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 March 31, 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 –7,946,374
outstanding as of May 17, 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
              31ITEM
      3
              Quantitative
      and Qualitative Disclosures about Market Risk
              47ITEM
      4
              Controls
      and Procedures
              49PART
      II: OTHER INFORMATIONITEM
      1
              Legal
      Proceedings
              50ITEM
      1A
              Risk
      Factors
              50ITEM
      2
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              50ITEM
      3
              Defaults
      upon Senior Securities
              50ITEM
      4
              (Removed
      and Reserved)
              50ITEM
      5
              Other
      Information
              50ITEM
      6
              Exhibits
              51SIGNATURES
              52


2


PART
I: FINANCIAL INFORMATION


Item
1 Financial Statements





21stCENTURY
HOLDING COMPANY


CONSOLIDATED
BALANCE SHEETS


(UNAUDITED)





Period
      EndingMarch
      31, 2010
                  
                  
                  December
      31, 2009(Dollars
      in Thousands)ASSETSInvestmentsDebt
      maturities, available for sale, at fair value
                  
                  $
                  91,201
                  
                  
                  $
                  91,513Debt
      maturities, held to maturity, at amortized cost
                  
                  
                  5,790
                  
                  
                  
                  2,650Equity
      securities, available for sale, at fair value
                  
                  
                  13,945
                  
                  
                  
                  20,056Total
      investments
                  
                  
                  110,936
                  
                  
                  
                  114,219Cash
      and short term investments
                  
                  
                  53,004
                  
                  
                  
                  28,197Prepaid
      reinsurance premiums
                  
                  
                  6,136
                  
                  
                  
                  10,319Premiums
      receivable, net of allowance for credit losses of $70 and $24,
      respectively
                  
                  
                  6,313
                  
                  
                  
                  10,311Reinsurance
      recoverable, net
                  
                  
                  13,065
                  
                  
                  
                  15,302Deferred
      policy acquisition costs
                  
                  
                  8,564
                  
                  
                  
                  8,267Deferred
      income taxes, net
                  
                  
                  5,011
                  
                  
                  
                  4,675Income
      taxes receivable
                  
                  
                  7,684
                  
                  
                  
                  7,069Property,
      plant and equipment, net
                  
                  
                  1,007
                  
                  
                  
                  859Other
      assets
                  
                  
                  2,851
                  
                  
                  
                  3,671Total
      assets
                  
                  $
                  214,571
                  
                  
                  $
                  202,889LIABILITIES
      AND SHAREHOLDERS' EQUITYUnpaid
      losses and LAE
                  
                  $
                  68,248
                  
                  
                  $
                  70,611Unearned
      premiums
                  
                  
                  52,883
                  
                  
                  
                  50,857Premiums
      deposits and customer credit balances
                  
                  
                  3,219
                  
                  
                  
                  2,129Bank
      overdraft
                  
                  
                  18,087
                  
                  
                  
                  8,251Deferred
      gain from sale of property
                  
                  
                  883
                  
                  
                  
                  1,006Accounts
      payable and accrued expenses
                  
                  
                  5,640
                  
                  
                  
                  2,593Total
      liabilities
                  
                  
                  148,960
                  
                  
                  
                  135,447Shareholders'
      equity:Common
      stock, $0.01 par value. Authorized 25,000,000 shares; issued and
      outstanding 7,946,374 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
                  
                  
                  50,301
                  
                  
                  
                  50,185Accumulated
      other comprehensive income
                  
                  
                  1,485
                  
                  
                  
                  2,026Retained
      earnings
                  
                  
                  13,746
                  
                  
                  
                  15,151Total
      shareholders' equity
                  
                  
                  65,611
                  
                  
                  
                  67,442Total
      liabilities and shareholders' equity
                  
                  $
                  214,571
                  
                  
                  $
                  202,889





SEE
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


3





21ST CENTURY
HOLDING COMPANY


CONSOLIDATED
STATEMENTS OF OPERATIONS


(UNAUDITED)





Three Months Ended March31,2010
                    
                    
                    2009(Dollars
      in Thousands except EPS and share and dividend data)Revenue:Gross
      premiums written
                    
                    $
                    27,021
                    
                    
                    $
                    28,431Gross
      premiums ceded
                    
                    
                    (918
                    )
                    
                    
                    (328
                    )Net
      premiums written
                    
                    
                    26,103
                    
                    
                    
                    28,103Decrease
      in prepaid reinsurance premiums
                    
                    
                    (13,061
                    )
                    
                    
                    (8,069
                    )Increase
      in unearned premiums
                    
                    
                    (2,026
                    )
                    
                    
                    (6,129
                    )Net
      change in prepaid reinsurance premiums and unearned
    premiums
                    
                    
                    (15,087
                    )
                    
                    
                    (14,198
                    )Net
      premiums earned
                    
                    
                    11,016
                    
                    
                    
                    13,905Commission
      income
                    
                    
                    386
                    
                    
                    
                    238Finance
      revenue
                    
                    
                    72
                    
                    
                    
                    83Managing
      general agent fees
                    
                    
                    494
                    
                    
                    
                    431Net
      investment income
                    
                    
                    935
                    
                    
                    
                    681Net
      realized investment gains (losses)
                    
                    
                    2,225
                    
                    
                    
                    (537
                    )Regulatory
      assessments recovered
                    
                    
                    515
                    
                    
                    
                    548Other
      income
                    
                    
                    137
                    
                    
                    
                    312Total
      revenue
                    
                    
                    15,780
                    
                    
                    
                    15,661Expenses:Losses
      and LAE
                    
                    
                    9,063
                    
                    
                    
                    8,874Operating
      and underwriting expenses
                    
                    
                    2,717
                    
                    
                    
                    1,953Salaries
      and wages
                    
                    
                    2,072
                    
                    
                    
                    1,909Policy
      acquisition costs, net of amortization
                    
                    
                    3,460
                    
                    
                    
                    2,744Total
      expenses
                    
                    
                    17,312
                    
                    
                    
                    15,480(Loss)
      Income before provision for income tax benefit
                    
                    
                    (1,532
                    )
                    
                    
                    181Provision
      for income tax benefit
                    
                    
                    (605
                    )
                    
                    
                    (122
                    )Net
      (loss) income
                    
                    $
                    (927
                    )
                    
                    $
                    303Net
      (loss) income  per share - basic
                    
                    $
                    (0.12
                    )
                    
                    $
                    0.04Net  (loss)
      income per share - diluted
                    
                    $
                    (0.12
                    )
                    
                    $
                    0.04Weighted
      average number of common shares outstanding - basic
                    
                    
                    7,946,374
                    
                    
                    
                    8,013,894Weighted
      average number of common shares outstanding - diluted
                    
                    
                    7,946,374
                    
                    
                    
                    8,013,894Dividends
      paid per share
                    
                    $
                    0.06
                    
                    
                    $
                    0.18





SEE
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4





21ST CENTURY
HOLDING COMPANY


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(UNAUDITED)





Three Months Ended March
31,2010
                
                
                2009(Dollars
      in Thousands)Cash
      flow from operating activities:Net
      (loss) income
                
                $
                (927
                )
                
                $
                303Adjustments
      to reconcile net (loss) income to net cash provided by operating
      activities:Amortization
      of investment premium (discount), net
                
                
                212
                
                
                
                (38
                )Depreciation
      and amortization of property plant and equipment, net
                
                
                51
                
                
                
                47Net
      realized investment (gains) losses
                
                
                (2,225
                )
                
                
                537(Recovery)
      Provision for credit losses, net
                
                
                (5
                )
                
                
                12Recovery
      for uncollectible premiums receivable
                
                
                (45
                )
                
                
                (24
                )Non-cash
      compensation
                
                
                79
                
                
                
                119Changes
      in operating assets and liabilities:Premiums
      receivable
                
                
                4,043
                
                
                
                (730
                )Prepaid
      reinsurance premiums
                
                
                4,182
                
                
                
                (4,124
                )Reinsurance
      recoverable, net
                
                
                2,237
                
                
                
                (808
                )Income
      taxes recoverable
                
                
                (615
                )
                
                
                336Deferred
      income taxes, net of other comprehensive income
                
                
                (9
                )
                
                
                (544
                )Policy
      acquisition costs, net of amortization
                
                
                (297
                )
                
                
                (1,537
                )Other
      assets
                
                
                702
                
                
                
                (487
                )Unpaid
      losses and LAE
                
                
                (2,362
                )
                
                
                1,316Unearned
      premiums
                
                
                2,026
                
                
                
                6,131Premium
      deposits and customer credit balances
                
                
                1,089
                
                
                
                273Bank
      overdraft
                
                
                9,836
                
                
                
                642Accounts
      payable and accrued expenses
                
                
                3,047
                
                
                
                (662
                )Net
      cash provided by operating activities
                
                
                21,019
                
                
                
                762Cash
      flow provided (used)  by investing activities:Proceeds
      from sale of investment securities
                
                
                31,135
                
                
                
                12,256Purchases
      of investment securities available for sale
                
                
                (26,708
                )
                
                
                (58,351
                )Purchases
      of property and equipment
                
                
                (199
                )
                
                
                (9
                )Net
      cash provided (used) by investing activities
                
                
                4,228
                
                
                
                (46,104
                )Cash
      flow used by financing activities:Dividends
      paid
                
                
                (477
                )
                
                
                (481
                )Tax
      benefit provision related to non-cash compensation
                
                
                36
                
                
                
                27Net
      cash used by financing activities
                
                
                (441
                )
                
                
                (454
                )Net
      increase (decrease) in cash and short term investments
                
                
                24,806
                
                
                
                (45,796
                )Cash
      and short term investments at beginning of period
                
                
                28,197
                
                
                
                124,577Cash
      and short term investments at end of period
                
                $
                53,003
                
                
                $
                78,781





SEE
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


5


21ST CENTURY
HOLDING COMPANY


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(UNAUDITED)





Three Months Ended March
31,(continued)
                
                2010
                
                
                2009(Dollars
      in Thousands)Supplemental
      disclosure of cash flow information:Cash
      paid during the period for:Income
      taxes
                
                $
                2
                
                
                $
                75Non-cash
      investing and finance activities:Accrued
      dividends payable
                
                $
                477
                
                
                $
                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,
commercial general liability, personal and commercial automobile, fire, allied
lines, surety,  commercial multi-peril and inland marine insurance 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’ multi-peril, 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
and Texas, and underwrites commercial general liability insurance in those
states. American Vehicle operates as a non-admitted carrier in Arkansas,
California, Georgia, 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 three months ended March 31, 2010, 78.0%, 13.0%, 3.0% and 6.0% of the
premiums we underwrote were for homeowners’ property and casualty, commercial
general liability, federal flood, and personal automobile insurance,
respectively. During the three months ended March 31, 2009, 81.0%, 15.9%, 2.6%
and 0.5% of the premiums we underwrote were for homeowners’ property and
casualty, 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.


