UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON, D.C.
20549


FORM
10-Q




x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES


EXCHANGE
ACT OF 1934





FOR
THE QUARTERLY PERIOD ENDED September 30, 2010


OR





 ̈ 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 0-2500111




21stCentury Holding
Company


(Exact
name of registrant as specified in its charter)





Florida
                    
                    65-0248866(State
      or Other Jurisdiction of
                    
                    (IRS
      EmployerIncorporation
      or Organization)
                    
                    Identification
      Number)





3661 West Oakland Park
Boulevard, Suite 300, Lauderdale Lakes, Florida 33311


(Address
of principal executive offices) (Zip Code)





954-581-9993


(Registrant's
telephone number, including area code)




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.





Yes x No  ̈





Indicate
by check mark whether the registrant has electronically submitted and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).





Yes  ̈ No  ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
accelerated filer  ̈      Accelerated
filer  ̈      Non-accelerated
filer  ̈      Smaller
reporting company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes  ̈ No x





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.





Common
Stock, $.01par value –7,946,384
outstanding as of November 15, 2010







21ST CENTURY
HOLDING COMPANY





INDEX





PAGEPART
      I: FINANCIAL INFORMATIONITEM
      1
                Financial
      Statements
                3ITEM
      2
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                33ITEM
      3
                Quantitative
      and Qualitative Disclosures about Market Risk
                55ITEM
      4
                Controls
      and Procedures
                57PART
      II: OTHER INFORMATIONITEM
      1
                Legal
      Proceedings
                58ITEM
      1A
                Risk
      Factors
                58ITEM
      2
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                58ITEM
      3
                Defaults
      upon Senior Securities
                58ITEM
      4
                (Removed
      and Reserved)
                58ITEM
      5
                Other
      Information
                59ITEM
      6
                Exhibits
                59SIGNATURES
                
                60


- 2
-


PART
I: FINANCIAL INFORMATION


Item
1 Financial Statements


21stCENTURY
HOLDING COMPANY


CONSOLIDATED
BALANCE SHEETS


(UNAUDITED)





Period EndingSeptember 30, 2010
                                    
                                    
                                    December 31, 2009(Dollars
      in Thousands)ASSETSInvestmentsDebt
      maturities, available for sale, at fair value
                                    
                                    $
                                    85,512
                                    
                                    
                                    $
                                    91,513Debt
      maturities, held to maturity, at amortized cost
                                    
                                    
                                    5,782
                                    
                                    
                                    
                                    2,650Equity
      securities, available for sale, at fair value
                                    
                                    
                                    19,654
                                    
                                    
                                    
                                    20,056Total
      investments
                                    
                                    
                                    110,948
                                    
                                    
                                    
                                    114,219Cash
      and short term investments
                                    
                                    
                                    34,555
                                    
                                    
                                    
                                    28,197Prepaid
      reinsurance premiums
                                    
                                    
                                    3,285
                                    
                                    
                                    
                                    10,319Premiums
      receivable, net of allowance for credit losses of $99 and $24,
      respectively
                                    
                                    
                                    5,789
                                    
                                    
                                    
                                    10,311Reinsurance
      recoverable, net
                                    
                                    
                                    10,230
                                    
                                    
                                    
                                    15,302Deferred
      policy acquisition costs
                                    
                                    
                                    7,675
                                    
                                    
                                    
                                    8,267Deferred
      income taxes, net
                                    
                                    
                                    5,687
                                    
                                    
                                    
                                    4,675Income
      taxes receivable
                                    
                                    
                                    2,260
                                    
                                    
                                    
                                    7,069Property,
      plant and equipment, net
                                    
                                    
                                    698
                                    
                                    
                                    
                                    859Other
      assets
                                    
                                    
                                    2,291
                                    
                                    
                                    
                                    3,671Total
      assets
                                    
                                    $
                                    183,418
                                    
                                    
                                    $
                                    202,889LIABILITIES
      AND SHAREHOLDERS' EQUITYUnpaid
      losses and LAE
                                    
                                    $
                                    63,455
                                    
                                    
                                    $
                                    70,611Unearned
      premiums
                                    
                                    
                                    47,850
                                    
                                    
                                    
                                    50,857Premiums
      deposits and customer credit balances
                                    
                                    
                                    2,467
                                    
                                    
                                    
                                    2,129Bank
      overdraft
                                    
                                    
                                    6,050
                                    
                                    
                                    
                                    8,251Deferred
      gain from sale of property
                                    
                                    
                                    633
                                    
                                    
                                    
                                    1,006Accounts
      payable and accrued expenses
                                    
                                    
                                    1,090
                                    
                                    
                                    
                                    2,593Total
      liabilities
                                    
                                    
                                    121,545
                                    
                                    
                                    
                                    135,447Shareholders'
      equity:Common
      stock, $0.01 par value. Authorized 25,000,000 shares; issued and
      outstanding 7,946,384 and 7,953,384, respectively.
                                    
                                    
                                    79
                                    
                                    
                                    
                                    80Preferred
      stock, $0.01 par value. Authorized 1,000,000 shares; none issued or
      outstanding
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Additional
      paid-in capital
                                    
                                    
                                    50,506
                                    
                                    
                                    
                                    50,185Accumulated
      other comprehensive income
                                    
                                    
                                    1,158
                                    
                                    
                                    
                                    2,026Retained
      earnings
                                    
                                    
                                    10,130
                                    
                                    
                                    
                                    15,151Total
      shareholders' equity
                                    
                                    
                                    61,873
                                    
                                    
                                    
                                    67,442Total
      liabilities and shareholders' equity
                                    
                                    $
                                    183,418
                                    
                                    
                                    $
                                    202,889





SEE
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


- 3
-




21ST CENTURY
HOLDING COMPANY


CONSOLIDATED
STATEMENTS OF OPERATIONS


(UNAUDITED)





Three Months Ended September 30,
                    
                    
                    Nine Months Ended September 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009(Dollars in Thousands except EPS and share and dividend data)
                    
                    
                    (Dollars in Thousands except EPS and share and dividend data)Revenue:Gross
      premiums written
                    
                    $
                    17,698
                    
                    
                    $
                    12,917
                    
                    
                    $
                    72,317
                    
                    
                    $
                    74,949Gross
      premiums ceded
                    
                    
                    (29,526
                    )
                    
                    
                    (36,804
                    )
                    
                    
                    (51,352
                    )
                    
                    
                    (56,720
                    )Net
      premiums written
                    
                    
                    (11,828
                    )
                    
                    
                    (23,887
                    )
                    
                    
                    20,965
                    
                    
                    
                    18,229Increase
      in prepaid reinsurance premiums
                    
                    
                    16,194
                    
                    
                    
                    22,300
                    
                    
                    
                    9,555
                    
                    
                    
                    24,535Decrease
      (Increase) in unearned premiums
                    
                    
                    7,255
                    
                    
                    
                    11,098
                    
                    
                    
                    3,008
                    
                    
                    
                    (5,084
                    )Net
      change in prepaid reinsurance premiums and unearned
    premiums
                    
                    
                    23,449
                    
                    
                    
                    33,398
                    
                    
                    
                    12,563
                    
                    
                    
                    19,451Net
      premiums earned
                    
                    
                    11,621
                    
                    
                    
                    9,511
                    
                    
                    
                    33,528
                    
                    
                    
                    37,680Commission
      income
                    
                    
                    399
                    
                    
                    
                    117
                    
                    
                    
                    1,343
                    
                    
                    
                    738Finance
      revenue
                    
                    
                    110
                    
                    
                    
                    62
                    
                    
                    
                    286
                    
                    
                    
                    236Managing
      general agent fees
                    
                    
                    310
                    
                    
                    
                    308
                    
                    
                    
                    1,243
                    
                    
                    
                    1,216Net
      investment income
                    
                    
                    925
                    
                    
                    
                    925
                    
                    
                    
                    2,871
                    
                    
                    
                    2,389Net
      realized investment gains
                    
                    
                    1,864
                    
                    
                    
                    1,550
                    
                    
                    
                    5,688
                    
                    
                    
                    1,082Regulatory
      assessments recovered
                    
                    
                    115
                    
                    
                    
                    294
                    
                    
                    
                    682
                    
                    
                    
                    2,029Other
      income
                    
                    
                    135
                    
                    
                    
                    232
                    
                    
                    
                    653
                    
                    
                    
                    614Total
      revenue
                    
                    
                    15,479
                    
                    
                    
                    12,999
                    
                    
                    
                    46,294
                    
                    
                    
                    45,984Expenses:Losses
      and LAE
                    
                    
                    8,669
                    
                    
                    
                    11,119
                    
                    
                    
                    27,930
                    
                    
                    
                    28,965Operating
      and underwriting expenses
                    
                    
                    2,542
                    
                    
                    
                    2,500
                    
                    
                    
                    8,271
                    
                    
                    
                    6,959Salaries
      and wages
                    
                    
                    2,146
                    
                    
                    
                    1,961
                    
                    
                    
                    6,394
                    
                    
                    
                    5,766Policy
      acquisition costs - amortization
                    
                    
                    3,913
                    
                    
                    
                    3,818
                    
                    
                    
                    10,408
                    
                    
                    
                    9,477Total
      expenses
                    
                    
                    17,270
                    
                    
                    
                    19,398
                    
                    
                    
                    53,003
                    
                    
                    
                    51,167Loss
      before provision for income tax benefit
                    
                    
                    (1,791
                    )
                    
                    
                    (6,398
                    )
                    
                    
                    (6,709
                    )
                    
                    
                    (5,182
                    )Income
      tax benefit
                    
                    
                    (523
                    )
                    
                    
                    (2,404
                    )
                    
                    
                    (2,165
                    )
                    
                    
                    (2,276
                    )Net
      loss
                    
                    $
                    (1,268
                    )
                    
                    $
                    (3,994
                    )
                    
                    $
                    (4,544
                    )
                    
                    $
                    (2,906
                    )Net
      loss  per share - basic
                    
                    $
                    (0.16
                    )
                    
                    $
                    (0.50
                    )
                    
                    $
                    (0.57
                    )
                    
                    $
                    (0.36
                    )Net  loss
      per share - diluted
                    
                    $
                    (0.16
                    )
                    
                    $
                    (0.50
                    )
                    
                    $
                    (0.57
                    )
                    
                    $
                    (0.36
                    )Weighted
      average number of common shares outstanding - basic
                    
                    
                    7,946,384
                    
                    
                    
                    8,013,894
                    
                    
                    
                    7,946,384
                    
                    
                    
                    8,013,894Weighted
      average number of common shares outstanding - diluted
                    
                    
                    7,946,384
                    
                    
                    
                    8,013,894
                    
                    
                    
                    7,946,384
                    
                    
                    
                    8,013,894Dividends
      paid per share
                    
                    $
                    -
                    
                    
                    $
                    0.06
                    
                    
                    $
                    0.06
                    
                    
                    $
                    0.30





SEE
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


- 4
-


21ST CENTURY
HOLDING COMPANY


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(UNAUDITED)





Nine Months Ended September 30,2010
                
                
                2009(Dollars in Thousands)Cash
      flow from operating activities:Net
      loss
                
                $
                (4,544
                )
                
                $
                (2,906
                )Adjustments
      to reconcile net loss to net cash (used) provided by operating
      activities:Amortization
      of investment premium (discount), net
                
                
                660
                
                
                
                (433
                )Depreciation
      and amortization of property plant and equipment, net
                
                
                165
                
                
                
                137Net
      realized investment (gains) losses
                
                
                (5,688
                )
                
                
                1,082Provision
      for credit losses, net
                
                
                2
                
                
                
                34(Recovery)
      provision for uncollectible premiums receivable
                
                
                (75
                )
                
                
                92Non-cash
      compensation
                
                
                209
                
                
                
                255Changes
      in operating assets and liabilities:Premiums
      receivable
                
                
                4,596
                
                
                
                (895
                )Prepaid
      reinsurance premiums
                
                
                7,034
                
                
                
                (8,087
                )Reinsurance
      recoverable, net
                
                
                5,072
                
                
                
                5,374Income
      taxes recoverable
                
                
                4,810
                
                
                
                (4,802
                )Deferred
      income tax expense, net of other comprehensive income
                
                
                (489
                )
                
                
                6,097Policy
      acquisition costs, net of amortization
                
                
                592
                
                
                
                (1,480
                )Other
      assets
                
                
                1,005
                
                
                
                (766
                )Unpaid
      losses and LAE
                
                
                (7,155
                )
                
                
                1,510Unearned
      premiums
                
                
                (3,008
                )
                
                
                5,084Premium
      deposits and customer credit balances
                
                
                337
                
                
                
                348Bank
      overdraft
                
                
                (2,201
                )
                
                
                2,776Accounts
      payable and accrued expenses
                
                
                (1,503
                )
                
                
                (1,235
                )Net
      cash (used) provided by operating activities
                
                
                (181
                )
                
                
                2,185Cash
      flow provided (used)  by investing activities:Proceeds
      from sale of investment securities
                
                
                111,805
                
                
                
                51,476Purchases
      of investment securities available for sale
                
                
                (104,897
                )
                
                
                (128,808
                )Purchases
      of property and equipment
                
                
                (4
                )
                
                
                (13
                )Net
      cash provided (used) by investing activities
                
                
                6,904
                
                
                
                (77,345
                )Cash
      flow used by financing activities:Dividends
      paid
                
                
                (477
                )
                
                
                (1,443
                )Tax
      benefit related to non-cash compensation
                
                
                112
                
                
                
                123Net
      cash used by financing activities
                
                
                (365
                )
                
                
                (1,320
                )Net
      increase (decrease) in cash and short term investments
                
                
                6,358
                
                
                
                (76,480
                )Cash
      and short term investments at beginning of period
                
                
                28,197
                
                
                
                124,577Cash
      and short term investments at end of period
                
                $
                34,555
                
                
                $
                48,097





SEE
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


- 5
-


21ST CENTURY
HOLDING COMPANY


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(UNAUDITED)





Nine Months Ended September 30,(continued)
                
                2010
                
                
                2009(Dollars in Thousands)Supplemental
      disclosure of cash flow information:Cash
      paid during the period for:Income
      taxes
                
                $
                -
                
                
                $
                178Non-cash
      investing and finance activities:Accrued
      dividends payable
                
                $
                -
                
                
                $
                481





SEE
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


- 6
-




21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements


(1)
Organization and Business





In this
Quarterly Report on Form 10-Q, “21st
Century” and the terms “Company”, “we”, “us” and “our” refer to 21st Century
Holding Company and its subsidiaries, unless the context indicates
otherwise.





21st Century
is an insurance holding company, which, through our subsidiaries and our
contractual relationships with our independent agents and general agents,
controls substantially all aspects of the insurance underwriting, distribution
and claims processes. We are authorized to underwrite homeowners’ multi-peril
(“homeowners’”), personal umbrella, commercial general liability, following form
commercial excess liability, personal and commercial automobile, fire, allied
lines, workers’ compensation, business personal property and commercial inland
marine insurance. We are authorized to underwrite in various states on behalf of
our wholly owned subsidiaries, Federated National Insurance Company (“Federated
National”) and American Vehicle Insurance Company (“American Vehicle”) and other
insurance carriers. We market and distribute our own and third-party insurers’
products and our other services through a network of independent agents. We also
utilize a select number of general agents for the same purpose.





Federated
National is licensed as an admitted carrier in Florida. Through contractual
relationships with a network of approximately 4,200 independent agents, of which
approximately 300 actively sell and service our products, Federated National is
authorized to underwrite homeowners’, fire, allied lines and personal automobile
insurance in Florida.





American
Vehicle is licensed as an admitted carrier in Florida, and underwrites
commercial general liability, and personal and commercial automobile insurance.
American Vehicle is also licensed as an admitted carrier in Alabama, Louisiana,
Georgia and Texas, and underwrites commercial general liability insurance in
those states. American Vehicle operates as a non-admitted carrier in Arkansas,
California, Kentucky, Maryland, Missouri, Nevada, Oklahoma, South Carolina,
Tennessee and Virginia, and can underwrite commercial general liability
insurance in all of these states.





An admitted carrier is an
insurance company that has received a license from the state department of
insurance giving the company the authority to write specific lines of insurance
in that state. These companies are also bound by rate and form regulations, and
are strictly regulated to protect policyholders from a variety of illegal and
unethical practices, including fraud. Admitted carriers are also required to
financially contribute to the state guarantee fund, which is used to pay for
losses if an insurance carrier becomes insolvent or unable to pay the losses due
their policyholders.





A non-admitted carrier is not
licensed by the state, but is allowed to do business in that state and is
strictly regulated to protect policyholders from a variety of illegal and
unethical practices, including fraud. Sometimes, non-admitted carriers are
referred to as “excess and surplus” lines carriers.  Non-admitted
carriers are subject to considerably less regulation with respect to policy
rates and forms. Non-admitted carriers are not required to financially
contribute to and benefit from the state guarantee fund, which is used to pay
for losses if an insurance carrier becomes insolvent or unable to pay the losses
due their policyholders.





During
the nine months ended September 30, 2010, 77.6%, 13.6%, 4.3% and 4.5% of the
premiums we underwrote were for homeowners’, commercial general liability,
federal flood, and personal automobile insurance, respectively. During the nine
months ended September 30, 2009, 79.3%, 16.7%, 3.7% and 0.3% of the premiums we
underwrote were for homeowners’,  commercial general liability,
federal flood, and personal automobile insurance, respectively.





Our
business, results of operations and financial condition are subject to
fluctuations due to a variety of factors. Abnormally high severity or frequency
of claims in any period could have a material adverse effect on our business,
results of operations and financial condition. When our estimated liabilities
for unpaid losses and loss adjustment expenses (“LAE”) are less than the
actuarially determined amounts, we increase the expense in the current period.
Conversely, when our estimated liabilities for unpaid losses and LAE are greater
than the actuarially determined amounts, we decrease the expense in the current
period.


- 7
-




21st Century
Holding Company
 Notes
to Condensed Consolidated Financial Statements


We
internally process claims made by our insureds through our wholly owned claims
adjusting company, Superior Adjusting, Inc. (“Superior”). We also offer premium
financing to our own and third-party insureds through our wholly owned
subsidiary, Federated Premium Finance, Inc. (“Federated Premium”).





We are
focusing our marketing efforts on continuing to expand our distribution network
and market our products and services throughout Florida and in other states by
establishing relationships with additional independent agents and general
agents. As this occurs, we will seek to replicate our distribution network in
those states. For example, American Vehicle became an admitted insurer in the
state of Georgia during the quarter ended September 30, 2010. There can be no
assurance, however, that we will be able to obtain the required regulatory
approvals to offer additional insurance products or expand into other
states.





Until this year, both Federated
National and American Vehicle were licensed in the state of Florida to write
commercial automobile related lines of business. Currently, American Vehicle has
a relatively small amount of commercial automobile premium in-force. However,
Federated National has not written any commercial automobile related business in
several years and as such has surrendered its authority to write this line of
business in Florida. This decision is not expected to have any effect on
operations.





Assurance
Managing General Agents, Inc. (“Assurance MGA”), a wholly owned subsidiary of
the Company, acts as Federated National’s and American Vehicle’s exclusive
managing general agent in the state of Florida and is also licensed as a
managing general agent in the states of Alabama, Arkansas, Georgia, Illinois,
Louisiana, North Carolina, Mississippi, Missouri, New York, Nevada, South
Carolina, Texas and Virginia. During 2009, Assurance MGA contracted with several
unaffiliated insurance companies to sell commercial general liability, workers
compensation and inland marine insurance through Assurance MGA’s existing
network of agents. This process will continue throughout 2010 as Assurance MGA
benefits from the arrangement by receiving commission revenue from policies sold
by its insurance partners, while minimizing its risks.





Assurance
MGA earns commissions and fees for providing policy administration, marketing,
accounting and analytical services, and for participating in the negotiation of
reinsurance contracts. Assurance MGA earns a $25 per policy fee, and a 6%
commission fee from its affiliates Federated National and American
Vehicle.





Insure-Link,
Inc. (“Insure-Link”) was formed in March 2008 to serve as an independent
insurance agency. The insurance agency markets direct to the public to provide a
variety of insurance products and services to individual clients, as well as
business clients, by offering a full line of insurance products including, but
not limited to,  homeowners’, personal and commercial automobile,
commercial general liability and workers’ compensation insurance through their
agency appointments with over fifty different carriers. Insure-Link will expand
its business through marketing and by acquiring other insurance
agencies.





(2)
Basis of Presentation





The accompanying unaudited condensed
consolidated financial statements for the Company and its subsidiaries have been
prepared in accordance with accounting principles generally accepted in the
United States of America referred to as Generally Accepted Accounting Principles
(“GAAP”) for interim financial information, and the Securities and Exchange
Commission (“SEC”) rules for interim financial reporting. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with GAAP have been condensed or omitted pursuant to such rules and
regulations. However, in the opinion of management, the accompanying financial
statements reflect all normal recurring adjustments necessary to present fairly
the Company’s financial position as of September 30, 2010 and the results of
operations and cash flows for the periods presented. The results of operations
for the interim periods presented are not necessarily indicative of the results
of operations to be expected for any subsequent interim period or for the fiscal
year ending December 31, 2010. The accompanying unaudited condensed consolidated
financial statements and notes thereto should be read in conjunction with the
audited consolidated financial statements for the year ended December 31, 2009
included in the Company’s Form 10-K, which was filed with the SEC on March 26,
2010.





In
preparing the interim unaudited condensed consolidated financial statements,
management was required to make certain estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues, expenses and related
disclosures at the financial reporting date and throughout the periods being
reported upon. Certain of the estimates result from judgments that can be
subjective and complex and consequently actual results may differ from these
estimates.


- 8
-




21st Century
Holding Company
 Notes
to Condensed Consolidated Financial Statements


Material
estimates that are particularly susceptible to significant change in the
near-term relate to the determination of loss and LAE, ceded reinsurance
balances payable, the recoverability of Deferred Policy Acquisition Costs
(“DPAC”), the determination of federal income taxes, and the net realizable
value of reinsurance recoverables. Although considerable variability is inherent
in these estimates, management believes that the amounts provided are
reasonable. These estimates are continually reviewed and adjusted as necessary.
Such adjustments are reflected in current operations.





All
significant intercompany balances and transactions have been eliminated. Certain
reclassifications have been made to the prior-period balances to conform to the
current-period presentation.





(3)
Summary of Significant Accounting Policies and Practices





(A)  Critical Accounting
Policies





The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions about future events that affect the amounts
reported in the financial statements and accompanying notes. Future events and
their effects cannot be determined with absolute certainty. Therefore, the
determination of estimates requires the exercise of judgment. Actual results
inevitably will differ from those estimates, and such differences may be
material to the financial statements.





The most
significant accounting estimates inherent in the preparation of our financial
statements include estimates associated with management’s evaluation of the
determination of (i) liability for unpaid losses and LAE, (ii) the amount and
recoverability of amortization of DPAC, and (iii) estimates for our reserves
with respect to finance contracts, premiums receivable and deferred income
taxes. Various assumptions and other factors underlie the determination of these
significant estimates, which are described in greater detail in Footnote 2 of
the Company’s audited consolidated financial statements for the fiscal year
ended December 31, 2009, which we included in the Company’s Annual Report on
Form 10-K which was filed with the SEC on March 26, 2010.





