer for the affected Building System, make all nonstructural repairs to the Premises and the fixtures, equipment and appurtenances therein (including all electrical, plumbing, heating, ventilation and air conditioning, sprinklers and life safety systems in and serving the Premises from the point of connection to the Building Systems) (collectively, “Tenant Fixtures”) as and when needed to preserve the Premises in good working order and condition, except for reasonable wear and tear and damage which is Landlord’s obligation to repair pursuant to the

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express provisions of this Lease. All damage to the Building or Complex or to any portion thereof, or to any Tenant Fixtures, requiring structural or nonstructural repair caused by or resulting from any act, omission, neglect or improper conduct of a Tenant Party or the moving of Tenant’s Property or Equipment into, within or out of the Premises by a Tenant Party, shall be repaired at Tenant’s expense by (i) Tenant, if the required repairs are nonstructural in nature and do not affect any Building System, or (ii) Landlord, if the required repairs are structural in nature, involve replacement of exterior window glass or affect any Building System. All Tenant repairs shall be of good quality utilizing new construction materials.

     Section 6.3 Reserved Rights. Landlord reserves the right to make all changes, alterations, additions, improvements, repairs or replacements to the Building, Complex and Building Systems, including changing the arrangement or location of entrances or passageways, doors and doorways, corridors, elevators, stairs, toilets or other Common Areas (collectively, “Work of Improvement”), as Landlord deems necessary or desirable, and to take all materials into the Premises required for the performance of such Work of Improvement, provided that (a) the level of any Building or Complex service shall not decrease in any material respect from the level required of Landlord in this Lease as a result thereof (other than temporary changes in the level of such services during the performance of any such Work of Improvement), (b) Tenant is not deprived of access to the Premises and (c) Landlord gives Tenant not less than five (5) days notice prior to commencing any Work of Improvement, except in the event of an emergency in which case no notice shall be required. Landlord shall use reasonable efforts to minimize interference with Tenant’s use and occupancy of the Premises during the performance of such Work of Improvement. There shall be no Rent abatement or allowance to Tenant for a diminution of rental value, no actual or constructive eviction of Tenant, in whole or in part, no relief from any of Tenant’s other obligations under this Lease, and no liability on the part of Landlord by reason of inconvenience, annoyance or injury to business arising from Landlord, Tenant or others performing, or failing to perform, any Work of Improvement. Except in the event of an emergency (in which event the following provision shall not apply) if the noise generated during the conduct of (i) any Work of Improvement performed by any Landlord Party in the Building, or (ii) any work in Building premises immediately adjacent to or above or below the Premises by any tenant or other occupant of the Building, is so disruptive that as a result thereof, Tenant cannot, in the exercise of its reasonable business judgment, operate its business and such noise continues for more than one (1) Business Day following written notice thereof from Tenant to Landlord, then, as of the (2nd) Business Day, Rent and all other charges payable to Landlord hereunder shall abate until such time as the noise has ceased, at which time Tenant shall resume the payments required hereunder. Further, in the event that any Landlord Party enters into the Premises under non-emergency situations in order to perform Work of Improvements and/or repairs thereto or to any other portion of the Building and, as a result thereof, Tenant cannot, in the exercise of its reasonable business judgment, operate its business therein, Rent payable to Landlord hereunder shall abate in proportion to the degree of interference from the date of such closure until such time as the condition giving rise to said closure has been corrected, at which time Tenant shall resume the payments required hereunder.

ARTICLE 7

TAXES AND OPERATING EXPENSES

     Section 7.1 Definitions. For the purposes of this Article 7, the following terms shall have the meanings set forth below:

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     (a) “Assessed Valuation” shall mean the amount for which the Real Property is assessed by the County Assessor of Cook County, Illinois for the purpose of imposition of Taxes.

     (b) “Operating Expenses” shall mean the aggregate of all costs and expenses paid or incurred by or on behalf of Landlord in connection with the ownership, operation, repair and maintenance of the Real Property, including the rental value of Landlord’s Building office and capital improvements only if such capital improvement either (i) is reasonably intended to result in a reduction in Operating Expenses (as for example, a labor-saving improvement), provided the amount included in Operating Expenses for any calendar year shall not exceed an amount equal to the savings reasonably anticipated to result from the installation and operation of such improvement, and/or (ii) is made during any calendar year in compliance with Requirements that were not in effect on the Effective Date. Such capital improvements shall be amortized (with interest at the Base Rate) on a straight-line basis over such period as Landlord shall reasonably determine, and the amount included in Operating Expenses for any calendar year shall be equal to the annual amortized amount. Operating Expenses shall not include any Excluded Expenses. If during the Term, Landlord shall not furnish any particular item(s) of work or service (which would otherwise constitute an Operating Expense) to any accruable portions of the Building for any reason, then, for purposes of computing Operating Expenses for such period, the amount included in Operating Expenses for such period shall be increased by an amount equal to the costs and expenses that would have been reasonably incurred by Landlord during such period if Landlord had furnished such item(s) of work or service to such portion of the Building. In determining the amount of Operating Expenses for any calendar year, if less than 100% of the Building rentable area is occupied by tenants at any time during any calendar year, Operating Expenses shall be determined for such calendar year to be an amount equal to the like expenses which would normally be expected to be incurred had such occupancy been 100% throughout such calendar year.

     (c) “Taxes” shall mean (i) all real estate taxes, assessments, sewer and water rents, rates and charges and other governmental levies, impositions or charges, whether general, special, ordinary, extraordinary, foreseen or unforeseen, which may be assessed, levied or imposed upon all or any part of the Real Property, and (ii) all expenses (including reasonable attorneys’ fees and disbursements and experts’ and other witnesses’ fees) incurred in contesting any of the foregoing or the Assessed Valuation of the Real Property. Taxes shall not include (x) interest or penalties incurred by Landlord as a result of Landlord’s late payment of Taxes, or (y) franchise, transfer, gift, inheritance, estate or net income taxes imposed upon Landlord. Whether or not Landlord elects to pay any assessment in annual installments, (i) all such assessment shall be deemed to have been so divided and to be payable in the maximum number of installments permitted by law, and (ii) there shall be deemed included in Taxes for each calendar year of the Term the installments of such assessment becoming payable during each such calendar year, together with interest payable during such calendar year on such installments and on all installments thereafter becoming due as provided by law, all as if such assessment had been so divided. If at any time the methods of taxation prevailing on the Effective Date shall be altered so that in lieu of or as an addition to the whole or any part of Taxes, there shall be assessed, levied or imposed (1) a tax, assessment, levy, imposition or charge based on the income or rents received from the Real Property whether or not wholly or partially as a capital levy or otherwise, (2) a tax, assessment, levy, imposition or charge measured by or based in whole or in part upon all or any part of the Real Property and imposed upon Landlord, (3) a license fee measured by the rents, or (4) any other tax, assessment, levy, imposition, charge or license fee however described or imposed, including business

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improvement district impositions, then all such taxes, assessments, levies, impositions, charges or license fees or the part thereof so measured or based shall be deemed to be Taxes.

     Section 7.2 Tenant’s Tax Payment.

          (a) Tenant shall pay to Landlord Tenant’s Proportionate Share of Taxes (“Tenant’s Tax Payment”). For each calendar year (or portion thereof) during the Term, Landlord shall furnish to Tenant a statement setting forth Landlord’s reasonable estimate of Tenant’s Tax Payment for such calendar year (the “Tax Estimate”). Tenant shall pay to Landlord on the 1st day of each month during the Term an amount equal to 1/12 of the Tax Estimate for such calendar year. If Landlord furnishes a Tax Estimate for a calendar year subsequent to the commencement thereof, then (i) until the 1^st day of the month following the month in which the Tax Estimate is furnished to Tenant, Tenant shall pay to Landlord on the 1^st day of each month an amount equal to the monthly sum payable by Tenant to Landlord under this Section 7.2 during the last month of the preceding calendar year, (ii) promptly after the Tax Estimate is furnished to Tenant or together therewith, Landlord shall give notice to Tenant stating whether the installments of Tenant’s Tax Estimate previously made for such calendar year were greater or less than the installments of Tenant’s Tax Estimate to be made for such calendar year in accordance with the Tax Estimate, and (x) if there shall be a deficiency, Tenant shall pay the amount thereof within 30 days after demand there for, or (y) if there shall have been an overpayment, Landlord shall credit the amount thereof against subsequent payments of Rent due hereunder, and (iii) on the 1^st day of the month following the month in which the Tax Estimate is furnished to Tenant, and on the 1^st day of each month thereafter throughout the remainder of such calendar year, Tenant shall pay to Landlord an amount equal to 1/12 of the Tax Estimate. Landlord shall have the right, upon not less than 30 days prior written notice to Tenant, to reasonably adjust the Tax Estimate from time to time during any calendar year.

          (b) As soon as reasonably practicable after Landlord has determined the Taxes for a calendar year, Landlord shall furnish to Tenant a statement showing: (i) the amount of actual Taxes for such calendar year, (ii) the actual amount of Tenant’s Tax Payment for such calendar year, and (iii) the sums paid by Tenant under Section 7.2(a). If the Statement shall show that the sums paid by Tenant under Section 7.2(a) exceeded the actual amount of Tenant’s Tax Payment for such calendar year, Landlord shall credit the amount of such excess against subsequent payments of Rent due hereunder (or, if a sufficient amount of Rent to absorb the refund is not payable hereunder, Landlord shall pay the refund to Tenant in cash). If the statement shall show that the sums so paid by Tenant were less than Tenant’s Tax Payment for such calendar year, Tenant shall pay the amount of such deficiency within 30 days after delivery of the Statement to Tenant.

          (c) Only Landlord may institute proceedings to reduce the Assessed Valuation of the Real Property and the filings of any such proceeding by Tenant without Landlord’s consent shall constitute an Event of Default. If Landlord receives a refund of Taxes for any calendar year during the Term, Landlord shall credit against subsequent payments of Rent due hereunder (or, if a sufficient amount of Rent to absorb the refund is not payable hereunder, Landlord shall pay the refund to Tenant in cash) an amount equal to Tenant’s Proportionate Share of the refund, net of any expenses incurred by Landlord in achieving such refund, which amount shall not exceed Tenant’s Tax Payment paid for such calendar year. Landlord shall not be obligated to file any application or institute any proceeding seeking a reduction in Taxes or the Assessed Valuation. The benefit of any exemption or abatement relating to all or any part of the Real Property shall accrue solely to the benefit of Landlord and Taxes shall be computed without taking into account any such exemption or abatement.

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          (d) Tenant shall be responsible for any applicable occupancy or rent tax now in effect or hereafter enacted and, if such tax is payable by Landlord, Tenant shall promptly pay such amounts to Landlord, upon Landlord’s demand.

          (e) Tenant shall be obligated to make Tenant’s Tax Payment regardless of whether Tenant may be exempt from the payment of any Taxes as the result of any reduction, abatement or exemption from Taxes granted or agreed to by any Governmental Authority, or by reason of Tenant’s diplomatic or other tax-exempt status.

Section 7.3 Tenant’s Operating Payment.

          (a) Tenant shall pay to Landlord Tenant’s Proportionate Share of Operating Expenses (“Tenant’s Operating Payment”). For each calendar year (or portion thereof) during the Term, Landlord shall furnish to Tenant a statement setting forth Landlord’s reasonable estimate of Tenant’s Operating Payment for such calendar year (the “Expense Estimate”). Tenant shall pay to Landlord on the 1^st day of each month during the Term an amount equal to 1/12 of the Expense Estimate for such calendar year. If Landlord furnishes an Expense Estimate for a calendar year subsequent to the commencement thereof, then (i) until the 1^st day of the month following the month in which the Expense Estimate is furnished to Tenant, Tenant shall pay to Landlord on the 1^st day of each month an amount equal to the monthly sum payable by Tenant to Landlord under this Section 7.3 during the last month of the preceding calendar year, (ii) promptly after the Expense Estimate is furnished to Tenant or together therewith, Landlord shall give notice to Tenant stating whether the installments of Tenant’s Operating Payment previously made for such calendar year were greater or less than the installments of Tenant’s Operating Payment to be made for such calendar year in accordance with the Expense Estimate, and (x) if there shall be a deficiency, Tenant shall pay the amount thereof within 30 days after demand therefor, or (y) if there shall have been an overpayment, Landlord shall credit the amount thereof against subsequent payments of Rent due hereunder, and (iii) on the 1^st day of the month following the month in which the Expense Estimate is furnished to Tenant, and on the 1^st day of each month thereafter throughout the remainder of such calendar year, Tenant shall pay to Landlord an amount equal to 1/12 of the Expense Estimate. Landlord shall have the right, upon not less than 30 days prior written notice to Tenant, to reasonably adjust the Expense Estimate from time to time during any calendar year.

          (b) As soon as reasonably practicable following the end of each calendar year, Landlord shall furnish to Tenant a statement for such calendar year showing: (i) the amount of Operating Expenses for such calendar year, (ii) the actual amount of Tenant’s Operating Payment for such calendar year, and (iii) the same paid by Tenant under Section 7.3(a). If the statement shows that the sums paid by Tenant under Section 7.3(a) exceeded the actual amount of Tenant’s Operating Payment for such calendar year, Landlord shall credit the amount of such excess against subsequent payments of Rent due hereunder (or, if a sufficient amount of Rent to absorb the refund is not payable hereunder, Landlord shall pay the refund to Tenant in cash). If the statement shows that the sums so paid by Tenant were less than Tenant’s Operating Payment for such calendar year, Tenant shall pay the amount of such deficiency within 30 days after delivery of the statement to Tenant.

     Section 7.4 Non-Waiver; Disputes.

          (a) Landlord’s failure to render any statement on a timely basis with respect to any calendar year shall not prejudice Landlord’s right to thereafter render a statement with

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respect to such calendar year or any subsequent calendar year, nor shall the rendering of a statement prejudice Landlord’s right to thereafter render a corrected statement for that calendar year.

          (b) Each statement sent to Tenant shall be conclusively binding upon Tenant unless Tenant (i) pays to Landlord when due the amount set forth in such statement, without prejudice to Tenant’s right to dispute such statement, and (ii) within 90 days after such statement is sent, sends a notice to Landlord objecting to such statement and specifying the reasons therefor. Tenant agrees that Tenant will not employ, in connection with any dispute under this Lease, any person or entity who is to be compensated, in whole or in part, on a contingency fee basis. If the parties are unable to resolve any dispute as to the correctness of such statement within 30 days following such notice of objection, either party may refer the issues raised to one of the nationally recognized public accounting firms selected by Landlord (but not employed by Landlord) and reasonably acceptable to Tenant, and the decision of such accountants shall be conclusively binding upon Landlord and Tenant. In connection therewith, Tenant and such accountants shall execute and deliver to Landlord a confidentiality agreement, in form and substance reasonably satisfactory to Landlord, whereby such parties agree not to disclose to any third party any of the information obtained in connection with such review. Tenant shall pay the fees and expenses relating to such procedure, unless such accountants determine that Landlord overstated Operating Expenses by more than 5% for such calendar year, in which case Landlord shall pay such fees and expenses. Except as provided in this Section 7.4, Tenant shall have no right whatsoever to dispute, by judicial proceeding or otherwise, the accuracy of any statement.

     Section 7.5 Proration. If the Commencement Date is not January 1, Tenant’s Tax Payment and Tenant’s Operating Payment for the calendar year in which the Commencement Date occurs shall be apportioned on the basis of the number of days in the year from the Commencement Date to the following December 31. If the Expiration Date occurs on a date other than December 31^st, Tenant’s Tax Payment and Tenant’s Operating Payment for the calendar year in which such Expiration Date occurs shall be apportioned on the basis of the number of days in the period from January 1^st to the Expiration Date. Upon the expiration or earlier termination of this Lease, any Additional Rent under this Article 7 shall be adjusted or paid within 30 days after submission of the statement for the last calendar year of the Term. Landlord shall have the right, from time to time, to equitably allocate some or all of the Taxes and/or Operating Expenses for the Real Property among different portions or occupants of the Real Property (the “Cost Pools”), in Landlord’s reasonable discretion. Such Cost Pools may include, but shall not be limited to, the office space tenants of the Real Property and the retail space tenants of the Real Property. The Taxes and/or Operating Expenses allocable to each such Cost Pool shall be allocated to such Cost Pool and charged to the tenants within such Cost Pool in an equitable manner.

     Section 7.6 No Reduction in Rent. In no event shall any decrease in Operating Expenses or Taxes result in a reduction in the Fixed Rent payable hereunder.

     Section 7.7 Allocation Within the Complex. Landlord shall separately determine Taxes and Expenses for the Real Property and the adjoining property within the Complex. If any Taxes or Expenses are imposed or incurred with respect to both the Real Property and such adjoining property (including the cost of a shared management office), Landlord shall allocate the same in accordance with sound accounting and management practices and any instruments or agreements pertaining to the sharing or allocation of the same.

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ARTICLE 8

REQUIREMENTS OF LAW

     Section 8.1 Compliance with Requirements.

          (a) Tenant’s Compliance. Tenant, at its expense, shall comply with all Requirements applicable to the Premises and/or Tenant’s use or occupancy thereof; provided, however, that Tenant shall not be obligated to comply with any Requirements requiring any structural alterations to the Building or Complex unless the application of such Requirements arises from (i) the specific manner and/or nature of Tenant’s use or occupancy of the Premises, as distinct from general office use, (ii) Alterations made by Tenant, or (iii) a breach by Tenant of any provisions of this Lease. Any repairs or alterations required for compliance with applicable Requirements shall be made at Tenant’s expense (1) by Tenant in compliance with Article 5 if such repairs or alterations are nonstructural and do not affect any Building System, and to the extent such repairs or alterations do not affect areas outside the Premises, or (2) by Landlord if such repairs or alterations are structural or affect any Building System, or to the extent such repairs or alterations affect areas outside the Premises. If Tenant obtains knowledge of any failure to comply with any Requirements applicable to the Premises, Tenant shall give Landlord prompt notice thereof.

          (b) Hazardous Materials. Tenant shall not cause or permit (i) any Hazardous Materials to be brought into the Building or Complex, (ii) the storage or use of Hazardous Materials in or about the Building, Complex or Premises (subject to the second sentence of this Section 8.1(b)), or (iii) the escape, disposal or release of any Hazardous Materials within or in the vicinity of the Building or Complex. Nothing herein shall be deemed to prevent Tenant’s use of any Hazardous Materials customarily used in the ordinary course of office work, provided such use is in accordance with all Requirements. Tenant shall be responsible, at its expense, for all matters directly or indirectly based on, or arising or resulting from the presence of Hazardous Materials in the Building or Complex which is caused or permitted by a Tenant Party. Tenant shall provide to Landlord copies of all communications received by Tenant with respect to any Requirements relating to Hazardous Materials, and/or any claims made in connection therewith. Landlord or its agents may perform environmental inspections of the Premises at any time.

          (c) Landlord’s Compliance. Landlord shall comply with (or cause to be complied with) all Requirements applicable to the Building or Complex which are not the obligation of Tenant, to the extent that non-compliance would materially impair Tenant’s use and occupancy of the Premises for the Permitted Uses. Landlord represents to Tenant that Landlord has not received any written notice with respect to (i) the existence of any Hazardous Materials in the Premises in violation of any Requirements or (ii) the Premises’ failure to comply, in any material respect, with any Requirements. Notwithstanding the foregoing, in the event of a breach of the foregoing representation by Landlord, Tenant’s sole remedy shall be to require Landlord to remedy the cause of such breach.

          (d) Landlord’s Insurance. Tenant shall not cause or permit any action or condition that would (i) invalidate or conflict with Landlord’s insurance policies, (ii) violate applicable rules, regulations and guidelines of the Fire Department, Fire Insurance Rating Organization or any other authority having jurisdiction over the Building or Complex, (iii) cause an increase in the premiums of insurance for the Building or Complex over that payable with respect to Comparable Buildings, or (iv) result in Landlord’s insurance companies’ refusing to

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insure the Building, Complex or any property therein in amounts and against risks as reasonably determined by Landlord. If insurance premiums increase as a result of Tenant’s failure to comply with the provisions of this Section 8.1, Tenant shall promptly cure such failure and shall reimburse Landlord for the increased insurance premiums paid by Landlord as a result of such failure by Tenant.

     Section 8.2 Fire and Life Safety. As of the date of this Lease, the sprinkler, fire-alarm and life-safety system in the Premises are in compliance with all Requirements. As of the date of this Lease, it shall be the Tenant’s responsibility, at Tenant’s sole cost, to comply with all Requirements and the other obligations set forth in this Section 8.2. Tenant shall maintain in good order and repair the sprinkler, fire-alarm and life-safety system in the Premises in accordance with this Lease including, without limitation, the provisions of Section 6.2 respecting any repairs affecting any Building System, the Rules and Regulations and all Requirements. If the Fire Insurance Rating Organization or any Governmental Authority or any of Landlord’s insurers requires or recommends any modifications and/or alterations be made or any additional equipment be supplied in connection with the sprinkler system or fire alarm and life-safety system serving the Building or Complex by reason of Tenant’s business, any Alterations performed by Tenant or the location of the partitions, Tenant’s Property, or other contents of the Premises, Landlord (to the extent outside of the Premises) or Tenant (to the extent within the Premises) shall make such modifications and/or Alterations, and supply such additional equipment, in either case at Tenant’s expense.

ARTICLE 9

SUBORDINATION

Section 9.1 Subordination and Attornment.

          (a) Provided that the Mortgagee or Lessor under any Mortgages or Superior Leases enters into a Subordination, Non-Disturbance and Attornment Agreement substantially in the form of Exhibit H attached hereto and made a part hereof, this Lease shall be subject and subordinate to all Mortgages and Superior Leases and, at the request of such Mortgagee or Lessor, Tenant shall attorn to any Mortgagee or Lessor, its successors in interest or any purchaser in a foreclosure sale.

          (b) If a Lessor or Mortgagee or any other person or entity shall succeed to the rights of Landlord under this Lease, whether through possession or foreclosure action or the delivery of a new lease or deed, then at the request of the successor landlord and upon such successor landlord’s written agreement to accept Tenant’s attornment and to recognize Tenant’s interest under this Lease, Tenant shall be deemed to have attorned to and recognized such successor landlord as Landlord under this Lease. The provisions of this Section 9.1 are self-operative and require no further instruments to give effect hereto; provided, however, that Tenant shall promptly execute and deliver any instrument that such successor landlord may reasonably request (i) evidencing such attornment, and (ii) setting forth the terms and conditions of Tenant’s tenancy. Upon such attornment this Lease shall continue in full force and effect as a direct lease between such successor landlord and Tenant upon all of the terms, conditions and covenants set forth in this Lease except that such successor landlord shall not be

               (i) liable for any act or omission of Landlord (except to the extent such act or omission continues beyond the date when such successor landlord succeeds to Landlord’s interest and Tenant gives notice of such act or omission);

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               (ii) subject to any defense, claim, counterclaim, set-off or offset which Tenant may have against Landlord;

               (iii) bound by any prepayment of more than one month’s Rent to any prior landlord;

               (iv) bound by any obligation to make any payment to Tenant which was required to be made prior to the time such successor landlord succeeded to Landlord’s interest;

               (v) bound by any obligation to perform any work or to make improvements to the Premises except for (x) repairs and maintenance required to be made by Landlord under this Lease, and (y) repairs to the Premises as a result of damage by fire or other casualty or a partial condemnation pursuant to the provisions of this Lease, but only to the extent that such repairs can reasonably be made from the net proceeds of any insurance or condemnation awards, respectively, actually made available to such successor landlord;

               (vi) bound by any modification, amendment or renewal of this Lease made without the consent of such successor landlord or any previous Lessor or Mortgagee under the Superior Lease or Mortgage in effect at the time of such modification, amendment or renewal;

               (vii) liable for the repayment of any security deposit or surrender of any letter of credit, unless and until such security deposit actually is paid or such letter of credit is actually delivered to such successor landlord; or

               (viii) liable for the payment of any unfunded tenant improvement allowance, refurbishment allowance or similar obligation.

          (c) Tenant shall from time to time within 20 days of request from Landlord execute and deliver any documents or instruments that may be reasonably required by any Mortgagee or Lessor to confirm any subordination.

     Section 9.2 Mortgage or Superior Lease Defaults. Any Mortgagee may elect that this Lease shall have priority over the Mortgage and, upon notification to Tenant by such Mortgagee, this Lease shall be deemed to have priority over such Mortgage, regardless of the date of this Lease.