- 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. 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.





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, 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
distributors. 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. As American Vehicle
continues its expansion into other states, we intend to retain other general
agents to market our commercial general liability insurance
products.





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 generates a 6% commission fee and a $25 per
policy 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 March 31, 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 three 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 March 31,
2010 and December 31, 2009. Changes in interest rates subsequent to March 31,
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 March 31, 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-ThanTemporary 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 Transaction 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  requires 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.





In
February 2010, the FASB issued ASU No. 2010-09:  Amendments to Certain Recognition and
Disclosure Requirements,an amendmentto Topic 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.


- 11
-


21st Century
Holding Company


Notes
to Condensed 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 three months
ended March 31, 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.





(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.


- 12
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





(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 three months ended March 31, 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 $6.7 million in connection with these assessments.





The State
Board of Administration ("SBA"), the body that oversees the FHCF, and the
FHCF Financing Corporation are considering 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.





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. 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
for 2010, 2009 or 2008.





Pursuant
to Florida Statutes Section 627.3512, insurers are permitted to recoup the
assessment by adding a surcharge to policies in an amount not to exceed the
amount paid by the insurer to Citizens. Federated National is currently
underwriting the recoupment in connection with the Citizens assessments and has
since recouped approximately $2.3 million. Federated National subrogated
approximately $1.8 million to the reinsurers.





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.


- 13
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





Florida OIR issued an Order April 29,
2010, levying an emergency assessment of 1.30%, which was previously 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
1.40% 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 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.





The
Company’s consolidated Florida income tax returns for 2007, 2006 and 2005 are
currently under review by the Florida Department of Revenue. The Florida income
tax return for 2008 is open for review.





The
Company has recorded a net deferred tax asset of $5.0 million as of March 31,
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, effective on or
about March 1, 2006, 21st Century
sold its interest in the Lauderdale Lakes property to an unrelated party. As
part of this transaction, 21st Century
agreed to lease the same facilities for a five-year term. Our lease for this
office space expires in December 2011.


- 14
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





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





Fiscal Year
                  
                  Lease payments(Dollars
      in Thousands)2010
                  
                  
                  4802011
                  
                  
                  650Total
                  
                  $
                  1,130





The
Company is also involved in various legal actions arising in the ordinary course
of business and not related to the insured claims activity.





From July
27, 2007 to August 7, 2007, several securities class action lawsuits were filed
against the Company and certain of its executive officers in the United States
District Court for the Southern District of Florida (“District Court”) on behalf
of all persons and entities (the “plaintiffs”) who purchased the Company's
securities during the various class periods specified in the complaints.  A
consolidated amended complaint (“Class Litigation”) was filed on behalf of the
class on January 22, 2008, Case No. 07-61057.  The complaint alleged that
the defendants made false and misleading statements and failed to accurately
project the Company's business and financial performance during the putative
class period. The plaintiffs sought an unspecified amount of damages and claim
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and Rule 10b-5.  On March 18, 2008, a verified shareholder derivative
complaint Case No. 08-cv-60374 (“Derivative Litigation”) was filed against
certain current or former officers and directors of the Company in the District
Court.





On November
7, 2008, the District Court granted in part and denied in part the
Company's motion to dismiss the consolidated class litigation with leave to
amend by December 8, 2009 or the allegations dismissed would be deemed
dismissed with prejudice without further order of the District Court.  Lead
plaintiffs did not seek to amend the consolidated complaint and the defendants
answered.  On July 29, 2008, the District Court granted the defendant’s
motion to dismiss the plaintiff’s shareholder derivative complaint without
prejudice.  On August 27, 2009, the derivative plaintiff filed an amended
shareholder derivative complaint.  On March 30, 2009, following various
motions by the parties, the District Court entered an order granting defendant’s
renewed motion to stay the shareholder derivative action pending resolution of
the class action.





On
September 4, 2009,
a  stipulation   of  settlement 
("Stipulation of Settlement")  was submitted to the Court
by  lead  plaintiffs,
the  derivative  plaintiff and the defendants, setting
forth the terms of  a settlement of the Class Litigation and
Derivative Litigation  ("Settlement Agreement") which proposed that a
payment of $2.4 million be made to the lead plaintiffs and the derivative
plaintiff.  The Stipulation of Settlement contains no admission of
liability or wrongdoing by the Company or its officers and directors. The
Company's insurance carriers agreed to fund the $2.4 million settlement payment.
The Stipulation of Settlement was preliminarily approved by the
Court on October 19, 2009.





At a settlement hearing held on
January 29, 2010, the District Court approved the terms of the Stipulation of
Settlement.  On March 15, 2010, counsel for Plaintiffs acknowledged
receipt of $2.4 million in settlement funds paid under the Company’s directors'
and officers’ insurance policy.





(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”.


- 15
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





Total
investments decreased $3.3 million, or 2.9%, to $110.9 million as of March 31,
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 March 31, 2010, compared with 98% as of
December 31, 2009.





We did
not hold any trading investment securities during the three months ended March
31, 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 three months ended March 31, 2010, in
connection with this process, we have not charged any net realized investment
loss to operations.





As of
March 31, 2010, all of our securities are in good standing and not impaired as
defined by FASB issued guidance, except for our holdings in Blackrock Pfd, Inc.,
which continues to be impaired by $0.1 million as of March 31, 2010, compared to
the total $0.4 million as of December 31, 2009.





During
the three months ended March 31, 2010, in connection with the other-than
temporarily or permanently impaired process, we did not charge any net realized
investment loss to operations.


- 16
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





The
investments held as of March 31, 2010 and December 31, 2009, were comprised
mainly of corporate bonds held in various industries and municipal and United
States government bonds. As of March 31, 2010, 87% of the debt portfolio is in
diverse industries and 13% is in United States government bonds.  As of
March 31, 2010, approximately 85% of the equity holdings are in equities related
to diverse industries and 15% are in mutual funds.





As of
March 31, 2010, 56.3% of the investment portfolio is in corporate bonds, 30.0%
is in obligations of states and political subdivisions, and 11.2% is in United
States government bonds. Approximately 16.0% of the common stock holdings are
related to foreign entities.





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.





As of
March 31, 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 March 31, 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 March 31, 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 March 31, 2010 and
December 31, 2009.





March 31, 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
                
                $
                6,369
                
                
                
                5.74
                %
                
                $
                10,152
                
                
                
                8.89
                %Obligations
      of states and political subdivisions
                
                
                28,780
                
                
                
                25.94
                %
                
                
                39,269
                
                
                
                34.38
                %Corporate
                
                
                55,351
                
                
                
                49.90
                %
                
                
                42,092
                
                
                
                36.85
                %International
                
                
                701
                
                
                
                0.63
                %
                
                
                -
                
                
                
                0.00
                %91,201
                
                
                
                82.21
                %
                
                
                91,513
                
                
                
                80.12
                %Debt
      securities, at amortized cost:United
      States government obligations and authorities
                
                $
                5,790
                
                
                
                5.22
                %
                
                
                2,650
                
                
                
                2.32
                %Total
      debt securities
                
                
                96,991
                
                
                
                5.22
                %
                
                
                94,163
                
                
                
                2.32
                %Equity
      securities, at market
                
                
                13,945
                
                
                
                12.57
                %
                
                
                20,056
                
                
                
                17.56
                %Total
      investments
                
                $
                110,936
                
                
                
                100.00
                %
                
                $
                114,219
                
                
                
                100.00
                %


- 17
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





The
following table shows the realized gains (losses) for debt and equity securities
for the three months ended March 31, 2010 and 2009.