We
believe that there were no significant changes in those critical accounting
policies and estimates during the first nine months of fiscal 2010. Senior
management has reviewed the development and selection of our critical accounting
policies and estimates and their disclosure in this Form 10-Q with the Audit
Committee of our Board of Directors.





The
process of determining significant estimates is fact-specific and takes into
account factors such as historical experience, current and expected economic
conditions, and in the case of unpaid losses and LAE, an actuarial valuation.
Management regularly reevaluates these significant factors and makes adjustments
where facts and circumstances dictate. In selecting the best estimate, we
utilize various actuarial methodologies. Each of these methodologies is designed
to forecast the number of claims we will be called upon to pay and the amounts
we will pay on average to settle those claims. In arriving at our best estimate,
our actuaries consider the likely predictive value of the various loss
development methodologies employed in light of underwriting practices, premium
rate changes and claim settlement practices that may have occurred, and weight
the credibility of each methodology. Our actuarial methodologies take into
account various factors, including, but not limited to, paid losses, liability
estimates for reported losses, paid allocated LAE, salvage and other recoveries
received, reported claim counts, open claim counts and counts for claims closed
with and without payment for loss.





Accounting
for loss contingencies pursuant to Financial Accounting Standards Board (“FASB”)
issued guidance involves the existence of a condition, situation or set of
circumstances involving uncertainty as to possible loss that will ultimately be
resolved when one or more future event(s) occur or fail to occur. Additionally,
accounting for a loss contingency requires management to assess each event as
probable, reasonably possible or remote. Probable is defined as the future event
or events are likely to occur. Reasonably possible is defined as the chance of
the future event or events occurring is more than remote but less than probable,
while remote is defined as the chance of the future event or events occurring is
slight. An estimated loss in connection with a loss contingency shall be
recorded by a charge to current operations if both of the following conditions
are met: First, the amount can be reasonably estimated, and second, the
information available prior to issuance of the financial statements indicates
that it is probable that a liability has been incurred at the date of the
financial statements. It is implicit in this condition that it is probable that
one or more future events will occur confirming the fact of the loss or
incurrence of a liability.


- 9
-




21st Century
Holding Company
 Notes
to Condensed Consolidated Financial Statements


We are
required to review the contractual terms of all our reinsurance purchases to
ensure compliance with FASB-issued guidance. The guidance 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. 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. The guidance 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.





FASB-issued
guidance addresses accounting and reporting for (a) investments in equity
securities that have readily determinable fair values and (b) all investments in
debt securities. The guidance requires that these securities be classified into
one of three categories: Held-to-maturity, Trading, or Available-for-sale
securities.





Investments
classified as held-to-maturity include debt securities wherein the Company’s
intent and ability are to hold the investment until maturity. The accounting
treatment for held-to-maturity investments is to carry them at amortized cost
without consideration to unrealized gains or losses. Investments classified as
trading securities include debt and equity securities bought and held primarily
for the sale in the near term. The accounting treatment for trading securities
is to carry them at fair value with unrealized holding gains and losses included
in current period operations. Investments classified as available-for-sale
include debt and equity securities that are not classified as held-to-maturity
or as trading security investments. The accounting treatment for
available-for-sale securities is to carry them at fair value with unrealized
holding gains and losses excluded from earnings and reported as a separate
component of shareholders’ equity, namely “Other Comprehensive
Income”.





A decline
in the fair value of an available-for-sale security below cost that is deemed
other-than temporary results in a charge to income, resulting in the
establishment of a new cost basis for the security.  Premiums and
discounts are amortized or accreted, respectively, over the life of the related
debt security as an adjustment to yield using a method that approximates the
effective interest method. Dividends and interest income are recognized when
earned. Realized gains and losses are included in earnings and are derived using
the specific-identification method for determining the cost of securities
sold.





Financial
instruments, which potentially expose us to concentrations of credit risk,
consist primarily of investments, premiums receivable, amounts due from
reinsurers on paid and unpaid losses and finance contracts. We have not
experienced significant losses related to premiums receivable from individual
policyholders or groups of policyholders in a particular industry or geographic
area. We believe no credit risk beyond the amounts provided for collection
losses is inherent in our premiums receivable or finance contracts. In order to
reduce credit risk for amounts due from reinsurers, we seek to do business with
financially sound reinsurance companies and regularly review the financial
strength of all reinsurers used. Additionally, our credit risk in connection
with our reinsurers is mitigated by the establishment of irrevocable clean
letters of credit in favor of Federated National.





The fair
value of our investments is estimated based on prices published by financial
services or quotations received from securities dealers and is reflective of the
interest rate environment that existed as of the close of business on September
30, 2010 and December 31, 2009. Changes in interest rates subsequent to
September 30, 2010 and December 31, 2009 may affect the fair value of our
investments.





The
carrying amounts for the following financial instrument categories approximate
their fair values at September 30, 2010 and December 31, 2009 because of their
short-term nature: cash and short term investments, premiums receivable, finance
contracts, due from reinsurers, revolving credit outstanding, bank overdraft,
accounts payable and accrued expenses.


- 10
-




21st Century
Holding Company
 Notes
to Condensed Consolidated Financial Statements


(B)
Impact of New Accounting Pronouncements





In April
2009, the FASB issued FASB Staff Position (“FSP”) FAS 115-2 and FSP FAS 124-2,
“Recognition and Presentation
of Other-Than Temporary Impairments” (“FSP FAS 115-2 and FSP FAS 124-2”)
related to the recognition and presentation of other-than temporary
impairments.  In April 2009, the SEC also adopted similar guidance with
Staff Accounting Bulletin (“SAB”) No. 111 (“SAB 111”) on Other-Than Temporary
Impairment. FSP FAS 115-2 and FSP FAS 124-2 establishes a new method of
recognizing and reporting other-than temporary impairments of debt securities
and contains additional disclosure requirements related to debt and equity
securities. For debt securities, the “ability and intent to hold” provision is
eliminated, and impairment is considered to be other-than temporary if an entity
(i) intends to sell the security, (ii) more likely than not will be
required to sell the security before recovering its cost, or (iii) does not
expect to recover the security’s entire amortized cost basis (even if the entity
does not intend to sell).  This new framework does not apply to equity
securities (i.e., impaired equity securities will continue to be evaluated under
previously existing guidance).  The “probability” standard relating to the
collectability of cash flows is eliminated, and impairment is now considered to
be other-than temporary if the present value of cash flows expected to be
collected from the debt security is less than the amortized cost basis of the
security.  FSP FAS 115-2 and FSP FAS 124-2 provides that for debt
securities which (i) an entity does not intend to sell and (ii) it is
not more likely than not that the entity will be required to sell before the
anticipated recovery of its remaining amortized cost basis, the impairment is
separated into the amount related to estimated credit losses and the amount
related to all other factors. The amount of the total impairment related to all
other factors is recorded in other comprehensive loss and the amount related to
estimated credit loss is recognized as a charge against current period
earnings.  FSP FAS 115-2 and FSP FAS 124-2 expands disclosure requirements
for both debt and equity securities and requires a more detailed, risk-oriented
breakdown of security types and related information, and requires that the
annual disclosures be made in interim periods.  FSP FAS 115-2 and FSP FAS
124-2 is effective for interim and annual periods ending after June 15,
2009, with early adoption permitted.  At the time of adoption, the Company
did not have any Other-Than Temporary Impairments for debt securities, and, the
adoption of this guidance did not have a material impact on the Company’s
consolidated financial statements.





In April
2009, the FASB issued 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 FAS
157-4“).  FSP FAS 157-4 is related to determining fair value when the
volume and level of activity for an asset or liability have significantly
decreased and identifying transactions that are not orderly.  The guidance
indicates that if an entity determines that either the volume and/or level of
activity for an asset or liability has significantly decreased (from normal
conditions for that asset or liability) or price quotations or observable inputs
are not associated with orderly transactions, increased analysis and management
judgment will be required to estimate fair value. The guidance is effective for
interim and annual periods ending after June 15, 2009, with early adoption
permitted and must be applied prospectively. The adoption of FSP FAS 157-4 did
not have a material impact on the Company’s financial statements or
condition.





In May
2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No.
165, “Subsequent
Events” (“SFAS No. 165”), which is now part of Accounting Standard Update
(“ASU”) ASU Topic 855, Subsequent Events.  In SFAS No. 165, the FASB
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before the financial statements are
issued.  Our adoption of SFAS No. 165 on April 1, 2009 did not have a
material impact on the Company’s consolidated financial statements.





In
January 2010, the FASB issued Accounting Standard Update (“ASU”) ASU No.
2010-06: Fair Value
Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements.  The amendments in ASU 2010-06 require additional
disclosures about fair value measurements, including transfers in and out of
Levels 1 and 2 and activity in Level 3 on a gross basis, and clarifies certain
other existing disclosure requirements including level of disaggregation and
disclosures around inputs and valuation techniques. The provisions of the new
standards are effective for interim or annual reporting periods beginning after
December 15, 2009, except for the additional Level 3 disclosures, which
will become effective for fiscal years beginnings after December 15, 2010.
These standards are disclosure only in nature and do not change accounting
requirements. Accordingly, adoption of the new standard had no impact on the
Company’s consolidated financial position, results of operations or cash
flows.


- 11
-




21st Century
Holding Company
 Notes
to Condensed Consolidated Financial Statements


In
February 2010, the FASB issued ASU No. 2010-09:  Amendments to Certain Recognition and
Disclosure Requirements,an amendmenttoTopic 855 Subsequent Events,
to address potentially conflicting interactions of the requirements in this
Topic with the SEC’s reporting requirements. This update amends Topic 855 as
follows: i) an entity that either is a SEC filer or a conduit bond obligor is
required to evaluate subsequent events through the date that the financial
statements are issued, if the entity does not meet either of these criteria then
it should evaluate subsequent events through the date the financial statements
are available to be issued; and ii) an SEC filer is not required to disclose the
date through which subsequent events have been evaluated. All amendments in this
ASU are effective upon issuance of this ASU, except for the use of the issued
date for conduit debt obligors which effective date is for interim and annual
periods ending after June 15, 2010. The Company’s subsequent events
disclosure will reflect the new guidance.





In October 2010, the FASB issued ASU
No. 2010-26: Financial Services – Insurance (Topic 944): Accounting for Costs Associated with
Acquiring or Renewing Insurance Contracts, a consensus of FASB Emerging
Issues Task Force.  The amendments in this Update modify the definition of
the types of costs incurred by insurance entities that can be capitalized in the
acquisition of new and renewal contracts. The amendments in this Update
specify that the costs must be based on successful efforts (that is, acquiring a
new or renewal contract).  The amendments also specify that advertising
costs should be included as deferred acquisition costs under certain
circumstances.  The amendments in this Update are effective for fiscal
years, and interim period within those fiscal years, beginning after December
15, 2011.  The amendments in this Update should be applied prospectively
upon adoption.  Retrospective application to all prior periods presented
upon the date of adoption also is permitted, but not required.  Early
adoption is permitted, but only at the beginning of an entity’s annual reporting
period.  The adoption of this Update is not expected to have a material
impact on the Company’s consolidated financial statements.





Other
recent accounting pronouncements issued by the FASB, the American Institute of
Certified Public Accountants (“AICPA”), and the SEC did not or are not believed
by management to have a material impact on the Company’s present or future
financial statements.





(C) Stock Options





Effective
January 1, 2006, the Company adopted the fair value recognition provisions of
FASB-issued guidance using the modified-prospective-transition method. Under
that transition method, compensation cost recognized during the nine months
ended September 30, 2010 includes compensation cost for all share-based payments
granted subsequent to January 1, 2006, based on the grant date fair value
estimated in accordance with the guidance.





(D)
Earnings per Share





Basic
earnings per share (“Basic EPS”) is computed by dividing net income by the
weighted average number of common shares outstanding during the period
presented.  Diluted earnings per share (“Diluted EPS”) is computed by
dividing net income by the weighted average number of shares of common stock and
common stock equivalents outstanding during the period presented; outstanding
warrants and stock options are considered common stock equivalents and are
included in the calculation using the treasury stock method.





(E)
Reclassifications





No
reclassification of the 2009 financial statements was necessary to conform to
the 2010 presentation.





(4)
Commitments and Contingencies





Management has a responsibility to
continually measure and monitor its commitments and its contingencies. The
nature of the Company’s commitments and contingencies can be grouped into three
major categories: insured claim activity, assessment related activities and
operational matters.


- 12
-




21st Century
Holding Company
 Notes
to Condensed Consolidated Financial Statements


(A)
Insured Claim Activity





We are
involved in claims and legal actions arising in the ordinary course of business.
Revisions to our estimates are based on our analysis of subsequent information
that we receive regarding various factors, including: (i) per claim information;
(ii) company and industry historical loss experience; (iii) legislative
enactments, judicial decisions, legal developments in the awarding of damages;
and (iv) trends in general economic conditions, including the effects of
inflation. Management revises its estimates based on the results of its
analysis. This process assumes that experience, adjusted for the effects of
current developments and anticipated trends, is an appropriate basis for
estimating the ultimate settlement of all claims. There is no precise method for
subsequently evaluating the impact of any specific factor on the adequacy of the
reserves, because the eventual redundancy or deficiency is affected by multiple
factors. In the opinion of management, the ultimate disposition of these matters
will not have a material adverse effect on our consolidated financial position,
results of operations, or liquidity.





The
Company’s subsidiaries are, from time to time, named as defendants in various
lawsuits incidental to their insurance operations. Legal actions relating to
claims made in the ordinary course of seeking indemnification for a loss covered
by the insurance policy are considered by the Company in establishing loss and
LAE reserves.





The Company also faces, in the
ordinary course of business, lawsuits that seek damages beyond policy limits,
commonly known as bad faith claims. The Company continually evaluates potential
liabilities and reserves for litigation of these types using the criteria
established by FASB-issued guidance. Under this guidance, reserves for a loss
are recorded if the likelihood of occurrence is probable and the amount can be
reasonably estimated. If a loss, while not probable, is judged to be reasonably
possible, management will make an estimate of a possible range of loss or state
that an estimate cannot be made. Management considers each legal action using
this guidance and records reserves for losses as warranted.





(B)
Assessment Related Activity





We
operate in a regulatory environment where certain entities and organizations
have the authority to require us to participate in assessments. Currently these
entities and organizations include, but are not limited to, Florida Insurance
Guaranty Association (“FIGA”), Citizens Property Insurance Corporation
(“Citizens”), Florida Hurricane Catastrophe Fund (“FHCF”) and Florida Joint
Underwriters Insurance Company (“JUA”).





As a
direct premium writer in the state of Florida, we are required to participate in
certain insurer solvency associations under Florida Statutes Section 631.57(3)
(a), administered by FIGA. Participation in these pools is based on our
written premium by line of business to total premiums written statewide by all
insurers. Participation has resulted in assessments against us, as it had
in 2006 and 2007, and again on October 30, 2009. There were no assessments
made during the nine months ended September 30, 2010 or for the year ended
December 31, 2008. Through 2007, we have been assessed $6.6 million and in
2009 we were assessed an additional $0.6 million in connection with the
insolvencies of domestic insurance companies. For statutory accounting
these assessments are not charged to operations; in contrast, GAAP treatment is
to charge current operations for the assessments. Through policyholder
surcharges, as approved by the Florida Office of Insurance Regulation (“Florida
OIR”), we have since recouped $6.9 million in connection with these
assessments.





The State
Board of Administration (“SBA”) and the FHCF Financing Corporation agreed to a
resolution that would authorize the issuance and sale of FHCF post-event revenue
bonds not to exceed $710 million. The proceeds of the bonds would be used for
the reimbursement of insurance companies for additional claims due to hurricanes
during the 2005 season. These bonds will have fixed interest rates, be exempt
from federal income taxes and be secured by not yet implemented emergency
assessments and reimbursement premiums. The inability to issue these bonds could
result in the FHCF's need to accelerate additional assessments. We have not
recorded any liability in connection with this initiative.





During
its regularly scheduled meeting on August 17, 2005, the Board of Governors of
Citizens determined a 2004 plan year deficit existed in the High Risk Account.
Citizens decided that a $515 million Regular Assessment was in the best interest
of Citizens and consistent with Florida Statutes. On this basis, Citizens
certified for a Regular Assessment.  Federated National’s
participation in this assessment totaled $2.0 million.


- 13
-


21st Century
Holding Company
 Notes
to Condensed Consolidated Financial Statements


During a
subsequent regularly scheduled meeting on or about December 18, 2006, Citizens
Board determined an additional 2004 plan year deficit existed in the High Risk
Account. Citizens decided that a $515 million Regular Assessment was in the best
interest of Citizens and consistent with Florida Statutes. On this basis,
Citizens certified for a Regular Assessment. Federated National’s participation
in this assessment totaled $0.3 million.





Pursuant
to Florida Statutes Section 627.3512, Federated National has since recouped the
assessments by adding a surcharge to policies. Provisions contained in our
excess of loss reinsurance policies provided for participation of our reinsurers
totaling $1.8 million of the $2.3 million in assessments. There was no
assessment made during the years 2007-2010.





The Florida OIR issued Information
Memorandum OIR-06-008M, titled Notice of Anticipated Florida
Hurricane Catastrophe Fund Assessment, anddated May 4, 2006, to
all property and casualty insurers, surplus lines insurers, and surplus lines
agents in the state of Florida placing them on notice of an anticipated FHCF
assessment. Sighting the unprecedented hurricane seasons of 2004 and 2005, the
FHCF exhausted nearly all of the $6 billion in reserves it had accumulated since
its inception in 1993. The Florida SBA issued its directive to levy an emergency
assessment upon all property and casualty business in the state of Florida.
There is no statutory requirement that policyholders be notified of the FHCF
assessment. The FHCF and Florida OIR are, however, recommending that insurers
include the FHCF assessment in a line item on the declaration page for two
reasons: (1) this is a multi-year assessment and (2) there may be concurrent
assessments and the insureds should know what amount is for which assessment.
The assessment became effective on all policies effective after January 1, 2007
and will be remitted to the administrator of the assessment as
collected.





Florida OIR issued an Order April 29,
2010, levying an increase to the emergency assessment to 1.3% from 1.0%, of
direct written premium on all property and casualty lines of business written in
the state of Florida for the benefit of the FHCF. The assessment was approved by
the Florida SBA to fund FHCF losses stemming from the 2005 hurricane season.
This order requires insurers to begin collecting the emergency assessment for
policies issued or renewed on or after January 1, 2011. The FHCF emergency
assessment will be remitted to the administrator of the assessment as collected
and therefore accounted for in a manner such that amounts collected or
receivable are not recorded as revenues and amounts due or paid are not
expensed. Previously and still in effect, the Florida OIR issued a
similar order dated January 11, 2007, levying an emergency assessment of
1.4% of direct written premium on all property and casualty lines of business
written in the state of Florida for the benefit of Citizens’ High Risk Account.
This order requires insurers to collect the emergency assessment for policies
issued or renewed on or after July 1, 2007. Similar to the FHCF assessment
discussed above, the Citizens emergency assessment is remitted to the
administrator of the assessment as collected and therefore accounted for in a
manner such that amounts collected or receivable are not recorded as revenues
and amounts due or paid are not expensed.





Federated National and American Vehicle
are also required to participate in an insurance apportionment plan under
Florida Statutes Section 627.351, which is referred to as a JUA Plan. The JUA
Plan provides for the equitable apportionment of any profits realized, or losses
and expenses incurred, among participating automobile insurers. In the event of
an underwriting deficit incurred by the JUA Plan which is not recovered through
the policyholders in the JUA Plan, such deficit shall be recovered from the
companies participating in the JUA Plan in the proportion that the net direct
written premiums of each such member during the preceding calendar year bear to
the aggregate net direct premiums written in this state by all members of the
JUA Plan. Neither Federated National nor American Vehicle was assessed by the
JUA Plan during 2010, 2009 or 2008.  Future assessments by this
association are undeterminable at this time.





(C)
Operational Matters





The
Company’s consolidated federal income tax returns for 2009, 2008, 2007, 2006 and
2005 are open for review by the Internal Revenue Service (“IRS”). The
federal income tax returns for 2003 and 2002 have been examined by the IRS. The
IRS concluded its examination for 2003 and 2002 and there were no material
changes in the tax liability for those years. The 2004 income tax return remains
open due to net operating loss carryforward to open years.


- 14
-




21st Century
Holding Company
 Notes
to Condensed Consolidated Financial Statements


The
Company’s consolidated Florida income tax returns for 2007, 2006, 2005 and 2004
were under examination by the Florida Department of Revenue as of September 31,
2010. The audit was settled and closed in early November 2010 with no change to
tax years 2007, 2006 and 2005. The audit resulted in an immaterial adjustment to
the 2004 tax year. The Florida income tax returns for 2008 and 2009 are open
for review.





The
Company has recorded a net deferred tax asset of $5.7 million as of September
30, 2010.  Realization of net deferred tax asset is dependent on generating
sufficient taxable income in future periods. Management believes that it is more
likely than not that the deferred tax assets will be realized and as such no
valuation allowance has been recorded against the net deferred tax asset. When
assessing the need for valuation allowances, the Company considers future
taxable income and ongoing prudent and feasible tax planning strategies. Should
a change in circumstances lead to a change in judgment about the realizability
of deferred tax assets in future years, the Company would record valuation
allowances as deemed appropriate in the period that the change in circumstances
occurs, along with a corresponding increase or charge to net income. The
resolution of tax reserves and changes in valuation allowances could be material
to the Company’s results of operations for any period, but is not expected to be
material to the Company’s financial position.





Relative to the Company’s commitments
stemming from operational matters, we sold our interest in the building housing
our operations in Lauderdale Lake on or about March 1, 2006 to an unrelated
party. As part of this transaction, we agreed to lease the same facilities for a
five-year term.  We amended the lease agreement and the note receivable on
September 1, 2010. As part of the amendment, we discounted the note
receivable and have discontinued the interest on the note. In consideration, we
will pay a reduced lease payment for the remainder of the lease. Our lease for
this office space expires in December 2011.





The expected future lease payouts in
connection with this lease are as follows.





Fiscal Year
                  
                  Lease payments(Dollars
      in Thousands)2010
                  
                  $
                  1822011
                  
                  
                  732Total
                  
                  $
                  914




The
Company is not currently involved in any legal actions arising from the ordinary
course of business that are not related to the insured claims activity. Please
see the Company's Form 10-Q for the quarter ended March 31, 2010 for information
regarding the settlement of the previously reported pending securities class
action.





(5)
Investments





FASB-issued
guidance addresses accounting and reporting for (a) investments in equity
securities that have readily determinable fair values and (b) all investments in
debt securities. FASB-issued guidance requires that these securities be
classified into one of three categories: (i) held-to-maturity, (ii) trading
securities or (iii) available-for-sale.





Investments
classified as held-to-maturity include debt securities wherein the Company’s
intent and ability are to hold the investment until maturity. The accounting
treatment for held-to-maturity investments is to carry them at amortized cost
without consideration to unrealized gains or losses. Investments classified as
trading securities include debt and equity securities bought and held primarily
for sale in the near term. The accounting treatment for trading securities is to
carry them at fair value with unrealized holding gains and losses included in
current period operations. Investments classified as available-for-sale include
debt and equity securities that are not classified as held-to-maturity or as
trading security investments. The accounting treatment for available-for-sale
securities is to carry them at fair value with unrealized holding gains and
losses excluded from earnings and reported as a separate component of
shareholders’ equity, namely “Other Comprehensive Income”.





Total
investments decreased $3.3 million, or 2.9%, to $110.9 million as of September
30, 2010, compared with $114.2 million as of December 31, 2009.


