First Amendment to Credit Agreement And Waiver of Defaults

Exhibit 10.3

First Amendment to Credit Agreement
And Waiver of Defaults

     This FIRST AMENDMENT TO CREDIT AGREEMENT AND WAIVER OF DEFAULTS (this “ First Amendment ”), dated as of August 12, 2005, is among AFFIRMATIVE INSURANCE HOLDINGS, INC., a Delaware corporation (“ Borrower ”), each other Obligor, and THE FROST NATIONAL BANK, a national banking association, as Administrative Agent, Lender and L/C Issuer.

RECITALS:

     Borrower, Administrative Agent, Lender and L/C Issuer have previously entered into the Credit Agreement dated as of July 30, 2004 (such agreement, together with all amendments and restatements, the “ Credit Agreement ”).

     Borrower has requested amendments to and waivers of certain provisions of the Credit Agreement and waivers of existing Defaults and Events of Default.

     Lender has agreed to amend the Credit Agreement, waive certain provisions of the Credit Agreement and waive the existing Defaults and Events of Default, subject to the terms of this First Amendment.

AGREEMENT:

     NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, the parties hereto agree as follows:

ARTICLE I

Definitions

     1.1 Definitions . All capitalized terms not otherwise defined herein have the same meanings as in the Credit Agreement.

ARTICLE II

Amendments to Credit Agreement

     2.1 Amendments to Credit Agreement Section 1.1 .

     (a) Section 1.1 is amended by adding the following in alphabetical order:

“ Affirmative Trust I ” means 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 is the issuer of the 2004 Preferred Securities, and which purchased from Borrower the

2004 Debentures with the net proceeds of the issuance and sale of the 2004 Preferred Securities.

“ Affirmative Trust II ” means 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 is the issuer of the 2005 Preferred Securities, and which purchased from Borrower the 2005 Debentures with the net proceeds of the issuance and sale of the 2005 Preferred Securities.

“ Affirmative Trust I Declaration of Trust ” means the Amended and Restated Declaration of Trust of Affirmative Trust I, dated as of December 21, 2004, together with all amendments and restatements.

“ Affirmative Trust II Declaration of Trust ” means the Amended and Restated Declaration of Trust of Affirmative Trust II, dated as of June 1, 2005, together with all amendments and restatements.

“ Expenses Incurred ” means (a) if the calculation is made as at the last day of the first three fiscal quarters of a RIC, the amount of other underwriting expenses incurred for the four fiscal quarters of such RIC ended as at such last day, computed using the same information and in the same manner (except that such computation shall be for the preceding four fiscal quarters) as was utilized in preparing page 4, line 4 of the September 30, 2004 quarterly regulatory financial statement of such RIC, utilizing the format promulgated by NAIC and filed with the applicable Insurance Regulator, or if such format is changed after the Agreement Date, the same type of information, computed in the same manner (except that such computation shall be for the preceding four fiscal quarters), as contained on page 4, line 4 of such regulatory financial statement of such RIC dated September 30, 2004, or (b) if the calculation is made as at the last day of the fiscal year of a RIC, other underwriting expenses incurred for the period of calculation as shown on page 4, line 4 of the regulatory financial statement of such RIC as would be prepared for such period utilizing the identical format promulgated by NAIC and utilized by such RIC in preparing the December 31, 2004 annual statements filed with the applicable Insurance Regulator, or if such format is changed after the Agreement Date, the same type of information, computed in the same manner, as contained on page 4, line 4 of such regulatory financial statement of such RIC dated December 31, 2004.

“ Expense Ratio ” means the ratio of Expenses Incurred to Premiums Written.

“ Loss Ratio ” means the ratio of Losses Incurred to Premiums Earned.

“ Losses Incurred ” means losses and loss adjustment expenses incurred for the period of calculation, being the sum of (a) (i) if the calculation is made as at the last day of the first three fiscal quarters of a RIC, the amount of losses incurred for the four fiscal quarters of such RIC ended as at such last day, computed using the same information and in the same manner (except that such computation shall