Three
      Months Ended March 31,2010
                
                
                2009Gains
                
                
                Fair
      Value
                
                
                Gains
                
                
                Fair
      Value(Losses)
                
                
                at Sale
                
                
                (Losses)
                
                
                at Sale(Dollars
      in Thousands)Debt
      securities
                
                $
                348
                
                
                $
                14,584
                
                
                $
                90
                
                
                $
                7,846Equity
      securities
                
                
                2,093
                
                
                
                13,349
                
                
                
                10
                
                
                
                151Total
      realized gains
                
                
                2,441
                
                
                
                27,933
                
                
                
                100
                
                
                
                7,997Debt
      securities
                
                
                (25
                )
                
                
                1,481
                
                
                
                (340
                )
                
                
                3,382Equity
      securities
                
                
                (191
                )
                
                
                1,439
                
                
                
                (297
                )
                
                
                781Total
      realized losses
                
                
                (216
                )
                
                
                2,920
                
                
                
                (637
                )
                
                
                4,163Net
      realized gains (losses) on investments
                
                $
                2,225
                
                
                $
                30,853
                
                
                $
                (537
                )
                
                $
                12,160


- 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 March 31, 2010 and December 31, 2009 is as
follows.





Gross
                
                
                GrossAmortized
                
                
                Unrealized
                
                
                Unrealized
                
                
                EstimatedCost
                
                
                Gains
                
                
                Losses
                
                
                Fair Value(Dollars
      in Thousands)March
      31, 2010Debt
      Securities  - Available For Sale:United
      States government obligations and authorities
                
                $
                6,404
                
                
                $
                63
                
                
                $
                97
                
                
                $
                6,370Obligations
      of states and political subdivisions
                
                
                28,333
                
                
                
                516
                
                
                
                69
                
                
                
                28,780Corporate
                
                
                53,167
                
                
                
                2,245
                
                
                
                62
                
                
                
                55,350International
                
                
                698
                
                
                
                4
                
                
                
                1
                
                
                
                701$
                88,602
                
                
                $
                2,828
                
                
                $
                229
                
                
                $
                91,201Debt
      Securities  - Held To Maturity:United
      States government obligations and authorities
                
                $
                5,790
                
                
                $
                204
                
                
                $
                136
                
                
                $
                5,858Corporate
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -$
                5,790
                
                
                $
                204
                
                
                $
                136
                
                
                $
                5,858Equity
      securities - common stocks
                
                $
                14,161
                
                
                $
                725
                
                
                $
                941
                
                
                $
                13,945December
      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 losses by investment class, aged for
length of time in a continuous unrealized loss position as of March 31,
2010.





Unrealized
      Losses
                  
                  
                  Less
      than 12
                    months
                  
                  
                  12
      months or
                    longer(Dollars
      in Thousands)Debt
      securities:United
      States government obligations and authorities
                  
                  $
                  (35
                  )
                  
                  $
                  (5
                  )
                  
                  $
                  (30
                  )Obligations
      of states and political subdivisions
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Corporate
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -(35
                  )
                  
                  
                  (5
                  )
                  
                  
                  (30
                  )Equity
      securities:Common
      stocks
                  
                  
                  (340
                  )
                  
                  
                  -
                  
                  
                  
                  (340
                  )Total
      debt and equity securities
                  
                  $
                  (375
                  )
                  
                  $
                  (5
                  )
                  
                  $
                  (370
                  )





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 March 31, 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.





March 31, 2010
                  
                  
                  December 31, 2009Amortized
                  
                  
                  Estimated
                  
                  
                  Amortized
                  
                  
                  EstimatedCost
                  
                  
                  Fair Value
                  
                  
                  Cost
                  
                  
                  Fair Value(Dollars
      in Thousands)Due
      in one year or less
                  
                  $
                  5,707
                  
                  
                  $
                  5,741
                  
                  
                  $
                  1,602
                  
                  
                  $
                  1,615Due
      after one through five years
                  
                  
                  51,319
                  
                  
                  
                  52,628
                  
                  
                  
                  49,821
                  
                  
                  
                  50,885Due
      after five through ten years
                  
                  
                  29,320
                  
                  
                  
                  30,473
                  
                  
                  
                  26,177
                  
                  
                  
                  27,217Due
      after ten years
                  
                  
                  8,046
                  
                  
                  
                  8,217
                  
                  
                  
                  14,441
                  
                  
                  
                  14,589Total
                  
                  $
                  94,392
                  
                  
                  $
                  97,059
                  
                  
                  $
                  92,041
                  
                  
                  $
                  94,306


- 20
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





United
States Treasury notes with a book value of $1,038,000 and $1,044,000, both
maturing in 2012, were on deposit with the Florida OIR as of March 31, 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 periods indicated.





Three Months Ended March
31,2010
                    
                    
                    2009(Dollars
      in Thousands)Interest
      on debt securities
                    
                    $
                    845
                    
                    
                    $
                    426Dividends
      on equity securities
                    
                    
                    87
                    
                    
                    
                    101Interest
      on cash and cash equivalents
                    
                    
                    3
                    
                    
                    
                    154Total
      investment income
                    
                    $
                    935
                    
                    
                    $
                    681Net
      realized gains (losses)
                    
                    $
                    2,225
                    
                    
                    $
                    (537
                    )





Proceeds
from sales of debt and equity securities during the three months ended March 31,
2010 and 2009, were approximately $31.1 million and $14.7 million,
respectively.





A summary of realized investment gains
(losses) and net unrealized gains follows.





Three Months Ended March
  31,2010
                      
                      
                      2009(Dollars
      in Thousands)Net
      realized gains (losses)Debt
      securities
                      
                      $
                      323
                      
                      
                      $
                      (257
                      )Equity
      securities
                      
                      
                      1,902
                      
                      
                      
                      (280
                      )Total
                      
                      $
                      2,225
                      
                      
                      $
                      (537
                      )





As of March 31, 2010
                    
                    
                    As of December 31, 2009(Dollars
      in Thousands)Net
      unrealized gains (losses)Debt
      securities
                    
                    $
                    2,599
                    
                    
                    $
                    2,122Equity
      securities
                    
                    
                    (217
                    )
                    
                    
                    1,128Total
                    
                    $
                    2,382
                    
                    
                    $
                    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.


- 21
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





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.





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 March 31, 2010, which are presented in accordance
with this guidance are as follows.





As of March 31, 2010Level 1
                
                
                Level 2
                
                
                Level 3
                
                
                Total(Dollars
      in Thousands)Debt
      securities:United
      States government obligations and authorities
                
                $
                -
                
                
                $
                6,370
                
                
                $
                -
                
                
                $
                6,370Obligations
      of states and political subdivisions
                
                
                -
                
                
                
                28,780
                
                
                
                -
                
                
                
                28,780Corporate
                
                
                55,350
                
                
                
                -
                
                
                
                -
                
                
                
                55,350International
                
                
                -
                
                
                
                701
                
                
                
                -
                
                
                
                70155,350
                
                
                
                35,851
                
                
                
                -
                
                
                
                91,201Equity
      securities:Common
      stocks
                
                
                13,945
                
                
                
                -
                
                
                
                -
                
                
                
                13,94513,945
                
                
                
                -
                
                
                
                -
                
                
                
                13,945Total
      debt and equity securities
                
                $
                69,295
                
                
                $
                35,851
                
                
                $
                -
                
                
                $
                105,146


- 22
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





Assets measured at fair value on a
recurring basis as of December 31, 2009, which are 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





(7)
 Comprehensive Income





For the three months ended March 31,
2010 and 2009, comprehensive income consisted of the
following.





Three Months Ended March
31,2010
                  
                  
                  2009(Dollars
      in Thousands)Net
      (loss) income
                  
                  $
                  (927
                  )
                  
                  $
                  303Change
      in net unrealized (losses) gains on investments available for
      sale
                  
                  
                  (869
                  )
                  
                  
                  45Comprehensive
      (loss) income, before tax
                  
                  
                  (1,796
                  )
                  
                  
                  348Income
      tax benefit (expense) related to items of other comprehensive
      income
                  
                  
                  327
                  
                  
                  
                  (16
                  )Comprehensive
      (loss) income
                  
                  $
                  (1,469
                  )
                  
                  $
                  332





(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.


- 23
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





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
2009–2010 hurricane season, thus 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.





Our
property lines of business include homeowners’ multi-peril and fire. For the
2009-2010 hurricane season, the excess of loss and FHCF treaties will insure 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 includes coverage purchased from the private
market, which afforded optional reinstatement premium protection that provides
coverage beyond the first event, along with coverage from the FHCF. Coverage
afforded by the FHCF totals 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.





The
estimated cost to the Company for the excess of loss reinsurance products for
the 2009-2010 hurricane season, inclusive of approximately $18.6 million payable
to the FHCF and the prepaid automatic premium reinstatement protection, was
approximately $52.7 million. The combination of private and FHCF excess of loss
reinsurance treaties will afford approximately $456.6 million of aggregate
coverage with maximum first event coverage totaling approximately $349.7
million. Our retention in connection with the first two covered events is $5.0
million for each event.





The cost
and amounts of reinsurance were based on management's analysis of Federated
National's exposure to catastrophic risk as of June 30, 2009. Our data was
subjected to exposure level analysis as of September 30, 2009. 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
the changes in our exposure level. The change to management’s June 30, 2009
analysis will be amortized over the remaining balance of the underlying policy
term. The Company’s retention did not change.


- 24
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





The
2009-2010 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
      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)





For the
2008-2009 hurricane season, the excess of loss and FHCF treaties insured us for
approximately $310.0 million of aggregate catastrophic losses and LAE with
a maximum single event coverage total of approximately $245.0 million, with the
Company retaining the first $3.0 million of losses and LAE. Our reinsurance
program included coverage purchased from the private market, which afforded
optional reinstatement premium protection that provides coverage beyond the
first event, along with coverage from the FHCF. Coverage afforded by the FHCF
totals approximately $167.0 million, or 54% of the $310.0 million of aggregate
catastrophic losses and LAE. The FHCF afforded coverage for the entire season,
subject to maximum payouts, without regard to any particular insurable event.
There were no claims made in connection with these treaties.


