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, 2010


OR





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


EXCHANGE
ACT OF 1934





FOR
THE TRANSITION PERIOD FROM ___________________TO
_______________________





Commission
File number 0-2500111




21stCentury Holding
Company


(Exact
name of registrant as specified in its charter)





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





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


(Address
of principal executive offices) (Zip Code)





954-581-9993


(Registrant's
telephone number, including area code)




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.





Yes x No  ̈





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





Yes  ̈ No  ̈





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





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





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


Yes  ̈ No x





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





Common
Stock, $.01par value
–7,946,384 outstanding as of August 16, 2010





21ST CENTURY
HOLDING COMPANY





INDEX





PAGEPART
      I: FINANCIAL INFORMATIONITEM
      1
                Financial
      Statements
                3ITEM
      2
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                32ITEM
      3
                Quantitative
      and Qualitative Disclosures about Market Risk
                54ITEM
      4
                Controls
      and Procedures
                56PART
      II: OTHER INFORMATIONITEM
      1
                Legal
      Proceedings
                57ITEM 1A
                Risk
      Factors
                57ITEM
      2
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                57ITEM
      3
                Defaults
      upon Senior Securities
                57ITEM
      4
                (Removed
      and Reserved)
                57ITEM
      5
                Other
      Information
                58ITEM
      6
                Exhibits
                58SIGNATURES
                59


- 2
-


PART
I: FINANCIAL INFORMATION


Item
1 Financial Statements


21stCENTURY
HOLDING COMPANY


CONSOLIDATED
BALANCE SHEETS


(UNAUDITED)





PeriodEndingJune30,2010
                    
                    
                    December31,2009(Dollars in Thousands)ASSETSInvestmentsDebt
      maturities, available for sale, at fair value
                    
                    $
                    60,417
                    
                    
                    $
                    91,513Debt
      maturities, held to maturity, at amortized cost
                    
                    
                    5,787
                    
                    
                    
                    2,650Equity
      securities, available for sale, at fair value
                    
                    
                    14,289
                    
                    
                    
                    20,056Total
      investments
                    
                    
                    80,493
                    
                    
                    
                    114,219Cash
      and short term investments
                    
                    
                    67,301
                    
                    
                    
                    28,197Prepaid
      reinsurance premiums
                    
                    
                    2,068
                    
                    
                    
                    10,319Premiums
      receivable, net of allowance for credit losses of $102 and $24,
      respectively
                    
                    
                    6,180
                    
                    
                    
                    10,311Reinsurance
      recoverable, net
                    
                    
                    13,918
                    
                    
                    
                    15,302Deferred
      policy acquisition costs
                    
                    
                    9,127
                    
                    
                    
                    8,267Deferred
      income taxes, net
                    
                    
                    4,439
                    
                    
                    
                    4,675Income
      taxes receivable
                    
                    
                    9,969
                    
                    
                    
                    7,069Property,
      plant and equipment, net
                    
                    
                    691
                    
                    
                    
                    859Other
      assets
                    
                    
                    2,382
                    
                    
                    
                    3,671Total
      assets
                    
                    $
                    196,568
                    
                    
                    $
                    202,889LIABILITIES
      AND SHAREHOLDERS' EQUITYUnpaid
      losses and LAE
                    
                    $
                    66,366
                    
                    
                    $
                    70,611Unearned
      premiums
                    
                    
                    55,104
                    
                    
                    
                    50,857Premiums
      deposits and customer credit balances
                    
                    
                    2,560
                    
                    
                    
                    2,129Bank
      overdraft
                    
                    
                    7,499
                    
                    
                    
                    8,251Deferred
      gain from sale of property
                    
                    
                    758
                    
                    
                    
                    1,006Accounts
      payable and accrued expenses
                    
                    
                    1,988
                    
                    
                    
                    2,593Total
      liabilities
                    
                    
                    134,275
                    
                    
                    
                    135,447Shareholders'
      equity:Common
      stock, $0.01 par value. Authorized 25,000,000 shares; issued and
      outstanding 7,946,384 and 7,953,384, respectively.
                    