     Section 9.3 Tenant’s Termination Right. As long as any Superior Lease or Mortgage exists, Tenant shall not seek to terminate this Lease by reason of any act or omission of Landlord until (a) Tenant shall have given notice of such act or omission to all Lessors and/or Mortgagees, and (b) a reasonable period of time (but not longer than any applicable period for cure provided to Landlord hereunder plus sixty (60) days) shall have elapsed following the giving of notice of such default and the expiration of any applicable notice or grace periods (unless such act or omission is not capable of being remedied within a reasonable period of time), during which period such Lessors and/or Mortgagees shall have the right, but not the obligation, to remedy such act or omission and thereafter diligently proceed to so remedy such act or omission. If any Lessor or Mortgagee elects to remedy such act or omission of Landlord, Tenant shall not seek to terminate this Lease so long as such Lessor or Mortgagee is proceeding with reasonable diligence to affect such remedy.

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     Section 9.4 Provisions. The provisions of this Article 9 shall (a) inure to the benefit of Landlord, any future owner of the Building, Complex or the Real Property, Lessor or Mortgagee and any sublessor thereof and (b) apply notwithstanding that, as a matter of law, this Lease may terminate upon the termination of any such Superior Lease or Mortgage;

     Section 9.5 Future Condominium Declaration. This Lease and Tenant’s rights hereunder are and will be subject and subordinate to any condominium declaration, by-laws and other instruments (collectively, the “Declaration”) which may be recorded regardless of the reason therefor, in order to subject the Building or Complex to a condominium form of ownership pursuant to the Illinois Condominium Property Act or any successor Requirement, provided that the Declaration does not by its terms increase the Rent, change Tenant’s non-Rent obligations or adversely affect Tenant’s rights under this Lease. At Landlord’s request, and subject to the foregoing proviso, Tenant will execute and deliver to Landlord an amendment of this Lease confirming such subordination and modifying this Lease to conform to such condominium regime.

ARTICLE 10

SERVICES

     Section 10.1 Electricity. Landlord shall not furnish electricity, but shall permit Tenant to make direct arrangements to obtain electricity from Commonwealth Edison Company or another utility approved by Landlord, and shall permit Landlord’s electric cables, circuits, riser lines, feeders and related Building Systems to be used for such purpose, but only to the extent that: (i) all such Building Systems are suitable, and the safe and lawful capacity thereof is not exceeded, (ii) sufficient capacity remains at all times for other existing and future tenants, as determined in Landlord’s discretion, and (iii) Tenant uses only normal quantities and types of office equipment and lighting in the Premises typical of average office use. Tenant shall make all arrangements for metering and direct payment for such electricity with such utility. Tenant shall pay for all electricity consumed in the Premises when due (including electricity during janitorial or other service, during any alterations or repairs, and for any special HVAC and lighting equipment serving the Premises). Landlord shall exclude such electricity costs from Expenses (except Landlord may elect from time to time to include electricity for separately metered building standard overhead lights in Expenses, in lieu of requiring payment by Tenant hereunder). Tenant’s connections, and installation of new cables, circuits, feeders, meters or other equipment, shall be at Tenant’s sole cost, and shall be subject to Landlord’s prior written approval and the other provisions of Article 5 respecting Alterations, and the Rules and Regulations respecting access to the utility closets.

     Section 10.2 Excess Electricity. Tenant shall at all times comply with the rules and regulations of the utility company supplying electricity to the Building or Complex. Tenant shall not use any electrical equipment, which, in Landlord’s reasonable judgment, would exceed the capacity of the electrical equipment serving the Premises. If Landlord determines that Tenant’s electrical requirements necessitate installation of any additional risers, feeders or other electrical distribution equipment (collectively, “Electrical Equipment”), or if Tenant provides Landlord with evidence reasonably satisfactory to Landlord of Tenant’s need for excess electricity and requests that additional Electrical Equipment be installed, Landlord shall, at Tenant’s expense, install such additional Electrical Equipment, provided that Landlord, in its sole judgment, determines that (a) such installation is practicable and necessary, (b) such additional Electrical Equipment is permissible under applicable Requirements, and (c) the installation of such Electrical Equipment will not cause permanent damage to the Building, Complex or the

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Premises, cause or create a hazardous condition, entail excessive or unreasonable alterations, interfere with or limit electrical usage by other tenants or occupants of the Building or Complex, or exceed the limits of the switchgear or other facilities serving the Building or Complex, or require power in excess of that available from the utility company serving the Building or Complex.

     Section 10.3 Elevators. Landlord shall provide passenger elevator service to the Premises 24 hours per day, 7 days per week; provided, however. Landlord may limit passenger elevator service during times other than Ordinary Business Hours. Landlord shall provide at least one freight elevator serving the Premises, available upon Tenant’s prior request, on a nonexclusive “first come, first serve” basis with other Building or Complex tenants, on all Business Days from 7:00 a.m. to 3:30 p.m., which hours of operation are subject to change.

     Section 10.4 Heating. Ventilation and Air Conditioning. Landlord shall furnish to the Premises heating, ventilation and air-conditioning (“HVAC”) in accordance with the Design Standards set forth in Exhibit D during Ordinary Business Hours. Landlord shall have access to all air-cooling, fan, ventilating and machine rooms and electrical closets and all other mechanical installations of Landlord (collectively, “Mechanical Installations”), and Tenant shall not construct partitions or other obstructions which may interfere with Landlord’s access thereto or the moving of Landlord’s equipment to and from the Mechanical Installations. No Tenant Party shall at any time enter the Mechanical Installations or tamper with, adjust, or otherwise affect such Mechanical Installations. Landlord shall not be responsible if the HVAC System fails to provide cooled or heated air, as the case may be, to the Premises in accordance with the Design Standards by reason of (i) any equipment installed by, for or on behalf of Tenant, which has an electrical load in excess of the average electrical load and human occupancy factors for the HVAC System as designed, or (ii) any rearrangement of partitioning or other Alterations made or performed by, for or on behalf of Tenant. Tenant shall install, if missing, blinds or shades on all windows, which blinds and shades shall be subject to Landlord’s reasonable approval, and shall keep operable windows in the Premises closed, and lower the blinds when necessary because of the sun’s position, whenever the HVAC System is in operation or as and when required by any Requirement. Tenant shall cooperate with Landlord and shall abide by the rules and regulations which Landlord may reasonably prescribe for the proper functioning and protection of the HVAC System.

     Section 10.5 Overtime Freight Elevators and HVAC. The Fixed Rent does not include any charge to Tenant for the furnishing of any freight elevator service or HVAC to the Premises during any periods other than as set forth in Section 10.3 and Section 10.4 (“Overtime Periods”). If Tenant desires any such services during Overtime Periods, Tenant shall deliver notice to the Building or Complex office requesting such services at least 24 hours prior to the time Tenant requests such services to be provided; provided, however, that Landlord shall use reasonable efforts to arrange such service on such shorter notice as Tenant shall provide. If Landlord furnishes freight elevator or HVAC service during Overtime Periods, Tenant shall pay to Landlord the cost thereof at the established rates from time to time for such services in the Building or Complex, plus a fee equal to fifteen percent (15%) of such established rates, along with Landlord’s reasonable out-of-pocket costs for architects, engineers, consultants and other parties relating to such extra utilities or services, plus a fee equal to fifteen percent (15%) of such out-of-pocket costs.

     Section 10.6 Cleaning. Landlord shall cause the Premises (excluding any portions thereof used for the storage, preparation, service or consumption of food or beverages, as an exhibition area or classroom, for storage, as a shipping room, mail room or similar purposes, for

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private bathrooms, showers or exercise facilities, as a trading floor, or primarily for operation of computer, data processing, reproduction, duplicating or similar equipment) to be cleaned, substantially in accordance with the standards set forth in Exhibit E. Any areas of the Premises which Landlord is not required to clean hereunder or which require additional cleaning shall be cleaned, at Tenant’s expense, by Landlord’s cleaning contractor, at rates which shall be competitive with rates of other cleaning contractors providing comparable services to Comparable Buildings. Landlord’s cleaning contractor and its employees shall have access to the Premises at all times except between 8;00 a.m. and 5:30 p.m. on weekdays which are not Observed Holidays.

     Section 10.7 Water. Landlord shall provide water in the core lavatories on each floor of the Building. If Tenant requires water for any additional purposes, Tenant’ shall pay for the cost of bringing water to the Premises and Landlord may install a meter to measure the water. Tenant shall pay the cost of such installation, and for all maintenance, repairs and replacements thereto, and for the reasonable charges of Landlord for the water consumed.

     Section 10.8 Refuse Removal. Landlord shall provide refuse removal services at the Building for ordinary office refuse and rubbish. Tenant shall pay to Landlord, Landlord’s reasonable charge for such removal to the extent that the refuse generated by Tenant exceeds the refuse customarily generated by general office tenants. Tenant shall not dispose of any refuse in the Common Areas, and if Tenant does so, Tenant shall be liable for Landlord’s reasonable charge for such removal.

     Section 10.9 Directory. The lobby shall contain a directory wherein the Building’s tenants shall be listed. Tenant shall be entitled to a proportionate share of such listings, based on the rentable square footage of the Premises.

     Section 10.10 Telecommunications. If Tenant requests that Landlord grant access to the Building or Complex to a telecommunications service provider designated by Tenant for purposes of providing telecommunications services to Tenant, Landlord shall use its good faith efforts to respond to such request within 7 days. Tenant acknowledges that nothing set forth in this Section 10.10 shall impose any affirmative obligation on Landlord to grant such request and that Landlord, in Its sole discretion, shall have the right to determine which telecommunications service providers shall have access to Building or Complex facilities.

     Section 10.11 Service interruptions. Landlord reserves the right to suspend any service when necessary, by reason of Unavoidable Delays, accidents or emergencies, or for any Work of Improvement which, in Landlord’s reasonable judgment, is necessary or appropriate, until such Unavoidable Delay, accident or emergency shall cease or such Work of Improvement is completed and, except as expressly provided in Section 6.3 above, or in this Section 10.11, Landlord shall not be liable for any interruption, curtailment or failure to supply services. Landlord shall use reasonable efforts to minimize interference with Tenant’s use and occupancy of the Premises as a result of any such interruption, curtailment or failure of or defect in such service, or change in the supply, character and/or quantity of, electrical service, and to restore any such services, remedy such situation and minimize any interference with Tenant’s business. The exercise of any such right or the occurrence of any such failure by Landlord shall not constitute an actual or constructive eviction, in whole or in part, entitle Tenant to any compensation, abatement or diminution of Rent, relieve Tenant from any of its obligations under this Lease, or impose any liability upon Landlord or any Indemnified Party by reason of inconvenience to Tenant, or interruption of Tenant’s business, or otherwise. Except as otherwise expressly provided herein, Landlord shall not be liable in any way to Tenant for any

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failure, defect or interruption of, or change in the supply, character and/or quantity of, electric service furnished to the Premises for any reason except if attributable to the gross negligence or willful misconduct of Landlord or any of the Landlord Parties. If any service or utility to the Premises should become unavailable (i) due to the negligence or willful misconduct of Landlord or any of the Landlord Parties for a period in excess of twenty-four (24) consecutive hours or (ii) for any other reason for a period in excess of six (6) consecutive Business Days, and Tenant, in its reasonable business judgment, elects to close the Premises as a result thereof, all Rent and other charges shall abate from the commencement of said unavailability of such service or utility until such time as said service or utility is restored to the Premises and Tenant is reasonably able to operate its business within the Premises.

     Section 10.12 Additional Services. Any service requested of Landlord by Tenant (a) not specifically required to be provided by Landlord as set forth in this Lease or (b) beyond the regular scope or hours of such service required to be provided by Landlord as set forth in this Lease shall be provided by Landlord at the established rates from time to time for such services in the Building or Complex, plus a fee equal to fifteen percent (15%) of such established rates, along with Landlord’s out-of-pocket costs for architects, engineers, consultants and other parties relating to such extra services, plus a fee equal to fifteen percent (15%) of such out-of-pocket costs.

ARTICLE 11

INSURANCE; PROPERTY LOSS OR DAMAGE

Section 11.1 Tenant’s Insurance.

          (a) Tenant, at its expense, shall obtain and keep in full force and effect during the Term:

               (i) a policy of commercial general liability insurance on an occurrence basis against claims for personal injury, bodily injury, death and/or property damage occurring in or about the Building, under which Tenant is named as the insured and Landlord, Landlord’s Agent and any Lessors and any Mortgagees whose names have been furnished to Tenant are named as additional insureds (the “Insured Parties”). Such insurance shall provide primary coverage without contribution from any other insurance carried by or for the benefit of the Insured Parties, and Tenant shall obtain blanket broad-form contractual liability coverage to insure its indemnity obligations set forth in Article 25. The minimum limits of liability applying exclusively to the Premises shall be a combined single limit with respect to each occurrence in an amount of not less than $3,000,000; provided, however, that Landlord shall retain the right to require Tenant to increase such coverage from time to time to that amount of insurance which in Landlord’s reasonable judgment is then being customarily required by landlords for similar office space in Comparable Buildings. The self insured retention for such policy shall not exceed $10,000. Tenant may satisfy the limits of liability required herein with a combination of umbrella and/or excess policies of insurance, provided that such policies comply with all of the provisions hereof (including, without limitation, with respect to scope of coverage and naming of the Insured Parties);

               (ii) insurance against loss or damage by fire, and such other risks and hazards as are insurable under then available standard forms of “Special Form Causes of Loss” or “All Risk” property insurance policies, insuring Tenant’s Property and all Alterations and improvements to the Premises (including the Initial Installations) to the extent such Alterations

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and improvements exceed the cost of the improvements typically performed in connection with the initial occupancy of tenants in the Building (“Building Standard Installations”), for the full insurable value thereof or replacement cost thereof, having a deductible amount, if any, not in excess of $25,000;

               (iii) during the performance of any Alteration, until completion thereof, Builder’s Risk insurance on an “all risk” basis and on a completed value form including a Permission to Complete and Occupy endorsement, for full replacement value covering the interest of Landlord and Tenant (and their respective contractors and subcontractors) in all work incorporated in the Building and all materials and equipment in or about the Premises;

               (iv) Workers’ Compensation Insurance, as required by law;

               (v) Business Interruption Insurance covering a minimum of one year of anticipated gross income;

               (vi) if the Building, Complex or Real Property includes a parking garage or surface parking lot that is utilized by Tenant, Commercial Automobile Liability Insurance for any owned, non-owned or hired vehicles with a combined single limit with respect to each occurrence in an amount of not less than $1,000,000; and

               (vii) such other insurance in such amounts as the insured Parties may reasonably require from time to time.

          (b) All insurance required to be carried by Tenant (i) shall contain a provision that (x) no act or omission of Tenant shall affect or limit the obligation of the insurance company to pay the amount of any loss sustained, and (y) shall be noncancellable and/or no material change in coverage shall be made thereto unless the Insured Parties receive 30 days’ prior notice of the same, by certified mail, return receipt requested, and (ii) shall be effected under valid and enforceable policies issued by reputable insurers admitted to do business in the State of Illinois and rated in Best’s Insurance Guide, or any successor thereto as having a “Best’s Rating” of “A-” or better and a “Financial Size Category” of at least “X” or better, or, if such ratings are not then in effect, the equivalent thereof or such other financial rating as Landlord may at any time consider appropriate.

          (c) On or prior to the Commencement Date, Tenant shall deliver to Landlord appropriate policies of insurance, including evidence of waivers of subrogation required to be carried pursuant to this Article 11 and that the Insured Parties are named as additional insured’s (the “Policies”), Evidence of each renewal or replacement of the Policies shall be delivered by Tenant to Landlord at least 10 days prior to the expiration of the Policies. In lieu of the Policies, Tenant may deliver to Landlord a certification from Tenant’s insurance company, on the form currently designated “Accord 27” (Evidence of Property Insurance) and “Accord 25-S” (Certificate of Liability Insurance), or the equivalent, provided that attached thereto is an endorsement to Tenant’s commercial general liability policy naming the Insured Parties as additional insured’s, which endorsement is at least as broad as ISO policy form “CG 20 11 Additional Insured - Managers or Lessors of Premises” (pre-1999 edition) and which endorsement expressly provides coverage for the negligence of the additional insured’s, which certification shall be binding on Tenant’s insurance company, and which shall expressly provide that such certification (i) conveys to the Insured Parties all the rights and privileges afforded under the Policies as primary insurance, and (ii) contains an unconditional obligation of the insurance company to advise all Insured Parties in writing by certified mail, return receipt requested, at

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least 30 days in advance of any termination or change to the Policies that would affect the interest of any of the Insured Parties.

     Section 11.2 Waiver of Subrogation. Landlord and Tenant shall each procure an appropriate clause in or endorsement to any property insurance covering the Real Property and personal property, fixtures and equipment located therein, wherein the insurer waives subrogation or consents to a waiver of right of recovery, and Landlord and Tenant agree not to make any claim against, or seek to recover from, the other for any loss or damage to its property or the property of others resulting from fire or other hazards. Tenant acknowledges that Landlord shall not carry insurance on, and shall not be responsible for, (i) damage to any Above Building Standard Installations, (ii) Tenant’s Property, and (iii) any loss suffered by Tenant due to interruption of Tenant’s business.

     Section 11.3 Restoration.

          (a) If the Premises are damaged by fire or other casualty, or if the Building is damaged such that Tenant is deprived of reasonable access to the Premises, the damage shall be repaired by Landlord, to substantially the condition of the Premises prior to the damage, subject to the provisions of any Mortgage or Superior Lease, but Landlord shall have no obligation to repair or restore (i) Tenant’s Property or (ii) except as provided in Section 11.3(b), any Alterations or improvements to the Premises to the extent such Alterations or improvements exceed Building Standard installations (“Above Building Standard Installations”). So long as Tenant is not in default beyond applicable grace or notice provisions in the payment or performance of its obligations under this Section 11.3, and provided Tenant timely delivers to Landlord either Tenant’s Restoration Payment (as hereinafter defined) or the Restoration Security (as hereinafter defined) or Tenant expressly waives any obligation of Landlord to repair or restore any of Tenant’s Above Building Standard Installations, then until the restoration of the Premises is Substantially Completed or would have been Substantially Completed but for Tenant Delay, Fixed Rent, Tenant’s Tax Payment and Tenant’s Operating Payment shall be reduced in the proportion by which the area of the part of the Premises which is not usable (or accessible ) and is not used by Tenant bears to the total area of the Premises.

          (b) As a condition precedent to Landlord’s obligation to repair or restore any Above Building Standard Installations, Tenant shall (i) pay to Landlord upon demand a sum (“Tenant’s Restoration Payment”) equal to the amount, if any, by which (A) the cost, as estimated by a reputable independent contractor designated by Landlord, of repairing and restoring all Alterations and Initial Installations in the Premises to their condition prior to the damage, exceeds (B) the cost of restoring the Premises with Building Standard Installations, or (ii) furnish to Landlord security (the “Restoration Security”) in form and amount reasonably acceptable to Landlord to secure Tenant’s obligation to pay all costs in excess of restoring the Premises with Building Standard Installations. If Tenant shall fail to deliver to Landlord either (1) Tenant’s Restoration Payment or the Restoration Security, as applicable, or (2) a waiver by Tenant, in form satisfactory to Landlord, of all of Landlord’s obligations to repair or restore any of the Above Building Standard Installations, in either case within 30 days after Landlord’s demand therefor, Landlord shall have no obligation to restore any Above Building Standard Installations and Tenant’s abatement of Fixed Rent, Tenant’s Tax Payment and Tenant’s Operating Payment shall cease when the restoration of the Premises (other than any Above Building Standard Installations) is Substantially Complete.

     Section 11.4 Landlord’s Termination Right. Notwithstanding anything to the contrary contained in Section 11.3, (a) if the Premises are totally damaged or are rendered wholly

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untenantable, (b) if the Building shall be so damaged that, in Landlord’s reasonable opinion, substantial alteration, demolition, or reconstruction of the Building shall be required (whether or not the Premises are so damaged or rendered untenantable), (c) if any Mortgagee shall require that the insurance proceeds or any portion thereof be used to retire the Mortgage debt or any Lessor shall terminate the Superior Lease, as the case may be, or (d) if the damage is not fully covered, except for deductible amounts, by Landlord’s insurance policies, then in any of such events, Landlord may, not later than 60 days following the date of the damage, terminate this Lease by notice to Tenant. If this Lease is so terminated, (a) the Term shall expire upon the 30th day after such notice is given, (b) Tenant shall vacate the Premises and surrender the same to Landlord, (c) Tenant’s liability for Rent shall cease as of the date of the damage, and (d) any prepaid Rent for any period after the date of the damage shall be refunded by Landlord to Tenant.

     Section 11.5 Tenant’s Termination Right. If the Premises are damaged or if the Building shall be so damaged that Tenant is deprived of reasonable access to the Premises, and if Landlord does not elect to terminate the Lease pursuant to Section 11.4, Landlord shall, within 60 days following the date of the damage, cause a contractor or architect selected by Landlord to give notice (the “Restoration Notice”) to Tenant of the date by which such contractor or architect estimates the restoration of the Premises (excluding any Above Building Standard Installations) shall be Substantially Completed. If (i) such date, as set forth in the Restoration Notice, is more than 12 months from the date of such damage, then Tenant shall have the right to terminate this Lease by giving notice to Landlord not later than 30 days following delivery of the Restoration Notice to Tenant or (ii) Landlord fails to Substantially Complete the repair or restoration of the Premises within 120% of the number of days set forth in the Restoration Notice, then Tenant, upon not less than 30 days’ prior written notice, may elect to terminate this Lease (either such notice in (i) or (ii) a “Termination Notice”). If Tenant delivers a Termination Notice, this Lease shall be deemed to have terminated as of the date of the giving of the Termination Notice, in the manner set forth in the second sentence of Section 11.4; provided, however, than in the case of a Termination Notice delivered pursuant to clause (ii) above, such Termination Notice shall be null and void if Landlord Substantially Completes such repair or restoration within such 30-day period.

     Section 11.6 Final 18 Months. Notwithstanding anything to the contrary in this Article 11, if any damage during the final 18 months of the Term renders the Premises wholly untenantable, either Landlord or Tenant may terminate this Lease by notice to the other party within 30 days after the occurrence of such damage and this Lease shall expire on the 30th day after the date of such notice. For purposes of this Section 11.6, the Premises shall be deemed wholly untenantable if Tenant shall be precluded from using more than 50% of the Premises for the conduct of its business and Tenant’s inability to so use the Premises is reasonably expected to continue for more than 90 days.

     Section 11.7 Landlord’s Liability. Any Building or Complex employee to whom any property shall be entrusted by or on behalf of Tenant shall be deemed to be acting as Tenant’s agent with respect to such property and neither Landlord nor its agents shall be liable for any damage to such property, or for the loss of or damage to any property of Tenant by theft or otherwise. None of the Insured Parties shall be liable for any injury or damage to persons or property or interruption of Tenant’s business resulting from fire or other casualty, any damage caused by other tenants or persons in the Building or Complex, or by construction of any private, public or quasi-public work, or any latent defect in the Premises, in the Building or Complex (except that Landlord shall be required to repair the same to the extent provided in Article 6). No penalty shall accrue for delays which may arise by reason of adjustment of

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casually insurance on the part of Landlord or Tenant, or for any Unavoidable Delays arising from any repair or restoration of any portion of the Building or Complex, provided that Landlord shall use reasonable efforts to minimize interference with Tenant’s use and occupancy of the Premises during the performance of any such repair or restoration.

     Section 11.8 Landlord’s Insurance. Landlord shall maintain the following insurance (“Landlord’s Insurance”), the premiums of which will be included in Operating Expenses: (1) Commercial General Liability Insurance applicable to the Real Property, Building and Common Areas providing, on an occurrence basis, a minimum combined single limit of at least $5,000,000.00; (2) all Risk Property insurance on the Building at replacement cost value with a deductible not to exceed $100,000.00; (3) Worker’s Compensation insurance as required by the State of Illinois and in amounts as may be required by applicable statute; and (4) Employer’s Liability Coverage of at least $1,000,000.00 per occurrence.

ARTICLE 12

EMINENT DOMAIN

     Section 12.1 Taking.

          (a) Total Taking. If all or substantially all of the Real Property, the Building or the Premises shall be acquired or condemned for any public or quasi-public purpose (a “Taking”), this Lease shall terminate and the Term shall end as of the date of the vesting of title and Rent shall be prorated and adjusted as of such date.

