OVERVIEW

We are a distributor and producer of non-standard personal automobile insurance policies and related products and services 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.

As of June 30, 2009, our subsidiaries included insurance companies licensed to write policies in 40 states, underwriting agencies, and retail agencies with 201 owned stores and relationships with two unaffiliated underwriting agencies. We are currently active in offering insurance directly to individual consumers through retail stores in 9 states (Louisiana, Texas, Illinois, Alabama, Missouri, Indiana, South Carolina, Kansas, and Wisconsin) and distributing our own insurance policies through 9,100 independent agents or brokers in 11 states (Louisiana, Texas, Illinois, Alabama, California, Michigan, Florida, Missouri, Indiana, South Carolina, and New Mexico).

We believe that the delivery of non-standard personal automobile insurance policies to individual consumers requires the interaction of four 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;

• 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; and

• Premium finance companies, which provide financing alternatives to individual customers of our retail agencies.

Our four 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 two of the other 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.

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.

CRITICAL ACCOUNTING POLICIES

There have been no changes of critical accounting policies since December 31, 2008.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 168, The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162 (SFAS 168) which establishes the Accounting Standards Codification (the Codification) and U.S. Securities and Exchange Commission (SEC) interpretive releases as the sources for authoritative GAAP. The Codification will supersede all existing non-SEC accounting and reporting standards under GAAP and is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Codification is not intended to change existing GAAP. Accordingly, we do not anticipate a material impact on our consolidated results of operations or financial condition.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS 167). SFAS 167 eliminates Interpretation 46(R)'s exceptions to consolidating qualifying special-purpose entities, contains new criteria for determining the primary beneficiary, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a variable interest entity. SFAS 167 also contains a new requirement that any term, transaction, or arrangement that does not have a substantive effect on an entity's status as a variable interest entity, a company's power over a variable interest entity, or a company's obligation to absorb losses or its right to receive benefits of an entity must be disregarded in applying Interpretation
46(R)'s provisions. The elimination of the qualifying special-purpose entity concept and its consolidation exceptions means more entities will be subject to consolidation assessments and reassessments. SFAS 167 will be effective for the fiscal year beginning January 1, 2010. We are currently assessing the potential impacts, if any, on our consolidated results of operations and financial condition.

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets - an amendment of FASB Statement No. 140 (SFAS 166). SFAS 166 eliminates the concept of a qualifying special-purpose entity, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor's interest in transferred financial assets. SFAS 166 will be effective for fiscal years beginning after November 15, 2009. We are currently assessing the potential impacts, if any, on our consolidated results of operations or financial condition.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165). SFAS 165 provides general standards for the accounting and reporting of subsequent events that occur between the balance sheet date and issuance of financial statements. It should not result in significant changes in the subsequent events that an entity reports, either through recognition or disclosure in its financial statements. SFAS 165 requires companies to recognize the effects, if material, of subsequent events in the financial statements if the subsequent event provides additional evidence about conditions that existed as of the balance sheet date. Companies must also disclose the date through which subsequent events have been evaluated and the nature of any nonrecognized subsequent events. Nonrecognized subsequent events include events that provide evidence about conditions that did not exist as of the balance sheet date, but which are of such a nature that they must be disclosed to keep the financial statements from being misleading. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. The statement is effective for financial reporting periods ending after June 15, 2009. We adopted SFAS 165 in the second quarter of 2009 and it had no material impact on our consolidated results of operations or financial condition. We have evaluated subsequent events for recognition or disclosure through August 10, 2009.

SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment to FASB Statement No. 133, became effective at the beginning of 2009. SFAS No. 161 amends and expands the disclosure requirements of Statement 133 in order to provide users of financial statements with enhanced disclosures about an entity's derivative and hedging activities thereby improving the transparency of financial reporting. To meet these objectives, SFAS No. 161 requires qualitative disclosure about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit risk related contingent features in derivative agreements. The adoption of SFAS No. 161 did not have a material impact on our consolidated results of operations or financial condition.

