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 June 30, 2009


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 Web site, 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 x     Non-accelerated
filer o      Smaller
reporting company  ̈





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 – 8,013,894
outstanding as of August 10, 2009









21ST CENTURY
HOLDING COMPANY





INDEX





PAGEPART
      I: FINANCIAL INFORMATIONITEM
      1
                    Financial
      Statements and Supplementary Data
                    3ITEM
      2
                    Management’s
      Discussion and Analysis of Financial Condition & Results of
      Operations
                    24ITEM
      3
                    Quantitative
      and Qualitative Disclosures about Market Risk
                    45ITEM
      4
                    Controls
      and Procedures
                    45PART
      II: OTHER INFORMATIONITEM
      1
                    Legal
      Proceedings
                    46ITEM
      1A
                    Risk
      Factors
                    46ITEM
      2
                    Unregistered
      Sales of Equity Securities and Use of Proceeds
                    46ITEM
      3
                    Defaults
      upon Senior Securities
                    46ITEM
      4
                    Submission
      of Matters to a Vote of Security Holders
                    46ITEM
      5
                    Other
      Information
                    47ITEM
      6
                    Exhibits
                    47SIGNATURES
                    49




- 2
-


PART
I: FINANCIAL INFORMATION


Item
1





21stCENTURY
HOLDING COMPANY


CONSOLIDATED
BALANCE SHEETS


(UNAUDITED)





Period EndingJune 30, 2009
                                  
                                  
                                  December 31, 2008(Dollars
      in Thousands)ASSETSInvestmentsDebt
      maturities, available for sale, at fair value
                                  
                                  $
                                  90,172
                                  
                                  
                                  $
                                  9,429Debt
      maturities, held to maturity, at amortized cost
                                  
                                  
                                  3,527
                                  
                                  
                                  
                                  13,496Equity
      securities, available for sale, at fair value
                                  
                                  
                                  10,195
                                  
                                  
                                  
                                  3,140Total
      investments
                                  
                                  
                                  103,894
                                  
                                  
                                  
                                  26,065Cash
      and short term investments
                                  
                                  
                                  63,236
                                  
                                  
                                  
                                  124,577Prepaid
      reinsurance premiums
                                  
                                  
                                  1,141
                                  
                                  
                                  
                                  5,537Premiums
      receivable, net of allowance for credit losses of $52 and $122,
      respectively
                                  
                                  
                                  4,561
                                  
                                  
                                  
                                  3,353Reinsurance
      recoverable, net of allowance for credit losses of $0 and $226,
      respectively
                                  
                                  
                                  18,879
                                  
                                  
                                  
                                  16,880Deferred
      policy acquisition costs
                                  
                                  
                                  9,849
                                  
                                  
                                  
                                  6,558Deferred
      income taxes, net
                                  
                                  
                                  7,434
                                  
                                  
                                  
                                  8,530Income
      taxes receivable
                                  
                                  
                                  2,889
                                  
                                  
                                  
                                  2,275Property,
      plant and equipment, net
                                  
                                  
                                  770
                                  
                                  
                                  
                                  855Other
      assets
                                  
                                  
                                  3,527
                                  
                                  
                                  
                                  2,472Total
      assets
                                  
                                  $
                                  216,180
                                  
                                  
                                  $
                                  197,102LIABILITIES
      AND SHAREHOLDERS' EQUITYUnpaid
      losses and LAE
                                  
                                  $
                                  67,772
                                  
                                  
                                  $
                                  64,775Unearned
      premiums
                                  
                                  
                                  56,690
                                  
                                  
                                  
                                  40,508Premiums
      deposits and customer credit balances
                                  
                                  
                                  2,025
                                  
                                  
                                  
                                  1,700Bank
      overdraft
                                  
                                  
                                  8,391
                                  
                                  
                                  
                                  8,694Deferred
      gain from sale of property
                                  
                                  
                                  1,251
                                  
                                  
                                  
                                  1,495Accounts
      payable and accrued expenses
                                  
                                  
                                  2,448
                                  
                                  
                                  
                                  3,699Total
      liabilities
                                  
                                  
                                  138,577
                                  
                                  
                                  
                                  120,871Shareholders'
      equity:Common
      stock, $0.01 par value. Authorized 25,000,000 shares; issued and
      outstanding 8,013,894 and 8,013,894, respectively.
                                  
                                  
                                  80
                                  
                                  
                                  
                                  80Preferred
      stock, $0.01 par value. Authorized 1,000,000 shares; none issued or
      outstanding
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Additional
      paid-in capital
                                  
                                  
                                  50,259
                                  
                                  
                                  
                                  49,979Accumulated
      other comprehensive (deficit)
                                  
                                  
                                  (221
                                  )
                                  
                                  
                                  (1,187
                                  )Retained
      earnings
                                  
                                  
                                  27,485
                                  
                                  
                                  
                                  27,359Total
      shareholders' equity
                                  
                                  
                                  77,603
                                  
                                  
                                  
                                  76,231Total
      liabilities and shareholders' equity
                                  
                                  $
                                  216,180
                                  
                                  
                                  $
                                  197,102




SEE
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


- 3
-





21ST CENTURY
HOLDING COMPANY


CONSOLIDATED
STATEMENTS OF OPERATIONS


(UNAUDITED)





Three
      Months Ended June 30,
                  
                  
                  Six
      Months Ended June 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008(Dollars
      in Thousands except EPS and dividend data)
                  
                  
                  (Dollars
      in Thousands except EPS and dividend data)Revenue:Gross
      premiums written
                  
                  $
                  33,601
                  
                  
                  $
                  27,241
                  
                  
                  $
                  62,032
                  
                  
                  $
                  54,844Gross
      premiums ceded
                  
                  
                  (19,588
                  )
                  
                  
                  (8,233
                  )
                  
                  
                  (19,916
                  )
                  
                  
                  (8,233
                  )Net
      premiums written
                  
                  
                  14,013
                  
                  
                  
                  19,008
                  
                  
                  
                  42,116
                  
                  
                  
                  46,611Increase
      (Decrease) in prepaid reinsurance premiums
                  
                  
                  10,305
                  
                  
                  
                  (2,366
                  )
                  
                  
                  2,236
                  
                  
                  
                  (13,520
                  )(Increase)
      Decrease in unearned premiums
                  
                  
                  (10,053
                  )
                  
                  
                  (1,183
                  )
                  
                  
                  (16,182
                  )
                  
                  
                  973Net
      change in prepaid reinsurance premiums and unearned
    premiums
                  
                  
                  252
                  
                  
                  
                  (3,549
                  )
                  
                  
                  (13,946
                  )
                  
                  
                  (12,547
                  )Net
      premiums earned
                  
                  
                  14,265
                  
                  
                  
                  15,459
                  
                  
                  
                  28,169
                  
                  
                  
                  34,066Commission
      income
                  
                  
                  383
                  
                  
                  
                  964
                  
                  
                  
                  621
                  
                  
                  
                  1,082Finance
      revenue
                  
                  
                  91
                  
                  
                  
                  92
                  
                  
                  
                  174
                  
                  
                  
                  177Managing
      general agent fees
                  
                  
                  478
                  
                  
                  
                  530
                  
                  
                  
                  909
                  
                  
                  
                  1,029Net
      investment income
                  
                  
                  584
                  
                  
                  
                  1,899
                  
                  
                  
                  1,229
                  
                  
                  
                  3,775Net
      realized investment gains (losses)
                  
                  
                  69
                  
                  
                  
                  (4,664
                  )
                  
                  
                  (468
                  )
                  
                  
                  (6,313
                  )Regulatory
      assessments recovered
                  
                  
                  1,188
                  
                  
                  
                  912
                  
                  
                  
                  1,736
                  
                  
                  
                  1,234Other
      income
                  
                  
                  70
                  
                  
                  
                  235
                  
                  
                  
                  382
                  
                  
                  
                  419Total
      revenue
                  
                  
                  17,128
                  
                  
                  
                  15,427
                  
                  
                  
                  32,752
                  
                  
                  
                  35,469Expenses:Losses
      and LAE
                  
                  
                  8,974
                  
                  
                  
                  12,494
                  
                  
                  
                  17,848
                  
                  
                  
                  20,368Operating
      and underwriting expenses
                  
                  
                  2,308
                  
                  
                  
                  1,473
                  
                  
                  
                  4,224
                  
                  
                  
                  3,029Salaries
      and wages
                  
                  
                  1,897
                  
                  
                  
                  1,763
                  
                  
                  
                  3,806
                  
                  
                  
                  3,521Policy
      acquisition costs, net of amortization
                  
                  
                  2,915
                  
                  
                  
                  3,787
                  
                  
                  
                  5,659
                  
                  
                  
                  7,623Total
      expenses
                  
                  
                  16,094
                  
                  
                  
                  19,517
                  
                  
                  
                  31,537
                  
                  
                  
                  34,541Income
      before provision for income tax expense
      (benefit)
                  
                  
                  1,034
                  
                  
                  
                  (4,090
                  )
                  
                  
                  1,215
                  
                  
                  
                  928Provision
      for income tax expense (benefit)
                  
                  
                  250
                  
                  
                  
                  (1,590
                  )
                  
                  
                  128
                  
                  
                  
                  (881
                  )Net
      income (loss)
                  
                  $
                  784
                  
                  
                  $
                  (2,500
                  )
                  
                  $
                  1,087
                  
                  
                  $
                  1,809Basic
      net income (loss) per share
                  
                  $
                  0.10
                  
                  
                  $
                  (0.31
                  )
                  
                  $
                  0.14
                  
                  
                  $
                  0.23Fully
      diluted net income (loss) per share
                  
                  $
                  0.10
                  
                  
                  $
                  (0.31
                  )
                  
                  $
                  0.14
                  
                  
                  $
                  0.23Weighted
      average number of common shares outstanding
                  
                  
                  8,013,894
                  
                  
                  
                  7,974,053
                  
                  
                  
                  8,013,894
                  
                  
                  
                  7,944,305Weighted
      average number of common shares outstanding (assuming
      dilution)
                  
                  
                  8,013,894
                  
                  
                  
                  7,974,053
                  
                  
                  
                  8,013,894
                  
                  
                  
                  7,975,057Dividends
      paid per share
                  
                  $
                  0.06
                  
                  
                  $
                  0.18
                  
                  
                  $
                  0.24
                  
                  
                  $
                  0.36





SEE
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


- 4
-





21ST CENTURY
HOLDING COMPANY


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(UNAUDITED)





Six Months Ended June 30,2009
                
                
                2008(Dollars
      in Thousands)Cash
      flow from operating activities:Net
      income
                
                $
                1,087
                
                
                $
                1,809Adjustments
      to reconcile net income to net cash provided by (used) operating
      activities:Amortization
      of investment discount, net
                
                
                (233
                )
                
                
                (106
                )Depreciation
      and amortization of property plant and equipment, net
                
                
                94
                
                
                
                166Net
      realized investment losses
                
                
                (468
                )
                
                
                (6,314
                )Provision
      (recovery) for credit losses, net
                
                
                26
                
                
                
                (7
                )Provision
      for uncollectible premiums receivable
                
                
                70
                
                
                
                50Non-cash
      compensation
                
                
                229
                
                
                
                503Changes
      in operating assets and liabilities:Premiums
      receivable
                
                
                (1,278
                )
                
                
                (1,417
                )Prepaid
      reinsurance premiums
                
                
                4,396
                
                
                
                7,680Reinsurance
      recoverable, net
                
                
                (1,999
                )
                
                
                6,146Income
      taxes recoverable
                
                
                (614
                )
                
                
                (1,710
                )Deferred
      income tax expense
                
                
                1,096
                
                
                
                (2,515
                )Policy
      acquisition costs, net of amortization
                
                
                (3,290
                )
                
                
                152Premium
      finance contracts receivable
                
                
                -
                
                
                
                226Other
      assets
                
                
                (1,324
                )
                
                
                (223
                )Unpaid
      losses and LAE
                
                
                2,996
                
                
                
                (1,337
                )Unearned
      premiums
                
                
                16,182
                
                
                
                (973
                )Premium
      deposits and customer credit balances
                
                
                325
                
                
                
                (620
                )Income
      taxes payable
                
                
                -
                
                
                
                (4,226
                )Bank
      overdraft
                
                
                (302
                )
                
                
                321Accounts
      payable and accrued expenses
                
                
                (1,252
                )
                
                
                (1,230
                )Net
      cash provided by (used) operating activities
                
                
                15,741
                
                
                
                (3,625
                )Cash
      flow (used) provided by investing activities:Proceeds
      from sale of investment securities
                
                
                26,966
                
                
                
                81,595Purchases
      of investment securities available for sale
                
                
                (103,128
                )
                
                
                (34,830
                )Purchases
      of property and equipment
                
                
                (9
                )
                
                
                (42
                )Net
      cash (used) provided by investing activities
                
                
                (76,171
                )
                
                
                46,723Cash
      flow (used) by financing activities:Exercised
      stock options
                
                
                -
                
                
                
                1,337Dividends
      paid
                
                
                (962
                )
                
                
                (2,814
                )Acquisition
      of Common Stock
                
                
                -
                
                
                
                (144
                )Tax
      benefit (provision) related to non-cash compensation
                
                
                51
                
                
                
                (207
                )Net
      cash (used) by financing activities
                
                
                (911
                )
                
                
                (1,828
                )Net
      (decrease) increase in cash and short term investments
                
                
                (61,341
                )
                
                
                41,270Cash
      and short term investments at beginning of period
                
                
                124,577
                
                
                
                22,524Cash
      and short term investments at end of period
                
                $
                63,236
                
                
                $
                63,794




SEE
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


- 5
-


21ST CENTURY
HOLDING COMPANY


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(UNAUDITED)





Six Months Ended June 30,(continued)
                
                2009
                
                
                2008(Dollars
      in Thousands)Supplemental
      disclosure of cash flow information:Cash
      paid during the period for:Income
      taxes
                
                $
                178
                
                
                $
                8,125Non-cash
      investing and finance activities:Accrued
      dividends payable
                
                $
                481
                
                
                $
                1,445





SEE
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




- 6
-




21st Century
Holding Company


Notes
to 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, Inc. and its subsidiaries, unless the context indicates
otherwise.