          (b) Partial Taking. Upon a Taking of only a part of the Real Property, the Building or the Premises then, except as hereinafter provided in this Article 12, this Lease shall continue in full force and effect, provided that from and after the date of the vesting of title, Fixed Rent and Tenant’s Proportionate Share shall be modified to reflect the reduction of the Premises and/or the Building as a result of such Taking.

          (c) Landlord’s Termination Right. Whether or not the Premises are affected, Landlord may, by notice to Tenant, within 60 days following the date upon which Landlord receives notice of the Taking of all or a portion of the Real Property, the Building or the Premises, terminate this Lease. Landlord agrees that it will not discriminate against Tenant vis a vis other tenants in the Building with similar premises in electing to terminate this Lease.

          (d) Tenant’s Termination Right. If the part of the Real Property so Taken contains more than 20% of the total area of the Premises occupied by Tenant immediately prior to such Taking, or if, by reason of such Taking, Tenant no longer has reasonable means of access to the Premises or the remaining portion of the Premises is no longer reasonably suitable for the conduct of Tenant’s business therein, Tenant may terminate this Lease by notice to Landlord given within 60 days following the date upon which Tenant is given notice of such Taking. If Tenant so notifies Landlord, this Lease shall end and expire upon the 30th day following the giving of such notice. If a part of the Premises shall be so Taken and this Lease is not terminated in accordance with this Section 12.1 Landlord, without being required to spend more than it collects as an award, shall, subject to the provisions of any Mortgage or Superior Lease, restore that part of the Premises not so Taken to a self-contained rental unit substantially equivalent (with respect to character, quality, appearance and services) to that which existed immediately prior to such Taking, excluding Tenant’s Property and any Above Building Standard Installations.

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          (e) Apportionment of Rent. Upon any termination of this Lease pursuant to the provisions of this Article 12, Rent shall be apportioned as of, and shall be paid or refunded up to and including, the date of such termination.

     Section 12.2 Awards. Upon any Taking, Landlord shall receive the entire award for any such Taking, and Tenant shall have no claim against Landlord or the condemning authority for the value of any unexpired portion of the Term or Tenant’s Alterations; and Tenant hereby assigns to Landlord all of its right in and to such award. Nothing contained in this Article 12 shall be deemed to prevent Tenant from making a separate claim in any condemnation proceedings for the then value of any Tenant’s Property or Above Building Standard Installations included in such Taking and for any moving expenses, provided any such award is in addition to, and does not result in a reduction of, the award made to Landlord.

     Section 12.3 Temporary Taking. If all or any part of the Premises is Taken temporarily during the Term for any public or quasi-public use or purpose, Tenant shall give prompt notice to Landlord and the Term shall not be reduced or affected in any way and Tenant shall continue to pay all Rent payable by Tenant without reduction or abatement and to perform all of its other obligations under this Lease, except to the extent prevented from doing so by the condemning authority, and Tenant shall be entitled to receive any award or payment from the condemning authority for such use, which shall be received, held and applied by Tenant as a trust fund for payment of the Rent falling due.

ARTICLE 13

ASSIGNMENT AND SUBLETTING

     Section 13.1 Consent Requirements.

          (a) No Transfers. Except as expressly set forth herein, Tenant shall not assign, mortgage, pledge, encumber, or otherwise transfer this Lease, whether by operation of law or otherwise, and shall not sublet, or permit, or suffer the Premises or any part thereof to be used or occupied by others (whether for desk space, mailing privileges or otherwise), without Landlord’s prior consent in each instance. Any assignment, sublease, mortgage, pledge, encumbrance or transfer in contravention of the provisions of this Article 13 shall be void and shall constitute an Event of Default.

          (b) Collection of Rent. If, without Landlord’s consent, this Lease is assigned, or any part of the Premises is sublet or occupied by anyone other than Tenant or this Lease is encumbered (by operation of law or otherwise), Landlord may collect rent from the assignee, subtenant or occupant, and apply the net amount collected to the Rent herein reserved. No such collection shall be deemed a waiver of the provisions of this Article 13, an acceptance of the assignee, subtenant or occupant as tenant, or a release of Tenant from the performance of Tenant’s covenants hereunder, and in all cases Tenant shall remain fully liable for its obligations under this Lease.

          (c) Further Assignment/Subletting. Landlord’s consent to any assignment or subletting shall not relieve Tenant from the obligation to obtain Landlord’s consent to any further assignment or subletting. In no event shall any permitted subtenant assign or encumber its sublease or further sublet any portion of its sublet space, or otherwise suffer or permit any portion of the sublet space to be used or occupied by others without Landlord’s prior consent, which consent shall not be unreasonably withheld or delayed.

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     Section 13.2 Tenant’s Notice. If Tenant desires to assign this Lease or sublet all or any portion of the Premises (sometimes referred to herein as a “Transfer”), Tenant shall give notice thereof to Landlord, which shall be accompanied by (a) with respect to an assignment of this Lease, the date Tenant desires the assignment to be effective, and (b) with respect to a sublet of all or a part of the Premises, a description of the portion of the Premises to be sublet, the commencement date of such sublease and the rent per rentable square foot Tenant will ask for such portion of the Premises (“Tenant’s Asking Rate”). Such notice shall be deemed an irrevocable offer from Tenant to Landlord of the right, at Landlord’s option, (1) to terminate this Lease with respect to such space as Tenant proposes to sublease (the “Partial Space”), upon the terms and conditions hereinafter set forth, or (2) if the proposed transaction is an assignment of this Lease or a subletting of 50% or more of the rentable square footage of the Premises, to terminate this Lease with respect to the entire Premises. Such option may be exercised by notice from Landlord to Tenant within 30 days after delivery of Tenant’s notice. If Landlord exercises its option to terminate this Lease with respect to all or a portion of the Premises, (a) this Lease shall end and expire with respect to all or a portion of the Premises, as the case may be, on the date that such assignment or sublease was to commence, provided that such date is in no event earlier than 90 days after the date of the above notice unless Landlord agrees to such earlier date, (b) Rent shall be apportioned, paid or refunded as of such date, (c) Tenant, upon Landlord’s request, shall enter into an amendment of this Lease ratifying and confirming such total or partial termination, and setting forth any appropriate modifications to the terms and provisions hereof, and (d) Landlord shall be free to lease the Premises (or any part thereof) to Tenant’s prospective assignee or subtenant or to any other party. Tenant shall pay all costs to make the Partial Space a self-contained rental unit and to install any required Building corridors.

     Section 13.3 Intentionally Omitted.

     Section 13.4 Conditions to Assignment/Subletting.

          (a) If Landlord does not exercise either of Landlord’s options provided under Sections 13.2 and 13.3, and provided that no Event of Default then exists, Landlord’s consent to the proposed assignment or subletting shall not be unreasonably withheld or delayed. Such consent shall be granted or denied within 15 Business Days after delivery to Landlord of (i) a true and complete statement reasonably detailing the identity of the proposed assignee or subtenant (“Transferee”), the nature of its business and its proposed use of the Premises, (ii) current financial information with respect to the Transferee, including its most recent financial statements, (iii) all of the terms of the proposed Transfer and the consideration therefor, together with a copy of all existing executed and/or proposed documentation pertaining to the proposed Transfer, including all existing operative documents to be executed to evidence such Transfer or the agreements incidental or related to such Transfer, and (iv) any other information Landlord may reasonably request. The factors Landlord may consider in determining whether to grant or withhold consent shall include, but not be limited to, the following:

               (i) the Transferee is engaged in a business or activity, and the Premises will be used in a manner, which (1) is in keeping with the then standards of the Building and Complex, (2) is for the Permitted Uses, and (3) does not violate any restrictions set forth in this Lease, any Mortgage or Superior Lease or any negative covenant as to use of the Premises other than for the Permitted Use required by any other lease in the Building or Complex;

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               (ii) the Transferee is reputable with sufficient financial means to perform all of its obligations under this Lease or the sublease, as the case may be;

               (iii) the Transferee is not then an occupant of the Building or Complex;

               (iv) the Transferee is not a person or entity (or affiliate of a person or entity) with whom Landlord is then or has been within the prior 3 months negotiating a letter of intent in connection with the rental of comparable space in the Building or Complex;

               (v) whether the granting of such consent shall result in there being more than 2 subtenants in each floor of the Premises;

               (vi) the proposed Transfer is either a sublease or a non-collateral complete assignment;

               (vii) the proposed Transfer would not cause Landlord to be in violation of any Requirements or any other lease, Mortgage, Superior Lease or agreement to which Landlord is a party and would not give a tenant of the Real Property a right to cancel its lease; and

               (viii) the Transferee shall not be either a governmental agency or an instrumentality thereof, nor shall the Transferee be entitled, directly or indirectly, to diplomatic or sovereign immunity, regardless of whether the Transferee agrees to waive such diplomatic or sovereign immunity, and shall be subject to the service of process in, and the jurisdiction of the courts of, the County of Cook and State of Illinois.

          The parties hereby agree, without limitation as to other reasonable grounds for withholding consent, that it shall be reasonable under this Lease and under applicable law for Landlord to withhold consent to any proposed Transfer based upon failure of any of the foregoing criteria.

          (b) With respect to each and every subletting and/or assignment approved by Landlord under the provisions of this Lease:

               (i) the form of the proposed assignment or sublease shall be reasonably satisfactory to Landlord;

               (ii) no sublease shall be for a term ending later than one day prior to the Expiration Date;

               (iii) no Transferee shall take possession of any part of the Premises until an executed counterpart of such sublease or assignment has been delivered to Landlord and approved by Landlord as provided in Section 13.4(a);

               (iv) if an Event of Default occurs prior to the effective date of such assignment or subletting, then Landlord’s consent thereto, if previously granted, shall be immediately deemed revoked without further notice to Tenant, and if such assignment or subletting would have been permitted without Landlord’s consent pursuant to Section 13.8, such permission shall be void and without force and effect, and in either such case, any such assignment or subletting shall constitute a further Event of Default hereunder; and

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               (v) Tenant shall, upon demand, reimburse Landlord for all reasonable out-of-pocket expenses incurred by Landlord in connection with such assignment or sublease, including any investigations as to the acceptability of the Transferee and all legal costs reasonably incurred in connection with the granting of any requested consent; and

               (vi) each sublease shall be subject and subordinate to this Lease and to the matters to which this Lease is or shall be subordinate; and Tenant and each Transferee shall be deemed to have agreed that upon the occurrence and during the continuation of an Event of Default hereunder, Tenant has hereby assigned to Landlord, and Landlord may, at its option, accept such assignment of, all right, title and interest of Tenant as sublandlord under such sublease, together with all modifications, extensions and renewals thereof then in effect and such Transferee shall, at Landlord’s option, attorn to Landlord pursuant to the then executory provisions of such sublease, except that Landlord shall not be (A) liable for any previous act or omission of Tenant under such sublease, (B) subject to any counterclaim, offset or defense not expressly provided in such sublease or which theretofore accrued to such Transferee against Tenant, (C) bound by any previous modification of such sublease not consented to by Landlord or by any prepayment of more than one month’s rent, (D) bound to return such Transferee’s security deposit, if any, except to the extent Landlord shall receive actual possession of such deposit and such Transferee shall be entitled to the return of all or any portion of such deposit under the terms of its sublease, or (E) obligated to make any payment to or on behalf of such Transferee, or to perform any work in the sublet space or the Building, or in any way to prepare the subleased space for occupancy, beyond Landlord’s obligations under this Lease. The provisions of this Section 13.4{b)(v) shall be self-operative, and no further instrument shall be required to give effect to this provision, provided that the Transferee shall execute and deliver to Landlord any instruments Landlord may reasonably request to evidence and confirm such subordination and attornment

     Section 13.5 Binding on Tenant; Indemnification of Landlord. Notwithstanding any assignment or subletting or any acceptance of rent by Landlord from any Transferee, Tenant and any guarantor shall remain fully liable for the payment of all Rent due and for the performance of all the covenants, terms and conditions contained in this Lease on Tenant’s part to be observed and performed, and any default under any term, covenant or condition of this Lease by any Transferee or anyone claiming under or through any Transferee shall be deemed to be a default under this Lease by Tenant. Tenant shall indemnify, defend, protect and hold harmless Landlord from and against any and all Losses resulting from any claims that may be made against Landlord by the Transferee or anyone claiming under or through any Transferee or by any brokers or other persons or entities claiming a commission or similar compensation in connection with the proposed assignment or sublease, irrespective of whether Landlord shall give or decline to give its consent to any proposed assignment or sublease, or if Landlord shall exercise any of its options under this Article 13.

     Section 13.6 Tenant’s Failure to Complete. If Landlord consents to a proposed assignment or sublease and Tenant fails to execute and deliver to Landlord such assignment or sublease within 90 days after the giving of such consent, or the amount of space subject to any such sublease varies by more than 10% from that specified in the notice given by Tenant to Landlord pursuant to Section 13.2, or the net effective rent payable under such sublease is less than 95% of Tenant’s Asking Rate, or if there are any changes in the terms and conditions of the proposed assignment or sublease such that Landlord would initially have been entitled to refuse its consent to such Transfer under this Article 13, then Tenant shall again comply with all of the provisions and conditions of Sections 13.2 and 13.4 before assigning this Lease or subletting all or part of the Premises.

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     Section 13.7 Profits. If Tenant enters into any assignment or sublease permitted hereunder or consented to by Landlord, Tenant shall, within 60 days of Landlord’s consent to such assignment or sublease (or if such assignment or sublease is permitted hereunder without Landlord’s prior consent, within 60 days of the effective date of such assignment or sublease), deliver to Landlord a list of Tenant’s reasonable third-party brokerage fees, legal fees and architectural fees paid or to be paid in connection with such transaction and, in the case of any sublease, any actual costs incurred by Tenant in separately demising the sublet space (collectively, “Transaction Costs”), together with a list of all of Tenant’s Property to be transferred to such Transferee. The Transaction Costs shall be amortized, on a straight-line basis, over the term of any sublease. Tenant shall deliver to Landlord evidence of the payment of such Transaction Costs promptly after the same are paid. In consideration of such assignment or subletting, Tenant shall pay to Landlord:

          (a) In the case of an assignment, on the effective date of the assignment, 50% of all sums and other consideration paid to Tenant by the Transferee for or by reason of such assignment (including key money, bonus money and any sums paid for services rendered by Tenant to the Transferee in excess of fair market value for such services and sums paid for the sale or rental of Tenant’s Property, less the then fair market or rental value thereof, as reasonably determined by Landlord) after first deducting the Transaction Costs; or

          (b) In the case of a sublease, 50% of any consideration payable under the sublease to Tenant by the Transferee which exceeds on a per square foot basis the Fixed Rent, Tenant’s Tax Payment and Tenant’s Operating Payment accruing during the term of the sublease in respect of the sublet space (together with any sums paid for services rendered by Tenant to the Transferee in excess of fair market value for such services and sums paid for the sale or rental of Tenant’s Property, less the then fair market or rental value thereof, as reasonably determined by Landlord) after first deducting the monthly amortized amount of Transaction Costs. The sums payable under this clause shall be paid by Tenant to Landlord monthly as and when paid by the subtenant to Tenant.

     The amount payable under this Section 13.7 with respect to any particular Transfer is sometimes referred to herein as the “Transfer Premium.” Landlord or its authorized representatives shall have the right at all reasonable times to audit the books, records and papers of Tenant relating to any Transfer, and shall have the right to make copies thereof. If the Transfer Premium respecting any Transfer shall be found understated, such event shall, at Landlord’s option, be deemed to be an Event of Default (as such term is defined in Section 15.1 below) and Tenant shall, within thirty (30) days after demand, pay the deficiency, and if understated by more than two percent (2%), Tenant shall pay Landlord’s costs of such audit.

     Section 13.8 Transfers.

          (a) Related Entities. If Tenant is a legal entity, the transfer (by one or more transfers), directly or indirectly, by operation of law or otherwise, of a majority of the stock or other beneficial ownership interest in Tenant or of all or substantially all of the assets of Tenant (collectively, “Ownership Interests”) shall be deemed a voluntary assignment of this Lease; provided, however, that the provisions of this Article 13 shall not apply to the transfer of Ownership Interests in Tenant if and so long as Tenant is publicly traded on a nationally recognized stock exchange. For purposes of this Article the term “transfers” shall be deemed to include (x) the issuance of new Ownership Interests which results in a majority of the Ownership Interests in Tenant being held by a person or entity which does not hold a majority of the Ownership interests in Tenant on the Effective Date (y) the sale, mortgage, hypothecation or

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pledge of more than an aggregate of fifty percent (50%) of Tenant’s net assets, and (z) except as provided below, the sale or transfer of all or substantially all of the assets of Tenant in one or more transactions or the merger, consolidation or conversion of Tenant into or with another business entity. The provisions of Section 13.1 shall not apply to transactions with a business entity into or with which Tenant is merged, consolidated or converted or to which all or substantially all of Tenant’s assets are transferred so long as (i) such transfer was made for a legitimate independent business purpose and not for the purpose of transferring this Lease, (ii) the successor to Tenant has a tangible net worth computed in accordance with generally accepted accounting principles consistently applied (and excluding goodwill, organization costs and other intangible assets) that is sufficient to meet the obligations of Tenant under this Lease and is at least equal to the net worth of Tenant (1) immediately prior to such merger, consolidation, conversion or transfer, or (2) on the Effective Date, whichever is greater, (iii) proof satisfactory to Landlord of such net worth is delivered to Landlord at least 10 days prior to the effective date of any such transaction, (iv) any such transfer shall be subject and subordinate to all of the terms and provisions of this Lease, and the transferee shall assume, in a written document reasonably satisfactory to Landlord and delivered to Landlord upon or prior to the effective date of such transfer, all the obligations of Tenant under this Lease, (v) Tenant and any guarantor shall remain fully liable for all obligations to be performed by Tenant under this Lease, and (vi) such transfer does not cause Landlord to be in default under any existing lease at the Real Property. Tenant may also, upon prior notice to Landlord, permit any business entity which controls, is controlled by, or is under common control with the original Tenant (a “Related Entity”) to sublet all or part of the Premises or assume this Lease for any Permitted Uses, provided the Related Entity is in Landlord’s reasonable judgment of a character and engaged in a business which is in keeping with the standards for the Building and for so long as such entity remains a Related Entity. Such sublease shall not be deemed to vest in any such Related Entity any right or interest in this Lease nor shall such sublease or any assignment relieve, release, impair or discharge any of Tenant’s obligations hereunder. For the purposes hereof, “control” shall be deemed to mean ownership of not less than 50% of all of the Ownership Interests of such corporation or other business entity. Notwithstanding the foregoing, Tenant shall have no right to assign this Lease or sublease all or any portion of the Premises without Landlord’s consent pursuant to this Section 13.8 if Tenant is not the initial Tenant herein named or a person or entity who acquired Tenant’s interest in this Lease in a transaction approved by Landlord, or if an Event of Default by Tenant exists under this Lease.

          (b) Applicability. The limitations set forth in this Section 13.8 shall apply to Transferee(s) and guarantor(s) of this Lease, if any, and any transfer by any such entity in violation of this Section 13.8 shall be a transfer in violation of Section 13.1.

          (c) Modifications, Takeover Agreements. Any modification, amendment or extension of a sublease and/or any other agreement by which a landlord of a building other than the Building or its affiliate agrees to assume the obligations of Tenant under this Lease shall be deemed a sublease for the purposes of Section 13.1 hereof.

     Section 13.9 Assumption of Obligations. No assignment or transfer shall be effective unless and until the Transferee executes, acknowledges and delivers to Landlord an agreement in form and substance reasonably satisfactory to Landlord whereby the Transferee (a) assumes Tenant’s obligations under this Lease and (b) agrees that, notwithstanding such assignment or transfer, the provisions of Section 13.1 hereof shall be binding upon it in respect of all future assignments and transfers.

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     Section 13.10 Tenant’s Liability. The joint and several liability of Tenant and any successors-in-interest of Tenant and the due performance of Tenant’s obligations under this Lease shall not be discharged, released or impaired by any agreement or stipulation made by Landlord, or any grantee or assignee of Landlord, extending the time, or modifying any of the terms and provisions of this Lease, or by any waiver or failure of Landlord, or any grantee or assignee of Landlord, to enforce any of the terms and provisions of this Lease.

     Section 13.11 Listings in Building Directory. The listing of any name other than that of Tenant on the doors of the Premises, the Building directory or elsewhere shall not vest any right or interest in this Lease or in the Premises, nor be deemed to constitute Landlord’s consent to any assignment or transfer of this Lease or to any sublease of the Premises or to the use or occupancy thereof by others. Any such listing shall constitute a privilege revocable in Landlord’s reasonable discretion by notice to Tenant.

     Section 13.12 Lease Disaffirmance or Rejection. If at any time after an assignment by Tenant named herein, this Lease is not affirmed or is rejected in any bankruptcy proceeding or any similar proceeding, or upon a termination of this Lease due to any such proceeding, Tenant named herein, upon request of Landlord given after such disaffirmance, rejection or termination (and actual notice thereof to Landlord in the event of a disaffirmance or rejection or in the event of termination other than by act of Landlord), shall (a) pay to Landlord all Rent and other charges due and owing by the assignee to Landlord under this Lease to and including the date of such disaffirmance, rejection or termination, and (b) as “tenant,” enter into a new lease of the Premises with Landlord for a term commencing on the effective date of such disaffirmance, rejection or termination and ending on the Expiration Date, at the same Rent and upon the then executory terms, covenants and conditions contained in this Lease, except that (i) the rights of Tenant named herein under the new lease shall be subject to the possessory rights of the assignee under this Lease and the possessory rights of any persons or entities claiming through or under such assignee or by virtue of any statute or of any order of any court, (ii) such new lease shall require all defaults existing under this Lease to be cured by Tenant named herein with due diligence, and (iii) such new lease shall require Tenant named herein to pay all Rent which, had this Lease not been so disaffirmed, rejected or terminated, would have become due under the provisions of this Lease after the date of such disaffirmance, rejection or termination with respect to any period prior thereto. If Tenant named herein defaults in its obligations to enter into such new lease for a period of 10 days after Landlord’s request, then, in addition to all other rights and remedies by reason of default, either at law or in equity, Landlord shall have the same rights and remedies against Tenant named herein as if it had entered into such new lease and such new lease had thereafter been terminated as of the commencement date thereof by reason of Tenant’s default thereunder.

ARTICLE 14

ACCESS TO PREMISES

     Section 14.1 Landlord’s Access.

          (a) Landlord, Landlord’s agents and utility service providers servicing the Building or Complex, upon reasonable prior notice to Tenant, may erect, use and maintain concealed ducts, pipes and conduits in and through the Premises provided such use does not cause the usable area of the Premises to be reduced beyond a de minimis amount or materially detracts from the appearance of the Premises. Landlord shall reasonably coordinate such work with Tenant so as to minimize its interference with Tenant’s use of the Premises. Landlord shall

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promptly repair any damage to the Premises caused by any work performed pursuant to this Article 14.

          (b) Landlord, any Lessor or Mortgagee and any other party designated by Landlord and their respective agents shall have the right to enter the Premises at all reasonable times, upon reasonable notice (which notice may be oral) except in the case of emergency (in which event no notice shall be required), to examine the Premises, to show the Premises to prospective purchasers, Mortgagees, Lessors or tenants during the last six (6) months of the Term and their respective agents and representatives or others and to perform Work of Improvement to the Premises, the Building or Complex.

          All parts (except surfaces facing the interior of the Premises) of all walls, windows and doors bounding the Premises, all balconies, terraces and roofs adjacent to the Premises, all space in or adjacent to the Premises used for shafts, stacks, stairways, mail chutes, conduits and other mechanical facilities, Building System, Building or Complex facilities and Common Areas are not part of the Premises, and Landlord shall have the use thereof and access thereto through the Premises for the purposes of Building and Complex operations, maintenance, alterations and repairs.

     Section 14.2 Building Name. Landlord has the right at any time to change the name, number or designation by which the Building or Complex is commonly known.

     Section 14.3 Substitution of Other Premises. Landlord shall have the right to move Tenant to other space in the Building or Complex substantially comparable to the Premises (which space shall be on the 30^th floor or higher and located on the north side of the Building), and all terms hereof shall apply to the new space with equal force. In such event, Landlord (w) shall give Tenant prior notice, (x) shall provide Tenant, at Landlord’s expense, with tenant improvements substantially comparable to those in the Premises, (y) shall, at Landlord’s expense, move Tenant’s effects to the new space at such time and in such manner as to inconvenience Tenant as little as reasonably practicable (which, at Tenant’s sole election, may include moving on a weekend), and (z) shall reimburse Tenant for Tenant’s reasonable out-of-pocket expenses incurred in connection with such relocation. In connection with such relocation of the Premises, the parties shall execute an amendment to this Lease stating the relocation of the Premises. Tenant shall vacate and surrender the Premises on the relocation date in the condition required by Section 18.1 below, and any failure to do so shall be subject to Section 18.2.