                    
                    79
                    
                    
                    
                    80Preferred
      stock, $0.01 par value. Authorized 1,000,000 shares; none issued or
      outstanding
                    
                    
                    -
                    
                    
                    
                    -Additional
      paid-in capital
                    
                    
                    50,421
                    
                    
                    
                    50,185Accumulated
      other comprehensive income
                    
                    
                    395
                    
                    
                    
                    2,026Retained
      earnings
                    
                    
                    11,398
                    
                    
                    
                    15,151Total
      shareholders' equity
                    
                    
                    62,293
                    
                    
                    
                    67,442Total
      liabilities and shareholders' equity
                    
                    $
                    196,568
                    
                    
                    $
                    202,889





SEE
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


- 3
-


21ST CENTURY
HOLDING COMPANY


CONSOLIDATED
STATEMENTS OF OPERATIONS


(UNAUDITED)





ThreeMonthsEndedJune30,
                                
                                
                                SixMonthsEndedJune30,2010
                                
                                
                                2009
                                
                                
                                2010
                                
                                
                                2009(Dollars in Thousands except EPS and share and dividend data)
                                
                                
                                (Dollars in Thousands except EPS and share and dividend data)Revenue:Gross
      premiums written
                                
                                $
                                27,597
                                
                                
                                $
                                33,601
                                
                                
                                $
                                54,619
                                
                                
                                $
                                62,032Gross
      premiums ceded
                                
                                
                                (20,907
                                )
                                
                                
                                (19,588
                                )
                                
                                
                                (21,825
                                )
                                
                                
                                (19,916
                                )Net
      premiums written
                                
                                
                                6,690
                                
                                
                                
                                14,013
                                
                                
                                
                                32,794
                                
                                
                                
                                42,116Increase
      (decrease) in prepaid reinsurance premiums
                                
                                
                                6,422
                                
                                
                                
                                10,305
                                
                                
                                
                                (6,639
                                )
                                
                                
                                2,236Increase
      in unearned premiums
                                
                                
                                (2,220
                                )
                                
                                
                                (10,053
                                )
                                
                                
                                (4,247
                                )
                                
                                
                                (16,182
                                )Net
      change in prepaid reinsurance premiums and unearned
    premiums
                                
                                
                                4,202
                                
                                
                                
                                252
                                
                                
                                
                                (10,886
                                )
                                
                                
                                (13,946
                                )Net
      premiums earned
                                
                                
                                10,892
                                
                                
                                
                                14,265
                                
                                
                                
                                21,908
                                
                                
                                
                                28,170Commission
      income
                                
                                
                                558
                                
                                
                                
                                383
                                
                                
                                
                                944
                                
                                
                                
                                621Finance
      revenue
                                
                                
                                103
                                
                                
                                
                                91
                                
                                
                                
                                176
                                
                                
                                
                                174Managing
      general agent fees
                                
                                
                                439
                                
                                
                                
                                478
                                
                                
                                
                                933
                                
                                
                                
                                909Net
      investment income
                                
                                
                                1,011
                                
                                
                                
                                782
                                
                                
                                
                                1,945
                                
                                
                                
                                1,463Net
      realized investment gains (losses)
                                
                                
                                1,599
                                
                                
                                
                                69
                                
                                
                                
                                3,824
                                
                                
                                
                                (468
                                )Regulatory
      assessments recovered
                                
                                
                                51
                                
                                
                                
                                1,188
                                
                                
                                
                                567
                                
                                
                                
                                1,736Other
      income
                                
                                
                                381
                                
                                
                                
                                70
                                
                                
                                
                                518
                                
                                
                                
                                382Total
      revenue
                                
                                
                                15,034
                                
                                
                                
                                17,326
                                
                                
                                
                                30,815
                                
                                
                                