21st Century
is an insurance holding company. Through our subsidiaries and contractual
relationships we control substantially all aspects of the insurance
underwriting, distribution and claims processes for most products offered . We
are authorized to underwrite homeowners’ multiple peril, commercial general
liability, personal and commercial automobile, fire, allied lines, surety, 
commercial multi-peril and inland marine in various states on behalf of our
wholly owned subsidiaries, Federated National Insurance Company (“Federated
National”) and American Vehicle Insurance Company (“American
Vehicle”).





Federated
National is licensed as an admitted carrier in Florida.  Through
contractual relationships with a network of approximately 1,500 independent and
a select number of general agents, Federated National is authorized to
underwrite fire, allied lines, personal automobile, and homeowners’ multi-peril
insurance in Florida.





American
Vehicle is licensed as an admitted carrier in Alabama, Florida, Louisiana and
Texas, and is authorized to underwrite homeowners’ multi-peril, commercial
multi-peril, inland marine, surety and personal and commercial automobile
insurance in Florida as an admitted carrier. American Vehicle is licensed
as a non-admitted carrier in Arkansas, California, Georgia, Kentucky, Maryland,
Missouri, Nevada, Oklahoma, South Carolina, Tennessee, and Virginia, and is
authorized to underwrite commercial general liability insurance in all of these
states. We will continue to deploy commercial general liability and other
commercial  insurance products into new states. This expansion will be
achieved primarily through partnerships with other insurance companies that hold
appropriate licensing and product offerings.  New partnerships formed in
2009 will enable us to deploy products for which we have a risk appetite, and
those products that will be deployed to capture fee income.





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.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 six months ended June 30, 2009, 83.3%, 13.6%, 2.8% and 0.3% of the premiums
we underwrote were for homeowners’ property and casualty insurance, commercial
general liability insurance, federal flood, and personal automobile insurance,
respectively. During the six months ended June 30, 2008, 72.8%, 26.6% and 0.6%
of the premiums we underwrote were for homeowners’ property and casualty
insurance, commercial general liability insurance 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 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”).





Assurance
Managing General Agents, Inc. (“Assurance MGA”), a wholly owned subsidiary, 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, Texas and Virginia. During the first six months of
2009, Assurance MGA contracted with two third party insurance companies to sell
commercial general liability, workers compensation and inland marine through
Assurance MGA’s existing network of distributors. This process will continue
throughout 2009 as Assurance MGA benefits from the arrangement by receiving
commission revenue from policies sold by its insurance partners, while
minimizing its risks.





Assurance
MGA earns commissions and fees for providing policy administration, marketing,
accounting and analytical services, and for participating in the negotiation of
reinsurance contracts. Assurance MGA 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 to the public to serve all of
their insurance needs. Insure-Link will expand its’ business through marketing
and by acquiring other insurance agencies.





(2)
Basis of Presentation





The
accompanying unaudited consolidated financial statements of 21st Century
have been prepared in accordance with generally accepted accounting principles
(“GAAP”) for interim financial information and with the instructions for Form
10-Q and Rule 10-01 of Regulation S-X.  These financial statements do
not include all information and notes required by GAAP for complete financial
statements, and should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's annual report
on Form 10-K for the year ended December 31, 2008. The December 31, 2008
year-end balance sheet data was derived from audited financial statements but
does not include all disclosures required by GAAP. The financial information
furnished reflects all adjustments, consisting only of normal recurring
accruals, which are, in the opinion of management, necessary for a fair
presentation of the financial position, results of operations and cash flows for
the periods presented. The results of operations are not necessarily indicative
of the results of operations that may be achieved in the future.





(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 deferred policy acquisition costs (“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 at Footnote 2 of the Company’s audited financial statements
for the fiscal year ended December 31, 2008, which we included in the Company’s
Annual Report on Form 10-K which was filed with the Securities and Exchange
Commission (“SEC”) on March 16, 2009.





We
believe that during the first six months of fiscal 2009 there were no
significant changes in those critical accounting policies and estimates. 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.


- 8
-





21st Century
Holding Company


Notes
to Consolidated Financial Statements





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 Statements of Financial Accounting Standards
(“SFAS”) Number 5, Accounting
for Contingencies(“SFAS No. 5”) 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.





SFAS
Number 115, Accounting for
Certain Investments in Debt and Equity Securities(“SFAS No. 115”)
addresses accounting and reporting for (a) investments in equity securities that
have readily determinable fair values and (b) all investments in debt
securities. SFAS No. 115 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”.





We are
required to review the contractual terms of all our reinsurance purchases to
ensure compliance with SFAS Number 113,Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts(SFAS No.
113”). The statement
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. SFAS No. 113 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.




- 9
-




21st Century
Holding Company


Notes
to Consolidated Financial Statements





(B)
Impact of New Accounting Pronouncements




In June
2009, the Financial Accounting Standards Board “(FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) 168, “The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles – a
replacement of FASB Statement No. 162” (“SFAS No. 168”). SFAS
No. 168 provides for the FASB Accounting Standards Codification (the
“Codification”) to become the single official source of authoritative,
nongovernmental U.S. generally accepted accounting principles (GAAP). The
Codification did not change GAAP but reorganizes the literature. SFAS No.
168 is effective for interim and annual periods ending after September 15,
2009.





In May 2009, FASB issued SFAS Number 165, “Subsequent Events” (“SFAS
No. 165”).  The objective of this Statement is to establish general
standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. In particular, SFAS No. 165 sets forth:





1.
            the
      period after the balance sheet date during which management of a reporting
      entity should evaluate events or transactions that may occur for potential
      recognition or disclosure in the financial
  statements,





2.
            the
      circumstances under which an entity should recognize events or
      transactions occurring after the balance sheet date in its financial
      statements, and,





3.
            the
      disclosures that an entity should make about events or transactions that
      occurred after the balance sheet
date.





In
accordance with this Statement, an entity should apply the requirements to
interim or annual financial periods ending after June 15, 2009. The
adoption of SFAS No. 165 did not have a material impact on the Company’s
financial statements or condition.





In April
2009, the FASB issued FASB Staff Position (“FSP”) FAS 115-2 and FSP FAS 124-2,
“Recognition and Presentation
of Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FSP FAS 124-2”).
 FSP FAS 115-2 and FSP FAS 124-2 collectively establish a new method of
recognizing and reporting other-than-temporary impairments of debt securities.
FSP 115-2 and FSP 124-2 also contain additional disclosure requirements related
to debt and equity securities. FSP FAS 115-2 and FSP FAS 124-2 change existing
impairment guidance under SFAS Number 115, “Accounting for Certain Investments
in Debt and Equity Securities”(“SFAS No. 115”). 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 also provide 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 are effective for interim and annual periods ending after
June 15, 2009, with early adoption permitted.  The adoption of FSP FAS
115-2 and FSP FAS 124-2 did not have a material impact on the Company’s
consolidated financial statements.





In April
2009, the SEC issued Staff Accounting Bulletin (“SAB”) No. 111 (“SAB 111”)
on Other-Than-Temporary Impairments.   This SAB amends Topic 5.M. in
the SAB Series entitled Other Than Temporary Impairment of Certain Investments
in Debt and Equity Securities (Topic 5.M.).   On April 9, 2009, the
FASB issued FSP FAS 115-2 and FSP FAS 124-2, to provide guidance for assessing
whether an impairment of a debt security is other than temporary.  SAB 111
maintains the staff’s previous views related to equity securities. It also
amends Topic 5.M. to exclude debt securities from its scope.


- 10
-





21st Century
Holding Company


Notes
to Consolidated Financial Statements





In April
2009, the FASB issued FSP FAS 107-1 and Accounting Pronouncements Board (“APB”)
28-1, “Interim Disclosures
about Fair Value of Financial Instruments” (“FSP FAS 107-1”).  
FSP FAS 107-1 relates to fair value disclosures in public entity financial
statements for financial instruments that are within the scope of SFAS
Number 107, “Disclosures
about Fair Value of Financial Instruments” (“SFAS No. 107”). This
guidance increases the frequency of those disclosures, requiring public entities
to provide the disclosures on a quarterly basis, rather than
annually.   FSP FAS 107-1 is effective for interim and annual periods
ending after June 15, 2009.  The adoption of FSP FAS 107-1 did not
have a material impact on the Company’s consolidated financial
statements.





In
September 2006, FASB issued SFAS No. 157, which enhances existing guidance for
measuring assets and liabilities using fair value and requires additional
disclosure about the use of fair value for measurement.  SFAS No. 157 was
originally effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. 
The adoption of SFAS No. 157 did not have a material impact on the
Company’s financial statements or condition.





In
February 2008, FASB issued FSP FAS 157-2, “Effective Date of SFAS No. 157”(“FSP FAS 157-2”).   FSP FAS 157-2,
which was effective upon issuance and delayed the effective date of SFAS No. 157
for non-financial assets and non-financial liabilities, except for items
recognized or disclosed at fair value at least once a year, to fiscal years
beginning after November 15, 2008.  FSP FAS 157-2 also covers interim
periods within the fiscal years for items within the scope of this FSP. 
The adoption of FSP FAS 157-2 did not have a material impact on the
Company’s financial statements or condition.





In
October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active”(“FSP FAS
157-3”).  The purpose of FSP FAS 157-3 was to clarify the application
of SFAS No. 157 in a market that is not active.  It allows for the use
of management’s internal assumptions about future cash flows with appropriately
risk-adjusted discount rates when relevant observable market data does not
exist.  FSP FAS 157-3 did not change the objective of SFAS No. 157,
which is the determination of the price that would be received in an orderly
transaction that is not a forced liquidation or distressed sale at the
measurement date.  FSP FAS 157-3 was effective upon issuance,
including prior periods for which financial statements had not been
issued.  The adoption of FSP FAS 157-3 did not have a material impact
on the Company’s financial statements or condition.





In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS
157-4”).  FSP FAS 157-4 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. FSP FAS 157-4 is effective for interim and annual periods ending after
June 15, 2009, with early adoption permitted.  FSP FAS 157-4 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
March 2008, the FASB issued SFAS Number 161, “Disclosures about Derivative
Instruments and Hedging Activities”(“SFAS No. 161”).  SFAS No. 161
requires companies with derivative instruments to disclose information that
should enable financial-statement users to understand how and why a company uses
derivative instruments, how derivative instruments and related hedged items are
accounted for under FASB SFAS Number 133, “Accounting for Derivative
Instruments and Hedging Activities,” (“SFAS No. 133”) and how derivative
instruments and related hedged items affect a company’s financial position,
financial performance and cash flows. SFAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after
November 15, 2008.   The Company does not utilize derivative
instruments, and, accordingly the adoption of SFAS No. 161 did not have an
impact on the Company’s consolidated financial statements.




- 11
-





21st Century
Holding Company


Notes
to Consolidated Financial Statements





In
December 2007, the FASB issued SFAS Number 160, Noncontrolling Interests in
Consolidated Financial Statements — An Amendment of ARB No. 51
(“SFAS No. 160”). SFAS No. 160 requires noncontrolling interests to be
treated as a separate component of equity, not as a liability or other item
outside of equity. Disclosure requirements include net income and comprehensive
income to be displayed for both the controlling and noncontrolling interests and
a separate schedule that shows the effects of any transactions with the
noncontrolling interests on the equity attributable to the controlling interest.
The provisions of this statement are effective for fiscal years beginning after
December 15, 2008. This statement should be applied prospectively except for the
presentation and disclosure requirements that shall be applied retrospectively
for all periods presented. The adoption of SFAS 160 did not have a material
impact on the Company’s financial statements or condition.





In
February 2007, FASB issued SFAS Number 159 The Fair Value Option for Financial
Assets and Financial Liabilities — Including an Amendment of
SFAS No. 115 (“SFAS No. 159”), which permits an entity to
measure many financial assets and financial liabilities at fair value that are
not currently required to be measured at fair value. Entities that elect the
fair value option will report unrealized gains and losses in earnings at each
subsequent reporting date. The fair value option may be elected on an
instrument-by-instrument basis, with a few exceptions. SFAS No. 159
amends previous guidance to extend the use of the fair value option to
available-for-sale and held-to-maturity securities. The Statement also
establishes presentation and disclosure requirements to help financial statement
users understand the effect of the election. We adopted SFAS No. 159 on its
effective date, January 1, 2008.  The Company did not elect to measure
any financial assets and liabilities with SFAS No. 159 fair value option, and
accordingly, to date, there is no impact on our 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
SFAS Number 123R Share-Based
Payment (“SFAS No. 123R”) using the modified-prospective-transition
method. Under that transition method, compensation cost recognized during the
six months ended June 30, 2009 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 provisions of SFAS No.
123R.





(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 2008 financial statements was necessary to conform to
the 2009 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.


- 12
-





21st Century
Holding Company


Notes
to Consolidated Financial Statements




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 SFAS Number 5 Accounting for Contingencies
(“SFAS No. 5”). 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 disclose, if it can be estimated, 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.  Certain claims
and legal actions have been brought against the Company for which no loss has
been accrued, and for which an estimate of a possible range of loss cannot be
made under the rules described above. While it is not possible to predict the
ultimate outcome of these claims or lawsuits, management does not believe they
are likely to have a material effect on the Company’s financial condition or
liquidity. Losses incurred because of these cases could, however, have a
material adverse impact on net earnings.




(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, the Florida
Insurance Guarantee Association (“FIGA”), Citizens Property Insurance
Corporation (“Citizens”) the Florida Hurricane Catastrophe Fund (“FHCF”) and the
Florida Joint Underwriters Association (“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 may result in assessments against us, as it did in 2006 and 2007.
Through 2007, we have been assessed $6.7 million in connection with the
association. 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 $5.5 million in
connection with these assessments. There were no assessments made for the year
ended December 31, 2008 or the six months ended June 30, 2009.





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 the year ended December 31, 2008 or the six months ended June 30,
2009.





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 $2.1 million. Federated National subrogated
approximately $1.8 million to the reinsurers.


- 13
-





21st Century
Holding Company


Notes
to Consolidated Financial Statements





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 State Board of Administration, the body that
oversees the FHCF, 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.





In addition to the assessments noted
above, the Florida OIR has also issued Information Memorandum OIR -07-02M,
titled Information Regarding
Emergency Assessment by Citizens Property Insurance Corporation, dated
January 11, 2007, to all property and casualty insurers in the state of Florida
placing them on notice that an order had been approved for an emergency
assessment by Citizens for its High Risk Account. This order requires insurers
to begin collecting 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 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.