     Section 14.4 Light and Air. If at any time any windows of the Premises are temporarily darkened or covered over by reason of any Work of Improvement, any of such windows are permanently darkened or covered over due to any Requirement or there is otherwise a diminution of light, air or view by another structure which may hereafter be erected (whether or not by Landlord), Landlord shall not be liable for any damages and Tenant shall not be entitled to any compensation or abatement of any Rent, nor shall the same release Tenant from its obligations hereunder or constitute an actual or constructive eviction.

ARTICLE 15

DEFAULT

     Section 15.1 Tenant’s Defaults. Each of the following events shall be an “Event of Default” hereunder:

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          (a) Tenant fails to pay when due any installment of Rent and such default shall continue for five (5) days after notice of such default is given to Tenant (which notice may be in the form of an Illinois Statutory 5-day notice utilized in forcible entry and detainer proceedings), except that if Landlord shall have given two such notices of default in the payment of any Rent in any 12-month period, Tenant shall not be entitled to any further notice of its delinquency in the payment of any Rent or an extended period in which to make payment until such time as 12 consecutive months shall have elapsed without Tenant having failed to make any such payment when due, and the occurrence of any default in the payment of any Rent within such 12-month period after the giving of 2 such notices shall constitute an Event of Default; or

          (b) Tenant fails to observe or perform any other term, covenant or condition of this Lease and such failure continues for more than 30 days (10 days with respect to a default under Article 3, Article 9 or Section 26.10) after notice by Landlord to Tenant of such default, or if such default (other than a default under Article 3, Article 9 or Section 26.10) is of a nature that it cannot be completely remedied within 30 days, failure by Tenant to commence to remedy such failure within said 30 days, and thereafter diligently prosecute to completion all steps necessary to remedy such default, provided in all events the same is completed within 90 days; or

          (c) if Landlord applies or retains any part of the security held by it hereunder, and Tenant fails to deposit with Landlord the amount so applied or retained by Landlord, or if Landlord draws on any Letter of Credit (as hereinafter defined), in part or in whole, and Tenant fails to provide Landlord with a replacement Letter of Credit, within 5 days after notice by Landlord to Tenant stating the amount applied, retained or drawn, as applicable; or

          (d) Tenant files a voluntary petition in bankruptcy or insolvency, or is adjudicated a bankrupt or insolvent, or files any petition or answer seeking any reorganization, liquidation, dissolution or similar relief under any present or future federal bankruptcy act or any other present or future applicable federal, state or other statute law, or makes an assignment for the benefit of creditors or seeks or consents to or acquiesces in the appointment of any trustee, receiver, liquidator or other similar official for Tenant or for all or any part of Tenant’s property; or

          (e) A court of competent jurisdiction shall enter an order, judgment or decree adjudicating Tenant bankrupt, or appointing a trustee, receiver or liquidator of Tenant, or of the whole or any substantial part of its property, without the consent of Tenant, or approving a petition filed against Tenant seeking reorganization or arrangement of Tenant under the bankruptcy laws of the United States, as now in effect or hereafter amended, or any state thereof, and such order, judgment or decree shall not be vacated or set aside or stayed within 60 days from the date of entry thereof.

     Upon the occurrence of any one or more of such Events of Default, Landlord may, at its sole option, give to Tenant notice of cancellation of this Lease (or of Tenant’s possession of the Premises), in which event this Lease and the Term (or Tenant’s possession of the Premises) shall terminate (whether or not the Term shall have commenced) with the same force and effect as if the date set forth in the notice was the Expiration Date stated herein; and Tenant shall then quit and surrender the Premises to Landlord, but Tenant shall remain liable for damages as provided in this Article 15. Any notice of cancellation of the Term (or Tenant’s possession of the Premises) may be given simultaneously with any notice of default given to Tenant.

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     Section 15.2 Landlord’s Remedies.

          (a) Possession/Relating. If this Lease and the Term, or Tenant’s right to possession of the Premises, terminates as provided in Section 15.1:

               (i) Surrender of Possession. Tenant shall quit and surrender the Premises to Landlord, and Landlord and its agents may immediately, or at any time after such termination, re-enter the Premises or any part thereof, without notice, either by summary proceedings, or by any other applicable action or proceeding, or by force (to the extent permitted by law) or otherwise in accordance with applicable legal proceedings (without being liable to indictment, prosecution or damages there for), and may repossess the Premises and dispossess Tenant and any other persons from the Premises and remove any and all of their property and effects from the Premises.

               (ii) Landlord’s Relating. Landlord, at Landlord’s option, may relet all or any part of the Premises from time to time, either in the name of Landlord or otherwise, to such tenant or tenants, for any term ending before, on or after the Expiration Date, at such rental and upon such other conditions (which may include concessions and free rent periods) as Landlord, in its sole discretion, may determine. Landlord shall have no obligation to accept any tenant offered by Tenant and shall not be liable for failure to relet or, in the event of any such relating, for failure to collect any rent due upon any such relating; and no such failure shall relieve Tenant of, or otherwise affect, any liability under this Lease. However, to the extent required by law, Landlord shall use reasonable efforts to mitigate its damages but shall not be required to divert prospective tenants from any other portions of the Building or Complex. Landlord, at Landlord’s option, may make such alterations, decorations and other physical changes in and to the Premises as Landlord, in its sole discretion, considers advisable or necessary in connection with such relating or proposed relating, without relieving Tenant of any liability under this Lease or otherwise affecting any such liability.

          (b) Tenant’s Waiver. Tenant, on its own behalf and on behalf of all persons claiming through or under Tenant, including all creditors, hereby waives all rights which Tenant and all such persons might otherwise have under any Requirement (i) to the service of any notice of intention to re-enter or to institute legal proceedings, (ii) to redeem, or to re-enter or repossess the Premises, or (iii) to restore the operation of this Lease, after (A) Tenant shall have been dispossessed by judgment or by warrant of any court or judge, (B) any re-entry by Landlord, or (C) any expiration or early termination of the term of this Lease, whether such dispossess, re-entry, expiration or termination shall be by operation of law or pursuant to the provisions of this Lease. The words “re-enter,” “re-entry” and “re-entered” as used in this Lease shall not be deemed to be restricted to their technical legal meanings.

          (c) Tenant’s Breach. Upon the breach or threatened breach by Tenant, or any persons claiming through or under Tenant, of any term, covenant or condition of this Lease, Landlord shall have the right to enjoin such breach and to invoke any other remedy allowed by law or in equity as if re-entry, summary proceedings and other special remedies were not provided in this Lease for such breach. The rights to invoke the remedies set forth above are cumulative and shall not preclude Landlord from invoking any other remedy allowed at law or in equity.

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     Section 15.3 Landlord’s Damages.

     (a) Amount of Damages. If this Lease and the Term, or Tenant’s right to possession of the Premises, terminates as provided in Section 15.1, then:

               (i) Tenant shall pay to Landlord all items of Rent payable under this Lease by Tenant to Landlord prior to the date of termination;

               (ii) Landlord may retain all monies, if any, paid by Tenant to Landlord, whether as prepaid Rent, a security deposit or otherwise, which monies, to the extent not otherwise applied to amounts due and owing to Landlord, shall be credited by Landlord against any damages payable by Tenant to Landlord;

               (iii) Tenant shall pay to Landlord, in monthly installments, on the days specified in this Lease for payment of installments of Fixed Rent, any Deficiency; it being understood that Landlord shall be entitled to recover the Deficiency from Tenant each month as the same shall arise, and no suit to collect the amount of the Deficiency for any month, shall prejudice Landlord’s right to collect the Deficiency for any subsequent month by a similar proceeding; and

               (iv) whether or not Landlord shall have collected any monthly Deficiency, Tenant shall pay to Landlord, on demand, in lieu of any further Deficiency and as liquidated and agreed final damages, a sum equal to the amount by which the Rent for the period which otherwise would have constituted the unexpired portion of the Term (assuming the Additional Rent during such period to be the same as was payable for the year immediately preceding such termination or re-entry, increased in each succeeding year by 4% (on a compounded basis)) exceeds the then fair and reasonable rental value of the Premises, for the same period (with both amounts being discounted to present value at a rate of interest equal to 2% below the then Base Rate) less the aggregate amount of Deficiencies theretofore collected by Landlord pursuant to the provisions of Section 15.3(a)(iii) for the same period. If, before presentation of proof of such liquidated damages to any court, commission or tribunal, the Premises, or any part thereof, shall have been relet by Landlord for the period which otherwise would have constituted the unexpired portion of the Term, or any part thereof, the amount of rent reserved upon such reletting shall be deemed prima facie, to be the fair and reasonable rental value for the part or the whole of the Premises so relet during the term of the reletting.

          (b) Reletting. If the Premises, or any part thereof, shall be relet together with other space in the Building, the rents collected or reserved under any such reletting and the expenses of any such reletting shall be equitably apportioned for the purposes of this Section 15.3. Tenant shall not be entitled to any rents collected or payable under any reletting, whether or not such rents exceeds the Fixed Rent reserved in this Lease. Nothing contained in Article 15 shall be deemed to limit or preclude the recovery by Landlord from Tenant of the maximum amount allowed to be obtained as damages by any Requirement, or of any sums or damages to which Landlord may be entitled in addition to the damages set forth in this Section 15.3.

     Section 15.4 Interest. If any payment of Rent is not paid within 5 Business Days of when due, interest shall accrue on such payment, from the date such payment became due until paid at the interest Rate. Tenant acknowledges that late payment by Tenant of Rent will cause Landlord to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult and impracticable to fix. Such costs include, without limitation, processing

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and accounting charges, and late charges that may be imposed on Landlord by the terms of any note secured by a Mortgage covering the Premises. Therefore, in addition to interest,, if any amount is not paid when due, a late charge equal to 5% of such amount shall be assessed; provided, however, that on 2 occasions during any calendar year of the Term, Landlord shall give Tenant notice of such late payment and Tenant shall have a period of 5 days thereafter in which to make such payment before any late charge is assessed. Such interest and late charges are separate and cumulative and are in addition to and shall not diminish or represent a substitute for any of Landlord’s rights or remedies under any other provision of this Lease.

     Section 15.5 Other Rights of Landlord. If Tenant fails to pay any Additional Rent when due, Landlord, in addition to any other right or remedy, shall have the same rights and remedies as in the case of a default by Tenant in the payment of Fixed Rent. If Tenant is in arrears in the payment of Rent, Tenant waives Tenant’s right, if any, to designate the items against which any payments made by Tenant are to be credited, and Landlord may apply any payments made by Tenant to any items Landlord sees fit, regardless of any request by Tenant. Landlord reserves the right, without lability to Tenant and without constituting any claim of constructive eviction, to suspend furnishing or rendering to Tenant any property, material, labor, utility or other service, whenever Landlord is obligated to furnish or render the same at the expense of Tenant, in the event that (but only for so long as) Tenant is in arrears in paying Landlord for such items for more than 5 days after notice from Landlord to Tenant demanding the payment of such arrears.

ARTICLE 16

LANDLORD’S RIGHT TO CURE; FEES AND EXPENSES

     If Tenant defaults in the performance of its obligations under this Lease, Landlord, without waiving such default, may perform such obligations at Tenant’s expense; (a) immediately, and without notice, in the case of emergency or if the default (i) materially interferes with the use by any other tenant of the Building or Complex, (ii) materially interferes with the efficient operation of the Building or Complex, (iii) results in a violation of any Requirement, or (iv) results or will result in a cancellation of any insurance policy maintained by Landlord, and (b) in any other case if such default continues after 10 days from the date Landlord gives notice of Landlord’s intention to perform the defaulted obligation. All costs and expenses incurred by Landlord in connection with any such performance by it and all costs and expenses, including reasonable counsel fees and disbursements, incurred by Landlord in any action or proceeding (including any unlawful detainer proceeding) brought by Landlord to enforce any obligation of Tenant under this Lease and/or right of Landlord in or to the Premises or as a result of any default by Tenant under this Lease, together with an amount equal to fifteen percent (15%) thereof for Landlord’s overhead, shall be paid by Tenant to Landlord on demand, with interest thereon at the Interest Rate from the date incurred by Landlord, Except as expressly provided to the contrary in this Lease, all costs and expenses which, pursuant to this Lease are incurred by Landlord and payable to Landlord by Tenant, and all charges, amounts and sums payable to Landlord by Tenant for any property, material, labor, utility or other services which, pursuant to this Lease, attributable directly to Tenant’s use and occupancy of the Premises or presence at the Building or Complex, or at the request and for the account of Tenant, are provided, furnished or rendered by Landlord, shall become due and payable by Tenant to Landlord within 10 Business Days after receipt of Landlord’s invoice for such amount.

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ARTICLE 17

NO REPRESENTATIONS BY LANDLORD; LANDLORD’S APPROVAL

     Section 17.1 No Representations. Except as expressly set forth herein, Landlord and Landlord’s agents have made no warranties, representations, statements or promises with respect to the Building, the Complex, the Real Property or the Premises and no rights, easements or licenses are acquired by Tenant by Implication or otherwise. Tenant is entering into this Lease after full investigation and is not relying upon any statement or representation made by Landlord not embodied in this Lease.

     Section 17.2 No Money Damages. Wherever in this Lease Landlord’s consent or approval is required, if Landlord refuses to grant such consent or approval, whether or not Landlord expressly agreed that such consent or approval would not be unreasonably withheld, Tenant shall not make or exercise, and Tenant hereby waives, any claim for money damages (including any claim by way of set-off, counterclaim or defense) and/or any right to terminate this Lease based upon Tenant’s claim or assertion that Landlord unreasonably withheld or delayed its consent or approval. Tenant’s sole remedy shall be an action or proceeding to enforce such provision, by specific performance, injunction or declaratory judgment. In no event shall Landlord be liable for, and Tenant, on behalf of itself and all other Tenant Parties, hereby waives any claim for, any indirect, consequential or punitive damages, including loss of profits or business opportunity, arising under or in connection with this Lease.

     Section 17.3 Reasonable Efforts. For purposes of this Lease, “reasonable efforts” by Landlord shall not include an obligation to employ contractors or labor at overtime or other premium pay rates or to incur any other overtime costs or additional expenses whatsoever.

ARTICLE 18

END OF TERM

     Section 18.1 Expiration. Upon the expiration or other termination of this Lease, Tenant shall quit and surrender the Premises to Landlord vacant, broom clean and in good order and condition, ordinary wear and tear and damage for which Tenant is not responsible under the terms of this Lease excepted, and Tenant shall remove all of Tenant’s Property and Specialty Alterations.

     Section 18.2 Holdover Rent. Landlord and Tenant recognize that Landlord’s damages resulting from Tenant’s failure to timely surrender possession of the Premises may be substantial, may exceed the amount of the Rent payable hereunder, and will be impossible to accurately measure. Accordingly, if possession of the Premises is not surrendered to Landlord on the Expiration Date or sooner termination of this Lease, Tenant shall be deemed to hold the Premises as a tenant at sufferance, subject to all the terms, covenants and conditions of this Lease except that, in addition to any other rights or remedies Landlord may have hereunder or at law, Tenant shall (a) pay to Landlord for each month (or any portion thereof) during which Tenant holds over in the Premises after the Expiration Date or sooner termination of this Lease, a sum equal to (i) with respect to the first 2 calendar months of such holdover, one and one half times the Real payable under this Lease for the last full calendar month of the Term, and (ii) with respect to any period after the initial 2 calendar months of holdover, two times the Rent payable under this Lease for the last full calendar month of the Term, (b) be liable to Landlord for (1) any payment or rent concession which Landlord may be required to make to any tenant

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obtained by Landlord for all or any part of the Premises (a “New Tenant”) in order to induce such New Tenant not to terminate its lease by reason of the holding-over by Tenant, and (2) the loss of the benefit of the bargain if any New Tenant shall terminate its lease by reason of the holding-over by Tenant, and (c) indemnify Landlord against all claims for damages by any New Tenant. No holding-over by Tenant, nor the payment to Landlord of the amounts specified above, shall operate to extend the Term hereof. Nothing herein contained shall be deemed to permit Tenant to retain possession of the Premises after the Expiration Date or sooner termination of this Lease, and no acceptance by Landlord of payments from Tenant after the Expiration Date or sooner termination of this Lease shall be deemed to be other than on account of the amount to be paid by Tenant in accordance with the provisions of this Section 18.2.

ARTICLE 19

QUIET ENJOYMENT

     Provided this Lease is in full force and effect and no Event of Default then exists, Tenant may peaceably and quietly enjoy the Premises without hindrance by Landlord or any person lawfully claiming through or under Landlord or claiming a right superior to Landlord’s, subject to the terms and conditions of this Lease and to all Superior Leases and Mortgages.

ARTICLE 20

NO SURRENDER; NO WAIVER

     Section 20.1 No Surrender or Release. No act or thing done by Landlord or Landlord’s agents or employees during the Term shall be deemed an acceptance of a surrender of the Premises, and no provision of this Lease shall be deemed to have been waived by Landlord, unless such waiver is in writing and is signed by Landlord.

     Section 20.2 No Waiver. The failure of either party to seek redress for violation of, or to insist upon the strict performance of, any covenant or condition of this Lease, or any of the Rules and Regulations, shall not be construed as a waiver or relinquishment for the future performance of such obligations of this Lease or the Rules and Regulations, or of the right to exercise such election but the same shall continue and remain in full force and effect with respect to any subsequent breach, act or omission. The receipt by Landlord of any Rent payable pursuant to this Lease or any other sums with knowledge of the breach of any covenant of this Lease shall not be deemed a waiver of such breach. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly Rent herein stipulated shall be deemed to be other than a payment on account of the earliest stipulated Rent, or as Landlord may elect to apply such payment, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as Rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord’s right to recover the balance of such Rent or pursue any other remedy provided in this Lease.

ARTICLE 21

WAIVER OF TRIAL BY JURY; COUNTERCLAIM

     Section 21.1 Jury Trial Waiver. LANDLORD AND TENANT HEREBY WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER

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PARTY AGAINST THE OTHER ON ANY MATTERS IN ANY WAY ARISING OUT OF OR CONNECTED WITH THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT, TENANT’S USE OR OCCUPANCY OF THE PREMISES, OR THE ENFORCEMENT OF ANY REMEDY UNDER ANY STATUTE, EMERGENCY OR OTHERWISE.

     Section 21.2 Waiver of Counterclaim. If Landlord commences any summary proceeding against Tenant, Tenant will not interpose any counterclaim of any nature or description in any such proceeding and will not seek to consolidate such proceeding with any other action which may have been or will be brought in any other court by Tenant.

ARTICLE 22

NOTICES

     Except as otherwise expressly provided in this Lease, all consents, notices, demands, requests, approvals or other communications given under this Lease shall be in writing and shall be deemed sufficiently given or rendered if delivered by hand (provided a signed receipt is obtained) or if sent by registered or certified mail (return receipt requested) or by a nationally recognized overnight delivery service making receipted deliveries, addressed to Landlord and Tenant as set forth in Article 1, and to any Mortgagee or Lessor who shall require copies of notices and whose address is provided to Tenant, or to such other address(es) as Landlord, Tenant or any Mortgagee or Lessor may designate as its new address(es) for such purpose by notice given to the other in accordance with the provisions of this Article 22. Any such approval, consent, notice, demand, request or other communication shall be deemed to have been given on the date of receipted delivery, refusal to accept delivery or when delivery is first attempted but cannot be made due to a change of address for which no notice is given or 3 Business Days after it shall have been mailed as provided in this Article 22, whichever is earlier.

ARTICLE 23

RULES AND REGULATIONS

     All Tenant Parties shall observe and comply with the Rules and Regulations, as supplemented or amended from time to time. Landlord reserves the right, from time to time, to adopt additional reasonable Rules and Regulations and to reasonably amend the Rules and Regulations then in effect. Nothing contained in this Lease shall impose upon Landlord any obligation to enforce the Rules and Regulations or terms, covenants or conditions in any other lease against any other Building or Complex tenant, and Landlord shall not be liable to Tenant for violation of the same by any other tenant, its employees, agents, visitors or licensees. Landlord agrees not to enforce the Rules and Regulations more stringently against Tenant than against other tenants of the Building or Complex in general. To the extent Tenant is permitted access to the adjoining property in the Complex, the Rules and Regulations shall apply thereto.

ARTICLE 24

BROKER

     Landlord has retained Landlord’s Agent as leasing agent in connection with this Lease and Landlord will be solely responsible for any fee that may be payable to Landlord’s Agent. Landlord agrees to pay a commission to Tenant’s Broker pursuant to a separate agreement. Each of Landlord and Tenant represents and warrants to the other that neither it nor its agents

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have dealt with any broker in connection with this Lease other than Landlord’s Agent and Tenant’s Broker. Each of Landlord and Tenant shall indemnify, defend, protect and hold the other party harmless from and against any and all Losses which the indemnified party may incur by reason of any claim of or liability to any broker, finder or like agent (other than Landlord’s Agent and Tenant’s Broker) arising out of any dealings claimed to have occurred between the indemnifying party and the claimant in connection with this Lease, and/or the above representation being false.

ARTICLE 25

INDEMNITY

     Section 25.1 Tenant’s Indemnity. Tenant shall not do or permit to be done any act or thing upon the Premises, the Building or Complex which may subject Landlord to any liability or responsibility for injury, damages to persons or property or to any liability by reason of any violation of any Requirement, and shall exercise such control over the Premises as to fully protect Landlord against any such liability. Except to the extent of any such injury or damage resulting from the negligence or willful misconduct of Landlord or Landlord’s agents or employees, Tenant shall indemnify, defend, protect and hold harmless each of the Indemnitees from and against any and all Losses, resulting from any claims (i) against the Indemnitees arising from any act, omission or negligence of all Tenant Parties, (ii) against the Indemnitees arising from any accident, injury or damage to any person or to the property of any person and occurring in or about the Premises, and (iii) against the Indemnitees resulting from any breach, violation or nonperformance of any covenant, condition or agreement of this Lease on the part of Tenant to be fulfilled, kept, observed or performed.

     Section 25.2 Landlord’s Indemnity. Landlord shall indemnify, defend, protect and hold harmless Tenant and the Tenant Parties from and against all Losses incurred by Tenant arising from any accident, injury or damage to any person or the property of any person in or about the Common Areas (specifically excluding the Premises) to the extent attributable to the negligence or willful misconduct of Landlord or its employees or agents or resulting from any breach, violation or non-performance of any covenant, condition or agreement of this Lease on the part of Landlord to be fulfilled, kept, observed or performed.

     Section 25.3 Defense and Settlement. If any claim, action or proceeding is made or brought against any Indemnitee, then upon demand by an Indemnitee, Tenant, at its sole cost and expense, shall resist or defend such claim, action or proceeding In the Indemnitee’s name (if necessary), by attorneys approved by the Indemnitee, which approval shall not be unreasonably withheld (attorneys for Tenant’s insurer shall be deemed approved for purposes of this Section 25.3). Notwithstanding the foregoing, an Indemnitee may retain its own attorneys to participate or assist in defending any claim, action or proceeding involving potential liability in excess of the amount available under Tenant’s liability insurance carried under Section 11.1 for such claim and Tenant shall pay the reasonable fees and disbursements of such attorneys. If Tenant fails to diligently defend or If there is a legal conflict or other conflict of interest, then Landlord may retain separate counsel at Tenant’s reasonable expense. Notwithstanding anything herein contained to the contrary, Tenant may direct the Indemnitee to settle any claim, suit or other proceeding provided that (a) such settlement shall involve no obligation on the part of the Indemnitee other than the payment of money, (b) any payments to be made pursuant to such settlement shall be paid in full exclusively by Tenant at the time such settlement is reached, (c) such settlement shall not require the Indemnitee to admit any liability, and (d) the

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Indemnitee shall have received an unconditional release from the other parties to such claim, suit or other proceeding.