- 15
-


21st Century
Holding Company
 Notes
to Condensed Consolidated Financial Statements


The debt
and equity securities that are available-for-sale and carried at fair value
represent 95% of total investments as of September 30, 2010, compared with 98%
as of December 31, 2009.





We did
not hold any trading investment securities during the nine months ended
September 30, 2010.





Additional
provisions contained in FASB-issued guidance address the determination as to
when an investment is considered impaired, whether that impairment is other-than
temporary, and the measurement of an impairment loss. The Company’s policy for
the valuation of temporarily impaired securities is to determine impairment
based on the analysis of the following factors:





·
            rating
      downgrade or other credit event (eg., failure to pay interest when
      due);





·
            length
      of time and the extent to which the fair value has been less than
      amortized cost;





·
            financial
      condition and near term prospects of the issuer, including any specific
      events which may influence the operations of the issuer such as changes in
      technology or discontinuance of a business
  segment;





·
            prospects
      for the issuer’s industry segment;





·
            intent
      and ability of the Company to retain the investment for a period of time
      sufficient to allow for anticipated recovery in market
    value;





·
            historical
      volatility of the fair value of the
security.





Pursuant
to FASB-issued guidance, the Company records the unrealized losses, net of
estimated income taxes that are associated with that part of our portfolio
classified as available-for-sale through the shareholders' equity account titled
“Other Comprehensive Income”. Management periodically reviews the individual
investments that comprise our portfolio in order to determine whether a decline
in fair value below our cost either is other-than temporarily or permanently
impaired. Factors used in such consideration include, but are not limited to,
the extent and length of time over which the market value has been less than
cost, the financial condition and near-term prospects of the issuer and our
ability and intent to keep the investment for a period sufficient to allow for
an anticipated recovery in market value.





In
reaching a conclusion that a security is either other-than temporarily or
permanently impaired we consider such factors as the timeliness and completeness
of expected dividends, principal and interest payments, ratings from nationally
recognized statistical rating organizations such as Standard and Poor’s and
Moody’s Investors Service, Inc. (“Moody’s”), as well as information released via
the general media channels. During the nine months ended September 30, 2010, in
connection with this process, we have not charged any net realized investment
loss to operations.





As of
September 30, 2010, all of our securities are in good standing and not impaired
as defined by FASB-issued guidance, compared with $0.4 million as of December
31, 2009.





The
investments held as of September 30, 2010 and December 31, 2009, were comprised
mainly of corporate bonds held in various industries and municipal and United
States government bonds. As of September 30, 2010, 75% of the debt portfolio is
in diverse industries and 25% is in United States government bonds.  As of
September 30, 2010, approximately 89% of the equity holdings are in equities
related to diverse industries and 11% are in mutual funds.





As of
September 30, 2010, 39% of the investment portfolio is in corporate bonds, 21%
is in obligations of states and political subdivisions, and 21% is in United
States government bonds. Approximately 10% of the common stock holdings are
related to foreign entities.


- 16
-




21st Century
Holding Company
 Notes
to Condensed Consolidated Financial Statements


During the three months ended March 31,
2010, we re-classified $3.1 million of our bond portfolio from
available-for-sale to held-to-maturity.





During the three months ended June 30,
2010, we did not reclassify any of our bond portfolio from available-for-sale to
held-to-maturity.





During the three months ended September
30, 2010, we did not reclassify any of our bond portfolio from
available-for-sale to held-to-maturity.





As of
September 30, 2010 and December 31, 2009, we have
classified $5.8 million and $2.7 million, respectively, of our bond
portfolio as held-to-maturity. We only classify bonds as held-to-maturity to
support securitization of credit requirements. Fully funded trust agreements or
outstanding irrevocable letters of credit, used for such purposes,
total $3.1 million for the period ended September 30, 2010 and
December 31, 2009, respectively.





During
April 2006, American Vehicle finalized a $15.0 million irrevocable letter of
credit in conjunction with the 100% Quota Share Reinsurance Agreement with
Republic Underwriters Insurance Company (“Republic”) which was terminated in
April 2007. As of December 31, 2007, the letter of credit in favor of Republic
totaled $10.0 million. As of December 31, 2008, the letter of credit in favor of
Republic totaled $3.0 million. As of December 31, 2009, the letter of credit in
favor of Republic totaled $1.0 million. As of September 30, 2010, the letter of
credit in favor of Republic totaled zero, and was replaced by a fully funded
trust agreement that totaled $1.0 million.





(A)
Debt and Equity Securities





The
following table summarizes, by type, our investments as of September 30, 2010
and December 31, 2009.





September 30, 2010
                
                
                December 31, 2009Carrying
                
                
                Percent
                
                
                Carrying
                
                
                PercentAmount
                
                
                of Total
                
                
                Amount
                
                
                of Total(Dollars in Thousands)Debt
      securities, at market:United
      States government obligations and authorities
                
                $
                17,296
                
                
                
                15.59
                %
                
                $
                10,152
                
                
                
                8.89
                %Obligations
      of states and political subdivisions
                
                
                23,005
                
                
                
                20.73
                %
                
                
                39,269
                
                
                
                34.38
                %Corporate
                
                
                43,160
                
                
                
                38.90
                %
                
                
                42,092
                
                
                
                36.85
                %International
                
                
                2,051
                
                
                
                1.85
                %
                
                
                -
                
                
                
                0.00
                %85,512
                
                
                
                77.07
                %
                
                
                91,513
                
                
                
                80.12
                %Debt
      securities, at amortized cost:United
      States government obligations and authorities
                
                
                5,782
                
                
                
                5.22
                %
                
                
                2,650
                
                
                
                2.32
                %Total
      debt securities
                
                
                91,294
                
                
                
                5.22
                %
                
                
                94,163
                
                
                
                2.32
                %Equity
      securities, at market:
                
                
                19,654
                
                
                
                17.71
                %
                
                
                20,056
                
                
                
                17.56
                %Total
      investments
                
                $
                110,948
                
                
                
                100.00
                %
                
                $
                114,219
                
                
                
                100.00
                %




- 17
-


21st Century
Holding Company
 Notes
to Condensed Consolidated Financial Statements


The
following table shows the realized gains for debt and equity securities for the
three months ended September 30, 2010 and 2009.





Three Months Ended September 30,2010
                
                
                2009Gains
                
                
                Fair Value
                
                
                Gains
                
                
                Fair Value(Losses)
                
                
                at Sale
                
                
                (Losses)
                
                
                at Sale(Dollars
      in Thousands)Debt
      securities
                
                $
                2,201
                
                
                $
                25,432
                
                
                $
                194
                
                
                $
                9,964Equity
      securities
                
                
                194
                
                
                
                2,579
                
                
                
                1,943
                
                
                
                10,250Total
      realized gains
                
                
                2,395
                
                
                
                28,011
                
                
                
                2,137
                
                
                
                20,214Debt
      securities
                
                
                (19
                )
                
                
                318
                
                
                
                (441
                )
                
                
                2,165Equity
      securities
                
                
                (512
                )
                
                
                2,258
                
                
                
                (146
                )
                
                
                1,376Total
      realized losses
                
                
                (531
                )
                
                
                2,576
                
                
                
                (587
                )
                
                
                3,541Net
      realized gains on investments
                
                $
                1,864
                
                
                $
                30,587
                
                
                $
                1,550
                
                
                $
                23,755





The
following table shows the realized gains for debt and equity securities for the
nine months ended September 30, 2010 and 2009.





Nine Months Ended September 30,2010
                
                
                2009Gains
                
                
                Fair Value
                
                
                Gains
                
                
                Fair Value(Losses)
                
                
                at Sale
                
                
                (Losses)
                
                
                at Sale(Dollars
      in Thousands)Debt
      securities
                
                $
                4,068
                
                
                $
                81,704
                
                
                $
                212
                
                
                $
                26,089Equity
      securities
                
                
                2,856
                
                
                
                20,626
                
                
                
                1,942
                
                
                
                11,352Total
      realized gains
                
                
                6,924
                
                
                
                102,330
                
                
                
                2,154
                
                
                
                37,441Debt
      securities
                
                
                (59
                )
                
                
                2,884
                
                
                
                (669
                )
                
                
                9,509Equity
      securities
                
                
                (1,177
                )
                
                
                6,139
                
                
                
                (403
                )
                
                
                3,040Total
      realized losses
                
                
                (1,236
                )
                
                
                9,023
                
                
                
                (1,072
                )
                
                
                12,549Net
      realized gains on investments
                
                $
                5,688
                
                
                $
                111,353
                
                
                $
                1,082
                
                
                $
                49,990




- 18
-




21st Century
Holding Company
 Notes
to Condensed Consolidated Financial Statements
  A summary
of the amortized cost, estimated fair value, gross unrealized gains and losses
of debt and equity securities at September 30, 2010 and December 31, 2009 is as
follows.





Gross
                
                
                GrossAmortized
                
                
                Unrealized
                
                
                Unrealized
                
                
                EstimatedCost
                
                
                Gains
                
                
                Losses
                
                
                Fair Value(Dollars in Thousands)September
      30, 2010Debt
      Securities  - Available-For-Sale:United
      States government obligations and authorities
                
                $
                17,138
                
                
                $
                191
                
                
                $
                33
                
                
                $
                17,296Obligations
      of states and political subdivisions
                
                
                22,368
                
                
                
                657
                
                
                
                20
                
                
                
                23,005Corporate
                
                
                41,780
                
                
                
                1,419
                
                
                
                39
                
                
                
                43,160International
                
                
                2,005
                
                
                
                49
                
                
                
                3
                
                
                
                2,051$
                83,291
                
                
                $
                2,316
                
                
                $
                95
                
                
                $
                85,512Debt
      Securities  - Held-To-Maturity:United
      States government obligations and authorities
                
                $
                5,782
                
                
                $
                277
                
                
                $
                12
                
                
                $
                6,047Corporate
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -$
                5,782
                
                
                $
                277
                
                
                $
                12
                
                
                $
                6,047Equity
      securities - common stocks
                
                $
                20,018
                
                
                $
                971
                
                
                $
                1,335
                
                
                $
                19,654December
      31, 2009Debt
      Securities  - Available-For-Sale:Obligations
      of states and political subdivisions
                
                $
                49,041
                
                
                $
                695
                
                
                $
                315
                
                
                $
                49,421Corporate
                
                
                40,350
                
                
                
                1,798
                
                
                
                56
                
                
                
                42,092$
                89,391
                
                
                $
                2,493
                
                
                $
                371
                
                
                $
                91,513Debt
      Securities  - Held-To-Maturity:United
      States government obligations and authorities
                
                $
                2,650
                
                
                $
                148
                
                
                $
                5
                
                
                $
                2,793Corporate
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -$
                2,650
                
                
                $
                148
                
                
                $
                5
                
                
                $
                2,793Equity
      securities - common stocks
                
                $
                18,927
                
                
                $
                1,840
                
                
                $
                711
                
                
                $
                20,056




- 19
-


21st Century
Holding Company
 Notes
to Condensed Consolidated Financial Statements
  The table
below reflects our unrealized investment gains (losses) by investment class,
aged for length of time in a continuous unrealized gain (loss) position as of
September 30, 2010.





Unrealized Gains
                    (Losses)
                  
                  
                  Less than 12
                    months
                  
                  
                  12 months or
                    longer(Dollars
      in Thousands)Debt
      securities:United
      States government obligations and authorities
                  
                  $
                  158
                  
                  
                  $
                  64
                  
                  
                  $
                  94Obligations
      of states and political subdivisions
                  
                  
                  636
                  
                  
                  
                  243
                  
                  
                  
                  393Corporate
                  
                  
                  1,381
                  
                  
                  
                  523
                  
                  
                  
                  858International
                  
                  
                  46
                  
                  
                  
                  23
                  
                  
                  
                  232,221
                  
                  
                  
                  853
                  
                  
                  
                  1,368Equity
      securities:Common
      stocks
                  
                  
                  (364
                  )
                  
                  
                  (96
                  )
                  
                  
                  (268
                  )Total
      debt and equity securities
                  
                  $
                  1,857
                  
                  
                  $
                  757
                  
                  
                  $
                  1,100





The table
below reflects our unrealized investment losses by investment class, aged for
length of time in a continuous unrealized loss position as of December 31,
2009.





Unrealized
                    Losses
                  
                  
                  Less than 12
                    months
                  
                  
                  12 months or
                    longer(Dollars
      in Thousands)Debt
      securities:United
      States government obligations and authorities
                  
                  $
                  (120
                  )
                  
                  $
                  (120
                  )
                  
                  $
                  -Obligations
      of states and political subdivisions
                  
                  
                  (4
                  )
                  
                  
                  -
                  
                  
                  
                  (4
                  )Corporate
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -(124
                  )
                  
                  
                  (120
                  )
                  
                  
                  (4
                  )Equity
      securities:Common
      stocks
                  
                  
                  (237
                  )
                  
                  
                  -
                  
                  
                  
                  (237
                  )Total
      debt and equity securities
                  
                  $
                  (361
                  )
                  
                  $
                  (120
                  )
                  
                  $
                  (241
                  )





Below is
a summary of debt securities at September 30, 2010 and December 31, 2009, by
contractual or expected maturity periods. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.





September 30, 2010
                  
                  
                  December 31, 2009Amortized
                  
                  
                  Estimated
                  
                  
                  Amortized
                  
                  
                  EstimatedCost
                  
                  
                  Fair Value
                  
                  
                  Cost
                  
                  
                  Fair Value(Dollars in Thousands)Due
      in one year or less
                  
                  $
                  8,863
                  
                  
                  $
                  8,911
                  
                  
                  $
                  1,602
                  
                  
                  $
                  1,615Due
      after one through five years
                  
                  
                  47,690
                  
                  
                  
                  48,621
                  
                  
                  
                  49,821
                  
                  
                  
                  50,885Due
      after five through ten years
                  
                  
                  26,581
                  
                  
                  
                  27,758
                  
                  
                  
                  26,177
                  
                  
                  
                  27,217Due
      after ten years
                  
                  
                  5,938
                  
                  
                  
                  6,269
                  
                  
                  
                  14,441
                  
                  
                  
                  14,589Total
                  
                  $
                  89,072
                  
                  
                  $
                  91,559
                  
                  
                  $
                  92,041
                  
                  
                  $
                  94,306


- 20
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





United
States Treasury notes with a book value of $1,037,000 and $1,042,000, both
maturing in 2012, were on deposit with the Florida OIR as of September 30, 2010,
as required by law for American Vehicle and Federated National respectively, and
are included with other investments held until maturity.





The table
below sets forth investment results for the three months ended September 30,
2010 and 2009.





Three Months Ended September 30,2010
                  
                  
                  2009(Dollars in Thousands)Interest
      on debt securities
                  
                  $
                  739
                  
                  
                  $
                  811Dividends
      on equity securities
                  
                  
                  180
                  
                  
                  
                  97Interest
      on cash and cash equivalents
                  
                  
                  6
                  
                  
                  
                  17Total
      investment income
                  
                  $
                  925
                  
                  
                  $
                  925Net
      realized gains
                  
                  $
                  1,864
                  
                  
                  $
                  1,550




Proceeds
from sales of debt and equity securities during the three months ended September
30, 2010 and 2009, were approximately $30.6 million and $24.5 million,
respectively.





The table
below sets forth investment results for the nine months ended September 30, 2010
and 2009.





Nine Months Ended September 30,2010
                  
                  
                  2009(Dollars in Thousands)Interest
      on debt securities
                  
                  $
                  2,510
                  
                  
                  $
                  1,868Dividends
      on equity securities
                  
                  
                  350
                  
                  
                  
                  315Interest
      on cash and cash equivalents
                  
                  
                  11
                  
                  
                  
                  206Total
      investment income
                  
                  $
                  2,871
                  
                  
                  $
                  2,389Net
      realized gains
                  
                  $
                  5,688
                  
                  
                  $
                  1,082




Proceeds
from sales of debt and equity securities during the nine months ended September
30, 2010 and 2009, were approximately $111.7 million and $51.5 million,
respectively.





The table below sets forth a summary of
net realized investment gains during the three months ended September 30, 2010
and 2009.





Three Months Ended September 30,2010
                    
                    
                    2009(Dollars in Thousands)Net
      realized gains (losses)Debt
      securities
                    
                    $
                    2,182
                    
                    
                    $
                    (247
                    )Equity
      securities
                    
                    
                    (318
                    )
                    
                    
                    1,797Total
                    
                    $
                    1,864
                    
                    
                    $
                    1,550




- 21
-




21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





The table below sets forth a summary of
realized investment gains (losses) during the nine months ended September 30,
2010 and 2009.





Nine Months Ended September 30,2010
                  
                  
                  2009(Dollars in Thousands)Net
      realized gains (losses)Debt
      securities
                  
                  $
                  4,009
                  
                  
                  $
                  (457
                  )Equity
      securities
                  
                  
                  1,679
                  
                  
                  
                  1,539Total
                  
                  $
                  5,688
                  
                  
                  $
                  1,082




A summary of net unrealized gains
(losses) follows.





As of September 30, 2010
                  
                  
                  As of December 31, 2009(Dollars in Thousands)Net
      unrealized gains (losses)Debt
      securities
                  
                  $
                  2,221
                  
                  
                  $
                  2,122Equity
      securities
                  
                  
                  (364
                  )
                  
                  
                  1,128Total
                  
                  $
                  1,857
                  
                  
                  $
                  3,250





(6)
Fair Value Disclosure





In April
2009, the FASB-issued accounting guidance that if an entity determines that
either the volume and/or level of activity for an investment security has
significantly decreased (from normal conditions for that investment security) or
price quotations or observable inputs are not associated with orderly
transactions, increased analysis and management judgment will be required to
estimate fair value. This guidance was effective for interim and annual periods
ending after June 15, 2009, with early adoption permitted. This guidance
was applied prospectively.  The adoption of this guidance did not have
an impact on the Company’s financial statements or condition.





In
October 2008, the FASB-issued accounting guidance to clarify the application of
GAAP in determining fair value of financial instruments in a market that is not
active.  The guidance was effective upon issuance, including prior
periods for which financial statements had not been issued.  Our
adoption of this guidance does not have a material effect on our financial
position, results of operations, cash flows or disclosures.





In
September 2006, FASB issued accounting guidance that defines fair value as the
exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for an
asset or liability in an orderly transaction between market participants on the
measurement date.  This guidance also establishes a fair value hierarchy
that requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value.  The guidance
also categorizes assets and liabilities at fair value into one of three
different levels depending on the observation of the inputs employed in the
measurement, as follows:





Level 1 —
inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets.  A quoted price for an
identical asset or liability in an active market provides the most reliable fair
value measurement because it is directly observable to the market.





Level 2 —
inputs to the valuation methodology include quoted prices for similar assets and
liabilities in active markets, and inputs are observable for an asset or
liability, either directly or indirectly, for substantially the full term of the
financial instrument.




- 22
-




21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





Level 3 —
inputs to the valuation methodology are unobservable and significant to the fair
value measurement.





Securities available-for-sale: 
The fair value of securities available-for-sale is determined by obtaining
quoted prices on nationally recognized security exchanges.





Assets measured at fair value on a
recurring basis as of September 30, 2010, presented in accordance with this
guidance, are as follows.





As of September 30, 2010Level 1
                    
                    
                    Level 2
                    
                    
                    Level 3
                    
                    
                    Total(Dollars in Thousands)Debt
      securities:United
      States government obligations and authorities
                    
                    $
                    -
                    
                    
                    $
                    17,296
                    
                    
                    $
                    -
                    
                    
                    $
                    17,296Obligations
      of states and political
                    
                    
                    -subdivisions
                    
                    
                    -
                    
                    
                    
                    23,005
                    
                    
                    
                    -
                    
                    
                    
                    23,005Corporate
                    
                    
                    43,160
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    43,160International
                    
                    
                    -
                    
                    
                    
                    2,051
                    
                    
                    
                    -
                    
                    
                    
                    2,05143,160
                    
                    
                    
                    42,352
                    
                    
                    
                    -
                    
                    
                    
                    85,512Equity
      securities:Common
      stocks
                    
                    
                    19,654
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    19,65419,654
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    19,654Total
      debt and equity securities
                    
                    $
                    62,814
                    
                    
                    $
                    42,352
                    
                    
                    $
                    -
                    
                    
                    $
                    105,166





Assets measured at fair value on a
recurring basis as of December 31, 2009, presented in accordance with this
guidance, are as follows.





As of December 31, 2009Level 1
                
                
                Level 2
                
                
                Level 3
                
                
                Total(Dollars in Thousands)Debt
      securities:United
      States government obligations and authorities
                
                $
                -
                
                
                $
                10,152
                
                
                $
                -
                
                
                $
                10,152Obligations
      of states and political subdivisions
                
                
                -
                
                
                
                39,269
                
                
                
                -
                
                
                
                39,269Corporate
                
                
                42,092
                
                
                
                -
                
                
                
                -
                
                
                
                42,09242,092
                
                
                
                49,421
                
                
                
                -
                
                
                
                91,513Equity
      securities:Common
      stocks
                
                
                20,056
                
                
                
                -
                
                
                
                -
                
                
                
                20,05620,056
                
                
                
                -
                
                
                
                -
                
                
                
                20,056Total
      debt and equity securities
                
                $
                62,148
                
                
                $
                49,421
                
                
                $
                -
                
                
                $
                111,569




- 23
-




21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





(7)  Comprehensive
Loss





For the three and nine months ended
September 30, 2010 and 2009, comprehensive loss consisted of the
following.





Three Months Ended September 30,
                
                
                Nine Months Ended September 30,2010
                
                
                2009
                
                
                2010
                
                
                2009(Dollars in Thousands)
                
                
                (Dollars in Thousands)Net
      loss
                
                $
                (1,268
                )
                
                $
                (3,993
                )
                
                $
                (4,544
                )
                
                $
                (2,906
                )Change
      in net unrealized gains (losses)  on investments available for
      sale
                
                
                1,224
                
                
                
                3,106
                
                
                
                (1,393
                )
                
                
                4,655Comprehensive
      (loss) income, before tax
                
                
                (44
                )
                
                
                (887
                )
                
                
                (5,937
                )
                
                
                1,749Income
      tax (expense) benefit  related to items of other comprehensive
      loss
                
                
                (461
                )
                
                
                (1,218
                )
                
                
                524
                
                
                
                (1,801
                )Comprehensive
      loss
                
                $
                (505
                )
                
                $
                (2,105
                )
                
                $
                (5,413
                )
                
                $
                (52
                )




(8)
Reinsurance Agreements





Financing
risk generally involves a combination of risk retention and risk transfer
techniques. Retention, similar to a deductable, involves financing losses by
funds internally generated. Transfer involves the existence of a contractual
arrangement designed to shift financial responsibility to another party in
exchange for premium. Secondary to the primary risk-transfer agreements there
are reinsurance agreements. Following reinsurance agreements there are also
retro-cessionary reinsurance agreements; each designed to shift financial
responsibility based on predefined conditions. Generally, there are three
separate kinds of reinsurance structures – quota share, excess of loss, and
facultative, each considered either proportional or non-proportional. Our
reinsurance structures are maintained to protect our insurance subsidiaries
against the severity of losses on individual claims or unusually serious
occurrences in which the frequency and or the severity of claims produce an
aggregate extraordinary loss from catastrophic events.