                                32,987Expenses:Losses
      and LAE
                                
                                
                                10,196
                                
                                
                                
                                8,974
                                
                                
                                
                                19,261
                                
                                
                                
                                17,848Operating
      and underwriting expenses
                                
                                
                                3,013
                                
                                
                                
                                2,506
                                
                                
                                
                                5,729
                                
                                
                                
                                4,459Salaries
      and wages
                                
                                
                                2,176
                                
                                
                                
                                1,897
                                
                                
                                
                                4,248
                                
                                
                                
                                3,806Policy
      acquisition costs, net of amortization
                                
                                
                                3,035
                                
                                
                                
                                2,915
                                
                                
                                
                                6,495
                                
                                
                                
                                5,659Total
      expenses
                                
                                
                                18,420
                                
                                
                                
                                16,292
                                
                                
                                
                                35,733
                                
                                
                                
                                31,772(Loss)
      income before provision for income tax (benefit) expense
                                
                                
                                (3,386
                                )
                                
                                
                                1,034
                                
                                
                                
                                (4,918
                                )
                                
                                
                                1,215Provision
      for income tax (benefit) expense
                                
                                
                                (1,037
                                )
                                
                                
                                250
                                
                                
                                
                                (1,642
                                )
                                
                                
                                128Net
      (loss) income
                                
                                $
                                (2,349
                                )
                                
                                $
                                784
                                
                                
                                $
                                (3,276
                                )
                                
                                $
                                1,087Net
      (loss) income  per share - basic
                                
                                $
                                (0.30
                                )
                                
                                $
                                0.10
                                
                                
                                $
                                (0.42
                                )
                                
                                $
                                0.14Net  (loss)
      income per share - diluted
                                
                                $
                                (0.30
                                )
                                
                                $
                                0.10
                                
                                
                                $
                                (0.42
                                )
                                
                                $
                                0.14Weighted
      average number of common shares outstanding - basic
                                
                                
                                7,946,384
                                
                                
                                
                                8,013,894
                                
                                
                                
                                7,946,384
                                
                                
                                
                                8,013,894Weighted
      average number of common shares outstanding - diluted
                                
                                
                                7,946,384
                                
                                
                                
                                8,013,894
                                
                                
                                
                                7,946,384
                                
                                
                                
                                8,013,894Dividends
      paid per share
                                
                                $
                                -
                                
                                
                                $
                                0.06
                                
                                
                                $
                                0.06
                                
                                
                                $
                                0.24





SEE
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


- 4
-


21ST CENTURY
HOLDING COMPANY


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(UNAUDITED)





Six Months Ended June 30,2010
                          
                          
                          2009(Dollars
      in Thousands)Cash
      flow from operating activities:Net
      (loss) income
                          
                          $
                          (3,276
                          )
                          
                          $
                          1,087Adjustments
      to reconcile net (loss) income to net cash provided by operating
      activities:Amortization
      of investment premium (discount), net
                          
                          
                          427
                          
                          
                          
                          (233
                          )Depreciation
      and amortization of property plant and equipment, net
                          
                          
                          107
                          
                          
                          
                          94Net
      realized investment gains
                          
                          
                          (3,824
                          )
                          
                          
                          (468
                          )Provision
      for credit losses, net
                          
                          
                          4
                          
                          
                          
                          26(Recovery)
      provision for uncollectible premiums receivable
                          
                          
                          (77
                          )
                          
                          
                          70Non-cash
      compensation
                          
                          
                          198
                          
                          
                          
                          229Changes
      in operating assets and liabilities:Premiums
      receivable
                          
                          
                          4,208
                          
                          
                          
                          (1,278
                          )Prepaid
      reinsurance premiums
                          
                          
                          8,251
                          
                          
                          
                          4,396Reinsurance
      recoverable, net
                          
                          
                          1,385
                          
                          
                          
                          (1,999
                          )Income
      taxes recoverable
                          
                          
                          (2,900
                          )
                          