     Section 25.4 Defense and Settlement. If any claim, action or proceeding is made or brought against Tenant or the Tenant Parties (a “Tenant Indemnitee”), then upon demand by such Tenant indemnitee, Landlord, at its sole cost and expense, shall resist or defend such claim, action or proceeding in the Tenant indemnitee’s name (if necessary), by attorneys approved by the Tenant indemnitee, which approval shall not be unreasonably withheld (attorneys for Landlord’s insurer shall be deemed approved for purposes of this Section 25.3). Notwithstanding the foregoing, a Tenant Indemnitee may retain its own attorneys to participate or assist in defending any claim, action or proceeding involving potential liability in excess of the amount available under Landlord’s liability insurance carried under Section 11.1 for such claim and Landlord shall pay the reasonable fees and disbursements of such attorneys. If Landlord fails to diligently defend or if there is a legal conflict or other conflict of interest, then Tenant may retain separate counsel at Landlord’s reasonable expense. Notwithstanding anything herein contained to the contrary, Landlord may direct the Tenant Indemnitee to settle any claim, suit or other proceeding provided that (a) such settlement shall involve no obligation on the part of the Tenant Indemnitee other than the payment of money, (b) any payments to be made pursuant to such settlement shall be paid In full exclusively by Landlord at the time such settlement is reached, (c) such settlement shall not require the Tenant Indemnitee to admit any liability, and (d) the Tenant Indemnitee shall have received an unconditional release from the other parties to such claim, suit or other proceeding.

ARTICLE 26

MISCELLANEOUS

     Section 26.1 Delivery. This Lease shall not be binding upon Landlord or Tenant unless and until Landlord shall have executed and delivered a fully executed copy of this Lease to Tenant.

     Section 26.2 Transfer of Real Property. Landlord’s obligations under this Lease shall not be binding upon the Landlord named herein after the sale, conveyance, assignment or transfer (collectively, a “Landlord Transfer”) by such Landlord (or upon any subsequent landlord after the Landlord Transfer by such subsequent landlord) of its interest in the Building, Complex or the Real Property, as the case may be, and in the event of any such Landlord Transfer, Landlord (and any such subsequent Landlord) shall be entirely freed and relieved of all covenants and obligations of Landlord hereunder arising from and after the date of the Landlord Transfer, and the transferee of Landlord’s interest (or that of such subsequent Landlord) in the Building, Complex or the Real Property, as the case may be, shall be deemed to have assumed all obligations under this Lease arising from and after the date of the Landlord Transfer.

     Section 26.3 Limitation on Liability. The liability of Landlord for Landlord’s obligations under this Lease shall be limited to Landlord’s interest in the Real Property and Tenant shall not look to any other properly or assets of Landlord or the property or assets of any direct or indirect partner, member, manager, shareholder, director, officer, principal, employee or agent of Landlord (collectively, the “Parties”) in seeking either to enforce Landlord’s obligations under this Lease or to satisfy a judgment for Landlord’s failure to perform such

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obligations; and none of the Parties shall be personally liable for the performance of Landlord’s obligations under this Lease.

     Section 26.4 Rent. All amounts payable by Tenant to or on behalf of Landlord under this Lease, whether or not expressly denominated Fixed Rent, Tenant’s Tax Payment, Tenant’s Operating Payment, Additional Rent or Rent, shall constitute rent for the purposes of Section 502(b)(6) of the United States Bankruptcy Code.

     Section 26.5 Entire Document. This Lease (including any Schedules and Exhibits referred to herein and all supplementary agreements provided for herein) contains the entire agreement between the parties and all prior negotiations and agreements are merged into this Lease. All of the Schedules and Exhibits attached hereto are incorporated in and made a part of this Lease, provided that in the event of any Inconsistency between the terms and provisions of this Lease and the terms and provisions of the Schedules and Exhibits hereto, the terms and provisions of this Lease shall control.

     Section 26.6 Governing Law. This Lease shall be governed in all respects by the laws of the State of Illinois.

     Section 26.7 Unenforceability. If any provision of this Lease, or its application to any person or entity or circumstance, shall ever be held to be invalid or unenforceable, then in each such event the remainder of this Lease or the application of such provision to any other person or entity or any other circumstance (other than those as to which it shall be invalid or unenforceable) shall not be thereby affected, and each provision hereof shall remain valid and enforceable to the fullest extent permitted by law.

     Section 26.8 Lease Disputes.

          (a) Tenant agrees that all disputes arising, directly or indirectly, out of or relating to this Lease, and all actions to enforce this Lease, shall be dealt with and adjudicated in the state courts of the State of Illinois or the United States District Court for the Northern District of Illinois and for that purpose hereby expressly and irrevocably submits itself to the jurisdiction of such courts. Tenant agrees that so far as is permitted under applicable law, this consent to personal jurisdiction shall be self-operative and no further instrument or action, other than service of process in one of the manners specified in this Lease, or as otherwise permitted by law, shall be necessary in order to confer jurisdiction upon it in any such court.

          (b) To the extent that Tenant has or hereafter may acquire any immunity from jurisdiction of any court or from any legal process (whether through service or notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise) with respect to itself or its property, Tenant irrevocably waives such immunity in respect of its obligations under this Lease.

     Section 26.9 Landlord’s Agent. Unless Landlord delivers notice to Tenant to the contrary, Landlord’s Agent is authorized to act as Landlord’s agent in connection with the performance of this Lease, and Tenant shall be entitled to rely upon correspondence received from Landlord’s Agent. Tenant acknowledges that Landlord’s Agent is acting solely as agent for Landlord in connection with the foregoing; and neither Landlord’s Agent nor any of its direct or indirect partners, members, managers, officers, shareholders, directors, employees, principals, agents or representatives shall have any liability to Tenant in connection with the performance

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of this Lease, and Tenant waives any and all claims against any and all of such parties arising out of, or in any way connected with, this Lease, the Building, the Complex or the Real Property.

     Section 26.10 Estoppel. Within 20 days following request from Landlord, any Mortgagee or any Lessor, Tenant shall deliver to Landlord a statement executed and acknowledged by Tenant, in form reasonably satisfactory to Landlord, (a) stating the Commencement Date and the Expiration Date, and that this Lease is then in full force and effect and has not been modified (or if modified, setting forth all modifications), (b) setting forth the date to which the Fixed Rent and any Additional Rent have been paid, together with the amount of monthly Fixed Rent and Additional Rent then payable, (c) stating whether or not, to the best of Tenant’s knowledge, Landlord is in default under this Lease, and, if Landlord is in default, setting forth the specific nature of all such defaults, (d) stating the amount of the Letter of Credit, if any, under this Lease, (e) stating whether there are any subleases or assignments affecting the Premises, (f) stating the address of Tenant to which all notices and communications under the Lease shall be sent, and (g) responding to any other factual matters reasonably requested by Landlord, such Mortgagee or such Lessor. Tenant acknowledges that any statement delivered pursuant to this Section 26,10 may be relied upon by any purchaser or owner of the Real Property, the Building, the Complex, or all or any portion of Landlord’s interest in the Real Property, the Building, the Complex, or any Superior Lease, or by any Mortgagee, or assignee thereof or by any Lessor, or assignee thereof.

     Section 26.11 Certain Interpretational Rules. For purposes of this Lease, whenever the words “include”, “includes”, or “including” are used, they shall be deemed to be followed by the words “without limitation” and, whenever the circumstances or the context requires, the singular shall be construed as the plural, the masculine shall be construed as the feminine and/or the neuter and vice versa. This Lease shall be Interpreted and enforced without the aid of any canon, custom or rule of law requiring or suggesting construction against the party drafting or causing the drafting of the provision in question. The captions in this Lease are inserted only as a matter of convenience and for reference and in no way define, limit or describe the scope of this Lease or the intent of any provision hereof.

     Section 26.12 Parties Bound. The terms, covenants, conditions and agreements contained in this Lease shall bind and inure to the benefit of Landlord and Tenant and, except as otherwise provided in this Lease, to their respective legal representatives, successors, and assigns.

     Section 26.13 No Recordation of Lease. This Lease shall not be recorded by either Landlord or Tenant.

     Section 26.14 Counterparts. This Lease may be executed in 2 or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one instrument.

     Section 26.15 Survival. All obligations and liabilities of Landlord or Tenant to the other which accrued before the expiration or other termination of this Lease, and all such obligations and liabilities which by their nature or under the circumstances can only be, or by the provisions of this Lease may be, performed after such expiration or other termination, shall survive the expiration or other termination of this Lease. Without limiting the generality of the foregoing, the rights and obligations of the parties with respect to any indemnity under this Lease, and with respect to any Rent and any other amounts payable under this Lease, shall survive the expiration or other termination of this Lease.

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     Section 26.16 Inability to Perform. Landlord and Tenant shall use reasonable efforts to promptly notify each other of any Unavoidable Delay which prevents such party from fulfilling any of its obligations under this Lease. Notwithstanding the foregoing, in no event shall an Unavoidable Delay affect, impair or excuse Tenant’s obligation to (i) timely pay all Rent, (ii) to timely deliver notice of exercise of its renewal right, or (iii) to maintain all insurance required to be maintained by Tenant under this Lease.

     Section 26.17 Financial Statements. Tenant shall from time to time, within ten (10) Business Days after request by Landlord in connection with a sale or refinancing of the Building, deliver to Landlord financial statements (including balance sheets and income/expense statements) for Tenant’s then most recent full and partial fiscal years immediately preceding such request, certified by an independent certified public accountant or Tenant’s chief financial officer and in form reasonably satisfactory to Landlord.

     Section 26.18 Tax Status of Beneficial Owner. Tenant recognizes and acknowledges that Landlord and/or certain beneficial owners of Landlord may from time to time qualify as real estate investment trusts pursuant to Sections 856 et seq. of the Internal Revenue Code of 1986 as amended (the “Code”) and that avoiding (a) the loss of such status, (b) the receipt of any income derived under any provision of this Lease that does not constitute “rents from real property” in the case of real estate investment trusts), and (c) the imposition of income, penalty or similar taxes (each an “Adverse Event”) is of material concern to Landlord and such beneficial owners. In the event that this Lease or any document contemplated hereby could, in the opinion of counsel to Landlord, result in or cause an Adverse Event, Tenant agrees to cooperate with Landlord in negotiating an amendment or modification thereof and shall at the request of Landlord execute and deliver such documents reasonably required to effect such amendment or modification. Any amendment or modification pursuant to this Section 26.18 shall be structured so that the net economic results to Landlord and Tenant shall be identical to those set forth in this Lease without regard to such amendment or modification. Without limiting any of Landlord’s other rights under this Section 26.18, Landlord may waive the receipt of any amount payable to Landlord hereunder and such waiver shall constitute an amendment or modification of this Lease with respect to such payment. Tenant expressly covenants and agrees not to enter into any sublease or assignment which provides for rental or other payment for such use, occupancy, or utilization based in whole or in part on the net income or profits derived by any person from the property leased, used, occupied, or utilized (other than an amount based on a fixed percentage or percentages of receipts or sales), and that any such purported sublease or assignment shall be absolutely void and ineffective as a conveyance of any right or interest in the possession, use, occupancy, or utilization of any part of the Premises.

ARTICLE 27

LETTER OF CREDIT

     Section 27.1 Form of Letter of Credit; Letter of Credit Amount. Concurrently with Tenant’s execution of this Lease, Tenant shall deliver to Landlord, as protection for the full and faithful performance by Tenant of all of its obligations under this Lease and for all losses and damages Landlord may suffer as a result of any breach or default by Tenant under this Lease, an irrevocable and unconditional negotiable standby letter of credit (the “Letter of Credit”), in the form attached hereto as Exhibit G and containing the terms required herein, payable in the City of Chicago, Illinois, running in favor of Landlord and issued by a solvent, nationally recognized bank with a long term rating of BBB or higher, under the supervision of the Office of Banks and Real Estate of the State of Illinois, or a national banking association, in the amount

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of Two Hundred Ninety Three Thousand Two Hundred Fifty Seven and 00/100 Dollars ($293,257.00) (the “Letter of Credit Amount”). The Letter of Credit shall (i) be “callable” at sight, irrevocable and unconditional, (ii) be maintained in effect, whether through renewal or extension, for the period from the Commencement Date and continuing until the date (the “LC Expiration Date”) that is one hundred twenty (120) days after the expiration of the Term (as the same may be extended), and Tenant shall deliver a new Letter of Credit or certificate of renewal or extension to Landlord at least ninety (90) days prior to the expiration of the Letter of Credit then held by Landlord, without any action whatsoever on the part of Landlord, (iii) be fully assignable by Landlord, its successors and assigns, (iv) permit partial draws and multiple presentations and drawings, and (v) be otherwise subject to the Uniform Customs and Practices for Documentary Credits (1993 Revision) International Chamber of Commerce Publication #500. If Tenant exercises its option to extend the Term pursuant to Article 28 of this Lease then, not later than ninety (90) days prior to the commencement of the Renewal Term, Tenant shall deliver to Landlord a new Letter of Credit or certificate of renewal or extension evidencing the LC Expiration Date as one hundred twenty (120) days after the expiration of the Renewal Term. The form and terms of the Letter of Credit and the bank issuing the same (the “Bank”) shall be acceptable to Landlord, in Landlord’s reasonable discretion. Landlord, or its then managing agent, shall have the right to draw down an amount up to the face amount of the Letter of Credit if any of the following shall have occurred or be applicable: (1) such amount is due to Landlord under the terms and conditions of this Lease, or (2) Tenant has filed a voluntary petition under the U.S. Bankruptcy Code or any state bankruptcy code (collectively, “Bankruptcy Code”), or (3) an involuntary petition has been filed against Tenant under the Bankruptcy Code, or (4) the Bank has notified Landlord that the Letter of Credit will not be renewed or extended through the LC Expiration Date. The Letter of Credit will be honored by the Bank regardless of whether Tenant disputes Landlord’s right to draw upon the Letter of Credit.

     Section 27.2 Transfer of Letter of Credit by Landlord. The Letter of Credit shall also provide that Landlord, its successors and assigns, may, at any time and without notice to Tenant and without first obtaining Tenant’s consent thereto, transfer (one or more times) all or any portion of its interest in and to the Letter of Credit to another party, person or entity, regardless of whether or not such transfer is separate from or as a part of the assignment by Landlord of its rights and interests in and to this Lease, In the event of a transfer of Landlord’s interest in the Building, Landlord shall transfer the Letter of Credit, in whole or in part, to the transferee and thereupon Landlord shall, without any further agreement between the parties, be released by Tenant from all liability therefor, and it is agreed that the provisions hereof shall apply to every transfer or assignment of the whole or any portion of said Letter of Credit to a new landlord. In connection with any such transfer of the Letter of Credit by Landlord, Tenant shall, at Tenant’s sole cost and expense, execute and submit to the Bank such applications, documents and instruments as may be necessary to effectuate such transfer, and Tenant shall be responsible for paying the Bank’s transfer and processing fees in connection therewith.

     Section 27.3 Maintenance of Letter of Credit by Tenant. If, as a result of any drawing by Landlord on the Letter of Credit, the amount of the Letter of Credit shall be less than the Letter of Credit Amount, Tenant shall, within five (5) Business Days thereafter, provide Landlord with additional letter(s) of credit in an amount equal to the deficiency, and any such additional letter(s) of credit shall comply with all of the provisions of this Article 27, and if Tenant fails to comply with the foregoing, notwithstanding anything to the contrary contained in Section 15.1 of this Lease, the same shall constitute an Event of Default by Tenant. Tenant further covenants and warrants that it will neither assign nor encumber the Letter of Credit or any part thereof and that neither Landlord nor its successors or assigns will be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance. Without

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limiting the generality of the foregoing, if the Letter of Credit expires earlier than the LC Expiration Date, Landlord will accept a renewal thereof (such renewal letter of credit to be in effect and delivered to Landlord, as applicable, not later than ninety (90) days prior to the expiration of the Letter of Credit), which shall be irrevocable and automatically renewable as above provided through the LC Expiration Date upon the same terms as the expiring Letter of Credit or such other terms as may be acceptable to Landlord in its sole discretion. However, if the Letter of Credit is not timely renewed, or if Tenant fails to maintain the Letter of Credit in the amount and in accordance with the terms set forth in this Article 27, Landlord shall have the right to present the Letter of Credit to the Bank in accordance with the terms of this Article 27, and the proceeds of the Letter of Credit may be applied by Landlord against any Rent payable by Tenant under this Lease that is not paid when due and/or to pay for all losses and damages that Landlord has suffered or that Landlord reasonably estimates that it will suffer as a result of any breach or default by Tenant under this Lease. Any unused proceeds shall constitute the property of Landlord and need not be segregated from Landlord’s other assets. Landlord agrees to pay to Tenant within thirty (30) days after the LC Expiration Date the amount of any proceeds of the Letter of Credit received by Landlord and not applied against any Rent payable by Tenant under this Lease that was not paid when due or used to pay for any losses and/or damages suffered by Landlord (or reasonably estimated by Landlord that it will suffer) as a result of any breach or default by Tenant under this Lease; provided, however, that if prior to the LC Expiration Date a voluntary petition is filed by Tenant, or an involuntary petition is filed against Tenant by any of Tenant’s creditors, under the Bankruptcy Code, then Landlord shall not be obligated to make such payment in the amount of the unused Letter of Credit proceeds until either all preference issues relating to payments under this Lease have been resolved in such bankruptcy or reorganization case or such bankruptcy or reorganization case has been dismissed.

     Section 27.4 Landlord’s Right to Draw Upon Letter of Credit. Tenant hereby acknowledges and agrees that Landlord is entering into this Lease in material reliance upon the ability of Landlord to draw upon the Letter of Credit upon the occurrence of any breach or default on the part of Tenant under this Lease. If an Event of Default shall occur, Landlord may, but without obligation to do so, and without notice to Tenant, draw upon the Letter of Credit, in part or in whole, to cure any breach or default of Tenant and/or to compensate Landlord for any and all damages of any kind or nature sustained or which Landlord reasonably estimates that it will sustain resulting from Tenant’s breach or default. The use, application or retention of the Letter of Credit, or any portion thereof, by Landlord shall not prevent Landlord from exercising any other right or remedy provided by this Lease or by any applicable law, it being intended that Landlord shall not first be required to proceed against the Letter of Credit, and shall not operate as a limitation on any recovery to which Landlord may otherwise be entitled. Tenant agrees not to interfere in any way with payment to Landlord of the proceeds of the Letter of Credit, either prior to or following a “draw” by Landlord of any portion of the Letter of Credit, regardless of whether any dispute exists between Tenant and Landlord as to Landlord’s right to draw upon the Letter of Credit. No condition or term of this Lease shall be deemed to render the Letter of Credit conditional to justify the issuer of the Letter of Credit in failing to honor a drawing upon such Letter of Credit in a timely manner. Tenant agrees and acknowledges that (a) the Letter of Credit constitutes a separate and independent contract between Landlord and the Bank, (b) Tenant is not a third party beneficiary of such contract, (c) Tenant has no property interest whatsoever in the Letter of Credit or the proceeds thereof, and (d) in the event Tenant becomes a debtor under any chapter of the Bankruptcy Code, neither Tenant, any trustee, nor Tenant’s bankruptcy estate shall have any right to restrict or limit Landlord’s claim and/or rights to the Letter of Credit and/or the proceeds thereof by application of Section 502(b)(6) of the U.S. Bankruptcy Code or otherwise.

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Section 27.5 Potential Reduction of Letter of Credit.

          (a) Definitions. For purposes of this Section 27.5, the following terms shall have the meanings set forth below:

               (i) “Reduction Date” means August 1, 2007 and each August 1^st thereafter during the Term, including but not after August 1, 2015.

               (ii) “Reduced Amount” means an amount equal to the amount shown on the chart below for such Reduction Date:

Reduction Date	Reduced Amount
August 1, 2007	$	234,606.00
August 1, 2008	$	187,685.00
August 1, 2009	$	150,148.00
August 1, 2010	$	120,118.00
August 1, 2011	$	96,095.00
August 1, 2012	$	76,876.00
August 1, 2013	$	61,501.00
August 1, 2014	$	49,200.00
August 1, 2015	$	39,360.00

          (b) Reduction Procedure.

               (i) Following each Reduction Date, and provided that (A) no Event of Default or default that, with the giving of notice and/or the passage of time, shall constitute an Event of Default, then exists and (B) no Event of Default described in Section 15.1(a) hereof has occurred on two or more occasions during the portion of the Term preceding such Reduction Date, Tenant shall be entitled to reduce the Letter of Credit to the Reduced Amount corresponding to such Reduction Date.

               (ii) Promptly following any such Reduction Date, Tenant may provide written notice to Landlord of any such permitted reduction in the amount of the Letter of Credit, which notice shall additionally certify that Tenant is in compliance with all requirements of this Article 27, and from and after Landlord’s receipt of such notice and confirmation of Tenant’s compliance with such requirements, Tenant shall be authorized to deliver a substitute or amended Letter of Credit to Landlord satisfying the requirements set forth in Section 27.1 above and in the Reduced Amount as set forth in this Section, and Landlord shall exchange the prior Letter of Credit for the substitute Letter of Credit in cooperation with the Issuing Bank.

               (iii) Notwithstanding anything to the contrary herein, if the Letter of Credit is reduced pursuant to this Section to $39,360.00, Tenant shall not be entitled to any further reduction of the Letter of Credit for the remainder of the Term of this Lease, including any renewal or extension thereof.

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ARTICLE 28

RENEWAL OPTION

     Section 28.1 Renewal Option. Tenant shall have the right to renew the Term for all of the Premises for one (1) renewal term of five (5) years (the “Renewal Term”) which shall commence on the day following the expiration of the initial Term and end on the fifth (5^th) anniversary of the Expiration Date, unless such Renewal Term shall sooner terminate pursuant to any of the terms of this Lease or otherwise. The Renewal Term shall commence only if (a) Tenant shall have notified Landlord in writing of Tenant’s exercise of such renewal right not more than fifteen (15) months nor less than twelve (12) months prior to the Expiration Date, (b) at the time of the exercise of such right and immediately prior to the Expiration Date, no Event of Default shall have occurred and be continuing hereunder, (c) the Tenant named herein (i.e., KR Callahan & Company, LLC) shall not have assigned the Lease and shall be in occupancy of one hundred percent (100%) of the rentable area of the Premises at the time such notice is given, and (d) there shall not have occurred any material adverse change in the financial condition of Tenant from the condition described in the financial statements submitted by Tenant to Landlord in connection with this Lease, Time is of the essence with respect to the giving of the notice of Tenant’s exercise of the renewal option. The Renewal Term shall be upon all of the agreements, terms, covenants and conditions hereof binding upon Tenant, except that the Fixed Rent shall be determined as provided in Section 28.2 and Tenant shall have no further right to renew the Term following the expiration of the Renewal Term. Upon the commencement of the Renewal Term, (A) the Renewal Term shall be added to and become part of the Term (but shall not be considered part of the initial Term), (B) any reference to “this Lease,” to the “Term,” and “term of this Lease” or any similar expression shall be deemed to include such Renewal Term, and (C) the expiration of such Renewal Term shall become the Expiration Date.

     Section 28.2 Renewal Term Rent. If the Term shall be renewed as provided in this Article 28, the annual Fixed Rent payable during the Renewal Term shall be equal to ninety-five percent (95%) of the Fair Market Value, as hereinafter defined. As used herein, the term “Fair Market Value” shall mean the fair market annual Fixed Rent of the Premises as of the commencement date of the Renewal Term (the “Calculation Date”), for a term equal to the Renewal Term, based on comparable space in the Building, or on comparable space in first-class office buildings of comparable age and quality in the West Loop downtown area of Chicago, Illinois, including all of Landlord’s services provided for in this Lease, and with the Premises considered as vacant, and in “as is” condition existing as of the Calculation Date. The calculation of Fair Market Value shall also be adjusted to take into account any Landlord Concessions (as defined below), if any. Within thirty (30) days following Landlord’s receipt of Tenant’s notice in which Tenant exercises Tenant’s renewal option, Landlord shall advise Tenant in writing (the “Rent Notice”) of (x) Landlord’s determination of Fair Market Value, and (y) any concessions, allowances or other benefits Landlord is willing to offer Tenant for the Renewal Term (the “Landlord Concessions”). If Tenant shall disagree with Landlord’s determination of Fair Market Value, Tenant shall have the right to rescind its earlier exercise of its renewal right by notifying Landlord in writing within thirty (30) days of Tenant’s receipt of Landlord’s Rent Notice, whereupon the Term of the Lease shall end on the Expiration Date. If Tenant shall fail to timely exercise such rescission right, the Term of this Lease shall be extended for the Renewal Term upon the terms and conditions set forth in the Rent Notice.