As is
common practice within the insurance industry, we transfer a portion of the
risks insured under our policies to other companies through the purchase of
reinsurance. We utilize reinsurance to reduce exposure to catastrophic and
non-catastrophic risks and to help manage the cost of capital. Reinsurance
techniques are designed to lessen earnings volatility, improve shareholder
return, and to support the required statutory surplus requirements. Additional
rationale to secure reinsurance includes an arbitrage of premium rate,
availability of reinsurer’s expertise, and improved management of a profitable
portfolio of insureds by way of enhanced analytical capacities.





Although
reinsurance does not discharge us from our primary obligation to pay for losses
insured under the policies we issue, reinsurance does make the assuming
reinsurer liable to the insurance subsidiary for the reinsured portion of the
risk. A credit risk exposure exists with respect to ceded losses to the extent
that any reinsurer is unable or unwilling to meet the obligations assumed under
the reinsurance contracts. The collectability of reinsurance is subject to the
solvency of the reinsurers, interpretation of contract language and other
factors. A reinsurer's insolvency or inability to make payments under the terms
of a reinsurance contract could have a material adverse effect on our results of
operations and financial condition. Our reinsurance structure has significant
risks, including the fact that the FHCF may not be able to raise sufficient
money to pay its claims or impair its ability to pay its claims in a timely
manner. This could result in significant financial, legal and operational
challenges to all property and casualty companies associated with FHCF,
including our company.





The
availability and costs associated with the acquisition of reinsurance will vary
year to year. These fluctuations, which can be significant, are not subject to
our control and may limit our ability to purchase adequate coverage. For
example, FHCF has restricted its very affordable reinsurance capacity for the
2010–2011 and 2009–2010 hurricane seasons and is expected to continue
constricting its claim paying capacity for future seasons. This gradual
restriction is requiring us to replace that capacity with more expensive private
market reinsurance. The recovery of increased reinsurance costs through rate
action is not immediate and cannot be presumed, as it is subject to Florida OIR
approval. Our reinsurance program is subject to approval by the Florida OIR and
review by Demotech, Inc. (“Demotech”).




- 24
-




21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





Our
property lines of business include homeowners’ and fire. For the 2010-2011
hurricane season, the excess of loss and FHCF treaties will insure the property
lines for approximately $360.7 million of aggregate catastrophic losses and LAE
with a maximum single event coverage totaling approximately $285.5 million, with
the Company retaining the first $5.0 million of losses and LAE for each event.
Our reinsurance program includes coverage purchased from the private market,
which affords optional reinstatement premium protection that provides coverage
beyond the first event, along with any remaining coverage from the FHCF.
Coverage afforded by the FHCF totals approximately $220.4 million, or 61.1% of
the $360.7 million of aggregate catastrophic losses and LAE. The FHCF affords
coverage for the entire season, subject to maximum payouts, without regard to
any particular insurable event.





The
estimated cost to the Company for the excess of loss reinsurance products for
the 2010-2011 hurricane season, inclusive of approximately $19.1 million payable
to the FHCF and the prepaid automatic premium reinstatement protection, is
approximately $46.5 million.





The cost and amounts of reinsurance
were originally based on management's analysis of Federated National's exposure
to catastrophic risk as of June 30, 2010. Our data was subjected to exposure
level analysis as of September 30, 2010. This analysis of our exposure level in
relation to the total exposures to the FHCF and excess of loss treaties produced
changes in limits and reinsurance premiums because of increase in our exposure
level. The September 30, 2010 change to limits total limits was an increase of
$10.3 million or 2.9% and the change to reinsurance premiums was an increase of
$3.7 million or 8.7%. The change to management’s June 30, 2010 analysis will be
amortized over the remaining balance of the underlying policy term. The
Company’s retention did not change.




- 25
-




21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





The
2010-2011 private reinsurance companies and their respective A.M. Best Company
(“A.M. Best”) rating are listed in the table as follows.





Reinsurer
                                                              
                                                              A.M. Best RatingUNITED
      STATESAmerican
      Agricultural Insurance
                                                              
                                                              A
                                                              
                                                              
                                                              (2)Everest
      Reinsurance Company
                                                              
                                                              A+
                                                              
                                                              
                                                              (2)Munich
      Reinsurance America, Inc.
                                                              
                                                              A+
                                                              
                                                              
                                                              (2)QBE
      Reinsurance Corporation
                                                              
                                                              A
                                                              
                                                              
                                                              (2)BERMUDAACE
      Tempest Reinsurance Ltd.
                                                              
                                                              A+
                                                              *
                                                              
                                                              (2)Actua
      Re Limited
                                                              
                                                              NR
                                                              *
                                                              
                                                              (1)Amlin
      Bermuda Limited
                                                              
                                                              A
                                                              
                                                              
                                                              (2)Ariel
      Reinsurance Company Limited
                                                              
                                                              A-
                                                              *DaVinci
      Reinsurance Limited
                                                              
                                                              A
                                                              *
                                                              
                                                              (2)Flagstone
      Reinsurance Limited
                                                              
                                                              A-Montpelier
      Reinsurance Ltd.
                                                              
                                                              A-
                                                              
                                                              
                                                              (2)Nephila/
      Allianz Risk Trnsfr Zurich (BDA)
                                                              
                                                              NR-5
                                                              *
                                                              
                                                              (2)Renaissance
      Reinsurance Limited
                                                              
                                                              A+
                                                              *
                                                              
                                                              (2)Torus
      Insurance (Bermuda) Limited
                                                              
                                                              A-
                                                              *UNITED
      KINGDOMAntares
      Syndicate No. 1274 (AUL)
                                                              
                                                              A
                                                              
                                                              
                                                              (2)Broadgate
      Underwriting Limited Syndicate No. 1301 (BGT)
                                                              
                                                              A
                                                              
                                                              
                                                              (2)Arrow
      Syndicate No. 1910 (ARW)
                                                              
                                                              A
                                                              *
                                                              
                                                              (2)Amlin
      Syndicate No. 2001 (AML)
                                                              
                                                              A
                                                              
                                                              
                                                              (2)Novae
      Syndicate No. 2007 (NVA)
                                                              
                                                              A
                                                              
                                                              
                                                              (2)Houson
      Casualty Co. (UK Branch)
                                                              
                                                              A+
                                                              
                                                              
                                                              (2)EUROPELansforsakringar
      Sak Forsakringsaktiebolag
                                                              
                                                              NR-5
                                                              
                                                              
                                                              (2)Liberty
      Syndicates Paris/Syndicate 4472
                                                              
                                                              A
                                                              
                                                              
                                                              (2)*
      Reinstatement Premium Protection Program Participants(1)
      Participant has funded a trust agreement for their exposure with
      approximately $3.8 million of cash and U.S. Government obligations of
      American institutions at fair market value.(2)
      Standard & Poor's rated "A" or higher (investment grade - economic
      situation can affect finance)




For the
2009-2010 hurricane season, the excess of loss and FHCF treaties insured the
property lines for approximately $456.6 million of aggregate catastrophic losses
and LAE with a maximum single event coverage totaling approximately $349.7
million, with the Company retaining the first $5.0 million of losses and LAE for
each event. Our reinsurance program included coverage purchased from the private
market, which afforded optional reinstatement premium protection that provided
coverage beyond the first event, along with coverage from the FHCF. Coverage
afforded by the FHCF totaled approximately $259.0 million, or 56.7% of the
$456.6 million of aggregate catastrophic losses and LAE. The FHCF affords
coverage for the entire season, subject to maximum payouts, without regard to
any particular insurable event.




- 26
-




21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





The
2009-2010 private reinsurance companies and their respective A.M. Best rating
are listed in the table as follows.





Reinsurer
                                                            
                                                            A.M. Best RatingUNITED
      STATESEverest
      Reinsurance Company
                                                            
                                                            A+
                                                            
                                                            
                                                            **Munich
      Reinsurance America, Inc.
                                                            
                                                            A+
                                                            
                                                            
                                                            **QBE
      Reinsurance Corporation
                                                            
                                                            A
                                                            
                                                            
                                                            **BERMUDAACE
      Tempest Reinsurance Limited
                                                            
                                                            A+
                                                            *Amlin
      Bermuda Limited
                                                            
                                                            AAriel
      Reinsurance Company Limited
                                                            
                                                            A-
                                                            *DaVinci
      Reinsurance Limited
                                                            
                                                            A
                                                            *Flagstone
      Reinsurance Limited
                                                            
                                                            A-Hiscox
      Insurance Company Limited
                                                            
                                                            A
                                                            *Montpelier
      Reinsurance Limited
                                                            
                                                            A-Platinum
      Underwriters Bermuda Limited
                                                            
                                                            A
                                                            *Renaissance
      Reinsurance Limited
                                                            
                                                            A+
                                                            *Torus
      Insurance (Bermuda) Limited
                                                            
                                                            A-
                                                            *LONDON
      & EUROPEAmlin
      Syndicate No. 2001 (AML)
                                                            
                                                            A+
                                                            
                                                            
                                                            **Antares
      Syndicate No. 1274 (AUL)
                                                            
                                                            A
                                                            
                                                            
                                                            **Arrow
      Syndicate No. 1910 (ARW)
                                                            
                                                            A
                                                            *
                                                            
                                                            **Broadgate
      Syndicate No. 1301 (BGT)
                                                            
                                                            A
                                                            
                                                            
                                                            **Liberty
      Syndicates Services Limited, Paris
                                                              for
      and on behalf of Lloyd's Syndicate No. 4472 (LIB)
                                                            
                                                            A
                                                            
                                                            
                                                            **Novae
      Syndicate No. 2007 (NVA)
                                                            
                                                            A
                                                            
                                                            
                                                            **SCOR
      Switzerland AG
                                                            
                                                            A-HEDGE
      FUNDS / COLLATERALIZEDActua
      Re Limited
                                                            
                                                            NR
                                                            *
                                                            
                                                            (1)Allianz
      Risk Transfer AG (Bermuda Branch)
                                                            
                                                            NR-5
                                                            *
                                                            
                                                            (2)*
      2009 Reinstatement Premium Protection Program Participants**
      Admitted in Florida as a reinsurer, whether through licensing,
      accreditation or other means.(Blank)
      Non admitted reinsurer in Florida.(1)
      Participant has funded a trust agreement for their partcipation with
      approximately $6.4 million of cash and U.S. Government obligations of
      American institutions at fair market value.(2)
      Standard & Poor's rated "AA" (Obligor's capacity to meet its financial
      commitment on the obligation is very strong)




American Vehicle and Federated National
entered into an 80% quota share treaty with Scor Reinsurance Company effective
May 1, 2010 for all private passenger automobile policies in effect on May 1,
2010. This treaty included a ceding of unearned premium to the reinsurers. Our
insurance companies will retain 20% of the policy risk for the term of the quota
share agreement.




- 27
-




21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





American Vehicle became an admitted
insurer in the state of Georgia during the quarter ended September 30, 2010. As
part of the ramp-up of our business in Georgia, we entered into an arrangement
to write non-standard private passenger automobile insurance through a reputable
managing general agent familiar with the Georgia market. A quota share treaty
will cede 100% of the risk and be fully collateralized for unearned premium and
unpaid loss and LAE.





Pursuant to commutation provisions
contained in the original 2004 FHCF agreement, on August 10, 2010 Federated
National and FHCF negotiated such a commutation agreement for the 2004 contract
year. The terms of the agreement provide that Federated National release the
FHCF from all its obligations under the original reinsurance agreement for a
negotiated consideration as a final payment for all unpaid claims subject to the
treaty. This negotiation resulted in a final commutation payment received by us
for a total of $0.75 million, which the Company believes is adequate to pay loss
and LAE including incurred but not yet reported (“IBNR”) for the subject losses.
The benefit of the FHCF treaty inures to the benefit of the private reinsurers
participating in the treaty.  Should our estimations for unpaid loss
and LAE exceed our commutation with the FHCF and ultimately prove inadequate,
our coverage in the private market will continue to indemnify us. We do not
expect the private market coverage to be exhausted. Additionally, this
commutation agreement did not have an effect on operational net
income.





As a
direct premium writer in the state of Florida, we are required to participate in
certain insurer solvency associations under Florida Statutes Section 631.57(3)
(a), administered by FIGA. Participation in these pools is based on our
written premium by line of business to total premiums written statewide by all
insurers. Participation has resulted in assessments against us, as it had
in 2006 and 2007, and again on October 30, 2009. There were no assessments
made during the nine months ended September 30, 2010 or for the year ended
December 31, 2008. Through 2007, we were assessed $6.6 million and in 2009
we were assessed an additional $0.6 million in connection with the insolvencies
of domestic insurance companies. For statutory accounting these assessments
are not charged to operations, in contrast, GAAP treatment is to charge current
operations for the assessments. Through policyholder surcharges, as approved by
the Florida OIR, we have since recouped $6.9 million in connection with these
assessments.





The SBA
and the FHCF Financing Corporation agreed to a resolution that would authorize
the issuance and sale of FHCF post-event revenue bonds not to exceed $710
million. The proceeds of the bonds would be used for the reimbursement of
insurance companies for additional claims due to hurricanes during the 2005
season. These bonds will have fixed interest rates, be exempt from federal
income taxes and be secured by not yet implemented emergency assessments and
reimbursement premiums. The inability to issue these bonds could result in the
FHCF's need to accelerate additional assessments. We have not recorded any
liability in connection with this initiative.





The FHCF
reimbursement contract and addendums are all effective June 1, 2010, and the
private excess of loss type treaties are all effective July 1, 2010; all
treaties have a term of one year. Our reinsurance treaty with the FHCF has a
significant credit risk, including the fact that the FHCF may not be able to
raise sufficient money to pay their claims or impair their ability to pay their
claims in a timely manner. This could result in significant financial, legal and
operational challenges to all companies, including ours. Additionally, the FHCF
treaty contains an exclusion for “Losses in excess of the sum of the Balance of
the Fund as of December 31 of the Contract Year and the amount the SBA is able
to raise through the issuance of revenue bonds or by the use of other financing
mechanisms, up to the limit pursuant to Section 215.555(4) (c), Florida
Statutes.” This credit risk is mitigated by a fund cash buildup due to the
absence of covered events in recent years.





To date,
there have been no claims asserted against the reinsurers in connection with the
2010–2011 and 2009–2010 excess of loss and FHCF treaties.





As
regards to the commercial multi-peril property program that began recording
premium on August 28, 2009, we have secured an automatic facultative reinsurance
agreement with Munich Reinsurance America, Inc. and Ascot Underwriting Limited
for bound risks with total insured values not to exceed $10.0 million, with
additional coverage in excess of $10.0 million available upon submission and
subjected to underwriting guidelines. This coverage excludes catastrophic
wind-storm risk. A.M. Best ratings for Munich Re and Ascot are A+ and A,
respectively.




- 28
-




21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





During
2009, the Company secured casualty reinsurance affording coverage totaling $4.0
million in excess of $1.0 million. This reinsurance also protects the Company
against extra contractual obligations and losses in excess of policy
limits. Any loss occurrence that involves liability exposure written by
either Federated National or American Vehicle or a combination of both will be
covered. The cost of this coverage totaled approximately $0.4
million.





In order
to expand our commercial business, American Vehicle has entered into various
quota share reinsurance agreements whereby American Vehicle is the assuming
reinsurer. On March 26, 2009, we announced that American Vehicle received
approval from the Florida OIR to enter into a reinsurance relationship allowing
the opportunity to market and underwrite commercial insurance through a company
that has an "A" rating with A.M. Best. This agreement is designed to enable the
deployment of commercial general liability and other commercial insurance
products in most of the contiguous 48 states to policyholders who require their
commercial insurance policy to come from an insurance company with an A- or
better A.M. Best rating. Operations began during the quarter ended June 30,
2009.





The quota
share retrocessionaire reinsurance agreements require American Vehicle to
securitize credit, regulatory and business risk. As of September 30, 2010,
irrevocable letters of credit fully collateralized by American Vehicle and
further guaranteed by the parent company, 21st Century, were replaced by fully
funded trust agreements. Fully funded trust agreements and outstanding
irrevocable letters of credit totaled $3.1 million as of September 30, 2010 and
December 31, 2009, respectively.





We are selective in choosing reinsurers
and consider numerous factors, the most important of which are the financial
stability of the reinsurer, their history of responding to claims and their
overall reputation. In an effort to minimize our exposure to the insolvency of a
reinsurer, we evaluate the acceptability and review the financial condition of
the reinsurer at least annually.





(9) Stock Compensation
Plans





We implemented a stock option plan in
September 1998, which expired in September 2008, and provided for the granting
of stock options to officers, key employees and consultants.  The
objectives of this plan included attracting and retaining the best personnel,
providing for additional performance incentives, and promoting our success by
providing employees the opportunity to acquire common stock. Options outstanding
under this plan were granted at prices either equal to or above the market value
of the stock on the date of grant, typically vest over a four-year or five-year
period and expire six or ten years after the grant date. Under this plan, we
were authorized to grant options to purchase up to 900,000 common shares, and,
as of September 30, 2010 and December 31, 2009, we had outstanding exercisable
options to purchase 119,599 and 124,599 shares, respectively.





In 2002,
we implemented the 2002 Stock Option Plan.  The purpose of this plan
is to advance our interests by providing an additional incentive to attract,
retain and motivate highly qualified and competent persons who are key to the
Company, including employees, consultants, independent contractors, officers and
directors. Our success is largely dependent upon their efforts and judgment;
therefore, by authorizing the grant of options to purchase common stock, we
encourage stock ownership. Options outstanding under the plan were granted at
prices either equal to or above the market value of the stock on the date of
grant, typically vest over a five-year period, and expire six or ten years after
the grant date. Under this plan, we are authorized to grant options to purchase
up to 1,800,000 common shares, and, as of September 30, 2010 and December 31,
2009, we had outstanding exercisable options to purchase 702,685 and 736,951
shares, respectively.




- 29
-




21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





Activity
in our stock option plans for the period from January 1, 2008 to September 30,
2010 is summarized below.





1998 Plan
                      
                      
                      2002 PlanNumber of
                        Shares
                      
                      
                      Weighted
                        Average
                        Option
                        Exercise Price
                      
                      
                      Number of
                        Shares
                      
                      
                      Weighted
                        Average
                        Option
                        Exercise PriceOutstanding
      at January 1, 2008
                      
                      
                      152,599
                      
                      
                      $
                      14.92
                      
                      
                      
                      660,309
                      
                      
                      $
                      13.78Granted
                      
                      
                      4,500
                      
                      
                      $
                      8.67
                      
                      
                      
                      162,500
                      
                      
                      $
                      8.92Exercised
                      
                      
                      (13,500
                      )
                      
                      $
                      6.67
                      
                      
                      
                      (141,458
                      )
                      
                      $
                      8.81Cancelled
                      
                      
                      (13,500
                      )
                      
                      $
                      10.03
                      
                      
                      
                      (23,200
                      )
                      
                      $
                      12.60Outstanding
      at January 1, 2009
                      
                      
                      130,099
                      
                      
                      $
                      16.07
                      
                      
                      
                      658,151
                      
                      
                      $
                      13.69Granted
                      
                      
                      -
                      
                      
                      $
                      -
                      
                      
                      
                      147,000
                      
                      
                      $
                      4.37Exercised
                      
                      
                      -
                      
                      
                      $
                      -
                      
                      
                      
                      -
                      
                      
                      $
                      -Cancelled
                      
                      
                      (5,500
                      )
                      
                      $
                      20.23
                      
                      
                      
                      (68,200
                      )
                      
                      $
                      11.58Outstanding
      at January 1, 2010
                      
                      
                      124,599
                      
                      
                      $
                      15.88
                      
                      
                      
                      736,951
                      
                      
                      $
                      12.03Granted
                      
                      
                      -
                      
                      
                      $
                      -
                      
                      
                      
                      104,500
                      
                      
                      $
                      3.60Exercised
                      
                      
                      -
                      
                      
                      $
                      -
                      
                      
                      
                      -
                      
                      
                      $
                      -Cancelled
                      
                      
                      (5,000
                      )
                      
                      $
                      13.70
                      
                      
                      
                      (138,766
                      )
                      
                      $
                      15.36Outstanding
      at September 30, 2010
                      
                      
                      119,599
                      
                      
                      $
                      15.97
                      
                      
                      
                      702,685
                      
                      
                      $
                      10.12




Options outstanding as of September 30,
2010 are exercisable as follows.





1998 Plan
                    
                    
                    2002 PlanOptions Exercisable at:
                    
                    Number of
                      Shares
                    
                    
                    Weighted
                      Average
                      Option
                      Exercise Price
                    
                    
                    Numberof Shares
                    
                    
                    Weighted
                      Average
                      Option
                      Exercise PriceSeptember
      30, 2010
                    
                    
                    72,589
                    
                    
                    $
                    15.97
                    
                    
                    
                    326,337
                    
                    
                    $
                    10.12December
      31, 2010
                    
                    
                    8,970
                    
                    
                    $
                    15.97
                    
                    
                    
                    60,910
                    
                    
                    $
                    10.12December
      31, 2011
                    
                    
                    18,670
                    
                    
                    $
                    15.97
                    
                    
                    
                    113,549
                    
                    
                    $
                    10.12December
      31, 2012
                    
                    
                    18,670
                    
                    
                    $
                    15.97
                    
                    
                    
                    89,489
                    
                    
                    $
                    10.12December
      31, 2013
                    
                    
                    700
                    
                    
                    $
                    15.97
                    
                    
                    
                    56,200
                    
                    
                    $
                    10.12December
      31, 2014
                    
                    
                    -
                    
                    
                    $
                    15.97
                    
                    
                    
                    35,300
                    
                    
                    $
                    10.12Thereafter
                    
                    
                    -
                    
                    
                    $
                    15.97
                    
                    
                    
                    20,900
                    
                    
                    $
                    10.12Total
      options exercisable
                    
                    
                    119,599
                    
                    
                    
                    
                    
                    
                    
                    702,685




Prior to
January 1, 2006, we accounted for the plans under the recognition and
measurement provisions of stock-based compensation using the intrinsic value
method prescribed by the Accounting Principles Board (“APB”) and related
Interpretation, as permitted by FASB-issued guidance.Under these provisions,
no stock-based employee compensation cost was recognized in the Statement of
Operations as all options granted under those plans had an exercise price equal
to or less than the market value of the underlying common stock on the date of
grant.





Upon the
exercise of options, the Company issues authorized shares.





Effective
January 1, 2006, the Company adopted the fair value recognition provisions of
FASB-issued guidance using the modified-prospective-transition method. Under
that transition method, compensation costs recognized during 2010 and 2009
include the following.




- 30
-




21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





·
            Compensation
      cost for all share-based payments granted prior to, but not yet vested as
      of January 1, 2006, based on the grant date fair value estimated in
      accordance with the original provisions of FASB-issued guidance,
      and





·
            Compensation
      cost for all share-based payments granted subsequent to January 1, 2006,
      based on the grant-date fair-value estimated in accordance with the
      provisions of FASB-issued guidance. Results for prior periods have not
      been restated, as not required to be by the
  pronouncement.





As a
result of adopting FASB-issued guidance on January 1, 2006, the Company’s income
from continuing operations before provision for income taxes and net income for
the three months ended September 30, 2010 are lower by approximately $99,000 and
$62,000, respectively, than if it had continued to account for share-based
compensation under APB guidance.





As a
result of adopting FASB-issued guidance on January 1, 2006, the Company’s income
from continuing operations before provision for income taxes and net income for
the nine months ended September 30, 2010 are lower by approximately $297,000 and
$185,000, respectively, than if it had continued to account for share-based
compensation under APB guidance.