                          
                          (614
                          )Deferred
      income tax expense, net of other comprehensive income
                          
                          
                          1,220
                          
                          
                          
                          1,096Policy
      acquisition costs, net of amortization
                          
                          
                          (860
                          )
                          
                          
                          (3,290
                          )Other
      assets
                          
                          
                          1,036
                          
                          
                          
                          (1,324
                          )Unpaid
      losses and LAE
                          
                          
                          (4,244
                          )
                          
                          
                          2,996Unearned
      premiums
                          
                          
                          4,247
                          
                          
                          
                          16,182Premium
      deposits and customer credit balances
                          
                          
                          431
                          
                          
                          
                          325Bank
      overdraft
                          
                          
                          (752
                          )
                          
                          
                          (302
                          )Accounts
      payable and accrued expenses
                          
                          
                          (605
                          )
                          
                          
                          (1,252
                          )Net
      cash provided by operating activities
                          
                          
                          4,976
                          
                          
                          
                          15,741Cash
      flow provided (used)  by investing activities:Proceeds
      from sale of investment securities
                          
                          
                          81,072
                          
                          
                          
                          26,966Purchases
      of investment securities available for sale
                          
                          
                          (46,565
                          )
                          
                          
                          (103,128
                          )Purchases
      of property and equipment
                          
                          
                          60
                          
                          
                          
                          (9
                          )Net
      cash provided (used) by investing activities
                          
                          
                          34,567
                          
                          
                          
                          (76,171
                          )Cash
      flow used by financing activities:Dividends
      paid
                          
                          
                          (477
                          )
                          
                          
                          (962
                          )Tax
      benefit related to non-cash compensation
                          
                          
                          38
                          
                          
                          
                          51Net
      cash used by financing activities
                          
                          
                          (439
                          )
                          
                          
                          (911
                          )Net
      increase (decrease) in cash and short term investments
                          
                          
                          39,104
                          
                          
                          
                          (61,341
                          )Cash
      and short term investments at beginning of period
                          
                          
                          28,197
                          
                          
                          
                          124,577Cash
      and short term investments at end of period
                          
                          $
                          67,301
                          
                          
                          $
                          63,236





SEE
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


- 5
-


21ST CENTURY
HOLDING COMPANY


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(UNAUDITED)





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





SEE
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


- 6
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





(1)
Organization and Business





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





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





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





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





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





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





During
the six months ended June 30, 2010, 79.3%, 12.3%, 3.4% and 5.0% of the premiums
we underwrote were for homeowners’ property and casualty, commercial general
liability, federal flood, and personal automobile insurance, respectively.
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, commercial
general liability, federal flood, and personal automobile insurance,
respectively.





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


- 7
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





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





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





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





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





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





(2)
Basis of Presentation





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





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





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


- 8
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





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





(3)
Summary of Significant Accounting Policies and Practices





(A) Critical Accounting
Policies





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





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





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





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





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


- 9
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





We are
required to review the contractual terms of all our reinsurance purchases to
ensure compliance with FASB-issued guidance. The guidance establishes
the conditions required for a contract with a reinsurer to be accounted for as
reinsurance and prescribes accounting and reporting standards for those
contracts. Contracts that do not result in the reasonable possibility that the
reinsurer may realize a significant loss from the insurance risk assumed
generally do not meet the conditions for reinsurance accounting and must be
accounted for as deposits. The guidance also requires us to disclose the nature,
purpose and effect of reinsurance transactions, including the premium amounts
associated with reinsurance assumed and ceded. It also requires disclosure of
concentrations of credit risk associated with reinsurance receivables and
prepaid reinsurance premiums.