be for the preceding four fiscal quarters) as was utilized in preparing page 4, line 2.4 of the September 30, 2004 quarterly regulatory financial statement of such RIC, utilizing the format promulgated by NAIC and filed with the applicable Insurance Regulator, or if such format is changed after the Agreement Date, the same type of information, computed in the same manner (except that such computation shall be for the preceding four fiscal quarters), as contained on page 4, line 2.4 of such regulatory financial statement of such RIC dated September 30, 2004, or (ii) if the calculation is made as at the last day of the fiscal year of a RIC, losses incurred as shown on page 4, line 2 of the regulatory financial statement of such RIC as would be prepared for such period utilizing the identical format promulgated by NAIC and utilized by such RIC in preparing the December 31, 2004 annual statements filed with the applicable Insurance Regulator, or if such format is changed after the Agreement Date, the same type of information, computed in the same manner, as contained on page 4, line 2 of such regulatory financial statement of such RIC dated December 31, 2004, plus (b) (i) if the calculation is made as at the last day of the first three fiscal quarters of a RIC, the amount of loss expenses incurred for the four fiscal quarters of such RIC ended as at such last day, computed using the same information and in the same manner (except that such computation shall be for the preceding four fiscal quarters) as was utilized in preparing page 4, line 3 of the September 30, 2004 quarterly regulatory financial statement of such RIC, utilizing the format promulgated by NAIC and filed with the applicable Insurance Regulator, or if such format is changed after the Agreement Date, the same type of information, computed in the same manner (except that such computation shall be for the preceding four fiscal quarters), as contained on page 4, line 3 of such regulatory financial statement of such RIC dated September 30, 2004, or (ii) if the calculation is made as at the last day of the fiscal year of a RIC, loss expenses incurred as shown on page 4, line 3 of the regulatory financial statement of such RIC as would be prepared for such period utilizing the identical format promulgated by NAIC and utilized by such RIC in preparing the December 31, 2004 annual statements filed with the applicable Insurance Regulator, or if such format is changed after the Agreement Date, the same type of information, computed in the same manner, as contained on page 4, line 3 of such regulatory financial statement of such RIC dated December 31, 2004.

“ Premiums Earned ” means (a) if the calculation is made as at the last day of the first three fiscal quarters of a RIC, the amount of premiums earned for the four fiscal quarters of such RIC ended as at such last day, computed using the same information and in the same manner (except that such computation shall be for the preceding four fiscal quarters) as was utilized in preparing page 4, line 1.4 of the September 30, 2004 quarterly regulatory financial statement of such RIC, utilizing the format promulgated by NAIC and filed with the applicable Insurance Regulator, or if such format is changed after the Agreement Date, the same type of information, computed in the same manner (except that such computation shall be for the preceding four fiscal quarters), as contained on page 4, line 1.4 of such regulatory financial statement of such RIC dated September 30, 2004, or (b) if the calculation is made as at the last day of the fiscal year of a RIC, premiums earned

for the period of calculation as shown on page 4, line 1 of the regulatory financial statement of such RIC as would be prepared for such period utilizing the identical format promulgated by NAIC and utilized by such RIC in preparing the December 31, 2004 annual statements filed with the applicable Insurance Regulator, or if such format is changed after the Agreement Date, the same type of information, computed in the same manner, as contained on page 4, line 1 of such regulatory financial statement of such RIC dated December 31, 2004.

“ Premiums Written ” means (a) if the calculation is made as at the last day of the first three fiscal quarters of a RIC, the amount of net premiums written for the four fiscal quarters of such RIC ended as at such last day, computed using the same information and in the same manner (except that such computation shall be for the preceding four fiscal quarters) as was utilized in preparing the parenthetical on page 4, line 1.4 of the regulatory financial statement of such RIC, utilizing the format promulgated by NAIC and filed with the applicable Insurance Regulator, or if such format is changed after the Agreement Date, the same type of information, computed in the same manner (except that such computation shall be for the preceding four fiscal quarters), as contained in the parenthetical on page 4, line 1.4 of such regulatory financial statement of such RIC dated September 30, 2004, or (b) if the calculation is made as at the last day of the fiscal year of a RIC, net premiums written as shown on page 8, Part 1B, line 34, column 6 of the regulatory financial statement of such RIC as would be prepared for such period utilizing the identical format promulgated by NAIC and utilized by such RIC in preparing the December 31, 2004, quarterly statements filed with the applicable Insurance Regulator, or if such format is changed after the Agreement Date, the same type of information, computed in the same manner, as contained on page 8, Part 1B, line 34, column 6 of such regulatory financial statement of such RIC dated as of December 31, 2004.

“ 2004 Debentures ” means the $30,928,000 aggregate principal amount of Junior Subordinated Debt Securities due 2035 issued by Borrower to Affirmative Trust I.