As a
result of adopting FASB-issued guidance on January 1, 2006, the Company’s income
from continuing operations before provision for income taxes and net income for
the three months ended September 30, 2009 are lower by approximately $96,000 and
$60,000, respectively, than if it had continued to account for share-based
compensation under APB guidance.





As a
result of adopting FASB-issued guidance on January 1, 2006, the Company’s income
from continuing operations before provision for income taxes and net income for
the nine months ended September 30, 2009 are lower by approximately $326,000 and
$203,000, respectively, than if it had continued to account for share-based
compensation under APB guidance.





Basic and
diluted earnings per share for the three months ended September 30, 2010 would
have been ($0.15), if the Company had not adopted FASB-issued guidance, compared
with reported basic and diluted earnings per share of ($0.16).  Basic
and diluted earnings per share for the nine months ended September 30, 2010
would have been ($0.55), if the Company had not adopted FASB-issued guidance,
compared with reported basic and diluted earnings per share of
($0.57).





Basic and
diluted earnings per share for the three months ended September 30, 2009 would
have been ($0.49), if the Company had not adopted FASB-issued guidance, compared
with reported basic and diluted earnings per share of ($0.50). Basic and diluted
earnings per share for the nine months ended September 30, 2009 would have been
($0.34), if the Company had not adopted FASB-issued guidance, compared with
reported basic and diluted earnings per share of ($0.36).





Because
the change in income taxes payable includes the effect of excess tax benefits,
those excess tax benefits also must be shown as a separate operating cash
outflow so that operating cash flows exclude the effect of excess tax benefits.
FASB-issued guidance requires the cash flows resulting from the tax benefits
resulting from tax deductions in excess of the compensation cost recognized for
those options (excess tax benefits) to be classified as financing cash
flows.





The
weighted average fair value of options granted during the three months ended
September 30, 2010 was $1.62 and during the same period 2009 was $1.29,
estimated on the date of grant using the Black-Scholes option-pricing
model.





- 31
-




21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





The fair
value of options granted is estimated on the date of grant using the following
assumptions.





September 30, 2010
                  
                  
                  September 30, 2009Dividend
      yield
                  
                  
                  1.78%
      - 5.80%
                  
                  
                  
                  5.90%
      - 17.30%Expected
      volatility
                  
                  
                  74.62%
      - 82.36%
                  
                  
                  
                  57.54%
      - 82.65%Risk-free
      interest rate
                  
                  
                  0.99%
      - 1.33%
                  
                  
                  
                  1.22%
      - 1.50%Expected
      life (in years)
                  
                  
                  3.06
      - 3.78
                  
                  
                  
                  3.45
      - 4.16




Summary
information about the Company’s stock options outstanding at September 30, 2010
follows.





Weighted Average
                    
                    
                    WeightedRange of
                    
                    
                    Outstanding at
                    
                    
                    Contractual
                    
                    
                    Average
                    
                    
                    Exercisable atExercise Price
                    
                    
                    September 30, 2010
                    
                    
                    Periods in Years
                    
                    
                    Exercise Price
                    
                    
                    September 30, 20101998
      Plan
                    
                    $
                    6.67
      - $27.79
                    
                    
                    
                    119,599
                    
                    
                    
                    2.59
                    
                    
                    $
                    15.97
                    
                    
                    
                    72,5892002
      Plan
                    
                    $
                    3.03
      - $18.21
                    
                    
                    
                    702,685
                    
                    
                    
                    3.81
                    
                    
                    $
                    10.12
                    
                    
                    
                    326,337




(10)
Stockholders’ Equity





Capital Stock





The Company’s authorized capital
consists of 1,000,000 shares of preferred stock, par value $0.01 per share, and
25,000,000 shares of common stock, par value $0.01 per share. As of September
30, 2010, there were no preferred shares issued or outstanding and there were
7,946,384 shares of common stock outstanding.





(11)
Subsequent Events





The Company has determined that there
are no events or transactions occurring subsequent to September 30, 2010, that
would have a material impact on the Company’s results of operations or financial
condition as of September 30, 2010.




- 32
-




21st Century
Holding Company


Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





General
information about 21st Century
Holding Company can be found at www.21stcenturyholding.com;
however, the information that can be accessed through our web site is not part
of our report. We make our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and amendments to these reports filed or
furnished pursuant to Section 13 or 15(d) of the Securities and Exchange Act of
1934 available free of charge on our web site, as soon as reasonably practicable
after they are electronically filed with the SEC.





Item
2





Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





You should read the following
discussion in conjunction with our condensed consolidated financial statements
and related notes and information included under this Item 2 and elsewhere in
this Quarterly Report on Form 10-Q and in our Annual Report on Form
10-K  filed with the Securities and Exchange Commission (“SEC”) on
March 26, 2010 (“Form 10-K”). Unless the context requires otherwise, as used in
this Form 10-Q, the terms “21st
Century” “Company,” “we,” “us” and “our,” refers to 21st Century
Holding Company and its subsidiaries.





Forward-Looking
Statements





Statements
in this Quarterly Report on Form 10-Q for the nine months ended September 30,
2010 (“Form 10-Q”)  or in documents that are incorporated by reference
that are not historical fact are forward-looking statements that are subject to
certain risks and uncertainties that could cause actual events and results to
differ materially from those discussed herein.  Without limiting the
generality of the foregoing, words such as “may,” “will,” “expect,” “believe,”
“anticipate,” “intend,” “could,” “would,” “estimate,” or “continue” or the
negative other variations thereof or comparable terminology are intended to
identify forward-looking statements.  The risks and uncertainties
include, without limitation, uncertainties related to estimates, assumptions and
projections relating to unpaid losses and loss adjustment expenses and other
accounting policies, losses from the nine hurricanes that occurred in fiscal
years 2005 and 2004 and in other estimates, assumptions and projections
contained in this Form 10-Q; inflation and other changes in economic conditions
(including changes in interest rates and financial markets); the impact of new
regulations adopted in Florida which affect the property and casualty insurance
market; the costs of reinsurance, assessments charged by various governmental
agencies; pricing competition and other initiatives by competitors; our ability
to obtain regulatory approval for requested rate changes and the timing thereof;
legislative and regulatory developments; the outcome of various litigation
matters pending against us, including the terms of any settlements; risks
related to the nature of our business; dependence on investment income and the
composition of our investment portfolio; the adequacy of our liability for loss
and loss adjustment expense; insurance agents; claims experience; ratings by
industry services; catastrophe losses; reliance on key personnel; weather
conditions (including the severity and frequency of storms, hurricanes,
tornadoes and hail); changes in driving patterns and loss trends; acts of war
and terrorist activities; court decisions and trends in litigation and health
care and auto repair costs; and other matters described from time to time by us
in this report, and in our other  filings with the SEC, including the
Company’s Form 10-K.





You are
cautioned not to place reliance on these forward-looking statements, which are
valid only as of the date they were made.  The Company undertakes no
obligation to update or revise any forward-looking statements to reflect new
information or the occurrence of unanticipated events or
otherwise.  In addition, readers should be aware that Generally
Accepted Accounting Principles (“GAAP”) prescribes when a company may reserve
for particular risks, including litigation exposures.  Accordingly,
results for a given reporting period could be significantly affected when a
reserve is established for a major contingency.  Reported results may
therefore appear to be volatile in certain accounting periods.


- 33
-


21st Century
Holding Company


Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





Overview





21st Century
is an insurance holding company, which, through our subsidiaries and our
contractual relationships with our independent agents and general agents,
controls substantially all aspects of the insurance underwriting, distribution
and claims processes. We are authorized to underwrite homeowners’ multi-peril
(“homeowners’”), personal umbrella, commercial general liability, following form
commercial excess liability, personal and commercial automobile, fire, allied
lines, workers’ compensation, business personal property and commercial inland
marine insurance. We are authorized to underwrite in various states on behalf of
our wholly owned subsidiaries, Federated National Insurance Company (“Federated
National”) and American Vehicle Insurance Company (“American Vehicle”) and other
insurance carriers. We market and distribute our own and third-party insurers’
products and our other services through a network of independent agents. We also
utilize a select number of general agents for the same purpose.





We operate in certain states as an
admitted carrier, meaning that we are licensed by those states and are subject
to comprehensive regulation by them.  Admitted carriers are typically
required to contribute financially to any state guarantee funds, such as in
Florida.  In other states, we operate as a non-admitted carrier, which
is sometimes also referred to as an “excess and surplus lines
carrier.”  Non-admitted carriers are generally subject to less
regulation by the states and typically are not required to contribute to state
guarantee funds.





Federated
National is licensed as an admitted carrier in Florida. Through contractual
relationships with a network of approximately 4,200 independent agents, of which
approximately 300 actively sell and service our products, Federated National is
authorized to underwrite homeowners’, fire, allied lines and personal automobile
insurance in Florida.





American
Vehicle is licensed as an admitted carrier in Florida, and underwrites
commercial general liability, and personal and commercial automobile insurance.
American Vehicle is also licensed as an admitted carrier in Alabama, Louisiana,
Georgia and Texas, and underwrites commercial general liability insurance in
those states. American Vehicle operates as a non-admitted carrier in Arkansas,
California, Kentucky, Maryland, Missouri, Nevada, Oklahoma, South Carolina,
Tennessee and Virginia, and can underwrite commercial general liability
insurance in all of these states.





We
internally process claims made by our insureds through our wholly owned claims
adjusting company, Superior Adjusting, Inc. (“Superior”). We also offer premium
financing to our own and third-party insureds through our wholly owned
subsidiary, Federated Premium Finance, Inc. (“Federated Premium”).





Assurance
Managing General Agents, Inc. (“Assurance MGA”), a wholly owned subsidiary of
the Company, acts as Federated National’s and American Vehicle’s exclusive
managing general agent in the state of Florida and is also licensed as a
managing general agent in the states of Alabama, Arkansas, Georgia, Illinois,
Louisiana, North Carolina, Mississippi, Missouri, New York, Nevada, South
Carolina, Texas and Virginia. During 2009, Assurance MGA contracted with
several unaffiliated insurance companies to sell commercial general liability,
workers compensation and inland marine insurance through Assurance MGA’s
existing network of agents. This process will continue throughout 2010 as
Assurance MGA benefits from the arrangement by receiving commission revenue from
policies sold by its insurance partners, while minimizing its
risks.





Assurance
MGA earns commissions and fees for providing policy administration, marketing,
accounting and analytical services, and for participating in the negotiation of
reinsurance contracts. Assurance MGA earns a $25 per policy fee, and a 6%
commission fee from its affiliates Federated National and American
Vehicle.





Insure-Link,
Inc. (“Insure-Link”) was formed in March 2008 to serve as an independent
insurance agency. The insurance agency markets direct to the public to provide a
variety of insurance products and services to individual clients as well as
business clients by offering a full line of insurance products including, but
not limited to,  homeowners’, personal and commercial automobile,
commercial general liability and workers compensation insurance through their
agency appointments with over fifty different carriers.  Insure-Link will
expand its’ business through marketing and by acquiring other insurance
agencies.


- 34
-


21st Century
Holding Company


Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





During
the nine months ended September 30, 2010, 77.6%, 13.6%, 4.3% and 4.5% of
the premiums we underwrote were for homeowners’, commercial general liability,
federal flood, and personal automobile insurance, respectively. During the nine
months ended September 30, 2009, 79.3%, 16.7%, 3.7% and 0.3% of the premiums we
underwrote were for homeowners’, commercial general liability, federal flood,
and personal automobile insurance, respectively.





Our
business, results of operations and financial condition are subject to
fluctuations due to a variety of factors. Abnormally high severity or frequency
of claims in any period could have a material adverse effect on our business,
results of operations and financial condition. When our estimated liabilities
for unpaid losses and loss adjustment expenses (“LAE”) are less than actual
losses and LAE, we increase reserves with a corresponding reduction in our net
income in the period in which the deficiency is identified. Conversely, when our
estimated liabilities for unpaid losses and LAE are greater than actual losses
and LAE, we decrease reserves with a corresponding increase in our net income in
the period in which the deficiency is identified.





We are
focusing our marketing efforts on continuing to expand our distribution network
and market our products and services throughout Florida and in other states by
establishing relationships with additional independent agents and general
agents. As this occurs, we will seek to replicate our distribution network in
those states. There can be no assurance, however, that we will be able to obtain
the required regulatory approvals to offer additional insurance products or
expand into other states.





We
operate in highly competitive markets and face competition from national,
regional and residual market insurance companies in the homeowners’, commercial
residential property, commercial general liability, and automobile markets, many
of whom are larger, have greater financial and other resources, and offer more
diversified insurance coverage. Our competitors include companies that market
their products through agents, as well as companies that sell insurance directly
to their customers. Large national writers may have certain competitive
advantages over agency writers, including increased name recognition, increased
loyalty of their customer base and reduced policy acquisition
costs.





Significant
competition also emerged because of fundamental changes in 2007 made to the
property and casualty insurance business in Florida, which resulted in a
multi-pronged approach to address the cost of residential property insurance in
Florida. First, the law increased the capacity of reinsurance that stabilized
the reinsurance market to the benefit of the insurance companies writing
properties lines in Florida. Secondly, the law provided for rate relief to all
policyholders. The law also authorized the state-owned insurance company,
Citizens Property Insurance Corporation (“Citizens”), which is free of many of
the restraints on private carriers such as surplus, ratios, income taxes and
reinsurance expense, to reduce its premium rates and begin competing against
private insurers in the residential property insurance market and expands the
authority of Citizens to write commercial insurance. We believe that these
aggressive marketplace changes in 2007 forced some carriers to pursue market
share based on “best case” pricing models that may ultimately prove unprofitable
from an underwriting perspective.





For
example, during 2009 we noted that the Florida Office of Insurance Regulation
(“Florida OIR”) placed at least four property and casualty insurance companies
in some form of receivership while several other Florida domiciled insurance
companies have recapitalized in order to remain viable in the Florida market.
The insolvency of these companies poses a risk to all other remaining carriers
in the state including Federated National and American Vehicle in
terms of assessments to support those failed companies. Through September 30,
2010, we are not aware of any such assessments in connection with the takeovers
during 2009; however, no guarantee can be made that no assessments will be
imposed.





In recent
years, approximately two-dozen new homeowner insurance companies
received authority by the Florida OIR to commence business as admitted carriers
in the state.





In 2006,
the state of Florida created the Insurance Capital Build-Up Incentive Program in
response to the catastrophic events that occurred during 2004 and 2005. This
program provided matching capital funds to any new or existing carrier licensed
to write homeowners’ insurance in the state of Florida under certain
conditions.  This program resulted in a significant erosion of our
homeowners’ insurance market since 2007.  We did not participate in the
Insurance Capital Build-Up Incentive Program. Although our pricing is inevitably
influenced to some degree by that of our competitors, we believe that it is
generally not in our shareholders’ best interest to compete solely on
price.


- 35
-


21st Century
Holding Company


Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





We face
increased competition from existing carriers and new entrants in our niche
markets. As mentioned earlier, in an effort to foster competition after the
hurricanes of 2004 and 2005, the State of Florida loaned money to multiple
carriers with certain debt covenants, including the maintenance of minimum
written premium. Our competition has attempted to gain market share through
aggressive pricing and generous policy acquisition costs, which has had an
adverse affect on our ability to maintain market share. Although our pricing is
inevitably influenced to some degree by that of our competitors, we believe that
it is generally not in our best interest to compete solely on price. We compete
based on underwriting criteria, our distribution network and superior service to
our agents and insureds.





In
Florida, more than 200 companies are authorized to underwrite
homeowners’ insurance. National and regional companies that compete with us
in the homeowners’ market include Castle Key (formerly Allstate Floridian)
Indemnity Insurance Company and Fidelity National Insurance Company. In addition
to these nationally recognized companies, we also compete with several Florida
domestic property and casualty companies such as, but not limited to, Universal
Property and Casualty Insurance Company, Royal Palm Insurance Company, Edison
Insurance Company, St. Johns Insurance Company, Cypress Property and Casualty
Insurance Company, and American Strategic Insurance Company.





Companies,
which compete with us nationally in the commercial general liability insurance
market, include Century Surety Insurance Company, Atlantic Casualty Insurance
Company, Colony Insurance Company and Burlington/First Financial Insurance
Companies.





Comparable
companies in the personal automobile insurance market include Kingsway Amigo
Insurance Company, United Automobile Insurance Company, Direct General Insurance
Company, and Ocean Harbor Insurance Company, as well as national insurers such
as Progressive Casualty Insurance Company and GEICO.





We
reported decreased gross written premium for the nine months ended September 30,
2010, and continue to face difficult economic conditions that affected our
earnings. Performance during the three and nine months ended September 30, 2010,
was affected by our increased reinsurance costs and reduced earned premium due
to mitigation credits.





Our
executive offices are located at 3661 West Oakland Park Boulevard, Suite 300,
Lauderdale Lakes, Florida, 33311 and our telephone number is (954)
581-9993.





Critical
Accounting Policies





See Note 3, “Summary of
Significant Accounting Policies” in the Notes to the Company’s condensed
consolidated financial statements for the quarter ended September 30, 2010
included in Item 1 of this Report on Form 10-Q for a discussion of the Company’s
critical accounting policies.





New
Accounting Pronouncements





See Note 3, “Summary of Significant
Accounting Policies” in the Notes to the Company’s  condensed
consolidated financial statements for the quarter ended September 30, 2010
included in Item 1 of this Report on Form 10-Q for a discussion of recent
accounting pronouncements and their effect, if any, on the
Company.


- 36
-


21st Century
Holding Company


Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





Analysis
of Financial Condition


As
of September 30, 2010 Compared with December 31, 2009





Total Investments





The
Financial Accounting Standards Board (“FASB”) issued guidance that addresses
accounting and reporting for (a) investments in equity securities that have
readily determinable fair values and (b) all investments in debt securities. The
guidance requires that these securities be classified into one of three
categories: (i) held-to-maturity, (ii) trading securities or (iii)
available-for-sale.





Investments
classified as held-to-maturity include debt securities wherein the Company’s
intent and ability are to hold the investment until maturity. The accounting
treatment for held-to-maturity investments is to carry them at amortized cost
without consideration to unrealized gains or losses. Investments classified as
trading securities include debt and equity securities bought and held primarily
for sale in the near term. The accounting treatment for trading securities is to
carry them at fair value with unrealized holding gains and losses included in
current period operations. Investments classified as available-for-sale include
debt and equity securities that are not classified as held-to-maturity or as
trading security investments. The accounting treatment for available-for-sale
securities is to carry them at fair value with unrealized holding gains and
losses excluded from earnings and reported as a separate component of
shareholders’ equity, namely “Other Comprehensive Income”.





Total
investments decreased $3.3 million, or 2.9%, to $110.9 million as of September
30, 2010, compared with $114.2 million as of December 31, 2009.





The debt
and equity securities that are available-for-sale and carried at fair value
represent 95% of total investments as of September 30, 2010, compared with 98%
as of December 31, 2009.





We did
not hold any trading investment securities during the nine months ended
September 30, 2010.





Below is
a summary of net unrealized gains and losses as of September 30, 2010 and
December 31, 2009, by category.





UnrealizedGainsand(Losses)September30,2010
                  
                  
                  December31,2009(Dollars in Thousands)Debt
      securities:United
      States government obligations and authorities
                  
                  $
                  158
                  
                  
                  $
                  (120
                  )Obligations
      of states and political subdivisions
                  
                  
                  636
                  
                  
                  
                  500Corporate
                  
                  
                  1,381
                  
                  
                  
                  1,742International
                  
                  
                  46
                  
                  
                  
                  -2,221
                  
                  
                  
                  2,122Equity
      securities:Common
      stocks
                  
                  
                  (364
                  )
                  
                  
                  1,128Total
      debt and equity securities
                  
                  $
                  1,857
                  
                  
                  $
                  3,250




The
Company’s investment in marketable equity securities consist primarily of
investments in common stock in diverse industries.  The $0.4 million
unrealized losses are from common stocks held in these diverse industries as of
September 30, 2010.  The Company evaluated the near-term prospects in
relation to the severity and duration of the impairment.  Based on
this evaluation and, the Company’s ability and intent to hold these investments
for a reasonable period of time sufficient for a forecasted recovery of fair
value, the Company does not consider these investments to be
other-than-temporarily impaired at September 30, 2010.





The
FASB-issued guidance also addresses the determination as to when an investment
is considered impaired, whether that impairment is other-than temporary, and the
measurement of an impairment loss. The Company’s policy for the valuation of
temporarily impaired securities is to determine impairment based on the analysis
of the following factors:


- 37
-


21st Century
Holding Company


Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





·
            rating
      downgrade or other credit event (eg., failure to pay interest when
      due);





·
            length
      of time and the extent to which the fair value has been less than
      amortized cost;





·
            financial
      condition and near term prospects of the issuer, including any specific
      events which may influence the operations of the issuer such as changes in
      technology or discontinuance of a business
  segment;





·
            prospects
      for the issuer’s industry segment;





·
            intent
      and ability of the Company to retain the investment for a period of time
      sufficient to allow for anticipated recovery in market
    value;





·
            historical
      volatility of the fair value of the
security.





Pursuant
to this guidance, the Company records the unrealized losses, net of estimated
income taxes that are associated with that part of our portfolio classified as
available for sale, through the shareholders' equity account titled “Other
Comprehensive Income”. Management periodically reviews the individual
investments that comprise our portfolio in order to determine whether a decline
in fair value below our cost either is other-than temporarily or permanently
impaired. Factors used in such consideration include, but are not limited to,
the extent and length of time over which the market value has been less than
cost, the financial condition and near-term prospects of the issuer and our
ability and intent to keep the investment for a period sufficient to allow for
an anticipated recovery in market value.





In
reaching a conclusion that a security is either other-than-temporarily or
permanently impaired we consider such factors as the timeliness and completeness
of expected dividends, principal and interest payments, ratings from nationally
recognized statistical rating organizations such as Standard and Poor’s and
Moody’s Investors Service, Inc. (“Moody’s”), as well as information released via
the general media channels. During the nine months ended September 30, 2010, in
connection with this process, we have not charged any net realized investment
loss to operations.





As of
September 30, 2010, all of our securities are in good standing and not impaired,
compared with $0.4 million of securities that were considered impaired as of
December 31, 2009.





During
the nine months ended September 30, 2010, in connection with the
other-than-temporarily or permanently impaired process, we did not charge any
net realized investment loss to operations.





The
investments held as of September 30, 2010 were comprised mainly of corporate
bonds held in various industries, municipal bonds and United States government
bonds. The investments held as of December 31, 2009, were comprised mainly of
corporate bonds held in various industries, municipal bonds and United States
government bonds.  As of September 30, 2010, 75% of the debt portfolio
is in diverse industries and 25% is in United States government bonds.  As
of September 30, 2010, approximately 89% of the equity holdings are in equities
related to diverse industries and 11% are in mutual funds.





As of
September 30, 2010, 39% of the investment portfolio is in corporate bonds, 21%
is in obligations of states and political subdivisions, and 21% is in United
States government bonds. Approximately 10% of the common stock holdings are
related to foreign entities.


- 38
-


21st Century
Holding Company


Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





The
following table summarizes, by type, our investments as of September 30, 2010
and December 31, 2009.