     Section 28.3 Agreement of Terms. Landlord and Tenant, at either party’s request, shall promptly execute and exchange an appropriate agreement evidencing the extension of the

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Term for the Renewal Term and the terms of such Renewal Term in a form reasonably satisfactory to both parties, but no such agreement shall be necessary in order to make the provisions hereof effective.

ARTICLE 29

TENANT’S EARLY TERMINATION RIGHT

Provided that no Event of Default shall have occurred under this Lease and be continuing hereunder at either the time of exercise or as of the Early Termination Date, Tenant shall have a one (1) time option, exercisable if at all, by irrevocable notice to Landlord delivered no later than the last day of the seventy-second (72nd) month of the initial Term to terminate this Lease effective as of the last day of the eighty-fourth (84^th) month of the initial Lease Term (the “Early Termination Date”). If Tenant elects to so terminate this Lease, Tenant shall pay to Landlord a termination fee in the amount of $270,928.55 (the “Termination Fee”) simultaneously with Tenant’s delivery of the notice of termination. If Tenant fails to timely deliver to Landlord its notice of termination or timely make its payment of the Termination Fee, the Tenant’s rights pursuant to this Article 29 shall lapse and be of no further force or effect.

[Signature Page Follows]

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     IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the day and year first above written.

LANDLORD:		TENANT:
227 MONROE STREET, INC.,		KR CALLAHAN & COMPANY, LLC,
a Delaware corporation		an Illinois limited liability company
By:	/s/ David Augarten David Augarten	By:	/s/ Kevin R. Callahan
Its:	Vice President	Its:	Senior Partner

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EXHIBIT A

Floor Plan

The floor plan which follows is intended solely to identify the general location of the Premises, and should not be used for any other purpose. All areas, dimensions and locations are approximate, and any physical conditions indicated may not exist as shown.

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EXHIBIT B

Definitions

     Base Rate: The annual rate of interest publicly announced from time to time by Citibank, N.A., or its successor, in New York, New York as its “base rate” (or such other term as may be used by Citibank, N.A., from time to time, for the rate presently referred to as its “base rate”).

     Building Systems: The mechanical, electrical, plumbing, sanitary, sprinkler, heating, ventilation and air conditioning, security, life-safety, elevator and other service systems or facilities of the Building up to the point of connection of localized distribution to the Premises (excluding, however, supplemental HVAC systems of tenants, sprinklers and the horizontal distribution systems within and servicing the Premises and by which mechanical, electrical, plumbing, sanitary, heating, ventilating and air conditioning, security, life-safety and other service systems are distributed from the base Building risers, feeders, panelboards, etc. for provision of such services to the Premises).

     Business Days: All days, excluding Saturdays, Sundays and Observed Holidays.

     Code: The Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder, as amended.

     Common Areas: The lobby, plaza and sidewalk areas, and other similar areas of general access on or in the Real Property or Complex and the areas on individual multi-tenant floors in the Building devoted to corridors, elevator lobbies, restrooms, and other similar facilities serving the Premises.

     Comparable Buildings: First-class office buildings of comparable age and quality in Chicago, Illinois.

     Complex: The Real Property and the adjoining property, which together are known as Franklin Center and are comprised of the AT&T Corporate Center and the USG Building, located at, respectively, 227 West Monroe Street and 222 West Adams Street, Chicago, Illinois.

     Deficiency: The difference between (a) the Fixed Rent and Additional Rent for the period which otherwise would have constituted the unexpired portion of the Term (assuming the Additional Rent for each year thereof to be the same as was payable for the year immediately preceding such termination or re-entry), and (b) the net amount, if any, of rents collected under any reletting effected pursuant to the provisions of the Lease for any part of such period (after first deducting from such rents all expenses incurred by Landlord in connection with the termination of this Lease, Landlord’s re-entry upon the Premises and such reletting, including repossession costs, brokerage commissions, attorneys’ fees and disbursements, and alteration costs).

     Excluded Expenses: (a) Taxes; (b) franchise or income taxes imposed upon Landlord; (c) mortgage amortization and interest; (d) leasing commissions; (e) the cost of tenant installations and decorations incurred in connection with preparing space for any Building tenant, including workletters and concessions; (f) fixed rent under Superior Leases, if any; (g) management fees to the extent in excess of the greater of (A) 3.5% of the gross rentals and other revenues collected for the Real Property (plus reimbursable expenses payable in

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connection with property management services), and (B) fees charged by Landlord or related entities for the management by any of them of other first class properties in the area of the Building; (h) wages, salaries and benefits paid to any persons above the grade of property manager or chief engineer; (i) legal and accounting fees relating to (A) disputes with tenants, prospective tenants or other occupants of the Building, (B) disputes with purchasers, prospective purchasers, mortgagees or prospective mortgagees of the Building or the Real Property or any part of either, or (C) negotiations of leases, contracts of sale or mortgages; (j) costs of services provided to other tenants of the Building on a “rent-inclusion” basis which are not provided to Tenant on such basis; (k) costs that are reimbursed out of insurance, warranty or condemnation proceeds, or which are reimbursed by Tenant or other tenants other than pursuant to an expense escalation clause; (l) costs in the nature of penalties or fines; (m) allowances, concessions or other costs and expenses of improving or decorating any demised or demisable space in the Building; (n) advertising and promotional expenses in connection with leasing of the Building; (o) the costs of installing, operating and maintaining a specialty improvement, including a conference center, a cafeteria, lodging or private dining facility, or an athletic, luncheon or recreational club unless Tenant is permitted to make use of such facility without additional cost (other than payments for key deposits, use of towels, or other incidental items) or on a subsidized basis consistent with other users; (p) any costs or expenses (including fines, interest, penalties and legal fees) arising out of Landlord’s failure to timely pay Operating Expenses or Taxes; (q) costs incurred in connection with the removal, encapsulation or other treatment of asbestos or any other Hazardous Materials (classified as such on the Effective Date) existing in the Premises in violation of applicable Requirements as of the date hereof; (r) the cost of capital improvements other than those expressly included in Operating Expenses pursuant to Section 7.1; (s) costs of any leasing office located at the Building; (t) costs due to violation by Landlord or its agent of the terms and conditions of any lease or of any law, statute, ordinance or of any insurance rating bureau or other quasi-public authority, or of any debt agreement or ground lease; (u) any cost paid to any person or entity related to Landlord which is in excess of the amount which would be paid absent such relationships; and (v) expenses incurred by Landlord in connection with the transfer or disposition of the Land or Building or Landlord’s interest therein.

     Governmental Authority: The United States of America, the City of Chicago, County of Cook, or State of Illinois, or any political subdivision, agency, department, commission, board, bureau or instrumentality of any of the foregoing, now existing or hereafter created, having jurisdiction over the Real Property.

     Hazardous Materials: Any substances, materials or wastes currently or in the future deemed or defined in any Requirement as “hazardous substances,” “toxic substances,” “contaminants,” “pollutants” or words of similar import.

     HVAC System: The Building System designed to provide heating, ventilation and air conditioning.

     Indemnitees: Landlord, Landlord’s Agent, each Mortgagee and Lessor, and each of their respective direct and indirect partners, officers, shareholders, directors, members, managers, trustees, beneficiaries, employees, principals, contractors, servants, agents, and representatives.

     Lessor: A lessor under a Superior Lease.

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     Losses: Any and all losses, liabilities, damages, claims, judgments, fines, suits, demands, costs, interest and expenses of any kind or nature (including reasonable attorneys’ fees and disbursements) incurred in connection with any claim, proceeding or judgment and the defense thereof, and including all costs of repairing any damage to the Premises or the or the appurtenances of any of the foregoing to which a particular indemnity and hold harmless agreement applies.

     Mortgage(s): Any mortgage, trust indenture or other financing document which may now or hereafter affect the Premises, the Real Property, the Building or any Superior Lease and the leasehold interest created thereby, and all renewals, extensions, supplements, amendments, modifications, consolidations and replacements thereof or thereto, substitutions therefor, and advances made thereunder.

     Mortgagee(s): Any mortgagee, trustee or other holder of a Mortgage.

     Observed Holidays: New Years Day, Martin Luther King Day, Presidents Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day, plus days observed by the State of Illinois, the City of Chicago and/or the labor unions servicing the Building as holidays.

     Ordinary Business Hours: 8:00 a.m. to 6:00 p.m. on Business Days.

     Prohibited Use: Any use or occupancy of the Premises that in Landlord’s reasonable judgment would: (a) cause damage to the Building or Complex or any equipment, facilities or other systems therein; (b) impair the appearance of the Building or Complex; (c) interfere with the efficient and economical maintenance, operation and repair of the Premises, the Building, the Complex, or the equipment, facilities or systems thereof; (d) adversely affect any service provided to, and/or the use and occupancy by, any Building or Complex tenant or occupants; (e) violate the certificate of occupancy issued for the Premises, the Building or Complex; (f) materially and adversely affect the first-class image of the Building or Complex; or (g) result in protests or civil disorder or commotions at, or other disruptions of the normal business activities in, the Building or Complex. Prohibited Use also includes the use of any part of the Premises for: (i) a restaurant or bar; (ii) the preparation, consumption, storage, manufacture or sale of food or beverages (except in connection with vending machines (provided that each machine, where necessary, shall have a waterproof pan thereunder and be connected to a drain) and/or warming kitchens installed for the use of Tenant’s employees only), liquor, tobacco or drugs; (iii) the business of photocopying, multilith or offset printing (except photocopying in connection with Tenant’s own business); (iv) a school or classroom; (v) lodging or sleeping; (vi) the operation of retail facilities (meaning a business whose primary patronage arises from the generalized solicitation of the general public to visit Tenant’s offices in person without a prior appointment) of a savings and loan association or retail facilities of any financial, lending, securities brokerage or investment activity; (vii) a payroll office; (viii) a barber, beauty or manicure shop; (ix) an employment agency or similar enterprise; (x) offices of any Governmental Authority, any foreign government, the United Nations, or any agency or department of the foregoing; (xi) the manufacture, retail sale, storage of merchandise or auction of merchandise, goods or property of any kind to the general public which could reasonably be expected to create a volume of pedestrian traffic substantially in excess of that normally encountered in the Premises; (xii) the rendering of medical, dental or other therapeutic or diagnostic services; or (xiii) any illegal purposes or any activity constituting a nuisance.

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     Requirements: All present and future laws, rules, orders, ordinances, regulations, statutes, requirements, codes and executive orders, extraordinary and ordinary of (i) all Governmental Authorities, including, without limitation, (A) the Americans With Disabilities Act, 42 U.S.C. §12.101 (et seq.), and any law of like import, and all rules, regulations and government orders with respect thereto, and (B) any of the foregoing relating to Hazardous Materials, environmental matters, public health and safety matters and landmarks protection, (ii) any applicable fire rating bureau or other body exercising similar functions, affecting the Real Property or the maintenance, use or occupation thereof, or any street, avenue or sidewalk comprising a part of or in front thereof or any vault in or under the same, (iii) all requirements of all insurance bodies affecting the Premises, (iv) utility service providers, and (v) Mortgagees or Lessors. “Requirements” shall also include the terms and conditions of any certificate of occupancy issued for the Premises, the Building or Complex, and any other covenants, conditions or restrictions affecting the Building, the Complex and/or the Real Property from time to time.

     Rules and Regulations: The rules and regulations annexed to and made a part of this Lease as Exhibit F, as they may be modified from time to time by Landlord.

     Specialty Alterations: Alterations which are not standard office installations such as kitchens, executive bathrooms, raised computer floors, computer room installations, supplemental HVAC equipment, safe deposit boxes, vaults, libraries or file rooms requiring reinforcement of floors, internal staircases, slab penetrations, conveyors, dumbwaiters, and other Alterations of a similar character. All Specialty Alterations are Above-Building Standard Installations.

     Substantial Completion: As to any construction performed by any party in the Premises, “Substantial Completion” or “Substantially Completed” means that such work has been completed, as reasonably determined by Landlord’s architect, in accordance with (a) the provisions of this Lease applicable thereto, (b) the plans and specifications for such work, and (c) all applicable Requirements, except for minor details of construction, decoration and mechanical adjustments, if any, the noncompletion of which does not materially interfere with Tenant’s use of the Premises or which in accordance with good construction practices should be completed after the completion of other work in the Premises, Building or Complex.

     Superior Lease(s): Any ground or underlying lease of the Real Property or any part thereof heretofore or hereafter made by Landlord and all renewals, extensions, supplements, amendments, modifications, consolidations, and replacements thereof.

     Tenant Delay: Any delays that occur as a result in one or more of the following: (i) Tenant’s request for changes to the Initial Installations, or otherwise, whether or not approved by Landlord, (ii) Tenant’s failure to approve estimates of costs or furnish an amount equal to Landlord’s estimate of costs within the time required under this Lease (which shall give Landlord the absolute right to postpone or suspend any work required of Landlord until such amount is furnished to Landlord, without limiting Landlord’s other remedies), (iii) any upgrades, special work or other Above Building Standard Installations, or items not customarily provided by Landlord to office tenants, to the extent that the same involve longer lead times, installation times, delays or difficulties in obtaining building permits, requirements for any governmental approval, permit or action beyond the issuance of normal building permits, or other delays not typically encountered in connection with Landlord’s standard office improvements, (iv)the performance by Tenant or Tenant’s contractors, agents or employees of any work at or about

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the Premises or Property, or (v) any act or omission of Tenant or Tenant’s contractors, agents or employees, or any breach by Tenant of any provisions contained in this Lease.

     Tenant Party: Tenant and any subtenants or occupants of the Premises and their respective agents, contractors, subcontractors, employees, invitees or licensees.

     Tenant’s Property: Tenant’s movable fixtures and movable partitions, telephone and other equipment, computer systems, telecommunications, data and other cabling, trade fixtures, furniture, furnishings, and other items of personal property which are removable without material damage to the Building or Complex.

     Unavoidable Delays: The inability of any party to this Lease to fulfill or delay in fulfilling any of its obligations under this Lease expressly or impliedly to be performed by such party or such party’s inability to make or delay in making any repairs, additions, alterations, improvements or decorations or inability to supply or delay in supplying any equipment or fixtures, if such party’s inability or delay is due to or arises by reason of strikes, labor troubles or by accident, or by any cause whatsoever beyond such party’s reasonable control, including governmental preemption in connection with a national emergency, Requirements or shortages, or unavailability of labor, fuel, steam, water, electricity or materials, or delays caused by the other party or other tenants, mechanical breakdown, acts of God, enemy action, civil commotion, fire or other casualty.

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EXHIBIT C

WORKLETTER

     1. Proposed and Final Plans.

          (a) On or before May 23, 2006, Tenant shall cause to be prepared and delivered to Landlord, for Landlord’s approval, the following proposed drawings (“Proposed Plans”) for all improvements Tenant desires to complete or have completed in the Premises (the “Initial Installations”):

               (i) Architectural drawings (consisting of demolition plans, floor construction plan, ceiling lighting and layout, power, and telephone plan).

               (ii) Mechanical drawings (consisting of HVAC, sprinkler, electrical, telephone, and plumbing). Mechanical drawings shall include a tabulation of connected electrical load and an analysis of anticipated electrical demand load.

               (iii) Finish schedule (consisting of wall finishes and floor finishes and miscellaneous details).

          (b) All architectural drawings shall be prepared at Tenant’s sole expense by a licensed architect employed by Tenant and approved by Landlord. Tenant shall deliver three sets of reproducible architectural drawings to Landlord. All mechanical drawings shall be prepared at Tenant’s sole expense by a licensed engineer designated by Landlord, whom Tenant shall employ. Tenant shall reimburse Landlord for all reasonable out-of-pocket costs incurred by Landlord in reviewing the Proposed Plans. Notwithstanding the foregoing, the “Space Plans” prepared by Gensler Architects shall be paid for by Landlord and shall not be included in the costs paid for or credited against the Landlord’s Contribution.

          (c) Within 10 days after Landlord’s receipt of the architectural drawings, Landlord shall approve or disapprove such drawings, and if disapproved, Landlord shall advise Tenant of any changes or additional information required to obtain Landlord’s approval.

          (d) Within 10 days after receipt of mechanical drawings, Landlord shall approve or disapprove such drawings, and if disapproved, Landlord shall advise Tenant of any changes required to obtain Landlord’s approval.

          (e) If Landlord disapproves of, or requests additional information regarding the Proposed Plans, Tenant shall, within 10 days thereafter, revise the Proposed Plans disapproved by Landlord and resubmit such plans to Landlord or otherwise provide such additional information to Landlord. Landlord shall, within 10 days after receipt of Tenant’s revised plans, approve or disapprove such drawings, and if disapproved, Landlord shall advise Tenant of any additional changes which may be required to obtain Landlord’s approval, If Landlord disapproves the revised plans specifying the reason therefor, or requests further additional information, Tenant shall, within 10 days of receipt of Landlord’s required changes, revise such plans and resubmit them to Landlord or deliver to Landlord such further information as Landlord has requested. Landlord shall, again within 10 days after receipt of Tenant’s revised plans, approve or disapprove such drawings, and if disapproved, Landlord shall advise Tenant of further changes, if any, required for Landlord’s approval. This process shall continue

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until Landlord has approved Tenant’s revised Proposed Plans. “Final Plans” shall mean the Proposed Plans, as revised, which have been approved by Landlord and Tenant in writing. Landlord agrees not to withhold or delay its approval unreasonably so long as such Initial Installations (i) are non-structural and do not affect any Building Systems, (ii) affect only the Premises and are not visible from outside of the Premises, (iii) do not affect the certificate of occupancy issued for the Building, the Complex or the Premises, (iv) do not violate any Requirement, and (v) utilize Building Standard Installations (as hereafter defined) or better quality materials and finishes.

          (f) All Proposed Plans and Final Plans shall comply with all applicable Requirements. Neither review nor approval by Landlord of the Proposed Plans and resulting Final Plans shall constitute a representation or warranty by Landlord that such plans either (i) are complete or suitable for their intended purpose, or (ii) comply with applicable Requirements, it being expressly agreed by Tenant that Landlord assumes no responsibility or liability whatsoever to Tenant or to any other person or entity for such completeness, suitability or compliance. Tenant shall not make any changes in the Final Plans without Landlord’s prior approval, which shall not be unreasonably withheld or delayed; provided that Landlord may, in the exercise of its sole and absolute discretion, disapprove any proposed changes adversely affecting the Building’s or Complex’s structure, Building Systems (including intrabuilding network telephone cable), equipment or the appearance or value of the Building or Complex.

     2. Performance of the Initial installations.

          (a) Filing of Final Plans, Permits. Tenant, at its sole cost and expense, shall file the Final Plans with the Governmental Authorities having jurisdiction over the Initial Installations. Tenant shall furnish Landlord with copies of all documents submitted to all such Governmental Authorities and with the authorizations to commence work and the permits for the Initial Installations issued by such Governmental Authorities. Tenant shall not commence the Initial installations until the required governmental authorizations for such work are obtained and delivered to Landlord.

          (b) Landlord Approval of Contractors. No later than 5 days following Landlord’s approval of the Final Plans, Tenant shall enter into a contract for construction of the Initial Installations with either Leopardo Construction or Belcaster Commercial Contractors, LLC (the “General Contractor”). Tenant’s construction contract with the General Contractor shall be subject to Landlord’s prior approval, which approval shall not be unreasonably withheld. The General Contractor shall be responsible for all required construction, management and supervision. Tenant shall cause the Initial Installations to be performed in an expeditious manner and shall be substantially completed by the Commencement Date or as soon thereafter as reasonably practical. In addition, Tenant shall only utilize for purposes of mechanical, electrical, structural, sprinkler, and fire and life safety those contractors as specifically designated by Landlord (collectively, the “Essential Subs”), which list of Essential Subs shall include 3 names each for those Essential Subs engaged in mechanical, electrical or structural contracting and 1 Essential Sub for fire alarm and life safety. Tenant shall submit to Landlord not less than 10 days prior to commencement of construction the following information and items:

               (i) The names and addresses of the other subcontractors, and subsubcontractors (collectively, together with the General Contractor and Essential Subs, the “Tenant’s Contractors”) Tenant intends to employ in the construction of the Initial Installations. Landlord shall have the right to approve or disapprove Tenant’s Contractors, and Tenant shall

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employ, as Tenant’s Contractors, only those persons or entities approved by Landlord. All contractors and subcontractors engaged by or on behalf of Tenant for the Premises shall be licensed contractors, possessing good labor relations, capable of performing quality workmanship and working in harmony with Landlord’s contractors and subcontractors and with other contractors and subcontractors on the job site. All work shall be coordinated with any general construction work in the Building and /or Complex.

               (ii) The scheduled commencement date of construction, the estimated date of completion of construction work, fixturing work, and date of occupancy of the Premises by Tenant.

               (iii) Itemized statement of estimated construction cost, including permits and fees, architectural, engineering, and contracting fees.

               (iv) Certified copies of insurance policies or certificates of insurance as hereinafter described. Tenant shall not permit Tenant’s Contractors to commence work until the required insurance has been obtained and certified copies of policies or certificates have been delivered to Landlord.

          (c) Access to Premises. Tenant, its employees, designers, contractors and workmen shall have access to the Premises prior to the Commencement Date to construct the Initial Installations, provided that Tenant and its employees, agents, contractors, and suppliers only access the Premises via the Building freight elevator, work in harmony and do not interfere with the performance of other work in the Building or Complex by Landlord, Landlord’s contractors, other tenants or occupants of the Building or Complex (whether or not the terms of their respective leases have commenced) or their contractors. If at any time such entry shall cause, or in Landlord’s reasonable judgment threaten to cause, such disharmony or interference, Landlord may terminate such permission upon 24 hours’ notice to Tenant, and thereupon, Tenant or its employees, agents, contractors, and suppliers causing such disharmony or interference shall immediately withdraw from the Premises, the Building and the Complex until Landlord determines such disturbance no longer exists.

          (d) Landlord’s Right to Perform. Landlord shall have the right, but not the obligation, to perform, on behalf of and for the account of Tenant, subject to reimbursement by Tenant, any of the Initial Installations which (i) Landlord reasonably deems necessary to be done on an emergency basis, (ii) pertains to structural components or the general Building systems, or (iii) pertains to the erection of temporary safety barricades or signs during construction.

          (e) Warranties. On completion of the Initial Installations, Tenant shall provide Landlord with copies of all warranties of at least one year duration on all the Initial Installations. At Landlord’s request, Tenant shall enforce, at Tenant’s expense, all guarantees and warranties made and/or furnished to Tenant with respect to the Initial Installations.

          (f) Protection of Building and Complex. All work performed by Tenant shall be performed with a minimum of interference with other tenants and occupants of the Building and Complex and shall conform to the Rules and Regulations and those rules and regulations governing construction in the Building and Complex as Landlord or Landlord’s Agent may Impose. Tenant will take all reasonable and customary precautionary steps to protect its facilities and the facilities of others affected by the Initial Installations and to properly police same and Landlord shall have no responsibility for any loss by theft or otherwise. Construction

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equipment and materials are to be located in confined areas and delivery and loading of equipment and materials shall be done at such reasonable locations and at such time as Landlord shall direct so as not to burden the operation of the Building or Complex. Landlord shall advise Tenant in advance of any special delivery and loading dock requirements. Tenant shall at all times keep the Premises and adjacent areas free from accumulations of waste materials or rubbish caused by its suppliers, contractors or workmen. Landlord may require daily clean-up if required for fire prevention and life safety reasons or applicable laws and reserves the right to do clean-up at the expense of Tenant if Tenant fails to comply with Landlord’s cleanup requirements. At the completion of the Initial Installations, Tenant’s Contractors shall forthwith remove all rubbish and all tools, equipment and surplus materials from and about the Premises, Building and Complex. Any damage caused by Tenant’s Contractors to any portion of the Building, the Complex or to any property of Landlord or other tenants shall be repaired forthwith after written notice from Landlord to its condition prior to such damage by Tenant at Tenant’s expense.

          (g) Compliance by all Tenant Contractors. Tenant shall impose and enforce all terms hereof on Tenant’s Contractors and its designers, architects and engineers. Landlord shall have the right to order Tenant or any of Tenant’s Contractors, designers, architects or engineers who willfully violate the provisions of this Workletter to cease work and remove himself or itself and his or its equipment and employees from the Building and Complex.