“ 2004 Documents ” means any equity security of Affirmative Trust I, any 2004 Debenture, any 2004 Preferred Security, the 2004 Indenture, the Affirmative Trust I Declaration of Trust, the 2004 Guaranty, any document evidencing or governing any equity or Debt of Affirmative Trust I and all other documents and instruments executed and delivered by Borrower or Affirmative Trust I in connection with any of the foregoing.

“ 2004 Guaranty ” means the Guaranty Agreement dated December 21, 2004, made by Borrower in favor of JPMorgan Chase Bank, N.A., as Guarantee Trustee, together with all amendments and restatements.

“ 2004 Indenture ” means the Indenture dated December 21, 2004, between Borrower and JPMorgan Chase Bank, N.A., as Trustee, together with all amendments and restatements.

“ 2004 Preferred Securities ” means the $30,000,000 Preferred Securities issued by Affirmative Trust I.

“ 2005 Debentures ” means the $25,774,000 aggregate principal amount of Junior Subordinated Debt Securities due 2035 issued by Borrower to Affirmative Trust II.

“ 2005 Documents ” means any equity security of Affirmative Trust II, any 2005 Debenture, any 2005 Preferred Security, the 2005 Indenture, the Affirmative Trust II Declaration of Trust, the 2005 Guaranty, any document evidencing or governing any equity or Debt of Affirmative Trust II and all other documents and instruments executed and delivered by Borrower or Affirmative Trust II in connection with any of the foregoing.

“ 2005 Guaranty ” means the Guaranty Agreement dated June 1, 2005, made by Borrower in favor of JPMorgan Chase Bank, N.A., as Guarantee Trustee, together with all amendments and restatements.

“ 2005 Indenture ” means the Indenture dated June 1, 2005, between Borrower and JPMorgan Chase Bank, N.A., as Trustee, together with all amendments and restatements.

“ 2005 Preferred Securities ” means the $25,000,000 Preferred Securities issued by Affirmative Trust II.

     (b) The definition of “ Combined Ratio ” is deleted in its entirety and the following is substituted in lieu thereof:

“ Combined Ratio ” means, with respect to a RIC, the sum of the Loss Ratio and the Expense Ratio (expressed as a percentage rounded to two decimal places), for the four fiscal quarter period ended on the date of determination, as calculated in accordance with the format of the statutory financial statements for a property and casualty insurance company prescribed by NAIC.

     (c) The definition of “ Consolidated Net Worth ” is deleted in its entirety and the following is substituted in lieu thereof:

“ Consolidated Net Worth ” means the sum of (a) 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, plus (b) if at the time of determination all amounts owed with respect to the 2004 Debentures and the 2004 Guaranty are subordinated to all Obligations on terms acceptable to Required Lenders, an amount equal to the lesser of (i) the unpaid principal amount (not to exceed $30,928,000) of the 2004 Debentures, and (ii) the outstanding amount (not to exceed $30,000,000) of the 2004 Preferred Securities, plus (c) if at the time of determination all amounts owed with respect to the 2005 Debentures and the 2005 Guaranty are subordinated to all Obligations on terms acceptable to Required Lenders, an amount equal to the lesser of (i) the unpaid

principal amount (not to exceed $25,774,000) of the 2005 Debentures, and (ii) the unpaid amount (not to exceed $25,000,000) of the 2005 Preferred Securities.

     (d) The definition of “ Debt ” is deleted in its entirety and the following is substituted in lieu thereof:

“ Debt ” means, at any time, for any Person, (a) Capital Leases, (b) Contingent Debt, (c) debt created, issued, incurred or assumed for money borrowed or for the deferred purchase price of property purchased, (d) all debt, obligations and liabilities secured by any Lien upon any property owned by such Person, even though it has not assumed or become liable for the payment of same, and (e) liabilities in respect of unfunded vested benefits under any Plans; provided, that, for purposes of Section 7.3 , Debt shall not include the unpaid principal amount of the 2004 Debentures or the 2005 Debentures or the obligations with respect to the 2004 Guaranty or the 2005 Guaranty if at the time of determination all amounts owed with respect to the 2004 Debentures, the 2004 Guaranty, the 2005 Debentures and the 2005 Guaranty are subordinated to all Obligations on terms acceptable to Required Lenders.

     (e) The definition of “ Permitted Acquisition ” is deleted in its entirety and the following is substituted in lieu thereof.