- 25
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





The
2008-2009 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+GMAC
      Re/Motors Insurance Corporation
                      
                      A-Munich
      Reinsurance America, Inc.
                      
                      A+QBE
      Reinsurance Corporation
                      
                      A
                      
                      *BERMUDAActua
      Re Limited
                      
                      NR
                      
                      *
                      
                      (1)Ariel
      Reinsurance Company Limited
                      
                      A-
                      
                      *DaVinci
      Reinsurance Limited
                      
                      A
                      
                      *Flagstone
      Reinsurance Limited
                      
                      A-Hiscox
      Insurance Company Limited
                      
                      A-Max
      Bermuda Limited
                      
                      A-New
      Castle Reinsurance Company Limited
                      
                      A-
                      
                      *Renaissance
      Reinsurance Limited
                      
                      A+
                      
                      *Amlin
      Bermuda Limited
                      
                      AEUROPELansforsakringar
      Sak Forsakringsaktiebolag
                      
                      NR
                      
                      
                      
                      (2)SCOR
      Switzerland AG
                      
                      A-*
      2008 Reinstatement Premium Protection Program
  Participants(1)
      Participant has funded a trust agreement for their unearned premium with
      approximately $1.3 million of cash and U.S. Government obligations of
      American institutions at fair market value.(2)
      Standard & Poor's rated "A" (investment grade - economic situation can
      affect
finance)





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 has in 2006 and 2007, and again on October 30,
2009. There were no assessments made for the year ended December 31, 2008.
Through 2007, we have been assessed $6.7 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 $6.2 million in connection with these
assessments.


- 26
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





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, 2009, and the private excess of loss type
treaties are all effective July 1, 2009; 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.”





To date,
there have been no claims asserted against the reinsurers in connection with the
2009–2010 and 2008–2009 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 Re and Ascot 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.





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 March 31, 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 March 31, 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 March 31, 2010 and December 31, 2009, we had outstanding exercisable
options to purchase 121,599 and 124,599 shares, respectively.


- 27
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





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 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 March 31, 2010 and December 31, 2009, we
had outstanding exercisable options to purchase 729,218 and 736,951 shares,
respectively.





Activity
in our stock option plans for the period from January 1, 2008 to March 31, 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
                      
                      
                      -
                      
                      
                      $
                      -
                      
                      
                      
                      30,000
                      
                      
                      $
                      4.36Exercised
                      
                      
                      -
                      
                      
                      $
                      -
                      
                      
                      
                      -
                      
                      
                      $
                      -Cancelled
                      
                      
                      (3,000
                      )
                      
                      $
                      13.70
                      
                      
                      
                      (37,733
                      )
                      
                      $
                      15.75Outstanding
      at March 31, 2010
                      
                      
                      121,599
                      
                      
                      $
                      15.94
                      
                      
                      
                      729,218
                      
                      
                      $
                      11.52


- 28
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





Options outstanding as of March 31,
2010 are exercisable as follows.





1998
      Plan
                  
                  
                  2002
      PlanOptions
      Exercisable at:
                  
                  Number of
                    Shares
                  
                  
                  Weighted
                    Average
                    Option
                    Exercise
      Price
                  
                  
                  Number
      of
                    Shares
                  
                  
                  Weighted
                    Average
                    Option
                    Exercise
      PriceMarch
      31, 2010
                  
                  
                  64,889
                  
                  
                  $
                  15.94
                  
                  
                  
                  388,504
                  
                  
                  $
                  11.52December
      31, 2010
                  
                  
                  18,670
                  
                  
                  $
                  15.94
                  
                  
                  
                  92,441
                  
                  
                  $
                  11.52December
      31, 2011
                  
                  
                  18,670
                  
                  
                  $
                  15.94
                  
                  
                  
                  102,484
                  
                  
                  $
                  11.52December
      31, 2012
                  
                  
                  18,670
                  
                  
                  $
                  15.94
                  
                  
                  
                  76,089
                  
                  
                  $
                  11.52December
      31, 2013
                  
                  
                  700
                  
                  
                  $
                  15.94
                  
                  
                  
                  42,300
                  
                  
                  $
                  11.52December
      31, 2014
                  
                  
                  -
                  
                  
                  $
                  15.94
                  
                  
                  
                  21,400
                  
                  
                  $
                  11.52Thereafter
                  
                  
                  -
                  
                  
                  $
                  15.94
                  
                  
                  
                  6,000
                  
                  
                  $
                  11.52Total
      options exercisable
                  
                  
                  121,599
                  
                  
                  
                  
                  
                  
                  
                  729,218





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 previously outstanding
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:





·
            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 March 31, 2010 are lower by approximately $96,000 and
$60,000, respectively, than if it had continued to account for share-based
compensation under ABP 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 March 31, 2009, were lower by approximately $146,000 and
$119,000, respectively, than if it had continued to account for share-based
compensation under ABP guidance.





Basic and
diluted earnings per share for the three months ended March 31, 2010 would have
been ($0.11), if the Company had not adopted FASB issued guidance, compared with
reported basic and diluted earnings per share of ($0.12).





Basic and
diluted earnings per share for the three months ended March 31, 2009 would have
been $0.06 if the Company had not adopted FASB issued guidance, compared with
reported basic and diluted earnings per share of $0.04.


- 29
-




21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





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
March 31, 2010 was $1.81 and during the same period 2009 was $3.30 to $4.73,
estimated on the date of grant using the Black-Scholes option-pricing
model.





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





March 31, 2010
                      
                      March 31, 2009Dividend
      yield
                      5.80%
                      
                      7.20%
      - 17.30%Expected
      volatility
                      82.36%
                      
                      57.54%
      - 70.68%Risk-free
      interest rate
                      1.33%
                      
                      1.22%
      - 1.50%Expected
      life (in years)
                      3.06
                      
                      3.53
      -
4.16





Summary
information about the Company’s stock options outstanding at March 31, 2010
follows.





Weighted Average
                  
                  
                  WeightedRange
      of
                  
                  
                  Outstanding
      at
                  
                  
                  Contractual
                  
                  
                  Average
                  
                  
                  Exercisable
      atExercise Price
                  
                  
                  March 31, 2010
                  
                  
                  Periods in Years
                  
                  
                  ExercisePrice
                  
                  
                  March 31, 20101998
      Plan
                  
                  $
                  6.67
      - $27.79
                  
                  
                  
                  121,599
                  
                  
                  
                  3.04
                  
                  
                  $
                  15.94
                  
                  
                  
                  64,8892002
      Plan
                  
                  $
                  3.03
      - $18.21
                  
                  
                  
                  729,218
                  
                  
                  
                  3.18
                  
                  
                  $
                  11.52
                  
                  
                  
                  388,504





(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 March 31, 2010, there were no preferred shares issued or
outstanding and there were 7,946,374 shares of common stock
outstanding.





(11)
Subsequent Events





None


- 30
-


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
Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 26,
2010. 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, unless the context indicates
otherwise.




Forward-Looking
Statements





Statements
in this Quarterly Report on Form 10-Q for the three months ended March 31, 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 our other  filings with the SEC, including the
Company’s 2009 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.




- 31
-




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,
commercial general liability, personal and commercial automobile, fire, allied
lines, surety,  commercial multi-peril and inland marine insurance 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’ multi-peril, 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
and Texas, and underwrites commercial general liability insurance in those
states. American Vehicle operates as a non-admitted carrier in Arkansas,
California, Georgia, 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 three months ended March 31, 2010, 78.0%, 13.0%, 3.0% and 6.0% of the
premiums we underwrote were for homeowners’ property and casualty, commercial
general liability, federal flood, and personal automobile insurance,
respectively. During the three months ended March 31, 2009, 81.0%, 15.9%, 2.6%
and 0.5% of the premiums we underwrote were for homeowners’ property and
casualty, 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
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. 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.


- 32
-


21st Century
Holding Company
 Management’s
Discussion and Analysis of Financial Condition and Results of
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, 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
distributors. 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. As American Vehicle
continues its expansion into other states, we intend to retain other general
agents to market our commercial general liability insurance
products.





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 generates a 6% commission fee and a $25 per
policy 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.





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 emerged because of the January 2007 emergency Florida legislation
session wherein it passed, and the Governor signed into law, a bill known as
“CS/HB-1A”. This law made fundamental changes to the property and casualty
insurance business in Florida and undertook 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 the state of
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 have 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. To date 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.


- 33
-




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


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 of Florida. At least one new carrier has been licensed to
enter the Florida homeowners’ market during 2009 and another in
2010.





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’ property 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.





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
on the basis of 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 Allstate 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
Universal Insurance Company of North America, Universal Property and Casualty
Insurance Company, United Property and Casualty, Royal Palm Insurance Company,
Edison Insurance Company, St. Johns Insurance Company, Cypress Property and
Casualty Insurance Company, Tower Hill Insurance Company, Florida Family
Insurance Company, Homeowners Choice 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 U.S. Security
Insurance Company, United Automobile Insurance Company, Direct General Insurance
Company, Ocean Harbor Insurance Company, and Security National Insurance
Company, as well as national insurers such as Progressive Casualty Insurance
Company and GEICO.





We
reported decreased gross written premium for the three months ended March 31,
2010, and continue to face difficult economic conditions that affected our
earnings. Performance during the three months ended March 31, 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 March 31, 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 March 31, 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.


- 34
-




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


Analysis
of Financial Condition


As
of March 31, 2010 Compared with December 31, 2009





Total
Investments





The
Financial Accounting Standards Board (“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 March 31,
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 March 31, 2010, compared with 98% as of
December 31, 2009.