          (h) Accidents, Notice to Landlord. Tenant’s Contractors shall assume responsibility for the prevention of accidents to its agents and employees and shall take all reasonable safety precautions with respect to the work to be performed and shall comply with all reasonable safety measures initiated by the Landlord and with all applicable Requirements for the safety of persons or property. Tenant shall advise the Tenant’s Contractors to report to Landlord any injury to any of its agents or employees and shall furnish Landlord a copy of the accident report filed with its insurance carrier within 3 days of its occurrence.

          (i) Required Insurance. Tenant shall cause Tenant’s Contractors to secure, pay for, and maintain during the performance of the construction of the Initial Installations, insurance in the following minimum coverages and limits of liability:

               (i) Workmen’s Compensation and Employer’s Liability Insurance as required by Requirements.

               (ii) Commercial General Liability Insurance (including Owner’s and Contractors’ Protective Liability) in an amount not less than $2,000,000 per occurrence, whether involving bodily injury liability (or death resulting therefrom) or property damage liability or a combination thereof with a minimum aggregate limit of $2,000,000, and with umbrella coverage with limits not less than $10,000,000. Such insurance shall provide for explosion and collapse, completed operations coverage with a two-year extension after completion of the work, and broad form blanket contractual liability coverage and shall insure Tenant’s Contractors against any and all claims for bodily injury, including death resulting therefrom and damage to the property of others and arising from its operations under the contracts whether such operations are performed by Tenant’s Contractors, or by anyone directly or indirectly employed by any of them.

               (iii) Business Automobile Liability Insurance, including the ownership, maintenance, and operation of any automotive equipment, owned, hired, or non-owned in an amount not less than $500,000 for each person in one accident, and $1,000,000 for injuries

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sustained by two or more persons in any one accident and property damage liability in an amount not less than $1,000,000 for each accident. Such insurance shall insure Tenant’s contractors against any and all claims for bodily injury, including death resulting there from, and damage to the property of others arising from its operations under the contracts, whether such operations are performed by Tenant’s Contractors, or by anyone directly or indirectly employed by any of them.

               (iv) “All-risk” builder’s risk insurance upon the entire initial installations to the full insurance value thereof. Such insurance shall include the interest of Landlord and Tenant (and their respective contractors and subcontractors of any tier to the extent of any insurable interest therein) in the Initial installations and shall insure against the perils of fire and extended coverage and shall include “all-risk” builder’s risk insurance for physical loss or damage including, without duplication of coverage, theft, vandalism, and malicious mischief. If portions of the Initial Installations are stored off the site of the Building or in transit to such site are not covered under such “all-risk” builder’s risk insurance, then Tenant shall effect and maintain similar property insurance on such portions of the Initial Installations.” Any loss insured under such “all-risk” builder’s risk insurance is to be adjusted with Landlord and Tenant and made payable to Landlord as trustee for the insureds, as their interest may appear, subject to the agreement reached by such parties in interest, or in the absence of any such agreement, then in accordance with a final, nonappealable order of a court of competent jurisdiction. If after such loss no other special agreement is made, the decision to replace or not replace any such damaged the initial Installations shall be made in accordance with the terms and provisions of the Lease including, this Work letter. The waiver of subrogation provisions contained in the Lease shall apply to the “all-risk” builder’s risk insurance policy to be obtained by Tenant pursuant to this paragraph (iv).

All policies (except the Workmen’s Compensation policy) shall be endorsed to include as additional named insureds Landlord and its officers, employees, and agents, Landlord’s contractors, Landlord’s architect, Tishman Speyer Properties, L.P., any Mortgagees and Superior Lessors and such additional persons as Landlord may designate. Such endorsements shall also provide that all additional insured parties shall be given 30 days’ prior written notice of any reduction, cancellation, or nonrenewal of coverage by certified mail, return receipt requested (except that 10 days’ notice shall be sufficient in the case of cancellation for nonpayment of premium) and shall provide that the insurance coverage afforded to the additional insured parties thereunder shall be primary to any insurance carried independently by such additional insured parties. At Tenant’s request, Landlord shall furnish a list of names and addresses of parties to be named as additional insureds. The insurance policies required hereunder shall be considered as the primary insurance and shall not call into contribution any insurance then maintained by Landlord. Additionally, where applicable, such policy shall contain a cross liability and severability of interest clause.

To the fullest extent permitted by law, Tenant (and Tenant’s Contractors) shall indemnify and hold harmless the Indemnitees from and against all Losses necessitated by activities of the indemnifying party’s contractors, bodily Injury to persons or damage to property of the Indemnitees arising out of or resulting from the performance of work by the indemnifying party or its contractors. The foregoing indemnity shall be in addition to the insurance requirements set forth above and shall not be in discharge or substitution of the same, and shall not be limited in any way by any limitations on the amount or type of damages, compensation or benefits payable by or for Tenant’s Contractors under Workers’ or Workmen’s Compensation Acts, Disability Benefit Acts or other Employee Benefit Acts.

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          (j) Quality of Work. The Initial Installations shall be constructed in a first-class workmanlike manner using only good grades of material and in compliance with the Final Plans, all insurance requirements, applicable laws and ordinances and rules and regulations of governmental departments or agencies and the rules and regulations adopted by Landlord for the Building and the Complex. The quality of the Initial Installations shall be equal to or of greater quality than the Building Standard Installations; provided that Landlord shall have the right to require that Tenant not deviate from certain of the Building Standard Installations. If Tenant requests that it not be required to install a Building Standard Installations suspended ceiling in all or any portion of the Premises, and in lieu thereof employ an “open” ceiling, Landlord reserves the right to require that Tenant install a Building Standard Installations ceiling upon the expiration or earlier termination of the Term.

          (k) “As-Built” Plans. Upon completion of the Initial Installations, Tenant shall furnish Landlord with “as built” plans and air balance reports for the Premises, final waivers of lien for the Initial Installations, a detailed breakdown of the costs of the Initial Installations (which may be in the form of an owner’s affidavit) and evidence of payment reasonably satisfactory to Landlord, and an occupancy permit for the Premises. The “as-built” plans shall be prepared on an AutoCAD Computer Assisted Drafting and Design System (or such other system or medium as Landlord may accept), using naming conventions issued by the American Institute of Architects in June, 1990 (or such other naming conventions as Landlord may accept) and magnetic computer media of such record drawings and specifications translated In DFX format or another format acceptable to Landlord.

          (l) Mechanics’ Liens. Tenant shall not permit any of the Tenant’s Contractors to place any lien upon the Building or Complex, and if any such lien is placed upon the Building or Complex, Tenant shall within 10 days of notice thereof, cause such lien to be discharged of record, by bonding or otherwise. If Tenant shall fail to cause any such lien to be discharged, Landlord shall have the right to have such lien discharged and Landlord’s expense in so doing, including bond premiums, reasonable legal fees and filing fees, shall be immediately due and payable by Tenant.

     3. Payment of Costs of the Initial Installations.

          (a) Subject to Landlord’s Contribution as provided in Paragraph 3(b) below, the Initial Installations shall be installed by Tenant at Tenant’s sole cost and expense. The cost of the Initial Installations shall include, and Tenant agrees to pay Landlord for, the following costs (“Landlord’s Costs”); (i) the cost of all work performed by Landlord on behalf of Tenant and for all materials and labor furnished on Tenant’s behalf, and (ii) the cost of any services provided to Tenant or Tenant’s Contractors including but not limited to the cost for rubbish removal, hoisting, and utilities to the extent not included in general conditions charges by the general contractor. Landlord may render bills to Tenant monthly for Landlord’s Costs (provided that the supervision fee shall be billed based on the cost of the Initial Installations performed during the period in question). All bills shall be due and payable no later than the 15^th day after delivery of such bills to Tenant.

          (b) Landlord shall pay to Tenant an amount not to exceed Landlord’s Contribution toward the cost of the Initial Installations, provided as of the date on which Landlord is required to make payment thereof, (i) the Lease is in full force and effect, and (ii) no Event of Default then exists. Tenant shall pay all costs of the Initial Installations in excess of Landlord’s Contribution. Landlord’s Contribution shall be payable solely on account of labor directly related to the Initial Installations and materials delivered to the Premises in connection with the Initial

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Installations, except that Tenant may apply up to 20% of Landlord’s Contribution to pay “soft costs”, consisting of architectural, consulting, engineering and legal fees, and furniture and equipment (exclusive of computer equipment) acquired for use in the Premises, incurred in connection with the Initial Installations, as well as moving expenses in connection with Tenant’s relocation to the Premises. Upon the completion of the Initial Installations and satisfaction of the conditions set forth below, and provided further that there has not then occurred an Event of Default under the Lease, Tenant may apply a portion (not to exceed an aggregate of $120,090.00) of any remaining balance of Landlord’s Contribution to the installment(s) of Rent next coming due under the Lease; provided further, however, that as of the date which is 24 months following the Commencement Date any amount of Landlord’s Contribution which has not been so applied shall be retained by Landlord. Except as otherwise expressly set forth herein. Tenant shall not be entitled to receive any portion of Landlord’s Contribution not actually expended by Tenant in the performance of the Initial Installations in accordance with this Workletter.

          (c) Landlord shall make progress payments to Tenant on a monthly basis, for the work performed during the previous month, less a retainage of 10% of each progress payment (“Retainage”). Each of Landlord’s progress payments shall be limited to that fraction of the total amount of such payment, the numerator of which is the amount of Landlord’s Contribution, and the denominator of which is the total contract price (or, if there is no specified or fixed contract price for the Initial Installations, then Landlord’s reasonable estimate thereof) for the performance of all of the Initial Installations shown on all plans and specifications approved by Landlord. Provided that Tenant delivers requisitions to Landlord on or prior to the 10^th day of any month, such progress payments shall be made within 30 days next following the delivery to Landlord of requisitions therefor, signed by the chief financial officer of Tenant, which requisitions shall set forth the names of each contractor and subcontractor to whom payment is due, and the amount thereof, and shall be accompanied by (i) with the exception of the first requisition, copies of conditional waivers and releases of lien upon progress payment in the form prescribed in the Requirements from all contractors, subcontractors, and material suppliers covering all work and materials which were the subject of previous progress payments by Landlord and Tenant, (ii) a written certification from Tenant’s architect that the work for which the requisition is being made has been completed substantially in accordance with the Final Plans and (iii) such other documents and information as Landlord may reasonably request, including in connection with title drawdowns and endorsements. Any requisition made following the 10^th day of any month shall be paid no later than the last day of the month following the month in which such requisitions are made. Landlord shall disburse the Retainage upon submission by Tenant to Landlord of Tenant’s requisition therefor accompanied by all documentation required under this Section 3(c), together with (A) proof of the satisfactory completion of all required inspections and issuance of any required approvals, permits and sign-offs for the Initial Installations by Governmental Authorities having jurisdiction thereover, (B) final “as-built” plans and specifications for the Initial Installations as required pursuant to Section 2(k) and (C) issuance of final, unconditional lien waivers and releases in the form prescribed by the Requirements by all contractors, subcontractors and material suppliers covering all of the Initial Installations. Notwithstanding anything to the contrary set forth in this Section 3(c), if Tenant does not pay any contractor or supplier as required by this provision, Landlord shall have the right, but not the obligation, to promptly pay to such contractor or supplier all sums so due from Tenant, and Tenant agrees the same shall be deemed Additional Rent and shall be paid by Tenant within 10 days after Landlord delivers to Tenant an invoice therefor.

          (d) If Tenant elects to perform the Initial Installations in two or more stages, then the amount of Landlord’s Contribution to be made available to Tenant in connection with

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each such stage (and subject to the limitations as set forth in Section 3(b), shall be in an amount equal to the product of (i) Landlord’s Contribution, and (ii) a fraction, the numerator of which is the rentable square footage of the portion of the Premises Tenant elects to so improve during such stage of construction and the denominator of which is the rentable square footage of the entire Premises.

     4. Miscellaneous.

          (a) All defined terms as used herein shall have the meanings ascribed to them in the Lease.

          (b) Tenant agrees that, in connection with the Initial Installations and its use of the Premises prior to the commencement of the Term of the Lease, Tenant shall have those duties and obligations with respect thereto that it has pursuant to the Lease during the Term, except the obligation for payment of rent, and further agrees that Landlord shall not be liable in any way for injury, loss, or damage which may occur to any of the Initial Installations or installations made in the Premises, or to any personal property placed therein, the same being at Tenant’s sole risk.

          (c) Except as expressly set forth herein, Landlord has no other agreement with Tenant and Landlord has no other obligation to do any other work or pay any amounts with respect to the Premises. Any other work in the Premises which may be permitted by Landlord pursuant to the terms and conditions of the Lease shall be done at Tenant’s sole cost and expense and in accordance with the terms and conditions of the Lease.

          (d) This Workletter shall not be deemed applicable to any additional space added to the original Premises at any time or from time to time, whether by any options under the Lease or otherwise, or to any portion of the original Premises or any additions thereto in the event of a renewal or extension of the initial term of the Lease, whether by any options under the Lease or otherwise, unless expressly so provided in the Lease or any amendment or supplement thereto.

          (e) The failure by Tenant to pay any monies due Landlord pursuant to this Workletter within the time period herein stated shall be deemed an Event of Default under the terms of the Lease for which Landlord shall be entitled to exercise all remedies available to Landlord for nonpayment of Rent. All late payments shall bear interest pursuant to Section 15.4 of the Lease.

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EXHIBIT D

Design Standards

AT&T Corporate Center

          (a) HVAC. The Building HVAC System serving the Premises is designed to maintain average temperatures within the Premises during Ordinary Business Hours of (i) not less than 70° F. during the heating season when the outdoor temperature is - -10° F. and (ii) not more than 77° F. and 50% humidity +/- 5% during the cooling season, when the outdoor temperature is 95^o F. dry bulb and 75° F. wet bulb, with, in the case of clauses (i) and (ii), a population load per floor of not more than one person per 100 square feet of useable area, other than in dining and other special use areas per floor for all purposes, and shades fully drawn and closed, including lighting and power, and to provide at least .2 CFM of outside ventilation per square foot of rentable area. Use of the Premises, or any part thereof, in a manner exceeding the foregoing design conditions or rearrangement of partitioning after the initial preparation of the Premises which interferes with normal operation of the air-conditioning service in the Premises may require changes in the air-conditioning system serving the Premises at Tenant’s expense.

          (b) Electrical. The Building Electrical system serving the Premises is designed to provide:

               (i) 2.0 watts per usable square foot of voltage (120/208 volt) connected power for lighting, and

               (ii) 5.0 watts (3^rd thru 28^th floors) or 3.0 watts (29^th thru 60^th floors) per usable square foot of voltage (120/208 volt) connected power for convenience receptacles.

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EXHIBIT E

Cleaning Specifications

GENERAL CLEANING

NIGHTLY

General Offices:

1.	All hard surfaced flooring to be swept using approved dustdown preparation.
2.	Carpet sweep all carpets, moving only light furniture (desks, file cabinets, etc. not to be moved).
3.	Hand dust and wipe clean all furniture, fixtures and window sills.
4.	Empty all waste receptacles and remove wastepaper.
5.	Wash clean all Building water fountains and coolers.
6.	Sweep all private stairways.

     Lavatories:

1.	Sweep and wash all floors, using proper disinfectants.
2.	Wash and polish all mirrors, shelves, bright work and enameled surfaces.
3.	Wash and disinfect all basins, bowls and urinals.
4.	Wash all toilet seats.
5.	Hand dust and clean all partitions, tile walls, dispensers and receptacles in lavatories and restrooms.
6.	Empty paper receptacles, fill receptacles from tenant supply and remove wastepaper.
7.	Fill toilet tissue holders from tenant supply.
8.	Empty and clean sanitary disposal receptacles.

WEEKLY

1.	Vacuum all carpeting and rugs.
2.	Dust all door louvers and other ventilating louvers within a person’s normal reach.
3.	Wipe clean all brass and other bright work.

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NOT MORE THAN 3 TIMES PER YEAR

     High dust premises complete including the following:

1.	Dust all pictures, frames, charts, graphs and similar wall hangings not reached in nightly cleaning.
2.	Dust all vertical surfaces, such as walls, partitions, doors, door frames and other surfaces not reached in nightly cleaning.
3.	Dust all Venetian blinds.
4.	Wash all windows.

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EXHIBIT F

Rules and Regulations

     (1) Access to Real Property. On Saturdays, Sundays and Holidays, and on other days between the hours of 7:00 P.M. and 8:00 A.M. the following day, or such other hours as Landlord shall determine from time to time, access to and within the Real Property and/or to the passageways, lobbies, entrances, exits, loading areas, corridors, elevators or stairways and other areas in the Real Property may be restricted and access gained by use of a key to the outside doors of the Real Property, or pursuant to such security procedures Landlord may from time to time impose. Landlord shall in all cases retain the right to control and prevent access to such areas by any Person (as defined below) engaged in activities which are illegal or violate these Rules and Regulations, or whose presence in the judgment of Landlord shall be prejudicial to the safety, character, reputation and interests of the Real Property and its tenants (and Landlord shall have no liability in damages for such actions taken in good faith). No Tenant and no employee or invitee of Tenant shall enter areas reserved for the exclusive use of Landlord, its employees or invitees or other Persons. Tenant shall keep doors to corridors and lobbies closed except when persons are entering or leaving. As used in these Rules and Regulations, the term “Person” shall mean any individual, trust, partnership, limited liability company, joint venture, association, corporation and any other entity.

     (2) Signs. Tenant shall not paint, display, inscribe, maintain or affix any sign, placard, picture, advertisement, name, notice, lettering or direction on any part of the outside or inside of the Real Property, or on any part of the inside of the Premises which can be seen from the outside of the Premises without the prior consent of Landlord, and then only such name or names or matter and in such color, size, style, character and material, and with professional designers, fabricators and installers as may be first approved or designated by Landlord in writing, Landlord shall prescribe the suite number and identification sign for the Premises (which shall be prepared and installed by Landlord at Tenant’s expense). Landlord reserves the right to remove at Tenant’s expense all matter not so installed or approved without notice to Tenant.

     (3) Window and Door Treatments. Tenant shall not place anything or allow anything to be placed in the Premises near the glass of any door, partition, wall or window which may be unsightly from outside the Premises, and Tenant shall not place or permit to be placed any article of any kind on any window ledge or on the exterior walls. Blinds, shades, awnings or other forms of inside or outside window ventilators or similar devices, shall not be placed in or about the outside windows or doors in the Premises except to the extent, if any, that the design, character, shape, color, material and make thereof is first approved or designated by the Landlord. Tenant shall not install or remove any solar tint film from the windows.

     (4) Walls and Floors. Tenant shall use carpet protectors for all desk chairs. Tenant shall not install linoleum, tile, carpet, wall-paper or other floor or wall covering which is tacked, glued or otherwise affixed to prevent easy removal. Tenant shall not mark, drive nails, screw or drill into, any walls, partitions, woodwork or plaster, or in any other way deface the Premises or any part thereof.

     (5) Lighting and General Appearance of Premises. Landlord reserves the right to designate and/or approve in writing all internal lighting that may be visible from the public, common or exterior areas. The design, arrangement, style, color, character, quality and general appearance of the portion of the Premises visible from public, common and exterior areas, and contents of such portion of the Premises, including furniture, fixtures, signs, art work, wall

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coverings, carpet and decorations, and all changes, additions and replacements thereto shall at all times have a neat, professional, attractive, first class office appearance.

     (6) Property Tradename, Likeness, Trademarks and “AT&T.” Tenant shall not in any manner use the name of the Real Property or Complex for any purpose, or use any tradenames or trademarks used by Landlord, any other tenant, or its affiliates, or the letters “AT&T,” or any picture or likeness of the Real Property, in any letterheads, envelopes, circulars, notices, advertisements, containers, wrapping or other material.

     (7) Deliveries and Removals. Furniture, freight and other large or heavy articles, and all other deliveries may be brought into the Real Property only at times and in the manner designated by Landlord, and always at the Tenant’s sole responsibility and risk. Landlord may inspect items brought into the Real Property or Premises with respect to weight or dangerous nature or compliance with this Lease or Laws. Landlord may (but shall have no obligation to) require that all furniture, equipment, cartons and other articles removed from the Premises or the Real Property be listed and a removal permit therefor first be obtained from Landlord. Tenant shall not take or permit to be taken in or out of other entrances or elevators of the Real Property, any item normally taken, or which Landlord otherwise reasonably requires to be taken, in or out through service doors or on freight elevators. Landlord may impose reasonable charges and requirements for the use of freight elevators and loading areas, and reserves the right to alter schedules without notice. Any hand-carts used at the Real Property shall have rubber wheels and sideguards, and no other material handling equipment may be brought upon the Real Property without Landlord’s prior written approval.

     (8) Outside Vendors. Tenant shall not obtain for use upon the Premises ice, drinking water, vending machine, towel, janitor and other services, except from Persons designated or approved by Landlord. Any Person engaged by Tenant to provide any other services shall be subject to scheduling and direction by the manager or security personnel of the Real Property. Vendors must use freight elevators and service entrances.

     (9) Overloading Floors; Vaults. Tenant shall not overload any floor or part thereof in the Premises, or Real Property, including any public corridors or elevators therein bringing in or removing any large or heavy articles, and Landlord may prohibit, or direct and control the location and size of, safes and all other heavy articles and require at Tenant’s expense supplementary supports of such material and dimensions as Landlord may deem necessary to properly distribute the weight.

     (10) Locks and Keys. Tenant shall use such standard key system designated by Landlord on all keyed doors to and within the Premises, excluding any permitted vaults or safes (but Landlord’s designation shall not be deemed a representation of adequacy to prevent unlawful entry or criminal acts, and Tenant shall maintain such additional insurance as Tenant deems advisable for such events). Tenant shall not attach or permit to be attached additional locks or similar devices to any door or window, change existing locks or the mechanism thereof, or make or permit to be made any keys for any door other than those provided by Landlord. If more than two keys for one lock are desired, Landlord will provide them upon payment of Landlord’s charges. In the event of loss of any keys furnished by Landlord, Tenant shall pay Landlord’s reasonable charges there for. The term “key” shall include mechanical, electronic or other keys, cards and passes.

     (11) Utility Closets and Connections. Landlord reserves the right to control access to and use of, and monitor and supervise any work in or affecting, the “wire” or telephone,

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electrical, plumbing or other utility closets (or Landlord may engage or designate an independent contractor to provide such services). Tenant shall obtain Landlord’s prior written consent for any such access, use and work in each instance, and shall comply with such requirements as Landlord may impose, and the other provisions of Article 10 respecting electric installations and connections and telephone lines and connections, and Article 5 respecting Alterations in general. Tenant shall have no right to use any broom closets, storage closets, janitorial closets, or other such closets, rooms and areas whatsoever.

     (12) Plumbing Equipment. The toilet rooms, urinals, wash bowls, drains, sewers and other plumbing fixtures, equipment and lines shall not be misused or used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein.

     (13) Trash. All garbage, refuse, trash and other waste shall be kept in the kind of container, placed in the areas, and prepared for collection in the manner and at the times and places specified by Landlord, subject to Section 8.1(b) respecting Hazardous Materials. Landlord reserves the right to require that Tenant participate in any recycling program designated by Landlord.

     (14) Alcohol, Drugs, Food and Smoking. Landlord reserves the right to exclude or expel from the Real Property any person who, in the judgment of Landlord, is intoxicated or under the influence of liquor or drugs, or who shall in any manner do any act in violation of any of these Rules and Regulations. Tenant shall not at any time manufacture, sell, use or give away, any spirituous, fermented, intoxicating or alcoholic liquors on the Premises, nor permit any of the same to occur. Tenant shall not at any time cook, sell, purchase or give away, food in any form by or to any of Tenant’s agents or employees or any other parties on the Premises, nor permit any of the same to occur (other than in microwave ovens and coffee makers properly maintained in good and safe working order and repair in lunch rooms or kitchens for employees as may be permitted or installed by Landlord, which does not violate any Requirements or bother or annoy any other tenant). Tenant and its employees shall not smoke tobacco on any part of the Real Property (including exterior areas) except those areas, if any, that are designated or approved as smoking areas by Landlord.

     (15) Use of Common Areas; No Soliciting. Tenant shall not use the common areas, including areas adjacent to the Premises, for any purpose other than ingress and egress, and any such use thereof shall be subject to the other provisions of this Lease, including these Rules and Regulations. Without limiting the generality of the foregoing, Tenant shall not allow anything to remain in any passageway, sidewalk, court, corridor, stairway, entrance, exit, elevator, parking or shipping area, or other area outside the Premises. Tenant shall not use the common areas to canvass, solicit business or information from, or distribute any article or material to, other tenants or invitees of the Real Property. Tenant shall not make any room-to-room canvass to solicit business or information or to distribute any article or material to or from other tenants of the Real Property and shall not exhibit, sell or offer to sell, use, rent or exchange any products or services in or from the Premise unless ordinarily embraced within the Tenant’s use of the Premises expressly permitted in the Lease.

