Affirmative Insurance Holdings, Inc. Announces Fourth Quarter and Full

Affirmative Insurance Holdings, Inc. Announces Fourth Quarter and Full Year Results for 2004

    Business Editors

    ADDISON, Texas--(BUSINESS WIRE)--Feb. 24, 2005--

Period Produces Continuing Strong Net Income, and Revenue Growth, Contributing to Excellent Full Year Results
    Affirmative Insurance Holdings, Inc. (Nasdaq:AFFM), a producer and provider of personal non-standard automobile insurance, today announced financial results for the quarter and year ended December 31, 2004.
    Highlights for the Company's fourth quarter and full year included:

--	Earnings per share for the fourth quarter of 2004 were $0.33 per diluted share and $1.72 per diluted share for the full year;
--	Total revenues for the fourth quarter of 2004 were $76.7 million, an increase of 19.7% as compared to pro forma total revenue for the same period of 2003. For the full year 2004, total revenues were $288.7 million, an increase of 19.0% from the prior year pro forma results;
--	Net income for the fourth quarter of 2004 was $5.7 million, even with pro forma net income for the same period of 2003. The fourth quarter of 2003 was favorably impacted by one time adjustments to revenue deferrals. Without these one time adjustments, net income for the fourth quarter of 2004 would have increased 15.9% as compared to the same period of 2003. For the full year net income was $24.4 million, an increase of 32.3% from the prior year pro forma results;
--	In the quarter the Company raised $30.0 million in an offering of trust preferred securities and contributed the net proceeds to its insurance subsidiaries. At December 31, 2004 the statutory surplus of the insurance companies was $139.3 million, up from $36.7 million at December 31, 2003, and the Company significantly reduced its purchase of reinsurance for 2005; and,
--	Affirmative completed the acquisition of the assets of 24 retail stores and a franchise operation with 42 locations in Florida at the end of December 2004.

    "We are pleased to announce solid financial results in the face of softening market conditions," said Thomas E. Mangold, president and chief executive officer of Affirmative Insurance Holdings, Inc. "We continue to focus on our plan of increasing total controlled premium by leveraging and developing our multiple distribution channel strategy, as well as making strategic acquisitions to drive additional growth and earnings. We accomplished this in 2004 while improving margins in both of our operating segments."
    Mangold also commented that as a result of increasing the surplus in the insurance companies following the initial public offering and the issuance of trust preferred securities, Affirmative plans to increase its retention of business to capture a larger share of its favorable underwriting results. In 2005, the Company expects to retain approximately 90.0% of its total controlled premiums, as compared to 52.8% for the full year 2004. The Company was able to achieve a 15.3% return on equity for the full year 2004 and ended the year with 13.1% debt to total capitalization.

    Fourth Quarter Financial Results

    Fourth quarter net income was $5.7 million or $0.33 per diluted share, even with the pro forma net income of $5.7 million or $0.56 per diluted share for the same period in 2003. Without the previously mentioned one time adjustments in the fourth quarter of 2003, net income for the fourth quarter of 2004 would have increased 15.9% as compared to the same period of 2003. Weighted average diluted shares for the fourth quarter were 17.1 million compared to 10.1 million for the year-ago period, as a result of the Company's initial public offering in July of 2004.
    Revenues for the three months ended December 31, 2004 were $76.7 million, an increase of $12.6 million or 19.7% compared to pro forma revenues for the three months ended December 31, 2003. The increase was primarily due to Affirmative's increased retention of gross premiums written as a result of the increased surplus in our insurance companies and increases in commission and fee income in the Company's Agency Segment.
    Fourth quarter revenues from agency operations increased 4.0% to $40.7 million with a pre-tax margin of 11.5%, compared to revenues of $39.1 million with a pre-tax margin of 20.0% for the fourth quarter of 2003. Revenues from insurance company operations for the fourth quarter of 2004 were $61.3 million, an increase of 22.9% as compared to fourth quarter 2003 pro forma revenues of $49.8 million. Combined ratio for the fourth quarter of 2004 was 92.5% compared to 96.8% for the fourth quarter of 2003.