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 either 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 2004, 2003 and 2002 have
been examined by the Internal Revenue Service (“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 under
examination.





The
Company records valuation allowances to reduce deferred tax assets to the amount
that is more likely than not to be realized. 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 adjust related valuation allowances 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
has 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 Consolidated Financial Statements





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





Fiscal Year
                    
                    Lease payments(Dollars
      in Thousands)2009
                    
                    $
                    3142010
                    
                    
                    6382011
                    
                    
                    650Total
                    
                    $
                    1,602





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 “plaintiff’s”) who purchased the Company's
securities during the various class periods specified in the complaints.  A
consolidated amended complaint was filed on behalf of the class on January 22,
2008.  The complaint alleges 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 seek 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 November
7, 2008, the District Court granted in part and denied in part the
Company's motion to dismiss the consolidated class complaint with leave to amend
by December 8, 2009 or the allegations dismissed would be deemed dismissed
with prejudice without further order of the Court.  Lead plaintiffs did not
seek to amend the consolidated complaint and the defendants have answered. 
The action will proceed on allegations with respect to the company's setting of
loss reserves for the year ending 2006 and first quarter of 2007.




The
District Court granted both defendants' motion to dismiss the plaintiff’s
derivative complaint and the Company’s subsequent motion to stay the amended
derivative complaint.





While the
Company believes that the allegations in the complaint are without merit, an
unfavorable resolution of pending litigation could have a material adverse
effect on our financial condition. Litigation may result in substantial costs
and expenses and significantly divert the attention of the Company's management
regardless of the outcome. There can be no assurance that the Company will be
able to achieve a favorable settlement of pending litigation or obtain a
favorable resolution of this litigation if it is not settled. In addition,
current litigation could lead to increased costs or interruptions of normal
business operations of the Company.





(5)
Fair Value Disclosure





In April
2009, the FASB issued FSP FAS 157-4.  FSP FAS 157-4 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. FSP FAS 157-4 is effective for interim and
annual periods ending after June 15, 2009, with early adoption permitted.
 FSP FAS 157-4 must be applied prospectively. The adoption of FSP FAS 157-4
did not have an impact on the Company’s financial statements or
condition.





In
October 2008, the FASB issued FSP FAS 157-3.  The purpose of FSP FAS
157-3 was to clarify the application of SFAS No. 157 in a market that is not
active.  FSP FAS 157-3 did not change the objective of SFAS No.
157.  FSP FAS 157-3 was effective upon issuance, including prior
periods for which financial statements had not been issued.  Our
adoption of FSP FAS 157-3 does not have a material effect on our financial
position, results of operations, cash flows or disclosures.




- 15
-





21st Century
Holding Company


Notes
to Consolidated Financial Statements





In
September 2006, FASB issued SFAS No. 157. SFAS No. 157 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 the
asset or liability in an orderly transaction between market participants on the
measurement date.  SFAS No. 157 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.  SFAS No. 157 categorizes assets and liabilities at fair value
into one of three different levels depending on the observability 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 the 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 pursuant to SFAS No. 115 are
presented in accordance with SFAS No. 157 as follows.





As of June 30, 2009Level 1
                  
                  
                  Level 2
                  
                  
                  Level 3
                  
                  
                  Total(Dollars
      in Thousands)Debt
      securities:US
      government obligations
                  
                  $
                  -
                  
                  
                  $
                  48,857
                  
                  
                  $
                  -
                  
                  
                  $
                  48,857Corporate
                  
                  
                  41,315
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  41,31541,315
                  
                  
                  
                  48,857
                  
                  
                  
                  -
                  
                  
                  
                  90,172Equity
      securities:Common
      stocks
                  
                  
                  10,195
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  10,19510,195
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  10,195Total
      debt and equity securities
                  
                  $
                  51,510
                  
                  
                  $
                  48,857
                  
                  
                  $
                  -
                  
                  
                  $
                  100,367





(6)
Comprehensive Income





For the three and six months ended June
30, 2009 and 2008, comprehensive income consisted of the
following.





Three Months Ended June 30,
                
                
                Six Months Ended June 30,2009
                
                
                2008
                
                
                2009
                
                
                2008(Dollars
      in Thousands)
                
                
                (Dollars
      in Thousands)Net  income
      (loss)
                
                $
                784
                
                
                $
                (2,500
                )
                
                $
                1,087
                
                
                $
                1,809Change
      in net unrealized gains on investments available for sale
                
                
                1,503
                
                
                
                1,602
                
                
                
                1,549
                
                
                
                1,675Comprehensive
      income (loss) , before tax
                
                
                2,287
                
                
                
                (898
                )
                
                
                2,636
                
                
                
                3,484Income
      tax (expense) benefit related to items of other comprehensive
      income
                
                
                (566
                )
                
                
                (634
                )
                
                
                (583
                )
                
                
                (589
                )Comprehensive
      income (loss)
                
                $
                1,721
                
                
                $
                (1,532
                )
                
                $
                2,053
                
                
                $
                2,895




- 16
-





21st Century
Holding Company


Notes
to Consolidated Financial Statements





(7)
Reinsurance Agreements





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 risk and
to help manage capital, while lessening earnings volatility and improving
shareholder return, and to support the required statutory surplus requirements.
Our catastrophe reinsurance program has been designed to coordinate coverage
provided under various treaties with various retentions and limits.
Additionally, the reinsurance is maintained to protect our insurance subsidiary
against the severity of losses on individual claims, unusually serious
occurrences in which a number of claims produce an aggregate extraordinary loss
and catastrophic events. Although reinsurance does not discharge our insurance
subsidiary from its primary obligation to pay for losses insured under the
policies it issues, reinsurance does make the assuming reinsurer liable to the
insurance subsidiary for the reinsured portion of the risk. A credit 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 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.





Therefore,
in the event of a catastrophic loss, we may become dependent upon the FHCF's
ability to pay, which may in turn, be dependent upon the FHCF's ability to issue
bonds in amounts that would be required to meet its reinsurance obligations in
the event of such a catastrophic loss. There is no assurance that the FHCF will
be able to do this. In a report dated May 12, 2009 by FHCF it concluded with the
following points.





1)
            The
      FHCF has substantial liquid resources of $7.96 billion available to it
      ($4.4 billion from the projected 2009 year-end cash balance and $3.5
      billion in pre-event bonding).





a)
            These
      resources would enable the FHCF to avoid bonding after most events, and
      would provide a time cushion before bonding was required after a large
      event. If bonding were required, the FHCF would not need to access the
      markets all at once in order to meet its reimbursement
      obligations.





b)
            The
      probability of storm losses exceeding these liquid resources is
      approximately 5.5% in a given
season.





c)
            The
      FHCF is a highly rated credit with long-term debt ratings of
      Aa3/AA-/AA-which are higher than all but a few reinsurers (Berkshire Re,
      Mapfre Re, Ms Frontier Re, and Tokio Millenium
  Re)





2)
            However,
      because of the expanded size of the FHCF, it is more reliant on funding
      from the post-event bond market –measured in terms of total dollars needed
      to fulfill its maximum potential obligation –than it has ever
      been.





a)
            Maximum
      potential bonding needs are approximately $23
  billion.





b)
            The
      ongoing global credit crisis has hampered the ability of all institutions,
      including the FHCF, to access the financial
  markets.





c)
            Based
      on estimates from its three senior managing underwriters, the FHCF could
      have a significant bonding shortfall after a large
    hurricane.





3)
            After
      receiving bonding capacity projections from the FHCF’s senior managers
      that ranged from $4.5 to $10 billion, a projected post-event bonding
      capacity estimate of $8 billion was used for analytical purposes, which
      resulted in a projected loss reimbursement capacity of $15.960
      billion.


- 17
-





21st Century
Holding Company


Notes
to Consolidated Financial Statements





Additionally,
the FHCF treaty contains an exclusion that specifically states “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.”





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.





For the
2009-2010 hurricane season, the excess of loss and FHCF treaties will insure us
for approximately $446.3 million of aggregate catastrophic losses and LAE with a
maximum single event coverage totaling approximately $339.7 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 58.0% of the $446.3 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.





As discussed in our Form 8-K dated June
16, 2009, the estimated cost to the Company for these reinsurance products for
the 2009 - 2010 hurricane season, inclusive of approximately $18.6 million
payable to the Florida Hurricane Catastrophe Fund ("FHCF") and the prepaid
automatic premium reinstatement protection will be approximately $53.3 million.
The combination of private and FHCF reinsurance treaties will afford
approximately $446.3 million of aggregate coverage with maximum first event
coverage totaling approximately $339.7 million. Our retention in connection with
the first two covered events is $5.0 million for each event.





As
discussed in our Form 8-K dated July 2, 2008, the cost to the Company for these
reinsurance products for the 2008 - 2009 hurricane season, inclusive of
approximately $8 million payable to the Florida Hurricane Catastrophe Fund
("FHCF") and the prepaid automatic premium reinstatement protection was
approximately $31 million. These reinsurance treaties afforded approximately
$298 million of aggregate coverage with maximum single event coverage totaling
approximately $232 million. Our retention in connection with the first two
covered events was $3 million.





The cost
and amounts of reinsurance are based on management's current analysis of
Federated National's exposure to catastrophic risk. Our data will be 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 may produce changes in retentions, limits and reinsurance premiums
because of increases or decreases in our exposure level.





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.





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. Effective January 1, 2012 the FHCF
Reimbursement Contract and addendums are scheduled to change to a calendar
year-end basis for Federated National as a limited apportionment
company.




- 18
-





21st Century
Holding Company


Notes
to Consolidated Financial Statements





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





Reinsurer
                      
                      A.M. Best RatingUNITED
      STATESEverest
      Reinsurance Company
                      
                      
                      A+
                      
                      
                      **Munich
      Reinsurance America, Inc.
                      
                      
                      A+
                      
                      
                      **QBE
      Reinsurance Corporation
                      
                      
                      A
                      
                      
                      **BERMUDAACE
      Tempest Reinsurance Limited
                      
                      
                      A+
                      *Amlin
      Bermuda Limited
                      
                      
                      AAriel
      Reinsurance Company Limited
                      
                      
                      A-
                      *DaVinci
      Reinsurance Limited
                      
                      
                      A
                      *Flagstone
      Reinsurance Limited
                      
                      
                      A-Hiscox
      Insurance Company Limited
                      
                      
                      A
                      *Montpelier
      Reinsurance Limited
                      
                      
                      A-Platinum
      Underwriters Bermuda Limited
                      
                      
                      A
                      *Renaissance
      Reinsurance Limited
                      
                      
                      A+
                      *Torus
      Insurance (Bermuda) Limited
                      
                      
                      A-
                      *LONDON
      & EUROPEAmlin
      Syndicate No. 2001 (AML)
                      
                      
                      A+
                      
                      
                      **Antares
      Syndicate No. 1274 (AUL)
                      
                      
                      A
                      
                      
                      **Arrow
      Syndicate No. 1910 (ARW)
                      
                      
                      A
                      *
                      
                      **Broadgate
      Syndicate No. 1301 (BGT)
                      
                      
                      A
                      
                      
                      **Liberty
      Syndicates Services Limited, Paris
                        for
      and on behalf of Lloyd's Syndicate No. 4472 (LIB)
                      
                      
                      A
                      
                      
                      **Novae
      Syndicate No. 2007 (NVA)
                      
                      
                      A
                      
                      
                      **SCOR
      Switzerland AG
                      
                      
                      A-HEDGE
      FUNDS / COLLATERALIZEDActua
      Re Limited
                      
                      
                      NR
                      *
                      
                      (1)Allianz
      Risk Transfer AG (Bermuda Branch)
                      
                      
                      NR-5
                      *
                      
                      (2)





* 2009
Reinstatement Premium Protection Program Participants





**
Admitted in Florida as a reinsurer, whether through licensing, accreditation or
other means.





(Blank)
Non admitted reinsurer in Florida.





(1)
Participant has funded a trust agreement for their partcipation with
approximately $6.4 million of cash and U.S. Government obligations of American
institutions at fair market value.





(2)
Standard & Poor's rated "AA" (Obligor's capacity to meet its financial
commitment on the obligation is very strong)




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.


- 19
-





21st Century
Holding Company


Notes
to Consolidated Financial Statements





In order
to expand our commercial general liability business, American Vehicle has
entered into various quota-share reinsurance agreements wherein American Vehicle
is the cedant. These quota-share reinsurance treaties require American Vehicle
to securitize its credit risk by posting irrevocable letters of credit. The
irrevocable letters of credit are fully collateralized by American Vehicle and
further guaranteed by the parent company, 21st
Century. Outstanding irrevocable letters of credit total $1.9 million and $3.0
million for the period ended June 30, 2009 and December 31, 2008,
respectively.




On March
26, 2009, we announced that American Vehicle received approval from the Florida
OIR to enter into a reinsurance relationship allowing American Vehicle the
opportunity to market and underwrite commercial general liability insurance
through a company that has an "A" rating with A.M. Best Company, Inc. ("A.M.
Best"). This agreement will enable American Vehicle to deploy an artisan
commercial general liability program in the Southeastern states to policyholders
who require their commercial general liability insurance policy to come from an
insurance company with a satisfactory A.M. Best rating. Operations began during
the quarter ended June 30, 2009.





(8) 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 June 30, 2009 and December 31, 2008, we had outstanding exercisable
options to purchase 125,099 and 130,099 shares, respectively.





In 2001,
we implemented a franchisee stock option plan that was terminated during
September 2008, and provided for the granting of stock options to individuals
purchasing Company owned agencies that were then converted to franchised
agencies.  The purpose of the plan was to advance our interests by
providing an additional incentive to encourage managers of Company owned
agencies to purchase the agencies and convert them to franchises. Options
outstanding under the plan were granted at prices, which were above the market
value of the stock on the date of grant, vested over a ten-year period, and
expired ten years after the grant date. Under this plan, we were authorized to
grant options to purchase up to 988,500 common shares, and, as of June 30, 2009,
we had no outstanding exercisable options to purchase shares.





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 June 30, 2009 and December 31, 2008, we
had outstanding exercisable options to purchase 753,651 and 658,151 shares,
respectively.