September30,2010
                  
                  
                  December31,2009Carrying
                  
                  
                  Percent
                  
                  
                  Carrying
                  
                  
                  PercentAmount
                  
                  
                  ofTotal
                  
                  
                  Amount
                  
                  
                  ofTotal(Dollars in Thousands)Debt
      securities, at market:United
      States government obligations and authorities
                  
                  $
                  17,296
                  
                  
                  
                  15.59
                  %
                  
                  $
                  10,152
                  
                  
                  
                  8.89
                  %Obligations
      of states and political subdivisions
                  
                  
                  23,005
                  
                  
                  
                  20.73
                  %
                  
                  
                  39,269
                  
                  
                  
                  34.38
                  %Corporate
                  
                  
                  43,160
                  
                  
                  
                  38.90
                  %
                  
                  
                  42,092
                  
                  
                  
                  36.85
                  %International
                  
                  
                  2,051
                  
                  
                  
                  1.85
                  %
                  
                  
                  -
                  
                  
                  
                  0.00
                  %85,512
                  
                  
                  
                  77.07
                  %
                  
                  
                  91,513
                  
                  
                  
                  80.12
                  %Debt
      securities, at amortized cost:United
      States government obligations and authorities
                  
                  
                  5,782
                  
                  
                  
                  5.22
                  %
                  
                  
                  2,650
                  
                  
                  
                  2.32
                  %Total
      debt securities
                  
                  
                  91,294
                  
                  
                  
                  5.22
                  %
                  
                  
                  94,163
                  
                  
                  
                  2.32
                  %Equity
      securities, at market:
                  
                  
                  19,654
                  
                  
                  
                  17.71
                  %
                  
                  
                  20,056
                  
                  
                  
                  17.56
                  %Total
      investments
                  
                  $
                  110,948
                  
                  
                  
                  100.00
                  %
                  
                  $
                  114,219
                  
                  
                  
                  100.00
                  %





As of
September 30, 2010 and December 31, 2009, we have
classified $5.8 million and $2.7 million, respectively, of our bond
portfolio as held-to-maturity. We only classify bonds as held-to-maturity to
support securitization of credit requirements. Fully funded trust agreements or
outstanding irrevocable letters of credit, used for such purposes,
total $3.1 million for the period ended September 30, 2010 and
December 31, 2009, respectively.





During
April 2006, American Vehicle finalized a $15.0 million irrevocable letter of
credit in conjunction with the 100% Quota Share Reinsurance Agreement with
Republic Underwriters Insurance Company (“Republic”) which was terminated in
April 2007. As of December 31, 2007, the letter of credit in favor of Republic
totaled $10.0 million. As of December 31, 2008, the letter of credit in favor of
Republic totaled $3.0 million. As of December 31, 2009, a letter of credit in
favor of Republic totaled $1.0 million. As of September 30, 2010, the letter of
credit in favor of Republic was replaced by a fully funded trust agreement that
totaled $1.0 million.





Cash and Short-Term
Investments





Cash and
short-term investments, which include cash, certificates of deposits, and money
market accounts, increased $6.4 million, or 22.6%, to $34.6 million as of
September 30, 2010, compared with $28.2 million as of December 31, 2009. The
increase in cash and short-term investments is from normal portfolio turnover
wherein investments were sold; we evaluate on an ongoing basis long and
short-term investment options for the best yields that match our liquidity
needs.





Prepaid Reinsurance
Premiums





Prepaid
reinsurance premiums decreased $7.0 million, or 68.2%, to $3.3 million as of
September 30, 2010, compared with $10.3 million as of December 31,
2009.  The change is due to our payments and amortization of prepaid
reinsurance premiums associated with our homeowners’ insurance book of
business. We believe concentrations of credit risk associated with our prepaid
reinsurance premiums are not significant.





Premiums Receivable, Net of Allowance
for Credit Losses





Premiums
receivable, net of allowance for credit losses, decreased $4.5 million, or
43.9%, to $5.8 million as of September 30, 2010, compared with $10.3 million as
of December 31, 2009.





Our
homeowners’ insurance premiums receivable decreased $6.0 million, or 66.6%,
to $3.0 million as of September 30, 2010, compared with $9.0 million as of
December 31, 2009. The balance at December 31, 2009 included $5.4 million
receivable in connection with our Citizens’ assumed policies.


- 39
-


21st Century
Holding Company


Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





Our
commercial general liability insurance premiums receivable increased $0.8
million, or 94.0%, to $1.7 million as of September 30, 2010, compared
with $0.9 million as of December 31, 2009.





Premiums receivable in connection with
our automobile line of business increased $0.7 million, or 159.1%, to $1.2
million as of September 30, 2010, compared with $0.5 million as of December 31,
2009. See “Results of Operations-Nine Months Ended September 30, 2010” for a
discussion regarding the increase in the Company’s sale of auto insurance during
2010.





Our
allowance for credit losses remained unchanged at approximately $0.1 million as
of September 30, 2010, compared with as of December 31, 2009.





Reinsurance Recoverable,
Net





Reinsurance
recoverable, net, decreased $5.1 million, or 33.1%, to $10.2 million as of
September 30, 2010, compared with $15.3 million as of December 31, 2009. The
change is due to payment patterns by our reinsurers. All amounts are
current and deemed collectable. We believe concentrations of credit risk
associated with our reinsurance recoverables, net, are not
significant.





Deferred Policy Acquisition Costs
(“DPAC”)





DPAC
decreased $0.6 million, or 7.2%, to $7.7 million as of September 30, 2010,
compared with $8.3 million as of December 31, 2009. The change is due to
decreased homeowners’ and commercial general liability written and unearned
premium.





Deferred Income Taxes, Net





Deferred
income taxes, net, increased $1.0 million, or 21.7%, to $5.7 million as of
September 30, 2010, compared with $4.7 million as of December 31, 2009. Deferred
income taxes, net, is comprised of approximately $7.6 million and $9.1 million
of deferred tax assets, net of approximately $1.9 million and $4.4 million of
deferred tax liabilities as of September 30, 2010 and December 31, 2009,
respectively.





Income Taxes Receivable





Income
taxes receivable decreased $4.8 million, or 68.0%, to $2.3 million as of
September 30, 2010, compared with $7.1 million as of December 31, 2009. The
change is due to the receipt of our prior year refund, net of our loss as
discussed within “Results of Operations-Nine Months Ended September 30,
2010”.




Other Assets





Other
assets decreased $1.4 million, or 37.6%, to $2.3 million as of September 30,
2010, compared with $3.7 million as of December 31, 2009. Major components of
other assets are shown in the following table; the accrued interest income
receivable is primarily investment related.





September30,2010
                  
                  
                  December31,2009(Dollars in Thousands)Accrued
      interest income receivable
                  
                  $
                  886
                  
                  
                  $
                  1,162Notes
      receivable
                  
                  
                  456
                  
                  
                  
                  599Deposits
                  
                  
                  287
                  
                  
                  
                  334Prepaid
      expenses
                  
                  
                  355
                  
                  
                  
                  644Receivable
      for investments sold
                  
                  
                  -
                  
                  
                  
                  567Other
                  
                  
                  307
                  
                  
                  
                  365Total
                  
                  $
                  2,291
                  
                  
                  $
                  3,671




- 40
-


21st Century
Holding Company


Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





Unpaid
Losses and LAE





Unpaid
losses and LAE decreased $7.1 million, or 10.1%, to $63.5 million as of
September 30, 2010, compared with $70.6 million as of December 31, 2009. The
composition of unpaid losses and LAE by product line is as follows.





September30,2010
                      
                      
                      December31,2009Case
                      
                      
                      Bulk
                      
                      
                      Total
                      
                      
                      Case
                      
                      
                      Bulk
                      
                      
                      Total(Dollars in Thousands)
                      
                      
                      (Dollars in Thousands)Homeowners'
                      
                      $
                      6,987
                      
                      
                      $
                      14,728
                      
                      
                      $
                      21,715
                      
                      
                      $
                      8,705
                      
                      
                      $
                      19,298
                      
                      
                      $
                      28,003Commercial
      General Liability
                      
                      
                      7,781
                      
                      
                      
                      27,230
                      
                      
                      
                      35,011
                      
                      
                      
                      7,885
                      
                      
                      
                      29,346
                      
                      
                      
                      37,231Automobile
                      
                      
                      3,481
                      
                      
                      
                      3,248
                      
                      
                      
                      6,729
                      
                      
                      
                      2,612
                      
                      
                      
                      2,765
                      
                      
                      
                      5,377Total
                      
                      $
                      18,249
                      
                      
                      $
                      45,206
                      
                      
                      $
                      63,455
                      
                      
                      $
                      19,202
                      
                      
                      $
                      51,409
                      
                      
                      $
                      70,611





Factors
that affect unpaid losses and LAE include the estimates made on a claim-by-claim
basis known as “case reserves” coupled with bulk estimates known as incurred but
not yet reported (“IBNR”). Periodic estimates by management of the ultimate
costs required to settle all claim files are based on the Company’s analysis of
historical data and estimations of the impact of numerous factors such as (i)
per claim information; (ii) company and industry historical loss experience;
(iii) legislative enactments, judicial decisions, legal developments in the
awarding of damages, and changes in political attitudes; and (iv) trends in
general economic conditions, including the effects of inflation.





Management
revises its estimates based on the results of its analysis. This process assumes
that experience, adjusted for the effects of current developments and
anticipated trends, is an appropriate basis for estimating the ultimate
settlement of all claims. There is no precise method for subsequently evaluating
the impact of any specific factor on the adequacy of the reserves, because the
eventual redundancy or deficiency is affected by multiple factors.





Unearned Premium





Unearned
premiums decreased $3.1 million, or 5.9%, to $47.8 million as of September 30,
2010, compared with $50.9 million as of December 31, 2009. The change was due to
a $3.9 million decrease in unearned homeowners’ insurance premiums, a $0.6
million decrease in unearned commercial general liability premiums, a $0.3
million increase in unearned flood insurance premiums, and a $1.1 million
increase in unearned automobile premiums. Generally, as is in this case, a
decrease in unearned premium directly relates to a decrease in written premium
on a rolling twelve-month basis. Competition could negatively affect our
unearned premium.





Premium Deposits and Customer Credit
Balances





Premium deposits and customer credit
balances increased $0.4 million, or 15.8%, to $2.5 million as of September 30,
2010, compared with $2.1 million as of December 31, 2009. Premium deposits are
monies received on policies not yet in-force as of September 30,
2010.





Bank
Overdraft





Bank
overdraft decreased $2.2 million, or 26.7%, to $6.1 million as of September 30,
2010, compared with $8.3 million as of December 31, 2009. The bank overdraft
relates primarily to losses and LAE disbursements paid but not presented for
payment by the policyholder or vendor. The change relates to our payment
patterns in relationship to the rate at which those cash disbursements are
presented to the bank for payment.





Deferred Gain from Sale of
Property





Deferred
gain from sale of property decreased $0.4 million, or 37.1%, to $0.6 million as
of September 30, 2010, compared with $1.0 million as of December 31, 2009. As
required by FASB guidance, we are amortizing the deferred gain over the term of
the leaseback, which is scheduled to end in December 2011.


- 41
-


21st Century
Holding Company


Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





Accounts Payable and Accrued
Expenses





Accounts payable and accrued expenses
decreased $1.5 million, or 57.9%, to $1.1 million as of September 30, 2010,
compared with $2.6 million as of December 31, 2009.





Results
of Operations


Three
Months Ended September 30, 2010 Compared with Three Months Ended September 30,
2009





Gross
Premiums Written





Gross
premiums written increased $4.8 million, or 37.0%, to $17.7 million for the
three months ended September 30, 2010, compared with $12.9 million for the three
months ended September 30, 2009.  The following table denotes gross
premiums written by major product line. This increase reflected primarily an
increase in the sale of homeowners’ policies.





ThreeMonthsEndedSeptember30,2010
                    
                    
                    2009(Dollars in Thousands)Amount
                    
                    
                    Percentage
                    
                    
                    Amount
                    
                    
                    PercentageHomeowners'
                    
                    $
                    12,860
                    
                    
                    
                    72.67
                    %
                    
                    $
                    7,815
                    
                    
                    
                    60.51
                    %Commercial
      General Liability
                    
                    
                    3,075
                    
                    
                    
                    17.37
                    %
                    
                    
                    4,072
                    
                    
                    
                    31.52
                    %Federal
      Flood
                    
                    
                    1,239
                    
                    
                    
                    7.00
                    %
                    
                    
                    983
                    
                    
                    
                    7.61
                    %Automobile
                    
                    
                    524
                    
                    
                    
                    2.96
                    %
                    
                    
                    47
                    
                    
                    
                    0.36
                    %Gross
      written premiums
                    
                    $
                    17,698
                    
                    
                    
                    100.00
                    %
                    
                    $
                    12,917
                    
                    
                    
                    100.00
                    %





On September 30, 2009, Federated
National announced it received approval from the Florida OIR for a premium rate
increase for its voluntary homeowners’ program within the state of Florida. The
premium rate increase, which averaged approximately 19%, was deployed on
policies with effective dates of November 1, 2009 and December 1, 2009, for new
and renewals, respectively.





On April 16, 2010, Federated National
announced it received approval from the Florida OIR for a premium rate increase
for its assumed homeowners’ program from Citizens within the state of Florida.
The premium rate increase, which averaged approximately 15%, was implemented on
Citizens take-out policies only with an effective date of July 1,
2010.





We
continue to offer premium discounts for wind mitigation efforts by
policyholders, as required by Florida law. These discounts have had a
significant effect on both written and earned premium. Wind
mitigation credits are 25.8% of the pre-credit premium, or $26.4 million, as of
September 30, 2010, as compared with 27.7% of the pre-credit premium, or $23.6
million, as of September 30, 2009.




During
the three months ended September 30, 2010 and 2009, the change to the cumulative
wind mitigation credits afforded our policyholders totaled
($0.6) million and $0.3 million, respectively. As of September 30,
2010, 59.5% of our in-force homeowners’ policyholders were receiving wind
mitigation credits totaling approximately $26.4 million (a
25.8% reduction of in-force premium), while 62.2% of our in-force
homeowners’ policyholders were receiving wind mitigation credits totaling
approximately $23.6 million, (a 27.7 % reduction of in-force premium), as
of September 30, 2009.





The Company’s increase in the sale of
homeowners’ policies by $5.1 million, or 64.6%, to $12.9 million for
the three months ended September 30, 2010, compared with $7.8 million
for the three months ended September 30, 2009 is gross of
reinsurance costs and net of Florida’s mandated homeowners’ wind mitigation
discounts.  Our number of in-force homeowners’
policies increased by approximately 7,400, or 20.9%, to approximately
43,000 as of September 30, 2010, as compared with
approximately 35,600 as of September 30, 2009.





We are
required to report write-your-own flood premiums on a direct and 100% ceded
basis.





Federated National and American Vehicle
are currently rated by Demotech, Inc. (“Demotech”) as "A" ("Exceptional"), which
is the third of seven ratings, and defined as “Regardless of the severity of a
general economic downturn or deterioration in the insurance cycle, insurers
earning a Financial Stability Rating (“FSR”) of “A” possess “Exceptional”
financial stability related to maintaining surplus as regards to policyholders”.
Demotech’s ratings are based upon factors of concern to agents, reinsurers
and policyholders and are not primarily directed toward the protection of
investors. Our Demotech rating could be jeopardized by factors including adverse
development and various surplus related ratio exceptions. On March 31, 2010,
Demotech reaffirmed Federated National’s FSR of “A” (“Exceptional”) subject to a
$10.0 million infusion of capital into Federated National.


- 42
-


21st Century
Holding Company


Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





This infusion was completed effective
March 31, 2010 and was in the form of a $5.0 million capital contribution from
the Company and a $5.0 million loan from American Vehicle to Federated National
evidenced by a $5.0 million subordinated surplus debenture due from Federated
National to American Vehicle.  The capital infusion was approved by
the Florida OIR. In a subsequent letter dated August 31, 2010, Demotech affirmed
the company's current FSR of A. The withdrawal of our ratings could limit or
prevent us from writing or renewing desirable insurance policies, from competing
with insurers who have higher ratings, and from obtaining adequate reinsurance,
or from borrowing on a line of credit. The withdrawal of our ratings could have
a material adverse effect on the Company’s results of operations and financial
position because the Company’s insurance products might no longer be acceptable
to the secondary marketplace and mortgage lenders. Furthermore, a withdrawal of
our ratings could prevent independent agents from selling and servicing our
insurance products.





The
Company’s sale of commercial general liability policies decreased by $1.0
million to $3.1 million for the three months ended September 30, 2010, compared
with $4.1 million for the three months ended September 30, 2009. The primary
factor for this decrease has been the slowdown in the economy, which had a
dramatic impact on the artisan contractor portfolio written by American Vehicle.
An additional factor is our decision to restrict underwriting authority within
specific commercial general liability classes and geographic areas.





The
following table sets forth the amounts and percentages of our gross premiums
written in connection with our commercial general liability program by
state.





Three Months Ended September
      30,2010
                                                  
                                                  
                                                  
                                                  2009Amount
                                                  
                                                  
                                                  Percentage
                                                  
                                                  
                                                  
                                                  Amount
                                                  
                                                  
                                                  Percentage(Dollars
      in Thousands)StateAlabama
                                                  
                                                  $
                                                  6
                                                  
                                                  
                                                  
                                                  0.20
                                                  %
                                                  
                                                  
                                                  $
                                                  11
                                                  
                                                  
                                                  
                                                  0.27
                                                  %Arkansas
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  0.00
                                                  %
                                                  
                                                  
                                                  
                                                  1
                                                  
                                                  
                                                  
                                                  0.02
                                                  %California
                                                  
                                                  
                                                  21
                                                  
                                                  
                                                  
                                                  0.68
                                                  %
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  0.00
                                                  %Florida
                                                  
                                                  
                                                  2,654
                                                  
                                                  
                                                  
                                                  86.31
                                                  %
                                                  
                                                  
                                                  
                                                  3,584
                                                  
                                                  
                                                  
                                                  88.03
                                                  %Georgia
                                                  
                                                  
                                                  17
                                                  
                                                  
                                                  
                                                  0.55
                                                  %
                                                  
                                                  
                                                  
                                                  76
                                                  
                                                  
                                                  
                                                  1.87
                                                  %Louisiana
                                                  
                                                  
                                                  208
                                                  
                                                  
                                                  
                                                  6.76
                                                  %
                                                  
                                                  
                                                  
                                                  199
                                                  
                                                  
                                                  
                                                  4.89
                                                  %Oklahoma
                                                  
                                                  
                                                  4
                                                  
                                                  
                                                  
                                                  0.13
                                                  %
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  0.00
                                                  %Texas
                                                  
                                                  
                                                  163
                                                  
                                                  
                                                  
                                                  5.30
                                                  %
                                                  
                                                  
                                                  
                                                  201
                                                  
                                                  
                                                  
                                                  4.92
                                                  %Virginia
                                                  
                                                  
                                                  2
                                                  
                                                  
                                                  
                                                  0.07
                                                  %
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  0.00
                                                  %Total
                                                  
                                                  $
                                                  3,075
                                                  
                                                  
                                                  
                                                  100.00
                                                  %
                                                  
                                                  
                                                  $
                                                  4,072
                                                  
                                                  
                                                  
                                                  100.00
                                                  %





The
Company’s sale of auto insurance policies increased to $0.5 million for the
three months ended September 30, 2010, compared with less than $0.1 million
for the three months ended September 30, 2009. The Company’s sale of auto
insurance included new and renewal policies during the three months ended
September 30, 2010, but was limited to renewal policies during the three
months ended September 30, 2009.





Gross
Premiums Ceded





Gross
premiums ceded decreased to $29.5 million for the three months ended September
30, 2010, compared with $36.8 million for the three months ended September 30,
2009, due to our decreased cost of reinsurance. Gross premiums ceded to the
Florida Hurricane Catastrophe Fund (“FHCF”) totaled $28.2 million, gross
premiums ceded to the write-your-own flood program totaled $1.2 million and
gross premiums ceded relating to our commercial automobile program totaled less
than $0.1 million for the three months ended September 30,
2010.


- 43
-


21st Century
Holding Company


Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





Increase in Prepaid Reinsurance
Premiums





The
increase in prepaid reinsurance premiums was $16.2 million for the three months
ended September 30, 2010, compared with $22.3 million for the three months ended
September 30, 2009. The decreased charge to written premium is associated with
our decreased cost of reinsurance and the timing of our reinsurance payments
measured against the term of the underlying reinsurance policies.





Decrease
in Unearned Premiums





The
decrease in unearned premiums was $7.3 million for the three months ended
September 30, 2010, compared with $11.1 million for the three months ended
September 30, 2009. The change was due to a $6.9 million decrease in unearned
homeowners’ insurance premiums, a $0.2 million decrease in unearned commercial
general liability premiums, a $0.4 million decrease in unearned automobile
premiums, net of a $0.2 million increase in unearned flood premiums during the
three months ended September 30, 2010. These changes are a result of differences
in written premium volume during this period as compared with the same period
last year. See “Gross Premiums Written” above.





Net
Premiums Earned





Net
premiums earned increased $2.1 million, or 22.2%, to $11.6 million for the three
months ended September 30, 2010, compared with $9.5 million for the three
months ended September 30, 2009.





The
following table denotes net premiums earned by product line.





ThreeMonthsEndedSeptember30,2010
                  
                  
                  2009Amount
                  
                  
                  Percentage
                  
                  
                  Amount
                  
                  
                  Percentage(Dollars in Thousands)Homeowners'
                  
                  $
                  7,912
                  
                  
                  
                  68.08
                  %
                  
                  $
                  4,861
                  
                  
                  
                  51.11
                  %Commercial
      General Liability
                  
                  
                  3,271
                  
                  
                  
                  28.15
                  %
                  
                  
                  4,587
                  
                  
                  
                  48.23
                  %Automobile
                  
                  
                  438
                  
                  
                  
                  3.77
                  %
                  
                  
                  63
                  
                  
                  
                  0.66
                  %Net
      premiums earned
                  
                  $
                  11,621
                  
                  
                  
                  100.00
                  %
                  
                  $
                  9,511
                  
                  
                  
                  100.00
                  %





The
change in homeowners’ net premiums earned is due to a $5.0 million increase in
gross written premium as discussed, a $7.6 million decrease in gross premiums
ceded and a $9.6 million decrease in the net change to prepaid reinsurance
premiums and unearned premium.





The
change in commercial general liability net premiums earned is a result of a $1.0
million decrease in gross written premium, reflecting the impact of the economic
slowdown on the artisan contractor portfolio written by American Vehicle and our
decision to restrict underwriting authority within specific commercial general
liability classes and geographic areas. The change is also a result of a $0.3
million decrease in the net change to unearned premium.





The
change in automobile net premiums earned is a result of a $0.5 million increase
in gross written premium as discussed, a $0.1 million decrease in gross premiums
ceded and a less than $0.1 million decrease in the change to unearned
premium.





Commission
Income





Commission
income increased $0.3 million, or 240.2%, to $0.4 million for the three months
ended September 30, 2010, compared with $0.1 million for the three months ended
September 30, 2009. The primary sources of our commission income are our
managing general agent services, write-your-own flood premiums and our
independent insurance agency, Insure-Link.