    Full Year Financial Results

    For the twelve months ended December 31, 2004 net income was $24.4 million or $1.72 per diluted share, compared to pro forma net income of $18.5 million or $1.83 per diluted share for the twelve months ended December 31, 2003. As a result of the Company's initial public offering in July of 2004, weighted average diluted shares for 2004 were 14.2 million compared to 10.1 million for 2003. Growth in net income during 2004 was driven by greater retention of premiums and improved production and operating margins as compared to 2003.
    Consolidated revenues for the fiscal year ended December 31, 2004 were $288.7 million compared to 2003 pro forma revenues of $242.7 million for the fiscal year ended December 31, 2003, an increase of 19.0%. The increase was primarily due to Affirmative's increased retention of gross premiums written as a result of the increased surplus in our insurance companies and increases in commission and fee income in the Company's Agency Segment.
    For the full year 2004, agency operations revenue increased 13.1% to $165.8 million with a pre-tax margin of 15.8% compared to full year 2003 revenue of $146.5 million with a pre-tax margin of 14.3%. For the full year, revenues from insurance company operations were $225.1 million, up 16.7% from pro forma revenues of $193.0 million for full year 2003. Combined ratio for the full year 2004 was 93.6% compared to 95.2% for 2003.

    Recent Events

    As previously announced, Affirmative completed the acquisition of the assets of 24 retail stores and a franchise operation with 42 locations in Florida at the end of December 2004. In addition, in January 2005 Affirmative closed two separate transactions and acquired the assets of 12 retail stores, 11 of which are in the Houston DMA. These acquisitions were purchased with cash on hand.

    Guidance and Supplemental Information

    Affirmative maintains a positive outlook for 2005 and has increased its earlier guidance for full year earnings to be in the range of $1.90 to $2.10 per diluted share from previous guidance of $1.85 to $2.05 per diluted share.
    To provide a more complete understanding of Affirmative's financial results, the Company has posted supplemental financial data on the investor relations portion of the Company's website, www.affirmativeholdings.com. The data pertains to fourth quarter and full year financial results for 2003 and 2004. The supplemental financial data also contains a reconciliation of 2003 pro forma financial results contained in this release to 2003 GAAP financial results.

    Conference call

    Affirmative will hold a conference today, Thursday, February 24th, at 11:00 a.m. Eastern Time, 10:00 a.m. Central Time. Following a brief presentation, participants will have the opportunity to ask questions. To participate in the call, dial 1-888-396-2356 (international dial 1-617-847-8709), ten minutes before the conference call begins and dial pass code 26111696.
    There will also be a real-time audio webcast of the conference call by CCBN. To listen to the live call, select the webcast icon from the investor relations section of Affirmative's website http://www.affirmativeholdings.com at least 15 minutes before the start of the call to register, download, and install any necessary audio software. Individuals accessing the audio webcast will be "listen only" and will not have the ability to take part in the Q&A session.
    A digital replay will be available one hour after the conclusion of the call. Interested individuals can access the webcast replay at http://www.affirmativeholdings.com, by clicking on the webcast link. The webcast replay will be available for 30 days after the call. Phone replay will be available through March 3rd and may be accessed by dialing 1-888-286-8010 (international dial 1-617-801-6888), then enter pass code 34228496.

    About Affirmative Insurance Holdings, Inc.

    Headquartered in Addison, Texas, Affirmative Insurance Holdings, Inc., is a producer and provider of personal non-standard automobile insurance policies to individual consumers in highly targeted geographic markets. Affirmative currently offers products and services in 11 states, including Texas, Illinois, California and Florida.

    Forward-Looking Statements Disclosure

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

Affirmative Insurance Holdings, Inc. Consolidated Statements of Operations - Unaudited (dollars in thousands, except per share data)

Three months ended December 31, Actual Actual Pro Forma 2004 2003 2003 ----------- ----------- ----------- Revenues Net premiums earned $53,065 $-- $43,602 Commissions and fees 22,706 28,700 19,929 Net investment income 938 41 41 Realized gains (losses) 1 -- -- Other -- -- 538 ----------- ----------- ----------- Total revenues 76,710 28,741 64,110 ----------- ----------- -----------