During
the six months ended June 30, 2009, we granted 38,071 qualified stock options
and 106,929 non-qualified stock options under our 2002 Stock Option Plan to
employees, executive officers and directors with an average option price of
$4.39 per share. Like all other outstanding stock options, these stock options
contain service conditions and do not contain any performance conditions. For a
further discussion regarding the provisions of SFAS No. 123R and its effect on
our operations, please refer to the foregoing section within this
footnote.




- 20
-





21st Century
Holding Company


Notes
to Consolidated Financial Statements





Activity in the Company’s stock option
plans for the period from December 31, 2006 to June 30, 2009, is summarized
below.





1998 Plan
                    
                    
                    2002 PlanNumber of
                      Shares
                    
                    
                    Weighted
                      Average
                      Option
                      ExercisePrice
                    
                    
                    Numberof
                      Shares
                    
                    
                    Weighted
                      Average
                      Option
                      ExercisePriceOutstanding
      at December 31, 2006
                    
                    
                    44,750
                    
                    
                    $
                    18.47
                    
                    
                    
                    637,358
                    
                    
                    $
                    13.80Granted
                    
                    
                    109,849
                    
                    
                    $
                    13.32
                    
                    
                    
                    57,151
                    
                    
                    $
                    13.18Exercised
                    
                    
                    (2,000
                    )
                    
                    $
                    6.67
                    
                    
                    
                    (16,300
                    )
                    
                    $
                    10.02Cancelled
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    (17,900
                    )
                    
                    $
                    15.82Outstanding
      at December 31, 2007
                    
                    
                    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 December 31, 2008
                    
                    
                    130,099
                    
                    
                    $
                    16.07
                    
                    
                    
                    658,151
                    
                    
                    $
                    13.69Granted
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    145,000
                    
                    
                    $
                    4.39Exercised
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    -Cancelled
                    
                    
                    (5,000
                    )
                    
                    $
                    21.38
                    
                    
                    
                    (49,500
                    )
                    
                    $
                    10.95Outstanding
      at June 30, 2009
                    
                    
                    125,099
                    
                    
                    $
                    15.85
                    
                    
                    
                    753,651
                    
                    
                    $
                    12.08




Options outstanding as of June 30, 2009
are exercisable as follows.





1998 Plan
                    
                    
                    2002 PlanOptions Exercisable at:
                    
                    Number of
                      Shares
                    
                    
                    Weighted
                      Average
                      Option
                      ExercisePrice
                    
                    
                    Numberof
                      Shares
                    
                    
                    Weighted
                      Average
                      Option
                      ExercisePriceMarch
      31, 2009
                    
                    
                    50,219
                    
                    
                    $
                    15.85
                    
                    
                    
                    309,953
                    
                    
                    $
                    12.08December
      31, 2009
                    
                    
                    14,770
                    
                    
                    $
                    15.85
                    
                    
                    
                    83,994
                    
                    
                    $
                    12.08December
      31, 2010
                    
                    
                    19,770
                    
                    
                    $
                    15.85
                    
                    
                    
                    140,662
                    
                    
                    $
                    12.08December
      31, 2011
                    
                    
                    19,770
                    
                    
                    $
                    15.85
                    
                    
                    
                    97,853
                    
                    
                    $
                    12.08December
      31, 2012
                    
                    
                    19,770
                    
                    
                    $
                    15.85
                    
                    
                    
                    70,289
                    
                    
                    $
                    12.08December
      31, 2013
                    
                    
                    800
                    
                    
                    $
                    15.85
                    
                    
                    
                    35,900
                    
                    
                    $
                    12.08Thereafter
                    
                    
                    -
                    
                    
                    $
                    15.85
                    
                    
                    
                    15,000
                    
                    
                    $
                    12.08Total
      options exercisible
                    
                    
                    125,099
                    
                    
                    
                    
                    
                    
                    
                    753,651




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 APB Opinion No. 25, Accounting for Stock Issued to
Employees,and related Interpretations, as permitted by SFAS Number 123
Accounting for Stock-Based
Compensation (“SFAS No. 123”).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 authorized
shares.





Effective
January 1, 2006, the Company adopted the fair value recognition provisions of
SFAS No. 123R using the modified-prospective-transition method. Under that
transition method, compensation costs recognized during the six months ended
June 30, 2009 and 2008 include:




- 21
-





21st Century
Holding Company


Notes
to Consolidated Financial Statements





·
            Compensation
      cost for all share-based payments granted prior to, but not yet vested as
      of January 1, 2006, based on the grant date fair value estimated in
      accordance with the original provisions of Statement 123,
    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 SFAS No. 123R. Results for prior periods have not been
      restated, as not required to by the
  pronouncement.





As a
result of adopting SFAS No. 123R on January 1, 2006, the Company’s income from
continuing operations before provision for income taxes and net income for the
six months ended June 30, 2009 are lower by approximately $230,000 and $145,000,
respectively, than if it had continued to account for share-based compensation
under ABP Opinion No. 25.





As a
result of adopting SFAS No. 123R on January 1, 2006, the Company’s income from
continuing operations before provision for income taxes and net income for the
six months ended June 30, 2008, are lower by approximately $258,000 and
$168,000, respectively, than if it had continued to account for share-based
compensation under ABP Opinion No. 25.





Basic and
diluted earnings per share for the six months ended June 30, 2009 would have
been $0.17 if the Company had not adopted SFAS No. 123R, compared with reported
basic and diluted earnings per share of $0.15. Basic and diluted earnings per
share for the six months ended June 30, 2008 would have been $.29 if the Company
had not adopted SFAS No. 123R, compared with reported basic and diluted earnings
per share of $0.23.





Basic and
diluted earnings per share for the three months ended June 30, 2009 would have
been $0.11 if the Company had not adopted SFAS No. 123R, compared with reported
basic and diluted earnings per share of $0.10. Basic and diluted earnings per
share for the three months ended June 30, 2008 would have been ($0.30) if the
Company had not adopted SFAS No. 123R, compared with reported basic and diluted
earnings per share of ($0.31).





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.
SFAS No. 123R 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
June 30, 2009 and 2008 estimated on the date of grant using the Black-Scholes
option-pricing model was $1.13 and $2.87 to $3.63, respectively.





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





June 30, 2009
                      
                      June 30, 2008Dividend
      yield
                      
                      7.20%
      - 17.30%
                      
                      5.50%
      - 8.30%Expected
      volatility
                      
                      57.54%
      - 70.68%
                      
                      54.65%
      - 54.83%Risk-free
      interest rate
                      
                      1.22%
      - 1.50%
                      
                      1.60%
      - 2.24%Expected
      life (in years)
                      
                      3.53
      - 4.16
                      
                      3.18
      -
3.19





Volatility
of a share price is the standard deviation of the continuously compounded rates
of return on the share over a specified period. The higher the volatility, the
more returns on the shares can be expected to vary up or down. The expected
volatility is a measure of the amount by which a financial variable such as a
share price has fluctuated (historical volatility) or is expected to fluctuate
(expected volatility) during a period. Our volatility as reflected above
contemplates only historical volatility.




- 22
-





21st Century
Holding Company


Notes
to Consolidated Financial Statements





Summary
information about the Company’s stock options outstanding as of June 30, 2009 is
as follows.





Weighted
      Average
                            
                            
                            WeightedRange
      of
                            
                            
                            Outstanding
      at
                            
                            
                            Contractual
                            
                            
                            Average
                            
                            
                            Exercisable
      atExercise Price
                            
                            
                            June 30, 2009
                            
                            
                            Periods in Years
                            
                            
                            Exercise Price
                            
                            
                            June 30, 20091998
      Plan
                            
                            $6.67
      - $27.79
                            
                            
                            
                            125,099
                            
                            
                            
                            3.87
                            
                            
                            $
                            15.85
                            
                            
                            
                            50,2192002
      Plan
                            
                            $3.30
      - $18.21
                            
                            
                            
                            753,651
                            
                            
                            
                            3.46
                            
                            
                            $
                            12.08
                            
                            
                            
                            309,953





(9)
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 June 30,
2009, there were no preferred shares issued or outstanding and there were
8,013,894 shares of common stock outstanding.





(10)
Subsequent Events





None




- 23
-





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





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





The
unaudited consolidated financial statements of 21st Century
have been prepared in accordance with GAAP for interim financial information and
with the instructions for Form 10-Q and Rule 10-01 of Regulation
S-X.  These financial statements do not include all information and
notes required by GAAP for complete financial statements, and should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2008 (“2008 10-K”). The December 31, 2008 year-end balance sheet data was
derived from audited financial statements but does not include all disclosures
required by GAAP. The financial information furnished reflects all adjustments,
consisting only of normal recurring accruals, which are, in the opinion of
management, necessary for a fair presentation of the financial position, results
of operations and cash flows for the periods presented. The results of
operations are not necessarily indicative of the results of operations that may
be achieved in the future.





Forward-Looking
Statements





Statements
in this Quarterly Report on Form 10-Q for the six months ended June 30, 2009
(“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 Securities and
Exchange Commission (“SEC”), including the Company’s 2008 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.




- 24
-





21st Century
Holding Company


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




Overview





21st Century
is an insurance holding company. Through our subsidiaries and contractual
relationships we control substantially all aspects of the insurance
underwriting, distribution and claims processes for most products offered . We
are authorized to underwrite homeowners’ multiple peril, commercial general
liability, personal and commercial automobile, fire, allied lines, surety, 
commercial multi-peril and inland marine in various states on behalf of our
wholly owned subsidiaries, Federated National Insurance Company (“Federated
National”) and American Vehicle Insurance Company (“American
Vehicle”).





Federated
National is licensed as an admitted carrier in Florida.  Through
contractual relationships with a network of approximately 1,500 independent and
a select number of general agents, Federated National is authorized to
underwrite fire, allied lines, personal automobile, and homeowners’ multi-peril
insurance in Florida.





American
Vehicle is licensed as an admitted carrier in Alabama, Florida, Louisiana and
Texas, and is authorized to underwrite homeowners’ multi-peril, commercial
multi-peril, inland marine, surety and personal and commercial automobile
insurance in Florida as an admitted carrier. American Vehicle is licensed
as a non-admitted carrier in Arkansas, California, Georgia, Kentucky, Maryland,
Missouri, Nevada, Oklahoma, South Carolina, Tennessee, and Virginia, and is
authorized to underwrite commercial general liability insurance in all of these
states. We will continue to deploy commercial general liability and other
commercial  insurance products into new states. This expansion will be
achieved primarily through partnerships with other insurance companies that hold
appropriate licensing and product offerings.  New partnerships formed in
2009 will enable us to deploy products for which we have a risk appetite, and
those products that will be deployed to capture fee income.





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. Admitted carriers are also required to contribute
financially 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 six months ended June 30, 2009, 83.3%, 13.6%, 2.8% and 0.3% of the premiums
we underwrote were for homeowners’ property and casualty insurance, commercial
general liability insurance, federal flood, and personal automobile insurance,
respectively. During the six months ended June 30, 2008, 72.8%, 26.6% and 0.6%
of the premiums we underwrote were for homeowners’ property and casualty
insurance, commercial general liability insurance 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”).


- 25
-


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, 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, Texas and Virginia. During the first six months of
2009, Assurance MGA contracted with two third party insurance companies to sell
commercial general liability, workers compensation and inland marine through
Assurance MGA’s existing network of distributors. This process will continue
throughout 2009 as Assurance MGA benefits from the arrangement by receiving
commission revenue from policies sold by its insurance partners, while
minimizing its risks.





Assurance
MGA earns commissions and fees for providing policy administration, marketing,
accounting and analytical services, and for participating in the negotiation of
reinsurance contracts. Assurance MGA 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 to the public to serve all of
their insurance needs. 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 property and casualty,
commercial general liability and automobile markets, many of whom are larger,
have greater financial and other resources, have better ratings, 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. Competition
is having a material adverse effect on our business, results of operations and
financial condition.





Significant
competition has 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.





Additionally,
in an effort to foster competition in the Florida homeowners’ property insurance
market, the State of Florida created a Capital Build-Up incentive program in
response to the catastrophic events that occurred during 2004 and 2005. This
program provides matching statutory capital to any new or existing carrier
licensed to write homeowners insurance in the state of Florida. This Capital
Build-Up incentive program has certain default covenants that require
participating carriers to maintain minimum net written premium ratios. This
program was not legislatively funded for either 2009 or 2008.





Finally,
during 2007 and during 2008, approximately two dozen new homeowner insurance
companies have received authority by the Florida Office of Insurance Regulation
(“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 the six months ended June 30, 2009.





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.





We did
not participate in the Capital Build-Up incentive program and therefore have
been able to remain committed to the discipline of writing business that is
profitable from an underwriting perspective. This commitment resulted in a
significant erosion of our homeowners’ property insurance market share in 2008
as compared with 2007. 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 compete based on
underwriting criteria, our distribution network and superior service to our
agents and insureds.


- 26
-


21st Century
Holding Company


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





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 First Floridian
Insurance Company. In addition to these nationally recognized names, 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, Royal Palm Insurance Company, Edison Insurance Company,
Olympus Insurance Company, St. Johns Insurance Company, Cypress Property and
Casualty Insurance Company, Tower Hill Insurance Company, Florida Family
Insurance Company and American Strategic Insurance Company.





Comparable
companies that compete with us 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.





With
respect to automobile insurance in Florida, we intentionally market only to our
existing policyholders by offering to renew the existing policy. Comparable
companies in the personal automobile insurance market include U.S. Security
Insurance Company, United Automobile Insurance Company, Direct General Insurance
Company and Ocean Harbor Insurance Company, as well as major insurers such as
Progressive Casualty Insurance Company.





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 consolidated
financial statements for the quarter ended June 30, 2009 included in Item I of
this Report on 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
consolidated financial statements for the quarter ended June 30, 2009 included
in Item I of this Report on 10-Q for a discussion of recent accounting
pronouncements and their effect, if any, on the Company.





Analysis
of Financial Condition


As
of June 30, 2009 Compared with December 31, 2008





Total Investments





SFAS No.
115 addresses accounting and reporting for (a) investments in equity securities
that have readily determinable fair values and (b) all investments in debt
securities. SFAS No. 115 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 increased $77.8 million, or 298.6%, to $103.9 million as of June 30,
2009, compared with $26.1 million as of December 31, 2008. Our fixed income
portfolio contained callable features exercised in 2008.  The proceeds from
our called securities were in cash and short-term investments as of December 31,
2008. During the six months ended June 30, 2009, we invested $70.8 million in
longer-term investments.  We are currently evaluating long and short-term
investment options for the best yields that match our liquidity
needs.