- 44
-


21st Century
Holding Company


Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





Net
Investment Income





Net
investment income remained unchanged at $0.9 million for the three months ended
September 30, 2010, compared with $0.9 million for three months ended September
30, 2009.  Our investment yield, net and gross of investment expenses,
excluding equities and including cash, were 2.2% and 2.5%, respectively, for the
three months ended September 30, 2010. Our investment yield, net and gross of
investment expenses, excluding equities and including cash, were 2.2% and 2.4%,
respectively, for the three months ended September 30, 2009.





Our
investment yield, net and gross of investment expenses measured against debt
securities, excluding equities and cash, were 3.2% and 3.5%, respectively, for
the three months ended September 30, 2010.  Our investment yield, net and
gross of investment expenses measured against debt securities, excluding
equities and cash, were 3.3% and 3.6%, respectively, for the three months ended
September 30, 2009.





See also
“Analysis of Financial Condition As of September 30, 2010 Compared with December
31, 2009 – Investments” for a further discussion on our investment
portfolio.





Net
Realized Investment Gains





Net
realized investment gains were $1.9 million for the three months ended September
30, 2010, compared with $1.6 million for the three months ended September 30,
2009.  Realized investment gains recognized for the three months ended
September 30, 2010 were higher in 2010 than in 2009 because of an
overweight in corporate bonds, which have performed well during 2010, and were
sold to lock in gains and bolster surplus.





During
the three months ended September 30, 2010 and 2009, we did not mark any equity
investments to market value pursuant to guidelines prescribed in FASB-issued
guidance. In reaching a conclusion that a security is either other than
temporarily or permanently impaired we consider such factors as the timeliness
and completeness of expected dividends, principal and interest payments, ratings
from nationally recognized statistical rating organizations such as Standard and
Poor’s and Moody’s, as well as information released via the general media
channels.





The table
below depicts the net realized investment gains by investment category during
the three months ended September 30, 2010 and 2009.





ThreeMonthsEndedSeptember 30,2010
                    
                    
                    2009(Dollars in Thousands)Realized
      gains:Debt
      securities
                    
                    $
                    2,201
                    
                    
                    $
                    194Equity
      securities
                    
                    
                    194
                    
                    
                    
                    1,943Total
      realized gains
                    
                    
                    2,395
                    
                    
                    
                    2,137Realized
      losses:Debt
      securities
                    
                    
                    (19
                    )
                    
                    
                    (441
                    )Equity
      securities
                    
                    
                    (512
                    )
                    
                    
                    (146
                    )Total
      realized losses
                    
                    
                    (531
                    )
                    
                    
                    (587
                    )Net
      realized gains on investments
                    
                    $
                    1,864
                    
                    
                    $
                    1,550





Other
Income





Other
income decreased $.01 million, or 41.9%, to $0.1 million for the three months
ended September 30, 2010, compared with $0.2 million for the three months ended
September 30, 2009. The major component of other income for the three
months ended September 30, 2010 is approximately $0.1 million in partial
recognition of our gain on the sale of our Lauderdale Lakes
property.


- 45
-




21st Century
Holding Company
 Management’s
Discussion and Analysis of Financial Condition and Results of
Operations


Losses
and LAE





Losses
and LAE, our most significant expense, represent actual payments made and
changes in estimated future payments to be made to or on behalf of our
policyholders, including expenses required to settle claims and losses. We
revise our estimates based on the results of analysis of estimated future
payments to be made. This process assumes that experience, adjusted for the
effects of current developments and anticipated trends, is an appropriate basis
for predicting future events.





Losses
and LAE decreased by $2.4 million, or 22.0%, to $8.7 million for the three
months ended September 30, 2010, compared with $11.1 million for the three
months ended September 30, 2009. The
overall change includes a $1.4 million decrease in our homeowners’ program and a
$2.1 million decrease in our commercial general liability program; these
decreases are due to favorable experience in these markets based in part on
enhanced underwriting and claim processing techniques. The overall increase also
includes a $1.1 million increase in connection with our re-launched automobile
program which has experienced adverse development in its’ initial
phase.





We
continue to revise our estimates of the ultimate financial impact of claims made
resulting from past storms. The revisions to our estimates are based on our
analysis of subsequent information that we receive regarding various factors,
including: (i) per claim information; (ii) Company and industry historical loss
experience; (iii) legislative enactments, judicial decisions, legal developments
in the awarding of damages, and (iv) trends in general economic conditions,
including the effects of inflation.





The
composition of unpaid losses and LAE by product line is as follows.





September30,2010
                  
                  
                  December31,2009Case
                  
                  
                  Bulk
                  
                  
                  Total
                  
                  
                  Case
                  
                  
                  Bulk
                  
                  
                  Total(Dollars in Thousands)
                  
                  
                  (Dollars in Thousands)Homeowners'
                  
                  $
                  6,987
                  
                  
                  $
                  14,728
                  
                  
                  $
                  21,715
                  
                  
                  $
                  8,705
                  
                  
                  $
                  19,298
                  
                  
                  $
                  28,003Commercial
      General Liability
                  
                  
                  7,781
                  
                  
                  
                  27,230
                  
                  
                  
                  35,011
                  
                  
                  
                  7,885
                  
                  
                  
                  29,346
                  
                  
                  
                  37,231Automobile
                  
                  
                  3,481
                  
                  
                  
                  3,248
                  
                  
                  
                  6,729
                  
                  
                  
                  2,612
                  
                  
                  
                  2,765
                  
                  
                  
                  5,377Total
                  
                  $
                  18,249
                  
                  
                  $
                  45,206
                  
                  
                  $
                  63,455
                  
                  
                  $
                  19,202
                  
                  
                  $
                  51,409
                  
                  
                  $
                  70,611





Factors
that affect unpaid losses and LAE include the estimates made on a claim-by-claim
basis known as “case reserves” coupled with bulk estimates known as IBNR.
Periodic estimates by management of the ultimate costs required to settle all
claim files are based on the Company’s analysis of historical data and
estimations of the impact of numerous factors such as (i) per claim information;
(ii) company and industry historical loss experience; (iii) legislative
enactments, judicial decisions, legal developments in the awarding of damages,
and changes in political attitudes; and (iv) trends in general economic
conditions, including the effects of inflation.





Management
revises its estimates based on the results of its analysis. This process assumes
that experience, adjusted for the effects of current developments and
anticipated trends, is an appropriate basis for estimating the ultimate
settlement of all claims. There is no precise method for subsequently evaluating
the impact of any specific factor on the adequacy of the reserves, because the
eventual redundancy or deficiency is affected by multiple factors. Because of
our process, reserves were decreased by approximately $7.2 million during the
three months ended September 30, 2010. This
overall change includes a $6.3 million decrease in our homeowners’ program and a
$2.2 million decrease in our commercial general liability program; these
decreases are due to favorable experience in these markets based in part on
enhanced underwriting and claim processing techniques. The overall increase also
includes a $1.3 million increase in connection with our re-launched automobile
program which has experienced adverse development in its’ initial
phase.





In
accordance with GAAP and for the reasons discussed above, our loss ratio is
computed as losses and LAE divided by net premiums earned. A lower loss ratio
generally results in higher operating income. Our loss ratio for the three-month
period ended September 30, 2010 was 73.6% compared with 118.7% for the same
period in 2009.


- 46
-




21st Century
Holding Company
 Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
  The table below reflects the loss
ratios by product line.





Three Months Ended September 30,2010
                  
                  
                  2009Homeowners'
                  
                  
                  84.74
                  %
                  
                  
                  156.40
                  %Commercial
      General Liability
                  
                  
                  38.48
                  %
                  
                  
                  80.80
                  %Automobile
                  
                  
                  222.10
                  %
                  
                  
                  -68.80
                  %Fire
                  
                  
                  12.29
                  %
                  
                  
                  0.00
                  %Inland
      Marine
                  
                  
                  33.57
                  %
                  
                  
                  0.00
                  %All
      lines
                  
                  
                  74.60
                  %
                  
                  
                  116.91
                  %





Operating and Underwriting
Expenses





Operating
and underwriting expenses remained unchanged at $2.5 million for the three
months ended September 30, 2010, compared with $2.5 million for the three months
ended September 30, 2009.





Salaries
and Wages





Salaries
and wages increased $0.1 million, or 9.5%, to $2.1 million for the three months
ended September 30, 2010, compared with $2.0 million for the three months ended
September 30, 2009. The increase is due to staffing for additional lines of
business.





The
charge to operations for stock-based compensation, in accordance with FASB
guidance, remained unchanged at approximately $0.1 million during the three
months ended September 30, 2010 compared with approximately $0.1 million for the
three months ended September 30, 2009.





Policy
Acquisition Costs - Amortization





Policy
acquisition costs - amortization, increased $0.1 million, or 2.5%, to $3.9
million for the three months ended September 30, 2010, compared with $3.8
million for the three months ended September 30, 2009.





Policy
acquisition costs - amortization, consists of the actual policy acquisition
costs, including commissions, payroll and premium taxes, less commissions earned
on reinsurance ceded and policy fees earned.





Income
Tax Benefit





The
income tax benefit was $0.5 million for the three months ended September 30,
2010, compared with $2.4 million for the three months ended September 30, 2009.
The effective rate for income taxes was 29.2% for the three months ended
September 30, 2010 and 37.6% for the three months ended September 30,
2009.





Net
Loss





As a result of the foregoing, the
Company’s net loss for the three months ended September 30, 2010 was $1.3
million compared with $4.0 million for the three months ended September 30,
2009.


- 47
-


21st Century
Holding Company


Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





Results
of Operations


Nine
Months Ended September 30, 2010 Compared with Nine Months Ended September 30,
2009





Gross
Premiums Written





Gross
premiums written decreased $2.6 million, or 3.5%, to $72.3 million for the nine
months ended September 30, 2010, compared with $74.9 million for the nine months
ended September 30, 2009.  The following table denotes gross
premiums written by major product line. This decline reflected primarily
decreases in the sale of homeowners’ and commercial general liability policies,
offset by an increase in the sale of automobile policies, as described
below.





NineMonthsEndedSeptember30,2010
                  
                  
                  2009(Dollars in Thousands)Amount
                  
                  
                  Percentage
                  
                  
                  Amount
                  
                  
                  PercentageHomeowners'
                  
                  $
                  56,164
                  
                  
                  
                  77.66
                  %
                  
                  $
                  59,503
                  
                  
                  
                  79.40
                  %Commercial
      General Liability
                  
                  
                  9,814
                  
                  
                  
                  13.57
                  %
                  
                  
                  12,490
                  
                  
                  
                  16.66
                  %Federal
      Flood
                  
                  
                  3,101
                  
                  
                  
                  4.29
                  %
                  
                  
                  2,737
                  
                  
                  
                  3.65
                  %Automobile
                  
                  
                  3,238
                  
                  
                  
                  4.48
                  %
                  
                  
                  219
                  
                  
                  
                  0.29
                  %Gross
      written premiums
                  
                  $
                  72,317
                  
                  
                  
                  100.00
                  %
                  
                  $
                  74,949
                  
                  
                  
                  100.00
                  %





See “Results of Operations-Three Months
Ended September 30, 2010” for a discussion of our recently approved rate
increases.




We
continue to offer premium discounts for wind mitigation efforts by
policyholders, as required by Florida law. These discounts have had a
significant effect on both written and earned premium. Wind mitigation credits
are 25.8% of the pre-credit premium, or $26.4 million, as of September 30, 2010,
as compared with 27.7% of the pre-credit premium, or $23.6 million, as of
September 30, 2009.





During
the nine months ended September 30, 2010 and 2009, the change to the cumulative
wind mitigation credits afforded our policyholders totaled
($1.2) million and $5.8 million, respectively. As of September 30,
2010, 59.5% of our in-force homeowners’ policyholders were receiving wind
mitigation credits totaling approximately $26.4 million (a
25.8% reduction of in-force premium), while 62.2 % of our in-force
homeowners’ policyholders were receiving wind mitigation credits totaling
approximately $23.6 million (a 27.7 % reduction of in-force premium), as of
September 30, 2009.





Due in part to Florida’s mandated
homeowners’ wind mitigation discounts, the Company’s sale of homeowners’
policies decreased $3.3 million, or 5.6%, to $56.2 million for the nine months
ended September 30, 2010, compared with $59.5 million for the nine months ended
September 30, 2009, gross of reinsurance costs. Our number of in-force
homeowners’ policies decreased by approximately 9,600, or 18.3%, to
approximately 43,000 as of September 30, 2010, as compared with approximately
52,600 as of December 31, 2009.





See “Results of Operations-Three Months
Ended September 30, 2010” for a description of Federated National’s capital
infusion and Demotech rating.





The
Company’s sale of commercial general liability policies decreased by $2.7
million to $9.8 million for the nine months ended September 30, 2010, compared
with $12.5 million for the nine months ended September 30, 2009. The primary
factor for this decrease has been the slowdown in the economy, which had a
dramatic impact on the artisan contractor portfolio written by American Vehicle.
An additional factor is our decision to restrict underwriting authority within
specific commercial general liability classes and geographic
areas.


- 48
-


21st Century
Holding Company


Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





The
following table sets forth the amounts and percentages of our gross premiums
written in connection with our commercial general liability program by
state.





Nine
      Months Ended September 30,2010
                                            
                                            
                                            
                                            2009Amount
                                            
                                            Percentage
                                            
                                            
                                            
                                            Amount
                                            
                                            
                                            Percentage(Dollars
      in Thousands)StateAlabama
                                            
                                            $
                                            35
                                            
                                            
                                            0.36
                                            %
                                            
                                            
                                            $
                                            58
                                            
                                            
                                            
                                            0.46
                                            %Arkansas
                                            
                                            
                                            1
                                            
                                            
                                            0.01
                                            %
                                            
                                            
                                            
                                            4
                                            
                                            
                                            
                                            0.03
                                            %California
                                            
                                            
                                            28
                                            
                                            
                                            0.29
                                            %
                                            
                                            
                                            
                                            51
                                            
                                            
                                            
                                            0.41
                                            %Florida
                                            
                                            
                                            8,212
                                            
                                            
                                            83.67
                                            %
                                            
                                            
                                            
                                            10,041
                                            
                                            
                                            
                                            80.39
                                            %Georgia
                                            
                                            
                                            66
                                            
                                            
                                            0.67
                                            %
                                            
                                            
                                            
                                            230
                                            
                                            
                                            
                                            1.84
                                            %Kentucky
                                            
                                            
                                            -
                                            
                                            
                                            0.00
                                            %
                                            
                                            
                                            
                                            1
                                            
                                            
                                            
                                            0.01
                                            %Louisiana
                                            
                                            
                                            894
                                            
                                            
                                            9.11
                                            %
                                            
                                            
                                            
                                            1,426
                                            
                                            
                                            
                                            11.42
                                            %Oklahoma
                                            
                                            
                                            8
                                            
                                            
                                            0.08
                                            %
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            0.00
                                            %South
      Carolina
                                            
                                            
                                            1
                                            
                                            
                                            0.01
                                            %
                                            
                                            
                                            
                                            2
                                            
                                            
                                            
                                            0.02
                                            %Texas
                                            
                                            
                                            567
                                            
                                            
                                            5.78
                                            %
                                            
                                            
                                            
                                            676
                                            
                                            
                                            
                                            5.41
                                            %Virginia
                                            
                                            
                                            2
                                            
                                            
                                            0.02
                                            %
                                            
                                            
                                            
                                            1
                                            
                                            
                                            
                                            0.01
                                            %Total
                                            
                                            $
                                            9,814
                                            
                                            
                                            100.00
                                            %
                                            
                                            
                                            $
                                            12,490
                                            
                                            
                                            
                                            100.00
                                            %





The
Company’s sale of auto insurance policies increased by $3.0 million to $3.2
million for the nine months ended September 30, 2010, compared with $0.2 million
for the nine months ended September 30, 2009. The Company’s sale of auto
insurance included new and renewal policies during the nine months ended
September 30, 2010, but was limited to renewal policies during the nine months
ended September 30, 2009.





Gross
Premiums Ceded





Gross
premiums ceded decreased to $51.4 million for the nine months ended September
30, 2010, compared with $56.7 million for the nine months ended September 30,
2009, due to our decreased cost of reinsurance. Gross premiums ceded to the FHCF
totaled $46.7 million, gross premiums ceded to the write-your-own flood program
totaled $3.1 million and gross premiums ceded relating to our commercial
automobile program totaled $1.6 for the nine months ended September 30,
2010.





Increase in Prepaid Reinsurance
Premiums





The
increase in prepaid reinsurance premiums was $9.6 million for the nine months
ended September 30, 2010, compared with $24.5 million for the nine months ended
September 30, 2009. The increased charge to written premium is primarily
associated with the timing of our reinsurance payments measured against the term
of the underlying reinsurance policies.





Decrease
(Increase) in Unearned Premiums





The
decrease in unearned premiums was $3.0 million for the nine months ended
September 30, 2010, compared with an increase of $5.1 million for the nine
months ended September 30, 2009. The change was due to a $3.9 million decrease
in unearned homeowners’ insurance premiums, a $0.5 million decrease in unearned
commercial general liability premiums, and a $1.1 million increase in unearned
automobile premiums, net of a $0.3 million increase in unearned flood premiums
during the nine months ended September 30, 2010. These changes are a result
of differences in written premium volume during this period as compared with the
same period last year.  See “Gross Premiums Written” discussion
above.





Net
Premiums Earned





Net
premiums earned decreased $4.2 million, or 11.0%, to $33.5 million for the nine
months ended September 30, 2010, compared with $37.7 million for the nine months
ended September 30, 2009.


- 49
-


21st Century
Holding Company


Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





The
following table denotes net premiums earned by product line.





NineMonthsEndedSeptember30,2010
                    
                    
                    2009Amount
                    
                    
                    Percentage
                    
                    
                    Amount
                    
                    
                    Percentage(Dollars in Thousands)Homeowners'
                    
                    $
                    21,977
                    
                    
                    
                    65.54
                    %
                    
                    $
                    22,375
                    
                    
                    
                    59.38
                    %Commercial
      General Liability
                    
                    
                    10,244
                    
                    
                    
                    30.56
                    %
                    
                    
                    15,091
                    
                    
                    
                    40.05
                    %Automobile
                    
                    
                    1,307
                    
                    
                    
                    3.90
                    %
                    
                    
                    214
                    
                    
                    
                    0.57
                    %Net
      premiums earned
                    
                    $
                    33,528
                    
                    
                    
                    100.00
                    %
                    
                    $
                    37,680
                    
                    
                    
                    100.00
                    %





The
change in homeowners’ net premiums earned is due to a $3.3 million decrease in
gross written premium as discussed, a $7.2 million decrease in gross premiums
ceded and a $4.3 million decrease in the net change to prepaid reinsurance
premiums and unearned premium.





The
change in commercial general liability net premiums earned is due to a $2.7
million decrease in gross written premium, reflecting the impact of the economic
slowdown on the artisan contractor portfolio written by American Vehicle and our
decision to restrict underwriting authority within specific commercial general
liability classes and geographic areas. The change is also a result of a $2.2
million decrease in the net change to unearned premium.





The
change in automobile net premiums earned is a result of a $3.0 million increase
in gross written premium as discussed, a $1.5 million increase in gross premiums
ceded and a $0.4 million increase in the change to unearned
premium.





Commission
Income





Commission
income increased $0.6 million, or 81.9%, to $1.3 million for the nine months
ended September 30, 2010, compared with $0.7 million for the nine months ended
September 30, 2009. The primary sources of our commission income are our
managing general agent services, write-your-own flood premiums and our
independent insurance agency, Insure-Link.





Net
Investment Income





Net
investment income increased $0.5 million, or 20.2%, to $2.9 million for the nine
months ended September 30, 2010, compared with $2.4 million for nine months
ended September 30, 2009.  Our investment yield, net and gross of
investment expenses, excluding equities and including cash, were 2.6% and 2.8%,
respectively, for the nine months ended September 30, 2010. Our investment
yield, net and gross of investment expenses, excluding equities and including
cash, were 1.9% and 2.0%, respectively, for the nine months ended September
30, 2009.





Our
investment yield, net and gross of investment expenses measured against debt
securities, excluding equities and cash, were 3.6% and 3.9%, respectively, for
the nine months ended September 30, 2010.  Our investment yield, net and
gross of investment expenses measured against debt securities, excluding
equities and cash, were 3.6% and 3.7%, respectively, for the nine months ended
September 30, 2009.





See also
“Analysis of Financial Condition As of September 30, 2010 Compared with December
31, 2009 – Investments” for a further discussion of our investment
portfolio.





Net
Realized Investment Gains





Net
realized investment gains were $5.7 million for the nine months ended September
30, 2010, compared with $1.1 million for the nine months ended September 30,
2009.  Realized investment gains recognized for the nine months ended
September 30, 2010 were higher in 2010 than in 2009 because of an overweight in
corporate bonds, which have performed well during 2010, and were sold to lock in
gains and bolster surplus.


- 50
-


21st Century
Holding Company


Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





During the nine months ended September
30, 2010 and 2009, we did not mark any equity investments to market value
pursuant to guidelines prescribed by FASB. See “Results of Operations-Three
Months Ended September 30, 2010” for a discussion of the factors we consider
when determining the need to mark investments to market value.





The table
below depicts the net realized investment gains (losses) by investment category
during the nine months ended September 30, 2010 and 2009.





NineMonthsEndedSeptember30,2010
                  
                  
                  2009(Dollars in Thousands)Realized
      gains:Debt
      securities
                  
                  $
                  4,068
                  
                  
                  $
                  212Equity
      securities
                  
                  
                  2,856
                  
                  
                  
                  1,942Total
      realized gains
                  
                  
                  6,924
                  
                  
                  
                  2,154Realized
      losses:Debt
      securities
                  
                  
                  (59
                  )
                  
                  
                  (669
                  )Equity
      securities
                  
                  
                  (1,177
                  )
                  
                  
                  (403
                  )Total
      realized losses
                  
                  
                  (1,236
                  )
                  
                  
                  (1,072
                  )Net
      realized gains on investments
                  
                  $
                  5,688
                  
                  
                  $
                  1,082





Regulatory Assessments
Recovered





Regulatory
assessments recovered decreased $1.3 million, or 66.4%, to $0.7 million for the
nine months ended September 30, 2010, compared with $2.0 million for the nine
months ended September 30, 2009. The unfavorable prior year variance is due
to the exhaustion of the FIGA3 recovery, overall reduction of recovery rates and
refund of prior year over-collections. The FIGA3 recovery was completed during
2009; there has been no recovery during 2010. The Florida OIR has approved
lesser rates of recovery for the remaining assessments. Therefore, a lesser
recovery is being realized during 2010. Prior year over-collections have been
refunded and the amounts reported for 2010 are net of these
refunds.





Other Income





Other
income increased $0.1 million, or 6.4%, to $0.7 million for the nine months
ended September 30, 2010, compared with $0.6 million for the nine months ended
September 30, 2009.





The major
components of other income for the nine months ended September 30, 2010 include
approximately $0.4 million in partial recognition of our gain on the sale of our
Lauderdale Lakes property and $0.2 million in recognition of our gain on the
sale of a vacant retail property.





Losses
and LAE





Losses
and LAE decreased by $1.1 million, or 3.6%, to $27.9 million for the nine months
ended September 30, 2010, compared with $29.0 million for the nine months ended
September 30, 2009. The overall change includes a $1.3 million increase in our
homeowners’ program, a $4.6 million decrease in our commercial general liability
program and a $2.2 million increase in connection with our automobile program.
See “Results of Operations-Three Months Ended September 30, 2010” for a further
explanation of losses and LAE.


- 51
-


21st Century
Holding Company


Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





The
composition of unpaid losses and LAE by product line is as follows.