     (16) Energy and Utility Conservation. Tenant shall not waste electricity, water, heat or air conditioning or other utilities or services, and agrees to cooperate fully with Landlord to assure the most effective and energy efficient operation of the Real Property and shall not allow the adjustment (except by Landlord’s authorized Real Property personnel) of any controls. Tenant shall not obstruct, alter or impair the efficient operation of the Building Systems, and shall not

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place any item so as to interfere with air flow. Tenant shall keep corridor doors closed and shall not open any windows, except that if the air circulation shall not be in operation, windows which are openable may be opened with Landlord’s consent. If reasonably requested by Landlord (and as a condition to claiming any deficiency in the air-conditioning or ventilation services provided by Landlord), Tenant shall close any blinds or drapes in the Premises to prevent or minimize direct sunlight.

     (17) Unattended Premises. Before leaving the Premises unattended, Tenant shall close and securely lock all doors or other means of entry to the Premises and shut off all lights and water faucets in the Premises (except heat to the extent necessary to prevent the freezing or bursting of pipes).

     (18) Going-Out-Of-Business Sales and Auctions. Tenant shall not use, or permit any other party to use, the Premises for any distress, fire, bankruptcy, close-out, “lost our lease” or going-out-of-business sale or auction. Tenant shall not display any signs advertising the foregoing anywhere in or about the Premises. This prohibition shall also apply to Tenant’s creditors.

     (19) Labor Harmony. Tenant shall not use (and upon notice from Landlord shall cease using) contractors, services, workmen, labor, materials or equipment, or labor and employment practices that, in Landlord’s good faith judgment, may cause strikes, picketing or boycotts or disturb labor harmony with the workforce or trades engaged in performing other work, labor or services in or about the Real Property.

     (20) Prohibited Activities. Tenant shall not: (i) use strobe or flashing lights in or on the Premises, (ii) install or operate any internal combustion engine, boiler, machinery, refrigerating, heating or air conditioning equipment in or about the Premises, (iii) use the Premises for housing, lodging or sleeping purposes or for the washing of clothes, (iv) place any radio or television antennae other than inside of the Premises, (v) operate or permit to be operated any musical or sound producing instrument or device which may be heard outside the Premises, (vi) use any source of power other than electricity, (vii) operate any electrical or other device from which may emanate electrical, electromagnetic, energy, microwave, radiation or other waves or fields which may interfere with or impair radio, television, microwave, or other broadcasting or reception from or in the Real Property or elsewhere or impair or interfere with computers, faxes or telecommunication lines or equipment at the Real Property or elsewhere, or create a health hazard, (viii) bring or permit any bicycle or other vehicle, or dog (except in the company of a blind person or except where specifically permitted) or other animal or bird in the Real Property, (ix) make or permit objectionable noise, vibration, or odor to emanate from the Premises, (x) do anything in or about the Premises or Real Property that is illegal, immoral, obscene, pornographic, or anything that may in Landlord’s good faith opinion create or maintain a nuisance, cause physical damage to the Premises or Real Property, interfere with the normal operation of the Systems and Equipment, impair the appearance, character or reputation of the Premises or Real Property, create waste to the Premises or Real Property, cause demonstrations, protests, loltering, bomb threats or other events that may require evacuation of the Building, (xi) advertise or engage in any activities which violate the spirit or letter of any code of ethics or licensing requirements of any professional or business organization, (xii) throw or permit to be thrown or dropped any article from any window or other opening in the Real Property, (xiii) use the Premises for any purpose, or permit upon the Premises or Real Property anything, that may be dangerous to persons or property (including firearms or other weapons (whether or not licensed or used by security guards) or any explosive or combustible articles or materials), (xiv) place vending or game machines in the Premises, except vending machines for employees, (xv) adversely affect

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the indoor air quality of the Premises or Real Property, or (xvi) do or permit anything to be done upon the Premises or Real Property in any way tending to disturb, bother, annoy or interfere with Landlord or any other tenant at the Real Property or the tenants of neighboring property, or otherwise disrupt orderly and quiet use and occupancy of the Real Property.

     (21) Parking. The following Rules and Regulations shall apply in the below-grade Real Property garage:

     (i) Parking shall be available in areas designated by Landlord from time to time, and for such daily or monthly charges as Landlord may establish from time to time. Parking for Tenant and its employees and visitors shall be on a “first come, first served,” unassigned basis, in common with Landlord and other tenants at the Real Property, and their employees and visitors, and other Persons to whom Landlord shall grant the right or who shall otherwise have the right to use the same. Landlord reserves the right to: (x) adopt additional requirements or procedures pertaining to parking, including a valet system, (y) assign specific spaces, and reserve spaces for small and other size cars, disabled persons, and other tenants, customers of tenants or other parties/and (z) restrict or prohibit full size vans and other large vehicles.

     (ii) Monthly fees shall be paid in advance prior to the first of each month. Failure to do so will automatically cancel parking privileges. No deductions from the monthly rate will be made for days on which the garage is not used by Tenant or its designees. In case of any violation of these Rules and Regulations, Landlord may also refuse to permit the violator to park, and may remove the vehicle owned or driven by the violator from the Real Property without liability whatsoever, at such violator’s risk and expense. Landlord reserves the right to close all or a portion of the parking areas or facilities in order to make repairs or perform maintenance services, or any other reason beyond Landlord’s reasonable control. In the event access is denied for any reason, any monthly parking charges shall be abated to the extent access is denied, as Tenant’s sole recourse.

     (iii) Hours shall be reasonably established by Landlord or its parking operator from time to time; cars must be parked entirely within the stall lines, and only small or other qualifying cars may be parked in areas reserved for such cars; all directional signs, arrows and speed limits must be observed; spaces reserved for disabled persons must be used only by vehicles properly designated; washing, waxing, cleaning or servicing of any vehicle is prohibited; parking is prohibited in areas: (a) not striped or designated for parking, (b) aisles, (c) where “no parking” signs are posted, (d) on ramps, and (e) loading areas and other specially designated areas. Delivery trucks and vehicles shall use only those areas designated therefor.

     (iv) Parking stickers, key cards or any other devices or forms of identification or entry shall remain the property of Landlord. Such devices must be displayed as requested and may not be mutilated in any manner. The serial number of the parking identification device may not be obliterated. Devices are not transferable and any device in the possession of an unauthorized holder will be void. Loss or theft of parking identification, key cards or other such devices must be reported to Landlord or any garage manager immediately. Any parking devices reported lost or stolen which are found on any unauthorized car will be confiscated and the illegal holder will be subject to prosecution. Lost or stolen devices found by Tenant or its employees must be reported to Landlord or the office of the garage immediately.

     (22) Responsibility for Compliance. Tenant shall be responsible for ensuring compliance with these Rules and Regulations and Regulations, as they may be amended, by Tenant’s employees and as applicable, by Tenant’s agents, invitees, contractors, subcontractors,

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and suppliers. Tenant shall cooperate with any reasonable program or requests by Landlord to monitor and enforce the Rules and Regulations, including providing vehicle numbers and taking appropriate action against such of the foregoing parties who violate these provisions.

F-6

EXHIBIT G

Form of Letter of Credit

Contact Phones:                                   

IRREVOCABLE LETTER OF CREDIT

, 20___	Our irrevocable standby Letter of Credit:
	No.
Beneficiary:
	Applicant:
227 Monroe Street, Inc.
Attention:
	Attention:
	Amount: Exactly USD $
	(                                                                 Dollars)
	Final Date of Expiration:
	[INSERT DATE WHICH IS ONE
	HUNDRED TWENTY (120) DAYS AFTER
	LEASE EXPIRATION DATE]

     We (the “Bank”) hereby issue our irrevocable standby Letter of Credit No.                      in Beneficiary’s favor for the account of the above-referenced Applicant, in the aggregate amount of exactly USD $                     .

     This Letter of Credit is available with us at our above office by presentation of your draft drawn on us at sight bearing the clause: “Drawn under                      [INSERT NAME OF BANK] Letter of Credit No.                     ” and accompanied by the original of this Letter of Credit. Such sight draft may be signed by Beneficiary or Beneficiary’s managing agent.

     Special conditions:

     Partial draws, as well as multiple presentations and drawings, under this Letter of Credit are permitted. Notwithstanding anything to the contrary contained herein, this Letter of Credit shall expire permanently without renewal on                     [INSERT DATE WHICH IS ONE HUNDRED TWENTY (120) DAYS AFTER LEASE EXPIRATION DATE].

     This Letter of Credit shall be automatically extended for an additional period of one (1) year, without amendment, from the present or each future expiration date but in any event not beyond                     [INSERT DATE WHICH IS ONE HUNDRED TWENTY (120) DAYS AFTER LEASE EXPIRATION DATE] which shall be the final expiration date of this Letter of

G-1

Credit, unless, at least sixty (60) days prior to the then current expiration date, we notify you by registered mail/overnight courier service at the above address that this Letter of Credit will not be extended beyond the current expiration date.

     We hereby agree with you that all drafts drawn under and in compliance with the terms of this Letter of Credit will be duly honored upon presentation to us on or before the expiration date of this Letter of Credit, regardless of whether Applicant disputes such presentation.

     This Letter of Credit is transferable one or more times and any such transfer shall be effected by us, provided that you deliver to us your written request for transfer in form and substance reasonably satisfactory to us. Beneficiary may, at any time and without notice to Applicant and without first obtaining Applicant’s consent thereto, transfer all or any portion of Beneficiary’s interest in and to the Letter of Credit to another party, person or entity, regardless of whether or not such transfer is separate from or as a part of the assignment by Beneficiary of Beneficiary’s rights and interests in and to that certain lease agreement dated                     , by and between                     , as landlord, and                     , as tenant, for premises located at                     ,                     ,                     . The original of this Letter of Credit together with any amendments thereto must accompany any such transfer request.

     Except so far as otherwise expressly stated, this documentary credit is subject to Uniform Customs and Practice for Documentary Credits, 1993 Revision, International Chamber Of Commerce Publication No. 500.

By:
	Authorized signature

Please direct any correspondence including drawing or inquiry quoting our reference number to the above referenced address.

G-2

EXHIBIT H

Form of SNDA

(the “Lender”)

- and -

(Tenant)

SUBORDINATION, NON-DISTURBANCE
AND ATTORNMENT AGREEMENT

Dated:                                         , 200_

Location:

County:

UPON
RECORDATION RETURN TO:

SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT

THIS SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT (the “Agreement”) made as of the ___ day of                     , 200___ by and between                                                                                                                      (the “Lender”), and                                                             , an                     , having  an address  at                                         ,                     ,                      (“Tenant”).

RECITALS

          A. Tenant is the tenant under a certain lease (the “Lease”) dated                                         , with                                                              , a                                                              (“Landlord”) or its predecessor in interest, of premises described in the Lease (the “Premises”) located in a certain office building known as                                          located in the County of                                          , State of                                          and more particularly described in Exhibit A attached hereto and made a part hereof (such office building, including the Premises, is hereinafter referred to as the “Property”).

          B. Landlord represents to Tenant that Landlord has executed a deed of trust in favor of Lender pursuant to which Landlord encumbered Landlord’s interest in the Property to secure, among other things, a loan made by Lender (or its predecessor in interest) to Landlord on terms more particularly set for in that certain Loan Agreement between Lender (or its predecessor in interest) and Landlord. The Deed of Trust and the Loan Agreement, along with other pertinent loan documents are hereinafter collectively referred to as the “Security Documents”.

AGREEMENT

          For mutual consideration, including the mutual covenants and agreements set forth below, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

          1. Tenant agrees that the Lease is and shall be subject and subordinate to the Security Documents and to all present or future advances under the obligations secured thereby and all renewals, amendments, modifications, consolidations, replacements and extensions of the secured obligations and the Security Documents, to the full extent of all amounts secured by the Security Documents from time to time. Said subordination is to have the same force and effect as if the Security Documents and such renewals, modifications, consolidations, replacements and extensions thereof had been executed, acknowledged, delivered and recorded prior to the Lease, any amendments or modifications thereof and any notice thereof.

          2. Lender agrees that, if the Lender exercises any of its rights under the Security Documents, including an entry by Lender pursuant to the Mortgage or a foreclosure of the Mortgage, Lender shall not disturb Tenant’s right of quiet possession of the Premises under the terms of the Lease so long as Tenant is not in default beyond any applicable grace period of any term, covenant or condition of the Lease.

          3. Tenant agrees that, in the event of a foreclosure of the Mortgage by Lender or the acceptance of a deed in lieu of foreclosure by Lender or any other succession of Lender to fee ownership, Tenant will attorn to and recognize Lender as its landlord under the Lease for the remainder of the term of the Lease (including all extension periods which have been or are hereafter exercised) upon the same terms and conditions as are set forth in the Lease, and Tenant hereby agrees to pay and perform all of the obligations of Tenant pursuant to the Lease.

          4. Tenant agrees that, in the event Lender succeeds to the interest of Landlord under the Lease, Lender shall not be:

          (a) liable for any act or omission of any prior Landlord (including, without limitation, the then defaulting Landlord), or

          (b) subject to any defense or offsets which Tenant may have against any prior Landlord (including, without limitation, the then defaulting Landlord), or

          (c) bound by any payment of rent or additional rent which Tenant might have paid for more than one month in advance of the due date under the Lease to any prior Landlord (including, without limitation, the then defaulting Landlord), or

          (d) bound by any obligation to make any payment to Tenant which was required to be made prior to the time Lender succeeded to any prior Landlord’s interest, or

          (e) accountable for any monies deposited with any prior Landlord (including security deposits), except to the extent such monies are actually received by Lender, or

          (f) bound by any surrender, termination, amendment or modification of the Lease made without the consent of Lender or a predecessor of Lender.

          5. Tenant agrees that, notwithstanding any provision hereof to the contrary, the terms of the Mortgage shall continue to govern with respect to the disposition of any insurance proceeds or eminent domain awards, and any obligations of Landlord to restore the real estate of which the Premises are a part shall, insofar as they apply to Lender, be limited to insurance proceeds or eminent domain awards received by Lender after the deduction of all costs and expenses incurred in obtaining such proceeds or awards.

          6. Tenant hereby agrees to give to Lender copies of all notices of Landlord default(s) under the Lease in the same manner as, and whenever, Tenant shall give any such notice of default to Landlord, and no such notice of default shall be deemed given to Landlord unless and until a copy of such notice shall have been so delivered to Lender. Lender shall have the right to remedy any Landlord default under the Lease, or to cause any default of Landlord

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under the Lease to be remedied, and for such purpose Tenant hereby grants Lender such additional period of time as may be reasonable to enable Lender to remedy, or cause to be remedied, any such default in addition to the period given to Landlord for remedying, or causing to be remedied, any such default. Tenant shall accept performance by Lender of any term, covenant, condition or agreement to be performed by Landlord under the Lease with the same force and effect as though performed by Landlord. No Landlord default under the Lease shall exist or shall be deemed to exist as long as Lender, in good faith, shall have commenced to cure such default within the above referenced time period and shall be prosecuting the same to completion with reasonable diligence, subject to force majeure. In the event of the termination of the Lease by reason of any default thereunder by Landlord, upon Lender’s written request, given within thirty (30) days after any such termination, Tenant, within fifteen (15) days after receipt of such request, shall execute and deliver to Lender or its designee or nominee a new lease of the Premises for the remainder of the term of the Lease upon all of the terms, covenants and conditions of the Lease. Lender shall have the right, without Tenant’s consent, to foreclose the Mortgage or to accept a deed in lieu of foreclosure of the Mortgage or to exercise any other remedies under the Security Documents.

          7. Tenant hereby consents to the Assignment of Leases and Rents from Landlord to Lender in connection with the Loan. Tenant acknowledges that the interest of the Landlord under the Lease is to be assigned to Lender solely as security for the purposes specified in said assignments, and Lender shall have no duty, liability or obligation whatsoever under the Lease or any extension or renewal thereof, either by virtue of said assignments or by any subsequent receipt or collection of rents thereunder, unless Lender shall specifically undertake such liability in writing or unless Lender or its designee or nominee becomes, and then only with respect to periods in which Lender or its designee or nominee becomes, the fee owner of the Premises. Tenant agrees that upon receipt of a written notice from Lender of a default by Landlord under the Loan, Tenant will thereafter, if requested by Lender, pay rent to Lender in accordance with the terms of the Lease.

          8. The Lease shall not be assigned by Tenant, modified, amended or terminated (except a termination that is permitted in the Lease without Landlord’s consent) without Lender’s prior written consent in each instance.

          9. Any notice, election, communication, request or other document or demand required or permitted under this Agreement shall be in writing and shall be deemed delivered on the earlier to occur of (a) receipt or (b) the date of delivery, refusal or nondelivery indicated on the return receipt, if deposited in a United States Postal Service Depository, postage prepaid, sent certified or registered mail, return receipt requested, or if sent via a recognized commercial courier service providing for a receipt, addressed to Tenant or Lender, as the case may be, at the following addresses:

               If to Tenant:

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               If to Lender:

          10. The term “Lender” as used herein includes any successor or assign of the named Lender herein, including without limitation, any co-lender at the time of making the Loan, any purchaser at a foreclosure sale and any transferee pursuant to a deed in lieu of foreclosure, and their successors and assigns, and the terms “Tenant” and “Landlord” as used herein include any successor and assign of the named Tenant and Landlord herein, respectively; provided, however, that such reference to Tenant’s or Landlord’s successors and assigns shall not be construed as Lender’s consent to any assignment or other transfer by Tenant or Landlord.

          11. If any provision of this Agreement is held to be invalid or unenforceable by a court of competent jurisdiction, such provision shall be deemed modified to the extent necessary to be enforceable, or if such modification is not practicable, such provision shall be deemed deleted from this Agreement, and the other provisions of this Agreement shall remain in full force and effect, and shall be liberally construed in favor of Lender.

          12. Neither this Agreement nor any of the terms hereof may be terminated, amended, supplemented, waived or modified orally, but only by an instrument in writing executed by the party against which enforcement of the termination, amendment, supplement, waiver or modification is sought.

          This Agreement shall be construed in accordance with the laws of the state of in which the Property is located.

          The person executing this Agreement on behalf of Tenant is authorized by Tenant to do so and execution hereof is the binding act of Tenant enforceable against Tenant.

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          Witness the execution hereof [under seal] as of the date first above written.

LENDER:

By:

Name:

Title:

TENANT:

By:

Name:

Title:

          The undersigned Landlord hereby consents to the foregoing Agreement and confirms the facts stated in the foregoing Agreement.

LANDLORD:

By:

Name:

Title:

[ADD APPROPRIATE ACKNOWLEDGMENT]

STATE OF                                                             )
                                                                                )SS.
COUNTY OF                                                         )

          On                          , 200___, personally appeared the above named                                              , a                      of                                             , and acknowledged the foregoing to be the free act and deed of said association, before me.

Notary Public

My commission expires:____________

                                        , ss.

          On                     , 200___, personally appeared the above named                     , the                     , of                      and acknowledged the foregoing to be the free act and deed of said                     , before me.

Notary Public

My commission expires:____________

                                        , ss.

          On                     , 200___, personally appeared the above named                     , the                     , of                      and acknowledged the foregoing to be the free act and deed of said                     , before me.

Notary Public

My commission expires:____________

EX-21.1

EXHIBIT 21.1

Subsidiaries of Affirmative Insurance Holdings, Inc.

Company	Jurisdiction of Incorporation/Formation
Affirmative Management Services, Inc.	Texas
Affirmative Services, Inc.	Texas
Affirmative Services Retail, Inc.	Texas
Affirmative Property Holdings, Inc.	Texas
Affirmative Underwriting Services, Inc.	Texas
Affirmative Insurance Services of Texas, Inc.	Texas
Affirmative Insurance Services of Pennsylvania, Inc.	Pennsylvania
Affirmative Insurance Services of Illinois, Inc.	Illinois
Affirmative Insurance Services of Florida, Inc.	Florida
Affirmative Insurance Services of South Carolina, Inc.	South Carolina
American Agencies Investments, Inc.	Delaware
American Agencies Insurance Services of Louisiana, Inc.	Louisiana
A-Affordable Managing General Agency, Inc.	Texas
Space Coast Holdings, Inc.	Delaware
Affirmative Premium Finance Holdings, Inc.	Delaware
Affirmative Premium Finance, Inc.	Delaware
Affirmative Insurance Group, Inc.	Texas
Affirmative Insurance Company	Illinois
Insura Property and Casualty Insurance Company	Illinois
Affirmative Insurance Company of Michigan	Michigan
USAgencies Casualty Insurance Company, Inc.	Louisiana
USAgencies Direct Insurance Company	New York
Affirmative Retail, Inc.	Texas
A-Affordable Insurance Agency, Inc.	Texas
Driver’s Choice Insurance Agencies, Inc.	South Carolina
Driver’s Choice Insurance Services, LLC	South Carolina
Fed USA Retail, Inc.	Florida
Instant Auto Insurance Agency of Arizona, Inc.	Arizona
Instant Auto Insurance Agency of Colorado, Inc.	Colorado
Instant Auto Insurance Agency of Indiana, Inc.	Indiana
Instant Auto Insurance Agency of New Mexico, Inc.	New Mexico
InsureOne Independent Insurance Agency, LLC	Illinois
Yellow Key Insurance Agency, Inc.	Illinois
Affirmative Franchising Group, Inc.	Texas
Fed USA Franchising Group, Inc.	Delaware
Fed USA Franchising, Inc.	Florida
Affirmative Alternative Distribution, Inc.	Texas
USAgencies, L.L.C.	Louisiana
LIFCO, L.L.C.	Louisiana
USAgencies Management Services, Inc.	Louisiana
Affirmative Insurance Holdings Statutory Trust I	Delaware
Affirmative Insurance Holdings Statutory Trust II	Delaware

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

The Board of Directors
Affirmative Insurance Holdings, Inc.:

We consent to incorporation by reference in the registration statement on Form S-8 (File No. 333-137938) of Affirmative Insurance Holdings, Inc. and subsidiaries of our reports dated March 16, 2007, relating to the consolidated balance sheet of Affirmative Insurance Holdings, Inc. and subsidiaries as of December 31, 2006, and the related consolidated statements of operations, stockholders’ equity and comprehensive income and cash flows for the year ended December 31, 2006 and all related financial statement schedules, management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2006, and the effectiveness of internal control over financial reporting as of December 31, 2006, which report appears in the December 31, 2006 annual report on Form 10-K of Affirmative Insurance Holdings, Inc.

/s/KPMG LLP

Dallas, Texas
March 16, 2007

EX-23.2

Exhibit 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No.333-137938) of Affirmative Insurance Holdings, Inc. of our report dated April 11, 2006 relating to the financial statements and financial statement schedules, which appears in this Form 10-K.

/s/ PricewaterhouseCoopers LLP
Dallas, Texas
March 16, 2007

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Kevin R. Callahan, Chairman of the Board and Chief Executive Officer of Affirmative Insurance Holdings, Inc., certify that:

1.	I have reviewed this annual report on Form 10-K of Affirmative Insurance Holdings, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 16, 2007

/s/ Kevin R. Callahan Kevin R. Callahan

Chairman of the Board and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Mark E. Pape, Executive Vice President and Chief Financial Officer of Affirmative Insurance Holdings, Inc., certify that:

1.	I have reviewed this annual report on Form 10-K of Affirmative Insurance Holdings, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 16, 2007

/s/ Mark E. Pape

Mark E. Pape

Executive Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION

     I, Kevin R. Callahan, Chairman of the Board and Chief Executive Officer of Affirmative Insurance Holdings, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, to the best of my knowledge, that:

(1)	the Annual Report on Form 10-K of the Company for the year ended December 31, 2006 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

This certificate is being furnished solely for purposes of Section 906.

Dated: March 16, 2007

                /s/ Kevin R. Callahan Kevin R. Callahan

Chairman of the Board and Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION

     I, Mark E. Pape, Executive Vice President and Chief Financial Officer of Affirmative Insurance Holdings, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, to the best of my knowledge, that:

(1)	the Annual Report on Form 10-K of the Company for the year ended December 31, 2006 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

This certificate is being furnished solely for purposes of Section 906.

Dated: March 16, 2007

                /s/ Mark E. Pape Mark E. Pape

Executive Vice President and Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.