- 27
-


21st Century
Holding Company


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





The fixed
maturities and the equity securities that are available for sale and carried at
fair value represent 97% of total investments as of June 30, 2009, compared with
48% as of December 31, 2008.





We did
not hold any trading investment securities during the six months ended June 30,
2009.





Below is
a summary of net unrealized gains and (losses) at June 30, 2009 and December 31,
2008 by category.  Of the $0.4 million unrealized losses for equity
securities, less than $0.4 million is from Western Asset /
Claymore Inflation Linked Securities and Income Fund (“WIA”).  The
fund invests at least 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.





Unrealized Gains and (Losses)June 30, 2009
                  
                  
                  December 31, 2008(Dollars in Thousands)Debt
      securities:U.S.
      government obligations
                  
                  $
                  (253
                  )
                  
                  $
                  (148
                  )Corporate
                  
                  
                  343
                  
                  
                  
                  (936
                  )90
                  
                  
                  
                  (1,084
                  )Equity
      securities:Common
      stocks
                  
                  
                  (444
                  )
                  
                  
                  (819
                  )Total
      debt and equity securities
                  
                  $
                  (354
                  )
                  
                  $
                  (1,903
                  )





Pursuant
to Financial Accounting Standard Board (“FASB”) SFAS No. 115, 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 temporary 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 temporary 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 six months ended June 30, 2009, in
connection with this process, we have not charged any net realized investment
loss to operations.





The
investments held as of June 30, 2009 and December 31, 2008, were comprised
mainly of United States Government and agency bonds, as well as municipal bonds
and corporate bonds held in the financial and conglomerate industries. As of
June 30, 2009 14% of the fixed income portfolio is in United States Government
bonds and 86% is in diverse industries. As of  June 30, 2009,
approximately 77% of the equity holdings are in mutual funds and 23% are in
equities related to diverse industries.





As of
June 30, 2009, all of our securities are in good standing and not impaired as
defined by FASB SFAS No. 115, except for our holdings in Blackrock Pfd, Inc.,
which were impaired  $1.4 million as of June 30, 2009 and $2.1 million
as of December 31, 2008.





In 2008,
we categorized $14.2 million of our bond portfolio as held-to-maturity because
we decided that we had the intention and ability to hold the bonds until
maturity. During the three months ended December 31, 2008, we categorized all
except $3.4 million of these bonds to available-for-sale because a
collateralized requirement was reduced.





As of
December 31, 2008, we reclassified $13.5 million of our bond portfolio as
held-to-maturity. The decision to classify this layer of our bond portfolio as
held-to-maturity was predicated on our intention and ability to hold these
securities until maturity. Additionally, we have and may continue to use this
position to secure credit to facilitate business opportunities in connection
with our commercial general liability program. Outstanding irrevocable letters
of credit, which were used for such purposes, total $1.9 million and $3.0
million for the period ended June 30, 2009 and December 31, 2008,
respectively.


- 28
-


21st Century
Holding Company


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





Cash and Short Term
Investments





Cash and
short-term investments, which include cash, certificates of deposits, and money
market accounts, decreased $61.4 million, or 49.2%, to $63.2 million as of June
30, 2009, compared with $124.6 million as of December 31, 2008.





Our fixed
income portfolio contained callable features exercised in 2008.  The
proceeds from our called securities were in cash and short-term investments as
of December 31, 2008. During the six months ended June 30, 2009, we invested
$70.8 million in longer-term investments.  We are currently evaluating long
and short-term investment options for the best yields that match our liquidity
needs.





Our
excess cash and cash equivalents are invested in accordance with our long-term
liquidity requirements. Our daily closing cash balance of approximately $2.0
million is swept into an overnight repurchase agreement account backed by U.S.
Government securities.





Prepaid Reinsurance
Premiums





Prepaid
reinsurance premiums decreased $4.4 million, or 79.4%, to $1.1 million as of
June 30, 2009, compared with $5.5 million as of December 31,
2008.  The change is due to our payments and amortization of prepaid
reinsurance premiums associated with our homeowners’ 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, increased $1.2 million, or
36.0%, to $4.6 million as of June 30, 2009, compared with $3.4 million as of
December 31, 2008.





Our
homeowners’ insurance premiums receivable increased $1.6 million, or 90.2%, to
$3.2 million as of June 30, 2009, compared with $1.6 million as of December 31,
2008.  Our commercial general liability insurance premiums receivable
decreased $0.5 million, or 28.2%, to $1.2 million as of June 30, 2009, compared
with $1.7 million as of December 31, 2008. Premiums receivable in connection
with our automobile line of business increased $0.1 million, or 88.7%, to $0.2
million as of June 30, 2009, compared with $0.1 million as of December 31,
2008.





Reinsurance Recoverable,
net





Reinsurance
recoverable, net, increased $2.0 million, or 11.8%, to $18.9 million as of June
30, 2009, compared with $16.9 million as of December 31, 2008. 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





Deferred
policy acquisition costs increased $3.2 million, or 50.2%, to $9.8 million as of
June 30, 2009, compared with $6.6 million as of December 31, 2008. The change is
due to increased homeowner’s written and unearned premium, net of decreased
commercial general liability premium.





Deferred Income Taxes, net





Deferred
income taxes, net, decreased $1.1 million, or 12.8%, to $7.4 million as of June
30, 2009, compared with $8.5 million as of December 31, 2008. Deferred income
taxes, net is comprised of approximately $11.0 million and $10.8 million of
deferred tax assets, net of approximately $3.6 million and $2.3 million of
deferred tax liabilities as of June 30, 2009 and December 31, 2008,
respectively.





- 29
-


21st Century
Holding Company


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





Income Taxes Receivable





Income
taxes receivable increased $0.6 million, or 27.0%, to $2.9 million as of June
30, 2009, compared with $2.3 million as of December 31, 2008. The change is due
to tax payment patterns in connection with our tax liabilities.





Property, Plant and Equipment,
net





Property,
plant and equipment, net, decreased $0.1 million, or 9.9%, to $0.8 million as of
June 30, 2009 compared with $0.9 million as of December 31, 2008. The change is
primarily due to depreciation and amortization of our existing property, plant
and equipment.




Other Assets





Other
assets increased $1.0 million, or 42.7%, to $3.5 million as of June 30, 2009,
compared with $2.5 million as of December 31, 2008. Major components of other
assets are shown in the following table; the accrued interest income receivable
is primarily investments related.





June 30, 2009
                  
                  
                  December 31, 2008(Dollars
      in Thousands)Accrued
      interest income receivable
                  
                  $
                  1,075
                  
                  
                  $
                  243Notes
      receivable
                  
                  
                  585
                  
                  
                  
                  703Prepaid
      expenses
                  
                  
                  608
                  
                  
                  
                  748Revenue
      sharing due from reinsurer
                  
                  
                  564
                  
                  
                  
                  282Other
                  
                  
                  695
                  
                  
                  
                  496Total
                  
                  $
                  3,527
                  
                  
                  $
                  2,472





Unpaid Losses and LAE





Unpaid
losses and LAE increased $3.0 million, or 4.6%, to $67.8 million as of June 30,
2009, compared with $64.8 million as of December 31, 2008. The composition of
unpaid losses and LAE by product line is as follows.





June 30, 2009
                              
                              
                              December31, 2008Case
                              
                              
                              Bulk
                              
                              
                              Total
                              
                              
                              Case
                              
                              
                              Bulk
                              
                              
                              Total(Dollars in Thousands)
                              
                              
                              (Dollars in Thousands)Homeowners'
                              
                              $
                              7,818
                              
                              
                              $
                              22,647
                              
                              
                              $
                              30,465
                              
                              
                              $
                              8,048
                              
                              
                              $
                              19,678
                              
                              
                              $
                              27,726Commercial
      General Liability
                              
                              
                              8,138
                              
                              
                              
                              27,291
                              
                              
                              
                              35,429
                              
                              
                              
                              7,531
                              
                              
                              
                              26,998
                              
                              
                              
                              34,529Automobile
                              
                              
                              480
                              
                              
                              
                              1,398
                              
                              
                              
                              1,878
                              
                              
                              
                              657
                              
                              
                              
                              1,863
                              
                              
                              
                              2,520Total
                              
                              $
                              16,436
                              
                              
                              $
                              51,336
                              
                              
                              $
                              67,772
                              
                              
                              $
                              16,236
                              
                              
                              $
                              48,539
                              
                              
                              $
                              64,775





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.


- 30
-


21st Century
Holding Company


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





Unearned Premium





Unearned
premiums increased $16.2 million, or 39.9%, to $56.7 million as of June 30,
2009, compared with $40.5 million as of December 31, 2008. The change was due to
an $18.2 million increase in unearned homeowners’ insurance premiums of which
$10.1 million is associated with our assumption of risks from Citizens, a $2.0
million decrease in unearned commercial general liability premiums, and less
than a $0.1 million decrease 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 $0.3 million, or 19.1%, to $2.0
million as of June 30, 2009, compared with $1.7 million as of December 31, 2008.
Premium deposits are monies received on policies not yet in force as of June 30,
2009.





Bank Overdraft





Bank
overdraft decreased $0.3 million, or 3.5%, to $8.4 million as of June 30, 2009,
compared with $8.7 million as of December 31, 2008. 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 $0.2 million, or 16.3%, to $1.3 million as
of June 30, 2009, compared with $1.5 million as of December 31, 2008. In
accordance with the provisions of SFAS Number 13 Accounting for Leases (“SFAS
No. 13”), we are amortizing the deferred gain over the term of the leaseback,
which is scheduled to end in December 2011.





Accounts Payable and Accrued
Expenses





Accounts
payable and accrued expenses decreased $1.3 million, or 33.8%, to $2.4 million
as of June 30, 2009, compared with $3.7 million as of December 31,
2008.  This change is due to the timing of payments with our trade
vendors.


- 31
-


21st Century
Holding Company


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





Results
of Operations


Three
Months Ended June 30, 2009 Compared with Three Months Ended June 30,
2008





Gross
Premiums Written





Gross
premiums written increased $6.4 million, or 23.3%, to $33.6 million for the
three months ended June 30, 2009, compared with $27.2 million for the three
months ended June 30, 2008.  The following table denotes gross
premiums written by major product line.





Three Months Ended June 30,2009
                  
                  
                  2008(Dollars in Thousands)Amount
                  
                  
                  Percentage
                  
                  
                  Amount
                  
                  
                  PercentageHomeowners'
                  
                  $
                  28,660
                  
                  
                  
                  85.30
                  %
                  
                  $
                  19,931
                  
                  
                  
                  73.16
                  %Commercial
      General Liability
                  
                  
                  3,895
                  
                  
                  
                  11.59
                  %
                  
                  
                  7,235
                  
                  
                  
                  26.56
                  %Federal
      Flood
                  
                  
                  1,018
                  
                  
                  
                  3.03
                  %
                  
                  
                  -
                  
                  
                  
                  -Automobile
                  
                  
                  28
                  
                  
                  
                  0.08
                  %
                  
                  
                  75
                  
                  
                  
                  0.28
                  %Gross
      written premiums
                  
                  $
                  33,601
                  
                  
                  
                  100.00
                  %
                  
                  $
                  27,241
                  
                  
                  
                  100.00
                  %





The
Florida Legislature required a rate decrease that resulted in an average 15.2%
decrease statewide on homeowners' policies that was integrated into our rates on
June 1, 2007. The effect of this rate decrease on existing policies and the
corresponding premium decrease in direct written premium was fully recognized in
policies by May 31, 2008. In addition, a rate decrease of 11.3% statewide for
homeowners' policies was approved by the Florida OIR and implemented with an
effective date of May 1, 2008 for new business and June 1, 2008 for renewal
business for the homeowners' program. The effect of this rate decrease is
flowing through the Company’s homeowners’ book of business such that a full
impact of the premium decreases on direct written premium was realized by April
2009 for the homeowners' program. These rate decreases have had an adverse
effect on gross and earned premium.





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 business and
renewal business, have also had a significant effect on both written and earned
premium.  As of June 30, 2009, 61.8 % of our homeowners’ policyholders were
receiving wind mitigation credits totaling approximately $23.3 million, (a 38.6%
reduction of in-force premium), while 40.1% of our homeowners’ policyholders
were receiving wind mitigation credits totaling approximately $11.4 million, (a
16.4% reduction of in-force premium), as of June 30, 2008.





Despite
effects of Florida’s mandated homeowners’ rates reduction and wind mitigation
discounts the Company’s sale of homeowners’ policies increased $8.7 million, or
43.8%, to $28.7 million for the three months ended June 30, 2009, compared with
$20.0 million for the three months ended June 30, 2008. Included in our sale of
homeowners’ policies during the three months ended June 30, 2009, is $7.0
million we assumed from Citizens.





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.





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 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 June 11, 2009, Demotech reaffirmed Federated
National’s Financial Stability Rating® (FSR) of
A, Exceptional.





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. Furthermore, a withdrawal of the rating could cause the Company’s
insurance policies to no longer be acceptable to the secondary marketplace and
mortgage lenders, which could cause a material adverse effect of the Company’s
results of operations and financial position.