“ Permitted Acquisition ” means the acquisition of all or substantially all of the assets or any of the equity of a property and casualty insurance company that is not, as of the acquisition effective date, issuing insurance policies other than automobile insurance policies or liable with respect to any insurance policy in force on such acquisition effective date other than automobile insurance policies, insurance agency or managing general agency, so long as in each case (a) there exists no Default or Event of Default both before and after giving effect to any such acquisition, (b) if such acquired entity is a property and casualty insurance company, the majority of the authorized, issued and outstanding equity of such acquired entity and the majority of each class of equity of such acquired entity that has voting rights (including voting rights arising upon the occurrence of a contingency) will be owned by either a Subsidiary of Borrower or a RIC, (c) if such acquired entity is an insurance agency or managing general agency, the majority of the authorized, issued and outstanding equity of such acquired entity and the majority of each class of equity of such acquired entity that has voting rights (including voting rights arising upon the occurrence of a contingency) will be owned by either Borrower or a wholly-owned Subsidiary of Borrower that is a Guarantor, (d) such acquired assets are acquired by either Borrower or a wholly-owned Subsidiary of Borrower that is a Guarantor, (e) Borrower provides Administrative Agent with information and a Compliance Certificate demonstrating pro forma compliance with the terms of this Agreement through the end of the third full fiscal quarter occurring after the effective date of such acquisition, after giving effect to such acquisition, including, without limitation, each provision of Sections 7.1 through 7.5 , (f) the aggregate cash portion of the consideration for all such acquisitions does not exceed $5,000,000 during any

fiscal year of Borrower or $10,000,000 over the term of this Agreement, and (g) each acquisition is consummated pursuant to a negotiated acquisition agreement on a non-hostile basis pursuant to an acquisition agreement approved by the board of directors or other applicable governing body of the entity to be acquired prior to the commencement thereof, and (h) each acquired entity executes and delivers, or causes to be executed and delivered, each of the documents described in Sections 7.10(a) – (i) .

     (f) The definition of “ Permitted Debt ” is deleted in its entirety and the following is substituted in lieu thereof:

“ Permitted Debt ” means (a) Existing Debt, (b) the Obligations, (c) trade accounts payable and other similar obligations incurred in the ordinary course of business, (d) intercompany balances in the ordinary course of business among Borrower and its Subsidiaries; provided, that all amounts owed by any Obligor to its Subsidiaries shall be subordinated to all Obligations on terms acceptable to Required Lenders, and, provided further, the aggregate amount of all Debt payable by SCHI Entities to Borrower and its Subsidiaries shall not exceed $1,000,000 at any time, (e) the 2004 Debentures; provided, that all amounts owed with respect to the 2004 Debentures shall be subordinated to all Obligations on terms acceptable to Required Lenders, and; provided further, the aggregate principal amount of all 2004 Debentures shall not exceed $30,928,000, (f) the 2004 Guaranty; provided, that all amounts owed with respect to the 2004 Guaranty shall be subordinated to all Obligations on terms acceptable to Required Lenders, (g) the 2005 Debentures; provided, that all amounts owed with respect to the 2005 Debentures shall be subordinated to all Obligations on terms acceptable to Required Lenders, and; provided further, the aggregate principal amount of all 2005 Debentures shall not exceed $25,774,000, (i) the 2005 Guaranty; provided, that all amounts owed with respect to the 2005 Guaranty shall be subordinated to all Obligations on terms acceptable to Required Lenders, (j) Capital Leases of Borrower and each of its Subsidiaries in an aggregate principal amount not to exceed $500,000 at any time, and (k) other Debt of Borrower subordinated to the Obligations on terms acceptable to Required Lenders in their discretion.

     (g) The definition of “ Subsidiary ” is amended by adding the following at the end thereof:

For the purposes of the Loan Documents, Affirmative Trust I and Affirmative Trust II are each deemed to be a Subsidiary of Borrower.

     2.2 Amendments to Section 6.2(a) .

      Sections 6.2(a)(i) and (ii) are deleted in their entirety and the following is substituted in lieu thereof:

     (i) As soon as available, but in any event within 15 days after the first to occur of (A) the required filing date (as established by securities Laws), and

(B) the date on which actually filed, annual consolidated and consolidating Financial Statements (such consolidated Financial Statements to be audited), showing the consolidated and consolidating financial condition and results of operations of Borrower and its consolidated Subsidiaries as of, and for the year ended on, such last day, accompanied by (A) an opinion of Auditors containing only qualifications and emphasis accepta