September30,2010
                        
                        
                        December31,2009Case
                        
                        
                        Bulk
                        
                        
                        Total
                        
                        
                        Case
                        
                        
                        Bulk
                        
                        
                        Total(Dollars in Thousands)
                        
                        
                        (Dollars in Thousands)Homeowners'
                        
                        $
                        6,987
                        
                        
                        $
                        14,728
                        
                        
                        $
                        21,715
                        
                        
                        $
                        8,705
                        
                        
                        $
                        19,298
                        
                        
                        $
                        28,003Commercial
      General Liability
                        
                        
                        7,781
                        
                        
                        
                        27,230
                        
                        
                        
                        35,011
                        
                        
                        
                        7,885
                        
                        
                        
                        29,346
                        
                        
                        
                        37,231Automobile
                        
                        
                        3,481
                        
                        
                        
                        3,248
                        
                        
                        
                        6,729
                        
                        
                        
                        2,612
                        
                        
                        
                        2,765
                        
                        
                        
                        5,377Total
                        
                        $
                        18,249
                        
                        
                        $
                        45,206
                        
                        
                        $
                        63,455
                        
                        
                        $
                        19,202
                        
                        
                        $
                        51,409
                        
                        
                        $
                        70,611





Reserves
for unpaid losses and LAE decreased by approximately $7.1 million during the
nine months ended September 30, 2010, as a result of our process of estimating
claims. See “Results of Operations-Three Months Ended September 30, 2010” for a
further explanation of losses and LAE.





Our loss
ratio for the nine-month period ended September 30, 2010 was 82.4% compared with
77.2% for the same period in 2009.





The table below reflects the loss
ratios by product line.





NineMonthsEndedSeptember30,2010
                  
                  
                  2009Homeowners'
                  
                  
                  92.50
                  %
                  
                  
                  84.00
                  %Commercial
      General Liability
                  
                  
                  55.87
                  %
                  
                  
                  68.50
                  %Automobile
                  
                  
                  180.16
                  %
                  
                  
                  -7.30
                  %Fire
                  
                  
                  13.92
                  %
                  
                  
                  0.00
                  %Inland
      Marine
                  
                  
                  42.60
                  %
                  
                  
                  0.00
                  %All
      lines
                  
                  
                  83.30
                  %
                  
                  
                  76.87
                  %





Operating and Underwriting
Expenses





Operating
and underwriting expenses increased $1.3 million, or 18.9%, to $8.3 million for
the nine months ended September 30, 2010, compared with $7.0 million for the
nine months ended September 30, 2009.  The change is primarily due to
$0.2 million increases in consulting fees, surveys and underwriting reports,
actuarial fees and licenses and fees, and immaterial increases in other
expenses.





Salaries
and Wages





Salaries
and wages increased $0.6 million, or 10.9%, to $6.4 million for the nine months
ended September 30, 2010, compared with $5.8 million for the nine months ended
September 30, 2009. The increase is due to staffing for additional lines of
business.





The
charge to operations for stock-based compensation, in accordance with FASB
guidance, was approximately $297,000 during the nine months ended September 30,
2010 compared with approximately $326,000 for the nine months ended September
30, 2009.





Policy
Acquisition Costs - Amortization





Policy
acquisition costs - amortization, increased $0.9 million, or 9.8%, to $10.4
million for the nine months ended September 30, 2010, compared with $9.5 million
for the nine months ended September 30, 2009.





Policy
acquisition costs - amortization, consists of the actual policy acquisition
costs, including commissions, payroll and premium taxes, less commissions earned
on reinsurance ceded and policy fees earned.


- 52
-


21st Century
Holding Company


Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





The
increase to policy acquisition costs, net of amortization, is due to increased
commissions related to our automobile program, offset by decreased commissions
related to our homeowners’ and commercial general liability programs. These
changes to commissions are due to related changes in gross written
premium.





Income
Tax Benefit





The
income tax benefit was $2.2 million for the nine months ended September 30,
2010, compared with an income tax benefit of $2.3 million for the
nine months ended September 30, 2009. The effective rate for income taxes
was 32.3% for the nine months ended September 30, 2010. The 43.9% effective rate
for income taxes for the nine months ended September 30, 2009 was primarily due
to our tax-exempt interest and dividend received deduction.





Net Loss





As a
result of the foregoing, the Company’s net loss for the nine months ended
September 30, 2010 was $4.5 million compared with a net loss of $2.9 million for
the nine months ended September 30, 2009.





Liquidity
and Capital Resources





During the nine months ended September
30, 2010, our primary sources of capital included proceeds from the sale of
investment securities, decreased prepaid reinsurance premiums, decreased
reinsurance recoverable, net, decreased income taxes recoverable, decreased
premiums receivable, decreased other assets and amortization of investment
premium. Additional sources of capital included decreased policy acquisition
costs, net of amortization, increased premium deposits and customer credit
balances, non-cash compensation, depreciation and amortization and a tax benefit
related to non-cash compensation.





During
the nine months ended September 30, 2010, operations used net operating cash
flow of $0.2 million, compared with having provided net operating cash flow of
$2.2 million for the nine months ended September 30, 2009.





During the nine months ended September
30, 2010, operations generated $24.5 million of gross cash flow, due to a
$7.0 million decrease in prepaid reinsurance premiums, a $5.1 million decrease
in reinsurance recoverable, net, a $4.8 million decrease in income taxes
recoverable, a $4.6 million decrease in premiums receivable and a $1.0 million
decrease in other assets. Additional sources of cash included $0.7 million of
amortization of investment premium, a $0.6 million decrease in policy
acquisition costs, net of amortization, a $0.3 million increase in premium
deposits and customer credit balances, $0.2 million of non-cash compensation and
$0.2 million of depreciation and amortization.





During the nine months ended September
30, 2010, operations used $24.7 million of gross cash flow, due to a $7.3
million decrease in unpaid losses and LAE, $5.7 million net realized investment
gains and a $3.0 million decrease in unearned premiums. Additional uses of cash
included a $2.2 million decrease in bank overdraft, a $1.5 million decrease in
accounts payable and accrued expenses and a $0.5 million increase in deferred
income tax expense, all in conjunction with a $4.5 million net
loss.





During
the nine months ended September 30, 2010, net cash provided by investing
activities was $6.9 million, compared with net cash used by investing activities
of $77.3 million during the nine months ended September 30, 2009. Our
available-for-sale investment portfolio is highly liquid as it consists entirely
of readily marketable securities. During the nine months ended September 30,
2010, investing activities generated $111.8 million and used $104.9
million.





During
the nine months ended September 30, 2010, net financing activities used $0.4
million, as compared with $1.3 million during the nine months ended September
30, 2009. In 2010, the sources of cash in connection with financing activities
included a $0.1 million tax benefit related to non-cash compensation. The uses
of cash in connection with financing activities included $0.5 million in
dividends paid.




In
response to the capital infusion from American Vehicle, the Florida OIR has
required that the Company not expend capital on the payment of dividends or the
buyback of the Company’s common stock until Federated National experiences two
consecutive quarters with an underwriting profit.Please see “Results of
Operations—Nine Months Ended September 30, 2010 Compared with Nine Months Ended
September 30, 2009—Gross Premiums Written”.


- 53
-


21st Century
Holding Company


Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





We offer direct billing in connection
with our automobile and homeowner programs. Direct billing is an agreement in
which the insurance company accepts from the insured, as a receivable, a promise
to pay the premium, as opposed to requiring the full amount of the policy at
policy inception, either directly from the insured or from a premium finance
company. The advantage of direct billing a policyholder by the insurance company
is that we are not reliant on a credit facility, but remain able to charge and
collect interest from the policyholder.





We
believe that our current capital resources will be sufficient to meet currently
anticipated working capital requirements. There can be no assurances, however,
that such will be the case.





As of September 30, 2010, we did not
have any relationships with unconsolidated entities or financial partnerships,
such as entities often referred to as “structured finance” or “special purpose”
entities, which were established for the purpose of facilitating
off-balance-sheet arrangements or other contractually narrow or limited
purposes. As such, management believes that we currently are not exposed to any
financing, liquidity, market or credit risks that could arise if we had engaged
in transactions of that type requiring disclosure herein.





Impact
of Inflation and Changing Prices





The
consolidated financial statements and related data presented herein have been
prepared in accordance with GAAP, which requires the measurement of financial
position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation. Our primary assets and liabilities are monetary in nature. As a
result, interest rates have a more significant impact on performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or with the same magnitude as the inflationary effect on
the cost of paying losses and LAE.





Insurance
premiums are established before we know the amount of losses and LAE and the
extent to which inflation may affect such expenses. Consequently, we attempt to
anticipate the future impact of inflation when establishing rate levels. While
we attempt to charge adequate premiums, we may be limited in raising premium
levels for competitive and regulatory reasons. Inflation also affects the market
value of our investment portfolio and the investment rate of return. Any future
economic changes that result in prolonged and increasing levels of inflation
could cause increases in the dollar amount of incurred losses and LAE and
thereby materially adversely affect future liability
requirements.


- 54
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21st Century
Holding Company





Item
3





Quantitative
and Qualitative Disclosures about Market Risk





Our
investment objective is to maximize total rate of return after federal income
taxes while maintaining liquidity and minimizing risk. Our current investment
policy limits investment in non-investment-grade debt securities (including
high-yield bonds), and limits total investments in preferred stock, common stock
and mortgage notes receivable. We also comply with applicable laws and
regulations that further restrict the type, quality and concentration of our
investments. In general, these laws and regulations permit investments, within
specified limits and subject to certain qualifications, in federal, state and
municipal obligations, corporate bonds, preferred and common equity securities
and real estate mortgages.





Our
investment policy is established by our Board’s Investment Committee and is
reviewed on a regular basis. Pursuant to this investment policy, as of September
30, 2010, approximately 87% of investments were in debt securities and cash and
cash equivalents, which are considered to be either held until maturity or
available for sale, based upon our estimates of required liquidity.
Approximately 94% of the debt securities are considered available for sale and
are marked to market. We may in the future consider additional debt securities
to be held to maturity and carried at amortized cost. We do not use any swaps,
options, futures or forward contracts to hedge or enhance our investment
portfolio.





The
following table summarizes, by type, our investments as of September 30, 2010
and December 31, 2009.





September30,2010
                
                
                December31,2009Carrying
                
                
                Percent
                
                
                Carrying
                
                
                PercentAmount
                
                
                ofTotal
                
                
                Amount
                
                
                ofTotal(Dollars in Thousands)Debt
      securities, at market:United
      States government obligations and authorities
                
                $
                17,296
                
                
                
                15.59
                %
                
                $
                10,152
                
                
                
                8.89
                %Obligations
      of states and political subdivisions
                
                
                23,005
                
                
                
                20.73
                %
                
                
                39,269
                
                
                
                34.38
                %Corporate
                
                
                43,160
                
                
                
                38.90
                %
                
                
                42,092
                
                
                
                36.85
                %International
                
                
                2,051
                
                
                
                1.85
                %
                
                
                -
                
                
                
                0.00
                %85,512
                
                
                
                77.07
                %
                
                
                91,513
                
                
                
                80.12
                %Debt
      securities, at amortized cost:United
      States government obligations and authorities
                
                
                5,782
                
                
                
                5.22
                %
                
                
                2,650
                
                
                
                2.32
                %Total
      debt securities
                
                
                91,294
                
                
                
                5.22
                %
                
                
                94,163
                
                
                
                2.32
                %Equity
      securities, at market:
                
                
                19,654
                
                
                
                17.71
                %
                
                
                20,056
                
                
                
                17.56
                %Total
      investments
                
                $
                110,948
                
                
                
                100.00
                %
                
                $
                114,219
                
                
                
                100.00
                %





Available-for-sale
debt securities are carried on the balance sheet at market and held-to-maturity
debt securities are carried on the balance sheet at amortized cost. As of
September 30, 2010 and December 31, 2009, debt securities had the following
quality ratings by Moody's or, if not rated by Moody's, by Standard and Poor's
Company or Fitch.





September30,2010
                  
                  
                  December31,2009Carrying
                  
                  
                  Percent
                  
                  
                  Carrying
                  
                  
                  PercentAmount
                  
                  
                  ofTotal
                  
                  
                  Amount
                  
                  
                  ofTotal(Dollars in Thousands)AAA
                  
                  $
                  38,873
                  
                  
                  
                  42.58
                  %
                  
                  $
                  40,390
                  
                  
                  
                  42.90
                  %AA
                  
                  
                  14,905
                  
                  
                  
                  16.33
                  %
                  
                  
                  18,619
                  
                  
                  
                  19.77
                  %A
                  
                  
                  28,300
                  
                  
                  
                  31.00
                  %
                  
                  
                  24,286
                  
                  
                  
                  25.79
                  %BBB
                  
                  
                  8,089
                  
                  
                  
                  8.86
                  %
                  
                  
                  9,954
                  
                  
                  
                  10.57
                  %Not
      rated
                  
                  
                  1,127
                  
                  
                  
                  1.23
                  %
                  
                  
                  914
                  
                  
                  
                  0.97
                  %$
                  91,294
                  
                  
                  
                  100.00
                  %
                  
                  $
                  94,163
                  
                  
                  
                  100.00
                  %




- 55
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21st Century
Holding Company





The
following table summarizes, by maturity, the debt securities as of September 30,
2010 and December 31, 2009.





September30,2010
                  
                  
                  December31,2009Carrying
                  
                  
                  Percent
                  
                  
                  Carrying
                  
                  
                  PercentAmount
                  
                  
                  ofTotal
                  
                  
                  Amount
                  
                  
                  ofTotal(Dollars in Thousands)Matures
      In:One
      year or less
                  
                  $
                  8,910
                  
                  
                  
                  9.76
                  %
                  
                  $
                  1,615
                  
                  
                  
                  1.72
                  %One
      year to five years
                  
                  
                  48,376
                  
                  
                  
                  52.99
                  %
                  
                  
                  50,781
                  
                  
                  
                  53.93
                  %Five
      years to 10 years
                  
                  
                  27,727
                  
                  
                  
                  30.37
                  %
                  
                  
                  27,178
                  
                  
                  
                  28.86
                  %More
      than 10 years
                  
                  
                  6,281
                  
                  
                  
                  6.88
                  %
                  
                  
                  14,589
                  
                  
                  
                  15.49
                  %Total
      debt securities
                  
                  $
                  91,294
                  
                  
                  
                  100.00
                  %
                  
                  $
                  94,163
                  
                  
                  
                  100.00
                  %





At
September 30, 2010, the weighted average maturity of the debt portfolio was
approximately 4.1 years.





The
following table provides information about the financial instruments as of
September 30, 2010 that are sensitive to changes in interest
rates.  The table presents principal cash flows and the related
weighted average interest rate by expected maturity date based upon par
values.





Carrying2010
                    
                    
                    2011
                    
                    
                    2012
                    
                    
                    2013
                    
                    
                    2014
                    
                    
                    2015
                    
                    
                    Thereafter
                    
                    
                    Total
                    
                    
                    Amount(Dollars
      in Thousands)Principal
      amount by expected maturity:United
      States government obligations and authorities
                    
                    $
                    -
                    
                    
                    $
                    4,850
                    
                    
                    $
                    3,500
                    
                    
                    $
                    2,500
                    
                    
                    $
                    500
                    
                    
                    $
                    -
                    
                    
                    $
                    1,840
                    
                    
                    $
                    13,190
                    
                    
                    $
                    19,489Obligations
      of states and political subdivisions
                    
                    
                    1,125
                    
                    
                    
                    225
                    
                    
                    
                    1,755
                    
                    
                    
                    2,750
                    
                    
                    
                    3,340
                    
                    
                    
                    685
                    
                    
                    
                    10,410
                    
                    
                    
                    20,290
                    
                    
                    
                    23,005Corporate
      securities
                    
                    
                    -
                    
                    
                    
                    6,050
                    
                    
                    
                    7,315
                    
                    
                    
                    2,559
                    
                    
                    
                    4,020
                    
                    
                    
                    980
                    
                    
                    
                    15,842
                    
                    
                    
                    36,766
                    
                    
                    
                    43,160International
      securities
                    
                    
                    -
                    
                    
                    
                    650
                    
                    
                    
                    -
                    
                    
                    
                    438
                    
                    
                    
                    350
                    
                    
                    
                    -
                    
                    
                    
                    405
                    
                    
                    
                    1,843
                    
                    
                    
                    2,051Collateralized
      mortgage obligations
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,502
                    
                    
                    
                    3,570
                    
                    
                    
                    3,667
                    
                    
                    
                    280
                    
                    
                    
                    320
                    
                    
                    
                    11,339
                    
                    
                    
                    3,589Equity
      securities, at market
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    19,654All
      investments
                    
                    $
                    1,125
                    
                    
                    $
                    11,775
                    
                    
                    $
                    16,072
                    
                    
                    $
                    11,817
                    
                    
                    $
                    11,877
                    
                    
                    $
                    1,945
                    
                    
                    $
                    28,817
                    
                    
                    $
                    83,428
                    
                    
                    $
                    110,948Weighted
      average interest rate by expected maturity:United
      States government obligationsand
      authorities
                    
                    
                    0.00
                    %
                    
                    
                    1.18
                    %
                    
                    
                    2.93
                    %
                    
                    
                    3.66
                    %
                    
                    
                    1.75
                    %
                    
                    
                    0.00
                    %
                    
                    
                    3.69
                    %
                    
                    
                    2.49
                    %Obligations
      of states and political subdivisions
                    
                    
                    5.11
                    %
                    
                    
                    5.50
                    %
                    
                    
                    5.20
                    %
                    
                    
                    3.93
                    %
                    
                    
                    4.96
                    %
                    
                    
                    5.00
                    %
                    
                    
                    5.29
                    %
                    
                    
                    5.03
                    %Corporate
      securities
                    
                    
                    0.00
                    %
                    
                    
                    3.68
                    %
                    
                    
                    3.75
                    %
                    
                    
                    3.70
                    %
                    
                    
                    5.50
                    %
                    
                    
                    4.67
                    %
                    
                    
                    6.28
                    %
                    
                    
                    5.04
                    %International
      securities
                    
                    
                    0.00
                    %
                    
                    
                    6.98
                    %
                    
                    
                    0.00
                    %
                    
                    
                    5.56
                    %
                    
                    
                    4.20
                    %
                    
                    
                    0.00
                    %
                    
                    
                    7.33
                    %
                    
                    
                    6.19
                    %Collateralized
      mortgage obligations
                    
                    
                    0.00
                    %
                    
                    
                    0.00
                    %
                    
                    
                    5.27
                    %
                    
                    
                    5.05
                    %
                    
                    
                    4.50
                    %
                    
                    
                    4.94
                    %
                    
                    
                    5.81
                    %
                    
                    
                    4.96
                    %Equity
      securities, at market
                    
                    
                    0.00
                    %
                    
                    
                    0.00
                    %
                    
                    
                    0.00
                    %
                    
                    
                    0.00
                    %
                    
                    
                    0.00
                    %
                    
                    
                    0.00
                    %
                    
                    
                    0.00
                    %
                    
                    
                    0.00
                    %All
      investments
                    
                    
                    5.11
                    %
                    
                    
                    2.87
                    %
                    
                    
                    4.06
                    %
                    
                    
                    4.22
                    %
                    
                    
                    4.84
                    %
                    
                    
                    4.83
                    %
                    
                    
                    5.77
                    %
                    
                    
                    4.65
                    %




- 56
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21st Century
Holding Company





Item
4





Controls
and Procedures







We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports that we file or submit under
the Securities Exchange Act is recorded, processed, summarized, and reported
within the time periods specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosures.







Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures as defined in Rules 13a-15(e) under the Securities Exchange Act
of 1934, as of September 30, 2010.  Based upon their evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures, as of September 30, 2010, were effective to provide
reasonable assurance that information required to be disclosed by us in the
reports filed or submitted by it under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms, and to provide reasonable assurance that information required to be
disclosed by us in such reports is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required
disclosure.





There
were no changes during the first nine months of 2010 that have materially
affected, or are reasonably likely to materially affect, our internal controls
over financial reporting.


- 57
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21st Century
Holding Company





Part
II: OTHER INFORMATION





Item
1





Legal
Proceedings





See Item 1 of Part I, “Financial
Statements – Note 4 – Commitments and Contingencies.”





Item
1A





Risk
Factors





There
have been no material changes from the risk factors previously disclosed in Item
1, Risk Factors, in the Company’s Form 10-K for the fiscal year ended December
31, 2009.





Additional
Risk Factors





The risks described in this Quarterly
Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2009 are not the only risks facing our Company. Additional
risks and uncertainties not currently known to us or that we currently deem to
be immaterial also may materially adversely affect our business, financial
condition and/or operating results.





Item
2





(a)





During
the three months ended September 30, 2010, we have issued an aggregate of 74,500
options to certain executive and non-executive employees of the Company under
our 2002 stock option plan. The options have an exercise price of $3.30 per
share, vest over five years and expire ten years from the grant
date.





(b)





None





(c)





Market
for the Company’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities





During
the nine months ended September 30, 2010, the Company did not repurchase any
common stock under the stock repurchase plan authorized in 2009, because the
Company suspended the shares purchase program, as directed by the Florida
OIR.  Under the Company’s repurchase plan announced in 2009 and its
prior plan announced in 2007, the company is authorized to purchase a total of
$4.8 million of its common stock in addition to the $4.2 million previously
purchased.





Item
3





Defaults
upon Senior Securities





None





Item
4





(Removed
and Reserved)


- 58
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21st Century
Holding Company





Item
5





Other
Information





None





Item
6





Exhibits





10.1
                    Excess
      Catastrophe Reinsurance Contract, effective July 1, 2010, issued to
      Federated National Insurance Company.*10.2
                    Excess
      Catastrophe Reinsurance Contract Private Layer 1, effective July 1, 2010,
      issued to Federated National Insurance Company. *10.3
                    Excess
      Catastrophe Reinsurance Contract Private Layer 2, effective July 1, 2010,
      issued to Federated National Insurance Company. *10.4
                    Reinstatement
      Premium Protection Contract, effective July 1, 2010, issued to Federated
      National Insurance Company. *31.1
                    Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act. *31.2
                    Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act. *32.1
                    Certification
      of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act. *32.2
                    Certification
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act. **Filed
      herewith




- 59
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21st Century
Holding Company





Signatures





Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.





21st
      CENTURY HOLDING COMPANYBy:
                              /s/ Michael H. BraunMichael
      H. Braun, Chief Executive Officer(Principal
      Executive Officer)/s/ Peter J. Prygelski, IIIPeter
      J. Prygelski, III, Chief Financial Officer(Principal
      Financial
Officer)





Date:
November 15, 2010


- 60
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21st Century
Holding Company





EXHIBIT
INDEX





10.1
                Excess
      Catastrophe Reinsurance Contract, effective July 1, 2010, issued to
      Federated National Insurance Company.10.2
                Excess
      Catastrophe Reinsurance Contract Private Layer 1, effective July 1, 2010,
      issued to Federated National Insurance Company.10.3
                Excess
      Catastrophe Reinsurance Contract Private Layer 2, effective July 1, 2010,
      issued to Federated National Insurance Company.10.4
                Reinstatement
      Premium Protection Contract, effective July 1, 2010, issued to Federated
      National Insurance Company.31.1
                Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act.31.2
                Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act.32.1
                Certification
      of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act.32.2
                Certification
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act.




- 61
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