- 32
-


21st Century
Holding Company


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





The
Company’s sale of commercial general liability policies decreased by $3.3
million to $3.9 million for the three months ended June 30, 2009, compared with
$7.2 million for the three months ended June 30, 2008. 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 June 30,2009
                        
                        
                        2008Amount
                        
                        
                        Percentage
                        
                        
                        Amount
                        
                        
                        Percentage(Dollars in
      Thousands)StateAlabama
                        
                        $
                        23
                        
                        
                        
                        0.60
                        %
                        
                        $
                        28
                        
                        
                        
                        0.39
                        %Arkansas
                        
                        
                        1
                        
                        
                        
                        0.04
                        %
                        
                        
                        4
                        
                        
                        
                        0.06
                        %California
                        
                        
                        9
                        
                        
                        
                        0.24
                        %
                        
                        
                        104
                        
                        
                        
                        1.44
                        %Florida
                        
                        
                        3,040
                        
                        
                        
                        78.06
                        %
                        
                        
                        4,507
                        
                        
                        
                        62.25
                        %Georgia
                        
                        
                        68
                        
                        
                        
                        1.74
                        %
                        
                        
                        143
                        
                        
                        
                        1.98
                        %Kentucky
                        
                        
                        1
                        
                        
                        
                        0.02
                        %
                        
                        
                        1
                        
                        
                        
                        0.01
                        %Louisiana
                        
                        
                        435
                        
                        
                        
                        11.17
                        %
                        
                        
                        1,330
                        
                        
                        
                        18.37
                        %South
      Carolina
                        
                        
                        2
                        
                        
                        
                        0.06
                        %
                        
                        
                        28
                        
                        
                        
                        0.39
                        %Texas
                        
                        
                        314
                        
                        
                        
                        8.07
                        %
                        
                        
                        1,090
                        
                        
                        
                        15.06
                        %Virginia
                        
                        
                        2
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Total
                        
                        $
                        3,895
                        
                        
                        
                        100.00
                        %
                        
                        $
                        7,235
                        
                        
                        
                        100.00
                        %





The
Company’s sale of auto insurance policies decreased by less than $0.1 million,
or 62.7%, to nearly nothing for the three months ended June 30, 2009, compared
with less than $0.1 million for the three months ended June 30, 2008. With
respect to automobile insurance in Florida, we intentionally market only to our
existing policyholders by offering to renew existing policies.





Gross
Premiums Ceded





Gross
premiums ceded increased to $19.6 million for the three months ended June 30,
2009, compared with $8.2 million for the three months ended June 30, 2008. Gross
premiums ceded to the Florida Hurricane Catastrophe Fund “(FHCF”) totaled $18.6
million and gross premiums ceded to the write-your-own flood program totaled
$1.0 million for the three months ended June 30, 2009.





Increase (Decrease) in Prepaid
Reinsurance Premiums





The
increase in prepaid reinsurance premiums was $10.3 million for the three months
ended June 30, 2009, compared with a $2.4 million decrease for the three months
ended June 30, 2008. This change is primarily associated with the timing of our
reinsurance payments measured against the term of the underlying reinsurance
policies.





Increase
in Unearned Premiums





The
increase in unearned premiums was $10.1 million for the three months ended June
30, 2009, compared with a $1.2 million increase for the three months ended June
30, 2008. The change was due to an $11.1 million increase in unearned
homeowners’ insurance premiums of which $4.1 million is associated with our
assumption of policies from Citizens, net of a $1.0 million decrease in unearned
commercial general liability premiums and a less than $0.1 million decrease in
unearned automobile premiums during the three months ended June 30, 2009. 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.


- 33
-


21st Century
Holding Company


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





Net
Premiums Earned





Net
premiums earned decreased $1.2 million, or 7.7%, to $14.3 million for the three
months ended June 30, 2009, compared with $15.5 million for the three months
ended June 30, 2008. The following table denotes net premiums earned by product
line.





Three Months Ended June 30,2009
                  
                  
                  2008Amount
                  
                  
                  Percentage
                  
                  
                  Amount
                  
                  
                  Percentage(Dollars
      in Thousands)Homeowners'
                  
                  $
                  9,239
                  
                  
                  
                  64.77
                  %
                  
                  $
                  7,977
                  
                  
                  
                  51.60
                  %Commercial
      General Liability
                  
                  
                  4,978
                  
                  
                  
                  34.90
                  %
                  
                  
                  7,380
                  
                  
                  
                  47.74
                  %Automobile
                  
                  
                  48
                  
                  
                  
                  0.33
                  %
                  
                  
                  103
                  
                  
                  
                  0.67
                  %Net
      premiums earned
                  
                  $
                  14,265
                  
                  
                  
                  100.00
                  %
                  
                  $
                  15,460
                  
                  
                  
                  100.00
                  %





The
change in commercial general liability net premiums earned is a result of
decreased premium volume.





The
change in homeowners’ net premiums earned is partially due to an $11.1 million
increase in unearned premiums, of which $4.1 million is associated with our
assumption of risks from Citizens, and an $8.7 million increase in premium
volume, of which $7.0 million is associated with Citizens.





Commission
Income





Commission
income decreased $0.6 million, or 60.3%, to $0.4 million for the three months
ended June 30, 2009, compared with $1.0 million for the three months ended June
30, 2008. The primary component of our commission income is in connection with
our reinsurance treaties and write-your-own flood premiums.





Finance Revenue





Finance
revenue remained unchanged at $0.1 million for the three months ended June 30,
2009, compared with $0.1 million for the three months ended June 30, 2008. This
is primarily due to the Company’s decreased emphasis on automobile insurance and
the finance revenue derived there-from.





Managing
General Agent Fees





Managing
general agent fees decreased less than $0.1 million, or 9.8%, to less than $0.5
million for the three months ended June 30, 2009, compared with more than $0.5
million for the three months ended June 30, 2008.





Net
Investment Income




Net
investment income decreased $1.3 million, or 69.2%, to $0.6 million for the
three months ended June 30, 2009, compared with $1.9 million for the three
months ended June 30, 2008. Net investment income on corporate bonds, which
generally provide a higher yield than U.S. government bonds, decreased $0.4
million to $0.5 million for the three months ended June 30, 2009, compared with
$0.9 million for the three months ended June 30, 2008. The decrease in corporate
bond income was due to our selection of higher quality bonds that reduce overall
portfolio risk though offer a lower yield.  Our yield of interest
income measured against debt securities and cash was 1.88% for the three months
ended June 30, 2009, compared with 4.00% for the three months ended June 30,
2008.





Net
investment income and the yield were adversely affected by having an average
cash balance of $67.2 million in the prime money market account that provided
less than a 1.0% yield during the three months ended June 30, 2009, compared
with an average cash balance of $45.6 during the three months ended June 30,
2008. Net investment income on U.S. government bonds remained unchanged with
less than $0.1 million for the three months ended June 30, 2009, compared with
less than $0.1 million for the three months ended June 30, 2008.





Dividend
income decreased $0.3 million to $0.1 million for the three months ended June
30, 2009, compared with $0.4 million for three months ended June 30, 2008.
Short-term income decreased $0.2 million to less than $0.1 million for the three
months ended June 30, 2009, compared with $0.2 million for the three months
ended June 30, 2008. Additionally, for the three months ended June 30, 2009,
asset management fees of $0.2 million are included in net investment income
compared to nearly nothing for the three months ended June 30,
2008.





- 34
-





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
June 30, 2009 Compared with December 31, 2008 – Investments”.





Net
Realized Investment Gains (Losses)





Net
realized investment gains were $0.1 million for the three months ended June 30,
2009, compared with net realized investment losses of $4.7 million for the three
months ended June 30, 2008. Realized investment losses recognized for the three
months ended June 30, 2009 were a result of sales of non-performing
investments.  Realized investment losses recognized for the three months
ended June 30, 2008 were a result of SFAS No.115 impairments for PDL Biopharma,
Inc. and Citigroup, Inc. The table below depicts the net realized investment
losses by investment category for the three months ended June 30, 2009 as
compared with the same period during 2008.





Net Realized Gains (Losses)Three Months Ended June 30,2009
                  
                  
                  2008(Dollars
      in Thousands)Debt
      securities:U.S.
      government obligations
                  
                  $
                  (9
                  )
                  
                  $
                  -Corporate
                  
                  
                  56
                  
                  
                  
                  -Equity
      securities:Common
      stocks
                  
                  
                  22
                  
                  
                  
                  (4,664
                  )Total
      net realized gains (losses)
                  
                  $
                  69
                  
                  
                  $
                  (4,664
                  )





Regulatory Assessments
Recovered





Regulatory
assessments recovered increased $0.3 million, or 30.2%, to $1.2 million for the
three months ended June 30, 2009, compared with $0.9 million for the three
months ended June 30, 2008.





Other Income





Other
income decreased $0.1 million, or 70.3%, to $0.1 million for the three months
ended June 30, 2009, compared with $0.2 million for the three months ended June
30, 2008.





Major
components of other income for the three months ended June 30, 2009 included
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 decreased by $3.5 million, or 28.2%, to $9.0 million for the three
months ended June 30, 2009, compared with $12.5 million for the three months
ended June 30, 2008. The overall change includes a $0.3 million increase in our
homeowners’ program, a $3.6 million decrease in our commercial general liability
program and a $0.2 million decrease in connection with our automobile
program.





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.


- 35
-


21st Century
Holding Company


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





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





June 30, 2009
                                
                                
                                December 31, 2008Case
                                
                                
                                Bulk
                                
                                
                                Total
                                
                                
                                Case
                                
                                
                                Bulk
                                
                                
                                Total(Dollars in Thousands)
                                
                                
                                (Dollars in Thousands)Homeowners'
                                
                                $
                                7,818
                                
                                
                                $
                                22,647
                                
                                
                                $
                                30,465
                                
                                
                                $
                                8,048
                                
                                
                                $
                                19,678
                                
                                
                                $
                                27,726Commercial
      General Liability
                                
                                
                                8,138
                                
                                
                                
                                27,291
                                
                                
                                
                                35,429
                                
                                
                                
                                7,531
                                
                                
                                
                                26,998
                                
                                
                                
                                34,529Automobile
                                
                                
                                480
                                
                                
                                
                                1,398
                                
                                
                                
                                1,878
                                
                                
                                
                                657
                                
                                
                                
                                1,863
                                
                                
                                
                                2,520Total
                                
                                $
                                16,436
                                
                                
                                $
                                51,336
                                
                                
                                $
                                67,772
                                
                                
                                $
                                16,236
                                
                                
                                $
                                48,539
                                
                                
                                $
                                64,775





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 increased by approximately $1.7 million during the
three months ended June 30, 2009.





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 June 30, 2009 was 62.9% compared with 80.8% for the same period in
2008. The table below reflects the loss ratios by product
line.





Three Months Ended June 30,2009
                  
                  
                  2008Homeowners'
                  
                  
                  65.58%
                  
                  
                  
                  77.50%Commercial
      General Liability
                  
                  
                  60.32%
                  
                  
                  
                  91.02%Automobile
                  
                  
                  -65.35%
                  
                  
                  
                  -114.70%All
      lines
                  
                  
                  62.91%
                  
                  
                  
                  80.81%





Operating and Underwriting
Expenses





Operating
and underwriting expenses increased $0.8 million, or 56.6%, to $2.3 million for
the three months ended June 30, 2009, compared with $1.5 million for the three
months ended June 30, 2008.





The
change is partially due to the addition of Insure-Link, created to serve as an
independent insurance agency, for which operating and underwriting expenses
increased to $0.2 million for the three months ended June 30, 2009, compared
with nearly nothing for the three months ended June 30, 2008. Additionally,
actuarial fees, bad debt expense, computer service fees and licenses and fees
expense increased a net total $0.4 million for the three months ended June 30,
2009, compared with the three months ended June 30, 2008.





Salaries
and Wages





Salaries
and wages increased $0.1 million, or 7.6%, to $1.9 million for the three months
ended June 30, 2009, compared with $1.8 million for the three months ended June
30, 2008. The change is primarily due to the addition of new employees of
Insure-Link, which was created to serve as an independent insurance
agency.


- 36
-


21st Century
Holding Company


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





The
charge to operations for stock based compensation, in accordance with the
provisions of SFAS No. 123R, was approximately $110,000 during the three months
ended June 30, 2009 compared with approximately $120,000 for the three months
ended June 30, 2008.





Policy
Acquisition Costs, Net of Amortization





Policy
acquisition costs, net of amortization, decreased $0.9 million, or 23.0%, to
$2.9 million for the three months ended June 30, 2009, compared with $3.8
million for the three months ended June 30, 2008. 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 change is due to increased homeowner’s
written premium, net of decreased commercial general liability
premium.





Provision
for Income Tax Expense (Benefit)





The
provision for income tax expense was $0.3 million for the three months ended
June 30, 2009, compared with a provision for income tax benefit of $1.6 million
for the three months ended June 30, 2008.  The effective rate for
income taxes of 24.2% for the three months ended June 30, 2009 was primarily due
to our tax-exempt interest and dividend received deduction. The effective rate
for income taxes was 38.8% for the three months ended June 30,
2008.





Net
Income (Loss)





Because
of the foregoing, the Company’s net income for the three months ended June 30,
2009, was $0.8 million compared with a net loss of $2.5 million for the three
months ended June 30, 2008.





Results
of Operations


Six
Months Ended June 30, 2009 Compared with Six Months Ended June 30,
2008





Gross
Premiums Written





Gross
premiums written increased $7.2 million, or 13.1%, to $62.0 million for the six
months ended June 30, 2009, compared with $54.8 million for the six months ended
June 30, 2008.  The following table denotes gross premiums written by
major product line:





Six Months Ended June 30,2009
                    
                    
                    2008(Dollars in Thousands)Amount
                    
                    
                    Percentage
                    
                    
                    Amount
                    
                    
                    PercentageHomeowners'
                    
                    $
                    51,688
                    
                    
                    
                    83.32
                    %
                    
                    $
                    39,920
                    
                    
                    
                    72.79
                    %Commercial
      General Liability
                    
                    
                    8,418
                    
                    
                    
                    13.57
                    %
                    
                    
                    14,590
                    
                    
                    
                    26.60
                    %Federal
      Flood
                    
                    
                    1,754
                    
                    
                    
                    2.83
                    %
                    
                    
                    -
                    
                    
                    
                    0.00
                    %Automobile
                    
                    
                    172
                    
                    
                    
                    0.28
                    %
                    
                    
                    334
                    
                    
                    
                    0.61
                    %Gross
      written premiums
                    
                    $
                    62,032
                    
                    
                    
                    100.00
                    %
                    
                    $
                    54,844
                    
                    
                    
                    100.00
                    %





The
Florida Legislature required a rate decrease that resulted in an average 15.2%
decrease statewide on homeowners' policies that was integrated into our rates on
June 1, 2007. The effect of this rate decrease on existing policies and the
corresponding premium decrease in direct written premium was fully recognized in
policies by May 31, 2008. In addition, a rate decrease of 11.3% statewide for
homeowners' policies was approved by the Florida OIR and implemented with an
effective date of May 1, 2008 for new business and June 1, 2008 for renewal
business for the homeowners' program. The effect of this rate decrease is
flowing through the Company’s homeowners’ book of business such that a full
impact of the premium decreases on direct written premium was realized by April
2009 for the homeowners' program. These rate decreases have had an adverse
effect on gross and earned premium.