We did
not hold any trading investment securities during the three months ended March
31, 2010.





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





Unrealized Gains and
    (Losses)March 31, 2010
                  
                  
                  December 31, 2009(Dollars
      in Thousands)Debt
      securities:United
      States government obligations and authorities
                  
                  $
                  (35
                  )
                  
                  $
                  (120
                  )Obligations
      of states and political subdivisions
                  
                  
                  447
                  
                  
                  
                  500Corporate
                  
                  
                  2,183
                  
                  
                  
                  1,742International
                  
                  
                  3
                  
                  
                  
                  -2,598
                  
                  
                  
                  2,122Equity
      securities:Common
      stocks
                  
                  
                  (217
                  )
                  
                  
                  1,128Total
      debt and equity securities
                  
                  $
                  2,381
                  
                  
                  $
                  3,250




The
$35,000 unrealized loss for debt securities is related to United States Treasury
obligations.  The unrealized losses on the Company’s investments in United
States Treasury obligations were caused by interest rate increases.  The
contractual terms of those investments do not permit the issuer to settle the
securities at a price less than the amortized cost bases of the
investments.  Because the Company does not intend to sell the investments
and it is not likely that the Company will be required to sell the investments
before recovery of their amortized cost bases, which may be maturity, the
Company does not consider those investments to be other-than temporarily
impaired as of March 31, 2010.




- 35
-




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


The $0.2
million unrealized losses for equity securities are related to Western / Asset
Claymore Inflation-Linked Securities and Income Fund (“WIA”).  WIA invests
80% of its total assets in inflation-linked securities and at least 60% of its
total managed assets in U.S. Treasury Inflation-Protected Securities. 
Based on the type of assets held by WIA, and the Company’s ability and intent to
hold this investment for a reasonable period of time sufficient for a
forecasted recovery of fair value, the Company does not consider this investment
to be other-than temporarily impaired as of March 31, 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 three months ended March 31, 2010, in
connection with this process, we have not charged any net realized investment
loss to operations.





As of
March 31, 2010, all of our securities are in good standing and not impaired as
defined by FASB issued guidance, except for our holdings in Blackrock Pfd, Inc.,
which continues to be impaired by $0.1 million as of March 31, 2010, compared to
the total $0.4 million as of December 31, 2009.





During
the three months ended March 31, 2009, 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 March 31, 2010, were comprised mainly of corporate bonds
held in various industries and municipal and United States government bonds. The
investments held as of December 31, 2009, were comprised mainly of corporate
bonds held in various industries and municipal and United States government
bonds.  As of March 31, 2010, 87% of the debt portfolio is in diverse
industries and 13% is in United States government bonds.  As of March 31,
2010, approximately 85% of the equity holdings are in equities related to
diverse industries and 15% are in mutual funds.





As of
March 31, 2010, 56.3% of the investment portfolio is in corporate bonds, 30.0%
is in obligations of states and political subdivisions, and 11.2% is in United
States government bonds. Approximately 16.0% of the common stock holdings are
related to foreign entities.


- 36
-




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 March 31, 2010 and
December 31, 2009.





March 31, 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
                
                $
                6,369
                
                
                
                5.74
                %
                
                $
                10,152
                
                
                
                8.89
                %Obligations
      of states and political subdivisions
                
                
                28,780
                
                
                
                25.94
                %
                
                
                39,269
                
                
                
                34.38
                %Corporate
                
                
                55,351
                
                
                
                49.90
                %
                
                
                42,092
                
                
                
                36.85
                %International
                
                
                701
                
                
                
                0.63
                %
                
                
                -
                
                
                
                0.00
                %91,201
                
                
                
                82.21
                %
                
                
                91,513
                
                
                
                80.12
                %Debt
      securities, at amortized cost:United
      States government obligations and authorities
                
                $
                5,790
                
                
                
                5.22
                %
                
                
                2,650
                
                
                
                2.32
                %Total
      debt securities
                
                
                96,991
                
                
                
                5.22
                %
                
                
                94,163
                
                
                
                2.32
                %Equity
      securities, at market
                
                
                13,945
                
                
                
                12.57
                %
                
                
                20,056
                
                
                
                17.56
                %Total
      investments
                
                $
                110,936
                
                
                
                100.00
                %
                
                $
                114,219
                
                
                
                100.00
                %





As of
March 31, 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 March 31, 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 March 31, 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.





Cash
and Short-Term Investments





Cash and
short-term investments, which include cash, certificates of deposits, and money
market accounts, increased $24.8 million, or 88.0%, to $53.0 million as of March
31, 2010, compared with $28.2 million as of December 31, 2009. The increase in
cash and short-term investments is from normal portfolio turnover where in
investments were sold; we are currently evaluating long and short-term
investment options for the best yields that match our liquidity
needs.





Prepaid
Reinsurance Premiums





Prepaid
reinsurance premiums decreased $4.2 million, or 40.5%, to $6.1 million as
of March 31, 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 $4.0 million, or
38.8%, to $6.3 million as of March 31, 2010, compared with $10.3 million as of
December 31, 2009.





Our
homeowners’ insurance premiums receivable decreased $5.0 million, or 55.6%, to
$4.0 million as of March 31, 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.


- 37
-




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


Our
commercial general liability insurance premiums receivable increased $0.1
million, or 17.4%, to $1.0 million as of March 31, 2010, compared with $0.9
million as of December 31, 2009.





Premiums
receivable in connection with our automobile line of business increased $0.9
million, or 199.1%, to $1.4 million as of March 31, 2010, compared with $0.5
million as of December 31, 2009.





Our
allowance for credit losses remained unchanged at less than $0.1 million as of
March 31, 2010, compared with as of December 31, 2009.





Reinsurance
Recoverable, net





Reinsurance
recoverable, net, decreased $2.2 million, or 14.6%, to $13.1 million as of March
31, 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
increased $0.3 million, or 3.6%, to $8.6 million as of March 31, 2010, compared
with $8.3 million as of December 31, 2009. The change is due to increased
homeowner’s direct written and unearned premium.





Deferred
Income Taxes, net





Deferred
income taxes, net, increased $0.3 million, or 7.2%, to $5.0 million as of
March 31, 2010, compared with $4.7 million as of December 31, 2009. Deferred
income taxes, net is comprised of approximately $6.8 million and $9.1 million of
deferred tax assets, net of approximately $2.1 million and $4.4 million of
deferred tax liabilities as of March 31, 2010 and December 31, 2009,
respectively.





Income
Taxes Receivable





Income
taxes receivable increased $0.6 million, or 8.7%, to $7.7 million as of
March 31, 2010, compared with $7.1 million as of December 31, 2009. The change
is due to tax payment patterns in connection with our tax
liabilities.





Property,
Plant and Equipment, net





Property,
plant and equipment, net, increased $0.1 million, or 17.2%, to $1.0 million as
of March 31, 2010 compared with $0.9 million as of December 31,
2009.





Other
Assets





Other
assets decreased $0.8 million, or 22.3%, to $2.9 million as of March 31, 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.





March 31, 2010
                  
                  
                  December 31, 2009(Dollars
      in Thousands)Accrued
      interest income receivable
                  
                  $
                  1,129
                  
                  
                  $
                  1,162Notes
      receivable
                  
                  
                  477
                  
                  
                  
                  599Deposits
                  
                  
                  346
                  
                  
                  
                  334Prepaid
      expenses
                  
                  
                  531
                  
                  
                  
                  644Receivable
      for investments sold
                  
                  
                  -
                  
                  
                  
                  567Other
                  
                  
                  368
                  
                  
                  
                  365Total
                  
                  $
                  2,851
                  
                  
                  $
                  3,671




- 38
-




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 $2.4 million, or 3.3%, to $68.2 million as of March 31,
2010, compared with $70.6 million as of December 31, 2009. The composition of
unpaid losses and LAE by product line is as follows.





March 31, 2010
                      
                      
                      December 31, 2009Case
                      
                      
                      Bulk
                      
                      
                      Total
                      
                      
                      Case
                      
                      
                      Bulk
                      
                      
                      Total(Dollars
      in Thousands)
                      
                      
                      (Dollars
      in Thousands)Homeowners'
                      
                      $
                      8,579
                      
                      
                      $
                      19,048
                      
                      
                      $
                      27,627
                      
                      
                      $
                      8,705
                      
                      
                      $
                      21,103
                      
                      
                      $
                      29,808Commercial
      General Liability
                      
                      
                      8,023
                      
                      
                      
                      28,741
                      
                      
                      
                      36,764
                      
                      
                      
                      7,885
                      
                      
                      
                      29,346
                      
                      
                      
                      37,231Automobile
                      
                      
                      2,876
                      
                      
                      
                      981
                      
                      
                      
                      3,857
                      
                      
                      
                      2,612
                      
                      
                      
                      960
                      
                      
                      
                      3,572Total
                      
                      $
                      19,478
                      
                      
                      $
                      48,770
                      
                      
                      $
                      68,248
                      
                      
                      $
                      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 increased $2.0 million, or 4.0%, to $52.9 million as of March 31, 2010,
compared with $50.9 million as of December 31, 2009. The change was due to
a $1.0 million increase in unearned homeowners’ insurance premiums, a $0.1
million decrease in unearned commercial general liability premiums, a less than
$0.1 million decrease in unearned flood insurance premiums, and a $1.2 million
increase in unearned automobile premiums. Generally, as is in this case, an
increase in unearned premium directly relates to an increase 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 $1.1 million, or 51.2%, to $3.2
million as of March 31, 2010, compared with $2.1 million as of December 31,
2009. Premium deposits are monies received on policies not yet in-force as of
March 31, 2010.