FASB Staff Position (FSP) FAS 107-1 and APB Opinion No. 28-1, Interim Disclosures about Fair Value of Financial Instruments, became effective in the second quarter of 2009 and requires disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. This FSP did not impact our consolidated results of operations or financial condition.

FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, became effective in the second quarter of 2009 and amended current other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments in the financial statements. This FSP did not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. Adoption of FSP 115-2 did not have a material impact on our consolidated results of operations or financial condition.

FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP 157-4), became effective in the second quarter and provides guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased and identifying circumstances that may indicate that a transaction is not orderly. Adoption of FSP 157-4 did not have a material impact on our consolidated results of operations or financial condition.

On January 1, 2009, the Company adopted the provisions of FASB Staff Position (FSP) No. 157-2, Effective Date of FASB Statement No. 157, which deferred the application of SFAS No. 157 to nonfinancial assets and nonfinancial liabilities not recognized or disclosed at least annually at fair value. The adoption of this standard did not have a material impact on our consolidated results of operations or financial condition.

MEASUREMENT OF PERFORMANCE

We are an insurance holding company engaged in the underwriting, servicing and distribution of non-standard personal automobile insurance policies and related products and services. We distribute our products through three distinct distribution channels: our 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 retail stores, we sell insurance policies of third-party insurers and other products or services of unaffiliated third-party providers and thereby earn commission income from those third-party providers and insurers and fees from the customers.

As part of our corporate strategy, we treat our retail stores as independent agents, encouraging them to sell to their individual customers whatever products are most appropriate for and affordable to 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 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. This reflects our intention of maintaining the margins in our insurance company subsidiaries, even at the cost of business lost to third-party carriers.

In the independent agency distribution channel and the unaffiliated underwriting agency distribution channel, the effect of competitive conditions is the same as in our 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 parties 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.

Premiums. 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 and assumed by distribution channel for the three and six months ended June 30, 2009 and 2008 (in thousands):

                                           Three Months Ended       Six Months Ended
                                                June 30,                June 30,
                                            2009         2008       2009        2008
    Our underwriting agencies:
    Retail agencies                      $    46,324   $ 54,523   $ 112,707   $ 127,238
    Independent agencies                      29,827     29,520      68,122      66,274

    Subtotal                                  76,151     84,043     180,829     193,512
    Unaffiliated underwriting agencies         6,156      7,185      13,639      16,877

    Total                                $    82,307   $ 91,228   $ 194,468   $ 210,389

Total gross premiums written for the three and six months ended June 30, 2009 decreased $8.9 million and $15.9 million, respectively, or 9.8% and 7.6%, respectively, compared with the prior year primarily due to macroeconomic factors and soft market conditions. 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 in our retail and franchised stores. We earn only commission income and fees in our retail distribution channel for sales of third-party insurance policies. Gross premiums written in our retail distribution channel for the three and six months ended June 30, 2009, decreased $8.2 million and $14.5 million, or 15.0% and 11.4%, respectively, when compared with the prior year.

In our independent agency distribution channel, gross premiums written for the three and six months ended June 30, 2009 increased $0.3 million and $1.8 million, respectively, or 1.0% and 2.8%, respectively, compared with the prior year.

Gross premiums written by our unaffiliated underwriting agencies for the three and six months ended June 30, 2009 decreased $1.0 million and $3.2 million, respectively, or 14.3% and 19.2%, respectively, compared with the prior year. For strategic reasons, we have chosen to reduce our emphasis on growth in the unaffiliated underwriting agencies distribution channel.

The following table displays our gross premiums written and assumed by state for the three and six months ended June 30, 2009 and 2008 (in thousands):

                                 Three Months Ended       Six Months Ended
                                      June 30,                June 30,
                                  2009         2008       2009        2008
              Louisiana        $    31,026   $ 32,070   $  72,456   $  73,809
              Texas                 19,757     16,080      43,821      35,209
              Illinois               8,705     12,093      22,353      29,531
              California             6,089      7,066      13,483      16,597
              Alabama                5,989      5,999      15,405      14,987
              Michigan               3,121      3,076       8,618       9,325
              Missouri               1,961      2,066       5,051       6,134
              Indiana                1,697      2,244       5,158       5,559
              Florida                1,859      7,216       3,798      11,474
              South Carolina         1,413      2,346       2,690       5,497
              New Mexico               623        853       1,479       1,987
              Other                     67        119         156         280