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 business and
renewal business, have also had a significant effect on both written and earned
premium.  As of June 30, 2009, 61.8 % of our homeowners’ policyholders were
receiving wind mitigation credits totaling approximately $23.3 million, (a 38.6%
reduction of in-force premium), while 40.1% of our homeowners’ policyholders
were receiving wind mitigation credits totaling approximately $11.4 million, (a
16.4% reduction of in-force premium), as of June 30, 2008.


- 37
-


21st Century
Holding Company


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





Net of
the effects of Florida’s mandated homeowners’ rates reduction and wind
mitigation discounts the Company’s sale of homeowners’ policies increased $11.8
million, or 29.5%, to $51.7 million for the six months ended June 30, 2009,
compared with $39.9 million for the six months ended June 30, 2008. Included in
our sale of homeowners’ policies during the six months ended June 30, 2009, is
$14.3 million we assumed from Citizens.





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.





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 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 June 11, 2009, Demotech reaffirmed Federated
National’s Financial Stability Rating® (FSR) of
A, Exceptional.





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. Furthermore, a withdrawal of the rating could cause the Company’s
insurance policies to no longer be acceptable to the secondary marketplace and
mortgage lenders, which could cause a material adverse effect of the Company’s
results of operations and financial position.





The
Company’s sale of commercial general liability policies decreased by $6.2
million to $8.4 million for the six months ended June 30, 2009, compared with
$14.6 million for the six months ended June 30, 2008. 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.





SixMonthsEndedJune30,2009
                          
                          
                          2008Amount
                          
                          
                          Percentage
                          
                          
                          Amount
                          
                          
                          Percentage(Dollars in Thousands)StateAlabama
                          
                          $
                          47
                          
                          
                          
                          0.56
                          %
                          
                          $
                          72
                          
                          
                          
                          0.49
                          %Arkansas
                          
                          
                          3
                          
                          
                          
                          0.03
                          %
                          
                          
                          12
                          
                          
                          
                          0.08
                          %California
                          
                          
                          54
                          
                          
                          
                          0.64
                          %
                          
                          
                          200
                          
                          
                          
                          1.37
                          %Florida
                          
                          
                          6,452
                          
                          
                          
                          76.65
                          %
                          
                          
                          9,394
                          
                          
                          
                          64.41
                          %Georgia
                          
                          
                          154
                          
                          
                          
                          1.82
                          %
                          
                          
                          329
                          
                          
                          
                          2.25
                          %Kentucky
                          
                          
                          1
                          
                          
                          
                          0.01
                          %
                          
                          
                          1
                          
                          
                          
                          0.01
                          %Louisiana
                          
                          
                          1,227
                          
                          
                          
                          14.58
                          %
                          
                          
                          2,514
                          
                          
                          
                          17.22
                          %South
      Carolina
                          
                          
                          3
                          
                          
                          
                          0.04
                          %
                          
                          
                          60
                          
                          
                          
                          0.41
                          %Texas
                          
                          
                          476
                          
                          
                          
                          5.65
                          %
                          
                          
                          2,000
                          
                          
                          
                          13.71
                          %Virginia
                          
                          
                          1
                          
                          
                          
                          0.02
                          %
                          
                          
                          8
                          
                          
                          
                          0.05
                          %Total
                          
                          $
                          8,418
                          
                          
                          
                          100.0
                          %
                          
                          $
                          14,590
                          
                          
                          
                          100.0
                          %





The
Company’s sale of auto insurance policies decreased less than $0.2 million, or
48.5%, to $0.2 million for the six months ended June 30, 2009, compared with
$0.3 million for the six months ended June 30, 2008. With respect to automobile
insurance in Florida, we intentionally market only to our existing policyholders
by offering to renew existing policies.


- 38
-


21st Century
Holding Company


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





Gross
Premiums Ceded





Gross
premiums ceded increased $11.7 million, or 141.9%, to $19.9 million for the six
months ended June 30, 2009, compared with $8.2 million for the six months ended
June 30, 2008. Gross premiums ceded to the FHCF totaled $18.2 million and gross
premiums ceded to the write-your-own flood program totaled $1.7 million for the
six months ended June 30, 2009.





Increase (Decrease) in Prepaid
Reinsurance Premiums





The
increase in prepaid reinsurance premiums was $2.2 million for the six months
ended June 30, 2009, compared with a $13.5 million decrease for the six months
ended June 30, 2008. This change is primarily is primarily associated with the
timing of our reinsurance payments measured against the term of the underlying
reinsurance policies.





(Increase)
Decrease in Unearned Premiums





The
increase in unearned premiums was $16.2 million for the six months ended June
30, 2009, compared with a $1.0 million decrease for the six months ended June
30, 2008. The 2009 amount was due to a $18.2 million increase in unearned
homeowners’ insurance premiums, net of a $2.0 million decrease in unearned
commercial general liability premiums and a less than $0.1 million decrease in
unearned automobile premiums. 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 $5.9 million, or 17.3%, to $28.2 million for the six
months ended June 30, 2009, compared with $34.1 million for the six months ended
June 30, 2008. The following table denotes net premiums earned by product
line.





Six Months Ended June 30,2009
                    
                    
                    2008Amount
                    
                    
                    Percentage
                    
                    
                    Amount
                    
                    
                    Percentage(Dollars in Thousands)Homeowners'
                    
                    $
                    17,514
                    
                    
                    
                    62.17
                    %
                    
                    $
                    18,948
                    
                    
                    
                    55.62
                    %Commercial
      General Liability
                    
                    
                    10,504
                    
                    
                    
                    37.29
                    %
                    
                    
                    14,732
                    
                    
                    
                    43.25
                    %Automobile
                    
                    
                    151
                    
                    
                    
                    0.54
                    %
                    
                    
                    386
                    
                    
                    
                    1.13
                    %Net
      premiums earned
                    
                    $
                    28,169
                    
                    
                    
                    100.00
                    %
                    
                    $
                    34,066
                    
                    
                    
                    100.00
                    %





The
change in commercial general liability net premiums earned is a result of
decreased premium volume.





The
change in homeowners’ net premiums earned is partially due to an $18.1 million
increase in unearned premiums, of which $10.1 million is associated with our
assumption of risks from Citizens. The change is also a result of a net $11.8
million increase in premium volume, which is comprised of a $14.3 million
increase associated with Citizens and a $2.5 million decrease associated with
our other homeowners’ premium volume.





Commission
Income





Commission
income decreased $0.5 million, or 42.6%, to $0.6 million for the six months
ended June 30, 2009, compared with $1.1 million for the six months ended June
30, 2008. The primary component of our commission income is in connection with
our reinsurance treaties and write-your-own flood premiums.





Finance Revenue





Finance
revenue remained unchanged at $0.2 million for the six months ended June 30,
2009, compared with $0.2 million for the six months ended June 30, 2008. This is
primarily due to the Company’s decreased emphasis on automobile insurance and
the finance revenue derived there-from.


- 39
-


21st Century
Holding Company


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





Managing
General Agent Fees





Managing
general agent fees decreased $0.1 million, or 11.7%, to $0.9 million for the six
months ended June 30, 2009, compared with $1.0 million for the six months ended
June 30, 2008.





Net
Investment Income




Net
investment income decreased $2.6 million, or 67.5%, to $1.2 million for the six
months ended June 30, 2009, compared with $3.8 million for the six months ended
June 30, 2008. Net investment income on corporate bonds, which generally provide
a higher yield than U.S. government bonds, decreased $1.2 million to $0.6
million for the six months ended June 30, 2009, compared with $1.8 million for
the six months ended June 30, 2008. The decrease in corporate bond income was
due to our selection of higher quality bonds that offer a lower yield. Our yield
of interest income measured against debt securities and cash was 1.69% for the
six months ended June 30, 2009, compared with 4.48% for the six months ended
June 30, 2008.
 
 Net
investment income and the yield were adversely affected by having an average
cash balance of $90.5 million in the prime money market account that provided
less than a 1.0% yield during the six months ended June 30, 2009, compared with
an average cash balance of $36.8 during the six months ended June 30, 2008. Net
investment income on U.S. government decreased $0.4 million to $0.2 million for
the six months ended June 30, 2009, compared with $0.6 million for the six
months ended June 30, 2008.
 
 Dividend
income decreased $0.3 million to $0.2 million for the six months ended June 30,
2009, compared with $0.5 million for the six months ended June 30, 2008.
Short-term income decreased $0.2 million to $0.1 million for the six months
ended June 30, 2009, compared with $0.3 million for the six months ended June
30, 2008. Additionally, for the six months ended June 30, 2009, asset management
fees of $0.2 million are included in net investment income compared to nearly
nothing for the six months ended June 30, 2008.


See
additional discussion within the above “Analysis of Financial Condition as of
June 30, 2009 Compared with December 31, 2008 – Investments”.




Net
Realized Investment Losses





Net
realized investment losses were $0.5 million for the six months ended June 30,
2009, compared with net realized investment losses of $6.3 million for the six
months ended June 30, 2008. Realized investment losses recognized for the six
months ended June 30, 2009 were a result of sales of non-performing investments
in Citigroup, Nextel and Blackrock PFD.  During the six months ended June
30, 2008, we marked five equity investments to market value pursuant to
guidelines prescribed in SFAS No. 115. The pretax charge to operations in the
six month ended June 30, 2008 was approximately $6.5 million in connection with
our estimates of the net realizable value of these investments.





The table
below depicts the net realized investment (losses) gains by investment category
for the six months ended June 30, 2009 as compared with the same period during
2008.





Net Realized Gains (Losses)Six Months Ended June 30,2009
                      
                      
                      2008(Dollars in Thousands)Debt
      securities:U.S.
      government obligations
                      
                      $
                      17
                      
                      
                      $
                      12Corporate
                      
                      
                      (228
                      )
                      
                      
                      -(211
                      )
                      
                      
                      12Equity
      securities:Common
      stocks
                      
                      
                      (257
                      )
                      
                      
                      (6,325
                      )Total
      net realized (losses)
                      
                      $
                      (468
                      )
                      
                      $
                      (6,313
                      )


- 40
-


21st Century
Holding Company


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





Regulatory Assessments
Recovered





Regulatory
assessments recovered increased $0.5 million, or 40.6%, to $1.7 million for the
six months ended June 30, 2009, compared with $1.2 million for the six months
ended June 30, 2008.





Other Income





Other
income remained unchanged at $0.4 million for the six months ended June 30,
2009, compared with  the six months ended June 30, 2008.





Major
components of other income for the six months ended June 30, 2009 included
approximately $0.2 million in partial recognition of our gain on the sale of our
Lauderdale Lakes property and $0.1 million in connection with rental income,
interest income and miscellaneous income.





Losses
and LAE





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





Losses
and LAE decreased by $2.6 million, or 12.4%, to $17.8 million for the six months
ended June 30, 2009, compared with $20.4 million for the six months ended June
30, 2008. The overall change includes a $0.8 million increase in our homeowners’
program, a $3.6 million decrease in our commercial general liability program and
a $0.2 million increase in connection with our automobile program.





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.





June 30, 2009
                    
                    
                    December 31, 2008Case
                    
                    
                    Bulk
                    
                    
                    Total
                    
                    
                    Case
                    
                    
                    Bulk
                    
                    
                    Total(Dollars in Thousands)
                    
                    
                    (Dollars in Thousands)Homeowners'
                    
                    $
                    7,818
                    
                    
                    $
                    22,647
                    
                    
                    $
                    30,465
                    
                    
                    $
                    8,048
                    
                    
                    $
                    19,678
                    
                    
                    $
                    27,726Commercial
      General Liability
                    
                    
                    8,138
                    
                    
                    
                    27,291
                    
                    
                    
                    35,429
                    
                    
                    
                    7,531
                    
                    
                    
                    26,998
                    
                    
                    
                    34,529Automobile
                    
                    
                    480
                    
                    
                    
                    1,398
                    
                    
                    
                    1,878
                    
                    
                    
                    657
                    
                    
                    
                    1,863
                    
                    
                    
                    2,520Total
                    
                    $
                    16,436
                    
                    
                    $
                    51,336
                    
                    
                    $
                    67,772
                    
                    
                    $
                    16,236
                    
                    
                    $
                    48,539
                    
                    
                    $
                    64,775





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 increased by approximately $3.0 million during the
six months ended June 30, 2009.


- 41
-


21st Century
Holding Company


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





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 six-month
period ended June 30, 2009 was 63.4% compared with 59.8% for the same period in
2008. The table below reflects the loss ratios by product
line.





Six Months Ended June 30,2009
                  
                  
                  2008Homeowners'
                  
                  
                  63.89%
                  
                  
                  
                  54.96%Commercial
      General Liability
                  
                  
                  63.31%
                  
                  
                  
                  70.42%Automobile
                  
                  
                  18.71%
                  
                  
                  
                  -45.09%All
      lines
                  
                  
                  63.35%
                  
                  
                  
                  59.79%





Operating and Underwriting
Expenses





Operating
and underwriting expenses increased $1.2 million, or 39.5%, to $4.2 million for
the six months ended June 30, 2009, compared with $3.0 million for the six
months ended June 30, 2008.





The
change is partially due to the addition of Insure-Link, created to serve as an
independent insurance agency, for which operating and underwriting expenses
increased to $0.3 million for the six months ended June 30, 2009, compared with
nearly nothing for the six months ended June 30, 2008. Additionally, premium tax
expense increased $0.5 million, to $0.4 million for the six months ended June
30, 2009, compared to a $0.1 million credit balance for the six months ended
June 30, 2008. Actuarial fees, surveys and underwriting reports, computer
service fees and licenses and fees expense increased a net total $0.4 million
for the six months ended June 30, 2009, compared with the six months ended June
30, 2008.





Salaries
and Wages





Salaries
and wages increased $0.3 million, or 8.1%, to $3.8 million for the six months
ended June 30, 2009, compared with $3.5 million for the six months ended June
30, 2008. The change is primarily due to the addition of new employees of
Insure-Link, which was created to serve as an independent insurance
agency.





The
charge to operations for stock based compensation, in accordance with the
provisions of SFAS No. 123R, was approximately $230,000 during the six months
ended June 30, 2009 compared with approximately $258,000 for the six months
ended June 30, 2008.