Bank
Overdraft





Bank
overdraft increased $9.8 million, or 119.2%, to $18.1 million as of March
31, 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 $0.1 million, or 12.3%, to $0.9 million as
of March 31, 2010, compared with $1.0 million as of December 31, 2009. In
accordance with the provisions of FASB issued guidance, we are amortizing the
deferred gain over the term of the leaseback, which is scheduled to end in
December 2011.




- 39
-




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 increased $3.0 million, or 117.5%, to $5.6 million
as of March 31, 2010, compared with $2.6 million as of December 31,
2009.  The March 31, 2010 balance includes $2.0 million due to
Citizen’s in connection with the cancellation of policies assumed during
2009.





Results
of Operations


Three
Months Ended March 31, 2010 Compared with Three Months Ended March 31,
2009





Gross
Premiums Written





Gross
premiums written decreased $1.4 million, or 5.0%, to $27.0 million for the three
months ended March 31, 2010, compared with $28.4 million for the three months
ended March 31, 2009.  The following table denotes gross premiums
written by major product line.





Three Months Ended March
31,2010
                    
                    
                    2009(Dollars
      in Thousands)Amount
                    
                    
                    Percentage
                    
                    
                    Amount
                    
                    
                    PercentageHomeowners'
                    
                    $
                    21,098
                    
                    
                    
                    78.08
                    %
                    
                    $
                    23,028
                    
                    
                    
                    80.99
                    %Commercial
      General Liability
                    
                    
                    3,499
                    
                    
                    
                    12.95
                    %
                    
                    
                    4,523
                    
                    
                    
                    15.91
                    %Federal
      Flood
                    
                    
                    810
                    
                    
                    
                    3.00
                    %
                    
                    
                    736
                    
                    
                    
                    2.59
                    %Automobile
                    
                    
                    1,614
                    
                    
                    
                    5.97
                    %
                    
                    
                    144
                    
                    
                    
                    0.51
                    %Gross
      written premiums
                    
                    $
                    27,021
                    
                    
                    
                    100.00
                    %
                    
                    $
                    28,431
                    
                    
                    
                    100.00
                    %





On
September 30, 2009, Federated National announced it received approval for a
premium rate increase for its voluntary homeowner's program within the state of
Florida, by Florida's OIR. The premium rate increase, which averaged
approximately nineteen percent, 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 for a premium rate
increase for its assumed homeowner's program from Citizens within the state of
Florida, by Florida's OIR. The premium rate increase, which averaged
approximately fifteen percent, will be deployed on Citizens take-out policies
only with an effective date of July 1, 2010.





We
continue to afford premium discounts in response to wind mitigation efforts by
policyholders. Such discounts, which were required by the Florida Legislature
and became effective on December 15, 2007 for new and renewal business, have
also had a significant effect on both written and earned premium. During the
three months ended March 31, 2010 and 2009, wind mitigation credits totaling
$1.2 million and $4.0 million were afforded our policyholders,
respectively. As of March 31, 2010, 58.9% of our in-force homeowners’
policyholders were receiving wind mitigation credits totaling approximately
$28.8 million, (a 25.6% reduction of in-force premium), while
56.4 % of our in-force homeowners’ policyholders were receiving wind
mitigation credits totaling approximately $19.1million, (a 24.6 % reduction
of in-force premium), as of March 31, 2009.





Due in
part to the effects of Florida’s mandated homeowners’ rates reduction and wind
mitigation discounts, the Company’s sale of homeowners’ policies decreased $1.9
million, or 8.4%, to $21.1 million for the three months ended March 31, 2010,
compared with $23.0 million for the three months ended March 31, 2009, gross of
reinsurance costs. Our number of in-force homeowners’ policies increased by
approximately 10,900, or 28.0%, to approximately 50,400 as of March 31, 2010, as
compared to approximately 39,500 as of March 31, 2009.





We are
required to report write-your-own flood premiums on a direct and 100% ceded
basis for the twelve months ended December 31, 2008 and subsequent periods.
Prior to 2008, we reported only the commissions income associated with this
program.




- 40
-




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


Federated
National and American Vehicle are currently rated by 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. However, our Demotech rating could be jeopardized by
such other 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.





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, and
Demotech reaffirmed Federated National’s “A” rating, also on March 31,
2010. 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, 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 $3.5 million for the three months ended March 31, 2010, compared with
$4.5 million for the three months ended March 31, 2009. The primary factor for
the decrease is a slowdown in the economy which has 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 March
31,2010
                      
                      
                      2009Amount
                      
                      
                      Percentage
                      
                      
                      Amount
                      
                      
                      Percentage(Dollars
      in Thousands)StateAlabama
                      
                      $
                      17
                      
                      
                      
                      0.48
                      %
                      
                      $
                      24
                      
                      
                      
                      0.53
                      %Arkansas
                      
                      
                      1
                      
                      
                      
                      0.02
                      %
                      
                      
                      1
                      
                      
                      
                      0.02
                      %California
                      
                      
                      0
                      
                      
                      
                      0.01
                      %
                      
                      
                      45
                      
                      
                      
                      0.99
                      %Florida
                      
                      
                      2,923
                      
                      
                      
                      83.56
                      %
                      
                      
                      3,412
                      
                      
                      
                      75.44
                      %Georgia
                      
                      
                      19
                      
                      
                      
                      0.54
                      %
                      
                      
                      86
                      
                      
                      
                      1.90
                      %Louisiana
                      
                      
                      374
                      
                      
                      
                      10.68
                      %
                      
                      
                      792
                      
                      
                      
                      17.51
                      %Oklahoma
                      
                      
                      1
                      
                      
                      
                      0.02
                      %
                      
                      
                      -
                      
                      
                      
                      0.00
                      %South
      Carolina
                      
                      
                      2
                      
                      
                      
                      0.05
                      %
                      
                      
                      1
                      
                      
                      
                      0.03
                      %Texas
                      
                      
                      162
                      
                      
                      
                      4.64
                      %
                      
                      
                      162
                      
                      
                      
                      3.58
                      %Total
                      
                      $
                      3,499
                      
                      
                      
                      100.00
                      %
                      
                      $
                      4,523
                      
                      
                      
                      100.00
                      %





The
Company’s sale of auto insurance policies increased by $1.5 million to $1.6
million for the three months ended March 31, 2010, compared with $0.1 million
for the three months ended March 31, 2009.





Gross
Premiums Ceded





Gross
premiums ceded increased to $0.9 million for the three months ended March 31,
2010, compared with $0.3 million for the three months ended March 31, 2009.
Gross premiums ceded under the write-your-own flood program totaled $0.8 million
for the three months ended March 31, 2010.





Decrease
in Prepaid Reinsurance Premiums





The
decrease in prepaid reinsurance premiums was $13.1 million for the three months
ended March 31, 2010, compared with $8.1 million for the three months ended
March 31, 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.


- 41
-




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


Increase
in Unearned Premiums





The
increase in unearned premiums was $2.0 million for the three months ended March
31, 2010, compared with $6.1 million for the three months ended March 31, 2009.
The change was due to a $1.0 million increase in unearned homeowners’ insurance
premiums, a $0.1 million decrease in unearned commercial general liability
premiums, a $1.2 million increase in unearned automobile premiums, net of a $0.1
million decrease in unearned flood premiums during the three months ended March
31, 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.





Net
Premiums Earned





Net
premiums earned decreased $2.9 million, or 20.8%, to $11.0 million for the three
months ended March 31, 2010, compared with $13.9 million for the three months
ended March 31, 2009. The following table denotes net premiums earned by product
line.





Three Months Ended March
31,2010
                  
                  
                  2009Amount
                  
                  
                  Percentage
                  
                  
                  Amount
                  
                  
                  Percentage(Dollars
      in Thousands)Homeowners'
                  
                  $
                  7,027
                  
                  
                  
                  63.79
                  %
                  
                  $
                  8,276
                  
                  
                  
                  59.52
                  %Commercial
      General Liability
                  
                  
                  3,595
                  
                  
                  
                  32.63
                  %
                  
                  
                  5,526
                  
                  
                  
                  39.74
                  %Automobile
                  
                  
                  394
                  
                  
                  
                  3.58
                  %
                  
                  
                  103
                  
                  
                  
                  0.74
                  %Net
      premiums earned
                  
                  $
                  11,016
                  
                  
                  
                  100.00
                  %
                  
                  $
                  13,905
                  
                  
                  
                  100.00
                  %




The
change in homeowners’ net premiums earned is due to a $1.9 million decrease in
gross written premium, a $0.5 million change in gross premiums ceded and a $1.2
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
decreased premium volume. The primary factor for the decrease in premium volume
is a slowdown in the economy which has 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
change in automobile net premiums earned is a result of a $1.5 million increase
in gross written premium, net a $1.2 million increase in the change to unearned
premium.





Commission
Income





Commission
income increased $0.2 million, or 62.3%, to $0.4 million for the three months
ended March 31, 2010, compared with $0.2 million for the three months ended
March 31, 2009. The primary sources of our commission income are in connection
with our managing general agent services, write-your-own-flood premiums and our
independent insurance agency, Insure-Link.





Net
Investment Income





Net
investment income increased $0.2 million, or 37.3%, to $0.9 million for the
three months ended March 31, 2010, compared with $0.7 million for three months
ended March 31, 2009.  Our investment yield, net and gross of investment
expenses, were 2.7% and 2.9%, respectively for the three months ended March 31,
2010. Our investment yield, net of investment expenses were 1.7% for the three
months ended March 31, 2009.