              Total            $    82,307   $ 91,228   $ 194,468   $ 210,389

The following table displays our net premiums written by distribution channel for the three and six months ended June 30, 2009 and 2008 (in thousands):

                                                   Three Months Ended             Six Months Ended
                                                        June 30,                      June 30,
                                                   2009           2008          2009           2008
Our underwriting agencies:
Retail agencies - gross premiums written         $  46,324      $ 54,523      $ 112,707      $ 127,238
Ceded reinsurance                                       -         (9,521 )       10,286        (22,175 )

Subtotal retail agencies net premiums written       46,324        45,002        122,993        105,063

Independent agencies - gross premiums written       29,827        29,520         68,122         66,274
Ceded reinsurance                                     (302 )        (392 )         (652 )       (1,139 )

Subtotal independent agencies net premiums
written                                             29,525        29,128         67,470         65,135

Unaffiliated underwriting agencies - gross
premiums written                                     6,156         7,185         13,639         16,877
Ceded reinsurance                                      (36 )         (59 )          (85 )         (122 )

Subtotal unaffiliated underwriting agencies
net premiums written                                 6,120         7,126         13,554         16,755

Catastrophe and contingent coverages with
various reinsurers                                    (176 )        (178 )         (356 )         (479 )

Total net premiums written                       $  81,793      $ 81,078      $ 203,661      $ 186,474

Total net premiums written for the three months ended June 30, 2009 increased $0.7 million, or 0.9%, compared with the prior year quarter. Total net premiums written for the six months ended June 30, 2009 increased $17.2 million, or 9.2%, compared with the prior year period. The increase was due to lower ceded reinsurance for our Louisiana and Alabama businesses. Effective January 1, 2009, we terminated our quota share reinsurance contract on a cut-off basis and $10.5 million of ceded unearned premium was returned.

RESULTS OF OPERATIONS

We had a net loss from continuing operations of $8.0 million and net income from continuing operations of $3.1 million for the three and six months ended June 30, 2009, compared with net income from continuing operations of $2.9 million and $7.9 million for the prior year. Significant items impacting the current year to date results were:

• net pretax gain on extinguishment of debt of $19.4 million in the first quarter of 2009;

• unfavorable development on reserve estimates for prior accident years of $11.0 million in the second quarter of 2009;

• net contingent commission expense related to prior period development of $1.3 million and $2.4 million for the three and six months ended June 30, 2009, respectively;

• an accrual of $1.0 million for severance payments to be made to a former executive in the second quarter of 2009; and

• loss on interest rate swaps of $0.5 million and $4.9 million for the three and six months ended June 30, 2009, respectively, associated with the discontinuation of hedge accounting for the interest rate swaps.

Comparison of the Three Months Ended June 30, 2009 to the Three Months Ended June 30, 2008

Total revenues for the three months ended June 30, 2009 increased $0.6 million, or 0.5%, compared with the three months ended June 30, 2008. The increase was primarily due to reduced dependence on reinsurance in 2009.

The largest component of revenue is net premiums earned on insurance policies issued by our five affiliated insurance carriers. Net premiums earned for the current quarter increased $0.7 million, or 0.7%, compared with the prior year quarter. Since insurance premiums are earned over the service period of the policies, the revenue in the current quarter includes premiums earned on insurance products written through our three distribution channels in both current and previous periods. Net premiums earned during the current quarter on policies sold through our affiliated underwriting agencies (including retail and independent agencies) increased by $2.6 million, or 3.1%. This increase is primarily due to the termination of our quota-share reinsurance agreement for Louisiana and Alabama business. Net premiums earned on insurance products sold through the unaffiliated underwriting agencies distribution channel decreased by $1.9 million, or 22.9%, compared with the prior year quarter.