Expenses Losses and loss adjustment expenses 33,644 -- 29,501 Policy acquisition and operating expenses 33,120 18,315 25,155 Interest expense 62 212 212 ----------- ----------- ----------- Total expenses 66,826 18,527 54,868 ----------- ----------- ----------- Net income before income taxes, minority interest and equity interest in unconsolidated subsidiaries 9,884 10,214 9,242 Income tax expense 3,651 3,653 3,314 Minority interest, net of income taxes 223 58 58 Equity interest in unconsolidated subsidiaries, net of income taxes 317 174 174 ----------- ----------- ----------- Net income $5,693 $6,329 $5,696 =========== =========== ===========

Net income per common share - Basic $0.34 $0.63 $0.56 =========== =========== =========== Net income per common share - Diluted $0.33 $0.62 $0.56 =========== =========== ===========

Weighted average shares - Basic 16,836,663 10,101,230 10,101,230 Weighted average shares - Diluted 17,130,371 10,138,266 10,138,266

Affirmative Insurance Holdings, Inc. Consolidated Statements of Operations - Unaudited (dollars in thousands, except per share data)

Twelve months ended December 31, Actual Actual Pro Forma 2004 2003 2003 ----------- ----------- ----------- Revenues Net premiums earned $194,341 $-- $167,411 Commissions and fees 92,014 103,344 71,709 Net investment income 2,327 189 189 Realized gains (losses) (8) 451 451 Other -- -- 2,890 ----------- ----------- ----------- Total revenues 288,674 103,984 242,650 ----------- ----------- -----------

Expenses Losses and loss adjustment expenses 128,969 -- 114,426 Policy acquisition and operating expenses 117,648 72,330 97,478 Interest expense 588 821 821 ----------- ----------- ----------- Total expenses 247,205 73,151 212,725 ----------- ----------- ----------- Net income before income taxes, minority interest and equity interest in unconsolidated subsidiaries 41,469 30,833 29,925 Income tax expense 15,319 11,025 10,707 Minority interest, net of income taxes 804 403 403 Equity interest in unconsolidated subsidiaries, net of income taxes 913 348 348 ----------- ----------- ----------- Net income $24,433 $19,057 $18,467 =========== =========== ===========

Net income per common share - Basic $1.74 $1.89 $1.83 =========== =========== =========== Net income per common share - Diluted $1.72 $1.88 $1.83 =========== =========== ===========

Weighted average shares - Basic 14,018,530 10,082,794 10,082,794 Weighted average shares - Diluted 14,213,682 10,112,585 10,112,585

Affirmative Insurance Holdings, Inc. Condensed Consolidated Balance Sheets (dollars in thousands)

December December 31, 31, 2004 2003 --------- ---------

Assets Fixed maturities - available for sale $157,666 $6,610 Short-term investments 1,995 -- Other invested assets -- 928 --------- --------- 159,661 7,538 Cash and cash equivalents 24,096 15,358 Fiduciary and restricted cash 16,267 9,467 Premiums and fees receivable 117,978 75,596 Commissions receivable 11,890 7,043 Receivable from reinsurers 84,332 94,526 Deferred acquisition costs 19,118 14,371 Other assets 106,855 91,309 --------- --------- Total assets $540,197 $315,208 ========= ========= Liabilities and Stockholders' Equity Liabilities Reserves for losses and loss adjustment expenses 99,746 58,507 Unearned premium 90,695 71,226 Amounts due reinsurers 55,728 19,633 Deferred revenue 24,478 15,451 Other liabilities 64,244 37,014 --------- --------- Total liabilities 334,891 201,831 --------- --------- Stockholders' equity Common stock 168 116 Warrants -- 157 Additional paid-in capital 151,752 84,074 Accumulated other comprehensive income (loss) 251 (9) Retained earnings 53,135 29,039 --------- --------- Total stockholders' equity 205,306 113,377 --------- --------- Total liabilities and stockholders' equity $540,197 $315,208 ========= =========

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CONTACT: Affirmative Insurance Holdings, Inc., Addison Stewart Yee, 972-728-2117

KEYWORD: TEXAS INDUSTRY KEYWORD: INSURANCE BANKING EARNINGS CONFERENCE CALLS SOURCE: Affirmative Insurance Holdings, Inc.

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