Our
investment yield, net and gross of investment expenses measured against debt
securities, excluding cash, were 3.9% and 4.1%, respectively for the three
months ended March 31, 2010.  Our investment yield, net and gross of
investment expenses measured against debt securities, excluding cash, were 3.6%
and 3.9%, respectively for the three months ended March 31,
2009.


- 42
-




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


See
additional discussion within the above “Analysis of Financial
Condition As of March 31, 2010 Compared with December 31, 2009–
Investments”.





Net
Realized Investment Gains (Losses)





Net
realized investment gains were $2.2 million for the three months ended March 31,
2010, compared with net realized investment losses of $0.5 million for the three
months ended March 31, 2009.  Realized investment gains recognized for the
three months ended March 31, 2010 were a result of portfolio
turnover.





During
the three months ended March 31, 2010, 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. During
the three months ended March 31, 2009, we did not mark any equity investments to
market value.





The table
below depicts the net realized investment gains (losses) by investment category
during the three months ended March 31, 2010 and 2009.





Three Months Ended March
31,2010
                  
                  
                  2009(Dollars
      in Thousands)Realized
      gains:Debt
      securities
                  
                  $
                  348
                  
                  
                  $
                  90Equity
      securities
                  
                  
                  2,093
                  
                  
                  
                  10Total
      realized gains
                  
                  
                  2,441
                  
                  
                  
                  100Realized
      losses:Debt
      securities
                  
                  
                  (25
                  )
                  
                  
                  (340
                  )Equity
      securities
                  
                  
                  (191
                  )
                  
                  
                  (297
                  )Total
      realized losses
                  
                  
                  (216
                  )
                  
                  
                  (637
                  )Net
      realized gains (losses) on investments
                  
                  $
                  2,225
                  
                  
                  $
                  (537
                  )





Regulatory
Assessments Recovered





Regulatory
assessments recovered remained unchanged at $0.5 million for the three months
ended March 31, 2010, compared with $0.5 million for the three months ended
March 31, 2009.





Other
Income





Other
income decreased $0.2 million, or 56.2%, to $0.1 million for the three months
ended March 31, 2010, compared with $0.3 million for the three months ended
March 31, 2009.





The major
component of other income for the three months ended March 31, 2010 is
approximately $0.1 million in partial recognition of our gain on the sale of our
Lauderdale Lakes property.





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 increased by $0.2 million, or 2.2%, to $9.1 million for the three months
ended March 31, 2010, compared with $8.9 million for the three months ended
March 31, 2009. The overall change includes a $1.3 million increase in our
homeowners’ program, a $1.4 million decrease in our commercial general liability
program and a $0.3 million increase in connection with our automobile
program.


- 43
-




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


We
continue to revise our estimates of the ultimate financial impact of 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.





March 31, 2010
                              
                              
                              December 31, 2009Case
                              
                              
                              Bulk
                              
                              
                              Total
                              
                              
                              Case
                              
                              
                              Bulk
                              
                              
                              Total(Dollars
      in Thousands)
                              
                              
                              (Dollars
      in Thousands)Homeowners'
                              
                              $
                              8,579
                              
                              
                              $
                              19,048
                              
                              
                              $
                              27,627
                              
                              
                              $
                              8,705
                              
                              
                              $
                              21,103
                              
                              
                              $
                              29,808Commercial
      General Liability
                              
                              
                              8,023
                              
                              
                              
                              28,741
                              
                              
                              
                              36,764
                              
                              
                              
                              7,885
                              
                              
                              
                              29,346
                              
                              
                              
                              37,231Automobile
                              
                              
                              2,876
                              
                              
                              
                              981
                              
                              
                              
                              3,857
                              
                              
                              
                              2,612
                              
                              
                              
                              960
                              
                              
                              
                              3,572Total
                              
                              $
                              19,478
                              
                              
                              $
                              48,770
                              
                              
                              $
                              68,248
                              
                              
                              $
                              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 $2.4 million during the
three months ended March 31, 2010.





In
accordance with GAAP, 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 March 31, 2010 was 81.5%
compared with 63.8% for the same period in 2009. The table below reflects the
loss ratios by product line.





Three Months Ended March
31,2010
                  
                  
                  2009Homeowners'
                  
                  
                  90.24
                  %
                  
                  
                  62.01
                  %Commercial
      General Liability
                  
                  
                  63.47
                  %
                  
                  
                  65.98
                  %Fire
                  
                  
                  14.34
                  %
                  
                  
                  0.00
                  %Inland
      Marine
                  
                  
                  48.75
                  %
                  
                  
                  0.00
                  %Automobile
                  
                  
                  120.63
                  %
                  
                  
                  91.01
                  %All
      lines
                  
                  
                  81.49
                  %
                  
                  
                  63.81
                  %





Operating
and Underwriting Expenses





Operating
and underwriting expenses increased $0.7 million, or 39.1%, to $2.7 million for
the three months ended March 31, 2010, compared with $2.0 million for the three
months ended March 31, 2009.  The change is partially due to a $0.1
million increase in actuarial fees, a $0.1 million increase in bad debts
expense, a $0.1 million increase in investment expenses, a $0.1 million increase
in boards and bureaus expense and a $0.2 million increase in premium tax
expense.


- 44
-




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


Salaries
and Wages





Salaries
and wages increased $0.2 million, or 8.6%, to $2.1 million for the three months
ended March 31, 2010, compared with $1.9 million for the three months ended
March 31, 2009.





The
charge to operations for stock based compensation, in accordance with the
provisions of FASB issued guidance, was approximately $96,000 during the three
months ended March 31, 2010 compared with approximately $120,000 for the three
months ended March 31, 2009.





Policy
Acquisition Costs, Net of Amortization





Policy
acquisition costs, net of amortization, increased $0.8 million, or 26.1%, to
$3.5 million for the three months ended March 31, 2010, compared with $2.7
million for the three months ended March 31, 2009.





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





The
increase to policy acquisition costs, net of amortization, is primarily due to
commissions related to our voluntary homeowners’ gross written premium which
increased $6.9 million, or 44.0%, to $22.7 million for the three months ended
March 31, 2010, compared with $15.8 million for the three months ended March 31,
2009.





Provision
for Income Tax Benefit





The
provision for income tax benefit was $0.6 million for the three months
ended March 31, 2010, compared with $0.1 million for the three months ended
March 31, 2009. The effective rate for income taxes was 39.5% for the three
months ended March 31, 2010.





Net
(Loss) Income





As a
result of the foregoing, the Company’s net loss for the three months ended March
31, 2010, was $0.9 million compared with net income of $0.3 million for the
three months ended March 31, 2009.





Liquidity
and Capital Resources





During
the three months ended March 31, 2010, our primary sources of capital included
proceeds from the sale of investment securities, increased bank overdrafts,
decreased prepaid reinsurance premiums, decreased premiums receivable, increased
accounts payable and accrued expenses and decreased reinsurance recoverable.
Additional sources of capital included increased unearned premiums,
increased premium deposits and customer credit balances, decreased other
assets, amortization of investment premium, non-cash compensation
and depreciation and amortization.





During
the three months ended March 31, 2010, operations provided net operating cash
flow of $21.0 million, compared with $0.8 million for the three months ended
March 31, 2009.





During
the three months ended March 31, 2010, operations generated $27.5 million of
gross cash flow, due to a $9.8 million increase in bank overdraft, a $4.2
million decrease in prepaid reinsurance premiums, a $4.1 million decrease in
premiums receivable, a $3.0 million increase in accounts payable and accrued
expenses and a $2.2 million decrease in reinsurance recoverable. Additional
sources of cash included a $2.0 million increase in unearned premiums, a $1.1
million increase in premium deposits and customer credit balances, a $0.7
million decrease in other assets, $0.2 million of amortization of investment
premium, net, $0.1 million of non-cash compensation and $0.1 million of
depreciation and amortization.





During
the three months ended March 31, 2010, operations used $6.5 million of gross
cash flow primarily due to a $2.3 million decrease in unpaid losses and LAE,
$2.2 million of net realized investment gains and a $0.6 million increase in
income taxes recoverable. Additional uses of cash included a $0.3 million
increase in policy acquisition costs net of amortization, a less than $0.1
million increase in the recovery for uncollectible premiums receivable and a
less than $0.1 million decrease in deferred income tax expense, all in
conjunction with a net loss of $0.9 million.


- 45
-


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


During
the three months ended March 31, 2010, net cash provided by investing activities
was $4.2 million, compared with net cash used by investment activities of $46.1
million during the three months ended March 31, 2009. Our available-for-sale
investment portfolio is highly liquid as it consists entirely of readily
marketable securities. During the three months ended March 31, 2010, investing
activities generated $31.1 million and used $26.9 million.





During
the three months ended March 31, 2010, net financing activities used $0.4
million, as compared with $0.5 million during the three months ended March 31,
2009. In 2010, the sources of cash in connection with financing activities
included a less than $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.




During
the three months ended March 31, 2010 and in connection with Florida OIR
approval of  the capital infusion during the quarter from American Vehicle
to Federated National,  the Company’s Board of Directors determined to
temporarily suspend payment of dividends on the Company’s common stock (see
“Results of Operations—Three Month Ended March 31, 2010 Compared with Three
Months Ended March 31, 2009—Gross Premiums Written”). As a result of this
infusion from American Vehicle, the Company is currently working with the
Florida OIR to establish the parameters for the resumption of the Company’s
common stock dividends.