The following table sets forth net premiums earned by distribution channel for the current quarter and the prior year quarter (in thousands):

                                                    Three Months Ended
                                                         June 30,
                                                     2009         2008
             Our underwriting agencies            $    87,761   $ 85,149
             Unaffiliated underwriting agencies         6,460      8,374

             Total net premiums earned            $    94,221   $ 93,523

Commission Income and Fees. Another measurement of our performance is the relative level of production of commission income and fees. Commission income and fees consist of (a) policy, installment, premium finance and agency fees earned for business written or assumed by our insurance companies both through independent agents and our retail agencies and (b) the commission, premium finance and agency fee income earned on sales of unaffiliated, third-party companies' insurance policies or other products sold by our retail agencies. These various types of commission income and fees are impacted in different ways by the decisions we make in pursuing our corporate strategy.

Policy, installment, premium finance and agency fees are earned for business written or assumed by our insurance companies both through independent agents and our retail agencies. Policy, installment and agency fees are fees charged to the customers in connection with their purchase of coverage from our insurance company subsidiaries. Generally, we can increase or decrease agency and installment fees subject to limited regulatory restrictions, but policy fees and interest rates must be approved by the applicable state's department of insurance. Premium finance fees are financing fees earned by our premium finance subsidiaries, and consist of interest and origination fees on premiums that customers choose to finance.

Commissions, premium finance and agency fees are earned on sales of unaffiliated (third-party) companies' products sold by our retail agencies. As described above, in our owned stores, there can be 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 that could result 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. In addition, we earn fees from the sales of other products and services such as auto club memberships, bond cards and tax preparation services offered by unaffiliated companies.

The following sets forth the components of consolidated commission income and fees earned for the current quarter and the prior year quarter (in thousands):

                                                   Three Months Ended
                                                        June 30,
                                                    2009         2008
              Policyholder fees                  $     9,942   $ 10,852
              Premium finance revenue                  5,462      4,959
              Commissions and fees                     3,195      2,230
              Agency fees                              1,102      1,139
              Other, net                                 178        173

              Total commission income and fees   $    19,879   $ 19,353

Total commission income and fees increased $0.5 million, or 2.7%, compared with the prior year quarter. Policyholder fees have decreased due to the lower overall volume of premiums written. We have experienced a steady increase in premium finance revenue since December 2007 when we began financing third-party premiums. Commissions and fees increased as a result of a revised rate structure in 2009 and more of our retail customers choosing third-party products due to the soft market conditions.

Net Investment Income and Other Income. Net investment income for the current quarter decreased $1.1 million, or 30.4%, compared with the prior year quarter. The decrease was primarily due to a reduction in yields and a 13.0% decrease in total average invested assets to $272.2 million during the current quarter from $312.9 million during the prior year quarter. The average investment yield was 2.6% (4.0% on a taxable equivalent basis) in the current quarter, compared with 3.4% (5.2% on taxable equivalent basis) in the prior year quarter.

As of June 30, 2009, we held $50.0 million, at amortized cost, and $39.3 million fair value of auction-rate tax-exempt securities. Generally, the interest rates for these securities are determined by bidding every 7, 28 or 35 days. When there are more sellers than buyers, an auction fails and bondholders that want to sell are unable to sell the securities. Auctions for these securities began to fail in late January 2008. Issuers remain obligated to pay interest and principal when due when an auction fails. Rates at failed auctions are set at a level established in the terms of the debt. In February 2008, investment banks stopped committing capital to the auctions and there have been widespread auctions failures since that time.

In August 2008, our broker announced settlements in principle with each of the Division Enforcement of the U.S. Securities and Exchange Commission (SEC), the New York Attorney General and other state agencies to purchase all of its clients' auction-rate securities at par and several other items, including fines. In October 2008, our broker filed a prospectus with the SEC, which published a legally-binding offer to all authorized holders of auction-rate securities in our broker's accounts ("the settlement"). The majority of our auction-rate securities qualify under the terms of the settlement. The time frames that our broker has set for buybacks have different start dates based upon the individual client's size, which is determined by each client's balance of investments held at our broker. For the majority of our auction-rate . . .