Policy
Acquisition Costs, Net of Amortization





Policy
acquisition costs, net of amortization, decreased $1.9 million, or 25.8%, to
$5.7 million for the six months ended June 30, 2009, compared with $7.6 million
for the six months ended June 30, 2008. 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 change is due to increased homeowners’
written premium, net of decreased commercial general liability
premium.





Provision
for Income Tax Expense (Benefit)





The
provision for income tax expense was $0.1 million for the six months ended June
30, 2009, compared with a provision for income tax benefit of $0.9 million for
the six months ended June 30, 2008.  The effective rate for income
taxes of 10.5% for the six months ended June 30, 2009 was primarily due to our
tax-exempt interest and dividend received deduction. The unusual provision for
the six months ended June 30, 2008 is due to a $6.5 million investment
impairment adjustment and the related deferred tax asset. Also affecting the
2008 rate was a one-time $1.0 million benefit in connection with the estimation
of the previous years’ income taxes.





Net
Income





Because
of the foregoing, the Company’s net income for the six months ended June 30,
2009, was $1.1 million compared with net income of $1.8 million for the six
months ended June 30, 2008.


- 42
-


21st Century
Holding Company


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





Liquidity
and Capital Resources





For the
six months ended June 30, 2009, our primary sources of capital were revenues
generated from operations, including increased unearned premiums, decreased
prepaid reinsurance premiums, increased unpaid losses and LAE, decreased
deferred income tax expense, increased premium deposits and customer credit
balances, non-cash compensation, depreciation and amortization, an increase in
the provision for uncollectible premiums receivable and an increase in the
provision for credit losses, net. Also contributing to our liquidity were
proceeds from the sale of investments and the tax benefit related to non-cash
compensation. Because we are a holding company, we are largely dependent upon
fees and commissions from our subsidiaries for cash flow.





For the
six months ended June 30, 2009, operations provided net operating cash flow of
$15.7 million, compared with having used $3.6 million for the six months ended
June 30, 2008.





For the
six months ended June 30, 2009, operations generated $26.5 million of gross cash
flow due to a $16.2 million increase in unearned premiums, a $4.4 million
decrease in prepaid reinsurance premiums,  a $3.0 million increase in
unpaid losses and LAE, a $1.1 million decrease in deferred income tax expense, a
$0.3 million increase in premium deposits and customer credit balances, $0.2
million in non-cash compensation, $0.1 million in depreciation and amortization,
a $0.1 million increase in the provision for uncollectible premiums receivable,
all in conjunction with net income of $1.1 million.





For the
six months ended June 30, 2009, operations used $10.8 million of gross cash flow
primarily due to a $3.3 million increase in policy acquisition costs, net of
amortization, a $2.0 million increase in reinsurance recoverable, net, a $1.3
million increase in other assets, a $1.3 million increase in premiums
receivable, a $1.3 million decrease in accounts payable and accrued expenses and
a $0.6 million increase in income taxes recoverable. To a much
less significant extent, operations used additional sources of cash via $0.5
million in net realized investment losses, a $0.3 million decrease in bank
overdraft and $0.2 million in amortization of investment discount,
net.





For the
six months ended June 30, 2009, net investing activities used $76.2 million,
compared with having provided $46.7 million for the six months ended June 30,
2008. Our available for sale investment portfolio is highly liquid as it
consists entirely of readily marketable securities.





For the
six months ended June 30, 2009, investing activities generated $27.0 million and
used $103.1 million mainly from the sale and purchase activity in our bond
portfolio. Our fixed income portfolio contained callable features exercised in
2008.  The proceeds from these called securities were in cash and
short-term investments as of December 31, 2008.  During the six months
ended June 30, 2009, we invested $70.8 million in longer-term investments. We
are currently evaluating long and short-term investment options for best yields
that match our liquidity needs.





For the
six months ended June 30, 2009, net financing activities used $0.9 million,
compared with having used $1.8 million for the six months ended June 30, 2008.
For the six months ended June 30, 2009, the uses of cash in connection with
financing activities included $1.0 million in dividends paid.





We offer
direct billing in connection with our homeowners’, commercial general liability
and automobile 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
June 30, 2009, 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 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.


- 43
-


21st Century
Holding Company


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




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.


- 44
-


21st Century
Holding Company





Item
3





Quantitative
and Qualitative Disclosures about Market Risk





Information
related to quantitative and qualitative disclosures about market risk was
included under Item 7A, “Quantitative and Qualitative Disclosures about Market
Risk”, in our Annual Report on Form 10-K for the year ended December 31, 2008.
No material changes have occurred in market risk since this information was
disclosed except as discussed below.





Our investment portfolio is available
for sale and carried at fair value, except for that portion deemed as held to
maturity.  Gains that represent securities with a fair value in excess
of amortized cost, and losses (amortized cost is in excess of fair value) that
are deemed temporary by management are recorded in shareholders’ equity in
accumulated other comprehensive income. Losses deemed other than temporary by
management are recorded as net realized losses in the consolidated statement of
operations. The amortized cost, estimated fair value of securities available for
sale and securities held to maturity, and unrealized gains and losses as of June
30, 2009 are as follows.





Book Value / Amortized Cost
                    
                    
                    Fair Value
                    
                    
                    Unrealized
                      Gains
                      (Losses)(Dollars
      in Thousands)Debt
      securities:U.S.
      government obligations, available for sale
                    
                    $
                    49,110
                    
                    
                    
                    47.11
                    %
                    
                    $
                    48,857
                    
                    
                    
                    46.95
                    %
                    
                    $
                    (253
                    )U.S.
      government obligations, held to maturity
                    
                    
                    2,639
                    
                    
                    
                    2.53
                    %
                    
                    
                    2,801
                    
                    
                    
                    2.69
                    %
                    
                    
                    162Corporate,
      available for sale
                    
                    
                    40,972
                    
                    
                    
                    39.30
                    %
                    
                    
                    41,315
                    
                    
                    
                    39.70
                    %
                    
                    
                    343Corporate,
      held to maturity
                    
                    
                    888
                    
                    
                    
                    0.85
                    %
                    
                    
                    890
                    
                    
                    
                    0.86
                    %
                    
                    
                    2$
                    93,609
                    
                    
                    
                    89.79
                    %
                    
                    $
                    93,863
                    
                    
                    
                    90.20
                    %
                    
                    $
                    254Equity
      securities:Common
      stocks available for sale
                    
                    
                    10,639
                    
                    
                    
                    10.21
                    %
                    
                    
                    10,195
                    
                    
                    
                    9.80
                    %
                    
                    
                    (444
                    )Total
      debt and equity securities
                    
                    $
                    104,248
                    
                    
                    
                    100.00
                    %
                    
                    $
                    104,058
                    
                    
                    
                    100.00
                    %
                    
                    $
                    (190
                    )





We did
not record the approximately $164,000 unrealized gains for our held to maturity
portfolio reflected in the above table, as of June 30, 2009.





As of
June 30, 2009, there were no concentrations greater than 5% of total investments
in any single investment other than United States government and agency
obligations and obligations of states and political subdivisions.





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 the Company files or
submits under the Securities and 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 the
Company’s management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosures.





Our
management, with the participation of its 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 June 30, 2009.  Based upon their evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures, as of June 30, 2009, were effective to
provide reasonable assurance that information required to be disclosed by the
Company 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 the Company in such reports is
accumulated and communicated to our management, including its 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.


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21st Century
Holding Company





Part
II: OTHER INFORMATION





Item
1





Legal
Proceedings





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





Item
1A





Risk
Factors





There
have been no material changes from the risk factors previously disclosed in Item
1, Risk Factors, in the Company’s Form 10-K for the fiscal year ended December
31, 2008.





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, 2008 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 June 30, 2009, we have issued an aggregate of 10,000
options to a board member of the Company under our 2002 stock option plan. The
options have an exercise price of $3.30 per share, vest over five years and
expire six years from the grant date.





(b)
None





(c)
None





Item
3





Defaults
upon Senior Securities





None





Item
4





Submission
of Matters to a Vote of Security Holders





Our
annual meeting of shareholders was held on June 2, 2009.  Proxies for
the meeting were solicited pursuant to Regulation 14A of the Securities Exchange
Act of 1934 and there were no solicitation in opposition to that of
management.





Both of management’s nominees for
directors as listed in the proxy statement were elected.  Bruce F.
Simberg and Richard W. Wilcox, Jr. were elected as Class II directors to serve
until the Annual Shareholder’s Meeting to be held in 2012 or until their
successors are qualified and elected.  The number of votes cast for
each nominee is as follows.





Shares
      Voted
                    
                    
                    Votes"FOR"
                    
                    
                    WithheldRichard
      W. Wilcox, Jr.
                    
                    
                    4,947,841
                    
                    
                    
                    2,225,624Bruce
      F. Simberg
                    
                    
                    4,884,846
                    
                    
                    
                    2,288,619


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21st Century
Holding Company





The
proposal to approve an amendment to the 2002 Stock Option Plan to extend the
maximum term of option grants from six years to ten years was approved by the
following votes.





Shares
      Voted
                    
                    
                    Shares
      Voted
                    
                    
                    Shares
                    
                    
                    Broker"FOR"
                    
                    
                    "AGAINST"
                    
                    
                    "ABSTAINING"
                    
                    
                    Non-Votes2,199,347
                    
                    
                    
                    1,625,252
                    
                    
                    
                    301,597
                    
                    
                    
                    3,047,269





The
proposal to adopt the 2009 Stock Option Plan was denied by the following
votes.





Shares
      Voted
                    
                    
                    Shares
      Voted
                    
                    
                    Shares
                    
                    
                    Broker"FOR"
                    
                    
                    "AGAINST"
                    
                    
                    "ABSTAINING"
                    
                    
                    Non-Votes1,070,105
                    
                    
                    
                    2,739,743
                    
                    
                    
                    316,347
                    
                    
                    
                    3,047,270





The
proposal to approve the appointment of DeMeo, Young, and McGrath as the
Company’s independent auditors for the fiscal year ended December 31, 2009, was
ratified by the following votes.





Shares
      Voted
                    
                    
                    Shares
      Voted
                    
                    
                    Shares
                    
                    
                    Broker"FOR"
                    
                    
                    "AGAINST"
                    
                    
                    "ABSTAINING"
                    
                    
                    Non-Votes5,674,636
                    
                    
                    
                    495,868
                    
                    
                    
                    1,002,961
                    
                    
                    
                    -





Item
5





Other
Information





On April
1, 2009, Jenifer G. Kimbrough jointed the Board of Directors of the
Company.  In connection with her appointment, the Company entered into
an indemnification agreement with her, a copy of which is attached as Exhibit
10.7 and incorporated herein by reference.





Effective
as of June 22, 2009, the Company entered into amended and restated employment
agreements with Michael Braun, its Chief Executive Officer and Peter Prygelski,
its Chief Financial Officer.  The Company amended the change of
control provisions to provide for two years severance to these executives
if  they are terminated without cause or if there is a change of
control and the executive is terminated without cause or for good reasons after
the change of control (as such terms are defined in the employment
agreements).  Additionally, the term of Mr. Prygelski's employment
agreement was extended until July 1, 2012.





The
foregoing description of the amended employment employments agreements for Mr.
Braun and Mr. Prygelski are qualified in their entirety by reference to the
amended  employment agreements, attached hereto as Exhibits 10.8 and
10.9 and incorporated herein by reference.





Item
6





Exhibits





10.1
Reimbursement Contract between Federated National Insurance Company and The
State Board of    Administration of Florida (SBA), which
administers the Florida Hurricane Catastrophe Fund (FHCF), effective June 1,
2009 (incorporated by reference from Exhibit 10.1 in the Company’s Form 8-K
filed with the SEC on June 4, 2009).





10.2
Addendum No. 1 to the Reimbursement Contract between Federated National
Insurance Company and The State Board of Administration of Florida (SBA) which
administers the Florida Hurricane Catastrophe Fund (FHCF), effective June 1,
2009 (incorporated by reference from Exhibit 10.2 in the Company’s Form 8-K
filed with the SEC on June 4, 2009).





10.3
Addendum No. 2 to the Reimbursement Contract between Federated National
Insurance Company and The State Board of Administration of Florida (SBA) which
administers the Florida Hurricane Catastrophe Fund (FHCF), effective June 1,
2009 (incorporated by reference from Exhibit 10.3 in the Company’s Form 8-K
filed with the SEC on June 4, 2009).


- 47
-


21st Century
Holding Company





10.4
Amended Addendum No. 2 to the Reimbursement Contract between Federated National
Insurance Company and The State Board of Administration of Florida (SBA) which
administers the Florida Hurricane Catastrophe Fund (FHCF), effective June 1,
2009 (incorporated by reference from Exhibit 10.1 in the Company’s Form 8-K
filed with the SEC on June 16, 2009).





10.5
Addendum No. 4 to the Reimbursement Contract between Federated National
Insurance Company and The State Board of Administration of Florida (SBA) which
administers the Florida Hurricane Catastrophe Fund (FHCF), effective June 1,
2009 (incorporated by reference from Exhibit 10.2 in the Company’s Form 8-K
filed with the SEC on June 16, 2009).





10.6
Addendum No. 5 to the Reimbursement Contract between Federated National
Insurance Company and The State Board of Administration of Florida (SBA) which
administers the Florida Hurricane Catastrophe Fund (FHCF), effective June 1,
2009 (incorporated by reference from Exhibit 10.3 in the Company’s Form 8-K
filed with the SEC on June 16, 2009).





10.7
Indemnification Agreement between the Company and Jenifer G. Kimbrough dated
April 1, 2009. *





10.8
Amended and Restated Employment Agreement between 21st Century Holding Company
and Michael H. Braun dated June 22, 2009.*





10.9
Amended and Restated Employment Agreement between 21st Century Holding Company
and Peter J. Prygelski dated June 22, 2009. *





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


- 48
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21st Century
Holding Company





Signatures





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





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





Date:
August 10, 2009


- 49
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21st Century
Holding Company




EXHIBIT
INDEX





10.7
Indemnification Agreement between the Company and Jenifer G. Kimbrough dated
April 1, 2009.





10.8
Amended and Restated Employment Agreement between 21st Century Holding Company
and Michael H. Braun dated June 22, 2009.





10.9
Amended and Restated Employment Agreement between 21st Century Holding Company
and Peter J. Prygelski dated June 22, 2009.





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.


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