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
March 31, 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.




- 46
-




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, which further restrict the type, quality and concentration of
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 the Board of Directors Investment Committee
and is reviewed on a regular basis. Pursuant to this investment policy, as of
March 31, 2010, approximately 91% 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 March 31, 2010 and
December 31, 2009.





March 31, 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
                
                $
                6,369
                
                
                
                5.74
                %
                
                $
                10,152
                
                
                
                8.89
                %Obligations
      of states and political subdivisions
                
                
                28,780
                
                
                
                25.94
                %
                
                
                39,269
                
                
                
                34.38
                %Corporate
                
                
                55,351
                
                
                
                49.90
                %
                
                
                42,092
                
                
                
                36.85
                %International
                
                
                701
                
                
                
                0.63
                %
                
                
                -
                
                
                
                0.00
                %91,201
                
                
                
                82.21
                %
                
                
                91,513
                
                
                
                80.12
                %Debt
      securities, at amortized cost:United
      States government obligations and authorities
                
                
                5,790
                
                
                
                5.22
                %
                
                
                2,650
                
                
                
                2.32
                %Total
      debt securities
                
                
                96,991
                
                
                
                5.22
                %
                
                
                94,163
                
                
                
                2.32
                %Equity
      securities, at market
                
                
                13,945
                
                
                
                12.57
                %
                
                
                20,056
                
                
                
                17.56
                %Total
      investments
                
                $
                110,936
                
                
                
                100.00
                %
                
                $
                114,219
                
                
                
                100.00
                %




- 47
-




21st Century
Holding Company


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 March
31, 2010 and December 31, 2009, debt securities had the following quality
ratings by Moody's and for securities not assigned a rating by Moody's, Standard
and Poor's Company or Fitch ratings were used.





March 31, 2010
                    
                    
                    December 31, 2009Carrying
                    
                    
                    Percent
                    
                    
                    Carrying
                    
                    
                    PercentAmount
                    
                    
                    of Total
                    
                    
                    Amount
                    
                    
                    of Total(Dollars
      in Thousands)AAA
                    
                    $
                    34,296
                    
                    
                    
                    35.37
                    %
                    
                    $
                    40,390
                    
                    
                    
                    42.90
                    %AA
                    
                    
                    18,379
                    
                    
                    
                    18.95
                    %
                    
                    
                    18,619
                    
                    
                    
                    19.77
                    %A
                    
                    
                    33,776
                    
                    
                    
                    34.82
                    %
                    
                    
                    24,286
                    
                    
                    
                    25.79
                    %BBB
                    
                    
                    10,004
                    
                    
                    
                    10.31
                    %
                    
                    
                    9,954
                    
                    
                    
                    10.57
                    %BB++
                    
                    
                    -
                    
                    
                    
                    0.00
                    %
                    
                    
                    -
                    
                    
                    
                    0.00
                    %Not
      rated
                    
                    
                    536
                    
                    
                    
                    0.55
                    %
                    
                    
                    914
                    
                    
                    
                    0.97
                    %$
                    96,991
                    
                    
                    
                    100.00
                    %
                    
                    $
                    94,163
                    
                    
                    
                    100.00
                    %




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





March 31, 2010
                  
                  
                  December 31, 2009Carrying
                  
                  
                  Percent
                  
                  
                  Carrying
                  
                  
                  PercentAmount
                  
                  
                  of Total
                  
                  
                  Amount
                  
                  
                  of Total(Dollars
      in Thousands)Matures
      In:One
      year or less
                  
                  $
                  5,739
                  
                  
                  
                  5.92
                  %
                  
                  $
                  1,615
                  
                  
                  
                  1.72
                  %One
      year to five years
                  
                  
                  49,718
                  
                  
                  
                  51.26
                  %
                  
                  
                  50,781
                  
                  
                  
                  53.93
                  %Five
      years to 10 years
                  
                  
                  33,165
                  
                  
                  
                  34.19
                  %
                  
                  
                  27,178
                  
                  
                  
                  28.86
                  %More
      than 10 years
                  
                  
                  8,369
                  
                  
                  
                  8.63
                  %
                  
                  
                  14,589
                  
                  
                  
                  15.49
                  %Total
      debt securities
                  
                  $
                  96,991
                  
                  
                  
                  100.00
                  %
                  
                  $
                  94,163
                  
                  
                  
                  100.00
                  %





At March
31, 2010, the weighted average maturity of the debt portfolio was approximately
6.0 years.




- 48
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21st Century
Holding Company


The
following table provides information about the financial instruments as of March
31, 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
                  
                  $
                  -
                  
                  
                  $
                  3,260
                  
                  
                  $
                  2,965
                  
                  
                  $
                  2,500
                  
                  
                  $
                  500
                  
                  
                  $
                  -
                  
                  
                  $
                  2,926
                  
                  
                  $
                  12,151
                  
                  
                  $
                  12,160Obligations
      of states and political subdivisions
                  
                  
                  3,225
                  
                  
                  
                  2,495
                  
                  
                  
                  3,390
                  
                  
                  
                  3,250
                  
                  
                  
                  2,690
                  
                  
                  
                  900
                  
                  
                  
                  10,600
                  
                  
                  
                  26,550
                  
                  
                  
                  28,780Corporate
      securities
                  
                  
                  200
                  
                  
                  
                  4,100
                  
                  
                  
                  10,400
                  
                  
                  
                  2,075
                  
                  
                  
                  6,214
                  
                  
                  
                  150
                  
                  
                  
                  23,170
                  
                  
                  
                  46,309
                  
                  
                  
                  55,351International
      securities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  200
                  
                  
                  
                  -
                  
                  
                  
                  121
                  
                  
                  
                  145
                  
                  
                  
                  200
                  
                  
                  
                  666
                  
                  
                  
                  701Collateralized
      mortgage obligations
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  4,034
                  
                  
                  
                  796
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  4,830
                  
                  
                  
                  -Equity
      securities, at market
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  13,945All
      investments
                  
                  $
                  3,425
                  
                  
                  $
                  9,855
                  
                  
                  $
                  20,989
                  
                  
                  $
                  8,621
                  
                  
                  $
                  9,525
                  
                  
                  $
                  1,195
                  
                  
                  $
                  36,896
                  
                  
                  $
                  90,506
                  
                  
                  $
                  110,937Weighted
      average interest rate by expected maturity:United
      States government obligations and authorities
                  
                  
                  0.00
                  %
                  
                  
                  1.28
                  %
                  
                  
                  3.40
                  %
                  
                  
                  3.66
                  %
                  
                  
                  1.75
                  %
                  
                  
                  0.00
                  %
                  
                  
                  3.42
                  %
                  
                  
                  2.82
                  %Obligations
      of states and political subdivisions
                  
                  
                  5.39
                  %
                  
                  
                  5.25
                  %
                  
                  
                  5.37
                  %
                  
                  
                  4.77
                  %
                  
                  
                  4.84
                  %
                  
                  
                  5.00
                  %
                  
                  
                  5.36
                  %
                  
                  
                  5.22
                  %Corporate
      securities
                  
                  
                  7.25
                  %
                  
                  
                  4.23
                  %
                  
                  
                  3.24
                  %
                  
                  
                  4.03
                  %
                  
                  
                  5.40
                  %
                  
                  
                  5.20
                  %
                  
                  
                  6.52
                  %
                  
                  
                  5.32
                  %International
      securities
                  
                  
                  0.00
                  %
                  
                  
                  0.00
                  %
                  
                  
                  4.50
                  %
                  
                  
                  0.00
                  %
                  
                  
                  4.10
                  %
                  
                  
                  4.50
                  %
                  
                  
                  5.00
                  %
                  
                  
                  4.58
                  %Collateralized
      mortgage obligations
                  
                  
                  0.00
                  %
                  
                  
                  0.00
                  %
                  
                  
                  5.50
                  %
                  
                  
                  5.50
                  %
                  
                  
                  0.00
                  %
                  
                  
                  0.00
                  %
                  
                  
                  0.00
                  %
                  
                  
                  5.50
                  %Equity
      securities, at market
                  
                  
                  0.00
                  %
                  
                  
                  0.00
                  %
                  
                  
                  0.00
                  %
                  
                  
                  0.00
                  %
                  
                  
                  0.00
                  %
                  
                  
                  0.00
                  %
                  
                  
                  0.00
                  %
                  
                  
                  0.00
                  %All
      investments
                  
                  
                  5.50
                  %
                  
                  
                  3.51
                  %
                  
                  
                  4.05
                  %
                  
                  
                  4.34
                  %
                  
                  
                  5.03
                  %
                  
                  
                  4.96
                  %
                  
                  
                  5.93
                  %
                  
                  
                  4.96
                  %





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 March 31, 2010.  Based upon their evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures, as of March 31, 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 quarter that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.




- 49
-




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)
Unregistered Sales of Equity Securities and Use of Proceeds





During
the three months ended March 31, 2010, we have issued an aggregate of 30,000
options to executives of the Company under our 2002 stock option plan. The
options have an exercise price of $4.36 per share, vest over five years and
expire ten years from the grant date.





(b)
None





(c)
None





Item
3





Defaults
upon Senior Securities





None





Item
4





(Removed
and Reserved)





None





Item
5





Other
Information





None




- 50
-




21st Century
Holding Company


Item
6





Exhibits





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




- 51
-




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: May
17, 2010


- 52
-




21st Century
Holding Company


EXHIBIT
INDEX





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.




- 53
-