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





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





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





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





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





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


- 10
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





(B)
Impact of New Accounting Pronouncements





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





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





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





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





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


- 11
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





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





(C) Stock Options





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





(D)
Earnings per Share





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





(E)
Reclassifications





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





(4)
Commitments and Contingencies





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





(A)
Insured Claim Activity





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





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





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


- 12
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





(B)
Assessment Related Activity





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





As a
direct premium writer in the state of Florida, we are required to participate in
certain insurer solvency associations under Florida Statutes Section 631.57(3)
(a), administered by FIGA. Participation in these pools is based on our
written premium by line of business to total premiums written statewide by all
insurers. Participation has resulted in assessments against us, as it had
in 2006 and 2007, and again on October 30, 2009. There were no assessments
made during the six months ended June 30, 2010 or for the year ended December
31, 2008. Through 2007, we have been assessed $6.6 million and in 2009 we
were assessed an additional $0.6 million in connection with the insolvencies of
domestic insurance companies. For statutory accounting these assessments
are not charged to operations; in contrast, GAAP treatment is to charge current
operations for the assessments. Through policyholder surcharges, as approved by
the Florida Office of Insurance Regulation (“Florida OIR”), we have since
recouped $6.8 million in connection with these assessments.





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





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





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





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





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


- 13
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





Florida OIR issued an Order April 29,
2010, levying an increase to the emergency assessment to 1.30% from 1.0%,
of direct written premium on all property and casualty lines of business written
in the state of Florida for the benefit of the FHCF. The assessment was approved
by the Florida SBA to fund FHCF losses stemming from the 2005 hurricane season.
This order requires insurers to begin collecting the emergency assessment for
policies issued or renewed on or after January 1, 2011. The FHCF emergency
assessment will be remitted to the administrator of the assessment as collected
and therefore accounted for in a manner such that amounts collected or
receivable are not recorded as revenues and amounts due or paid are not
expensed. Previously and still in effect, the Florida OIR issued a
similar order dated January 11, 2007, levying an emergency assessment of
1.40% of direct written premium on all property and casualty lines of business
written in the state of Florida for the benefit of Citizens’ High Risk Account.
This order requires insurers to collect the emergency assessment for policies
issued or renewed on or after July 1, 2007. Similar to the FHCF assessment
discussed above, the Citizens emergency assessment is remitted to the
administrator of the assessment as collected and therefore accounted for in a
manner such that amounts collected or receivable are not recorded as revenues
and amounts due or paid are not expensed.





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





(C)
Operational Matters





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





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





The
Company has recorded a net deferred tax asset of $4.4 million as of June 30,
2010.  Realization of net deferred tax asset is dependent on generating
sufficient taxable income in future periods. Management believes that it is more
likely than not that the deferred tax assets will be realized and as such no
valuation allowance has been recorded against the net deferred tax asset. When
assessing the need for valuation allowances, the Company considers future
taxable income and ongoing prudent and feasible tax planning strategies. Should
a change in circumstances lead to a change in judgment about the realizability
of deferred tax assets in future years, the Company would record valuation
allowances as deemed appropriate in the period that the change in circumstances
occurs, along with a corresponding increase or charge to net income. The
resolution of tax reserves and changes in valuation allowances could be material
to the Company’s results of operations for any period, but is not expected to be
material to the Company’s financial position.





Relative
to the Company’s commitments stemming from operational matters, effective on or
about March 1, 2006, 21st Century
sold its interest in the Lauderdale Lakes property to an unrelated party. As
part of this transaction, 21st Century
agreed to lease the same facilities for a five-year term. Our lease for this
office space expires in December 2011.


- 14
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





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





FiscalYear
                  
                  Leasepayments(Dollars in Thousands)2010
                  
                  $
                  3202011
                  
                  
                  650Total
                  
                  $
                  970





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





(5)
Investments





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





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





Total
investments decreased $33.7 million, or 29.5%, to $80.5 million as of June 30,
2010, compared with $114.2 million as of December 31, 2009.





The debt
and equity securities that are available for sale and carried at fair value
represent 93% of total investments as of June 30, 2010, compared with 98% as of
December 31, 2009.





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





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





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





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





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





·
            prospects
      for the issuer’s industry segment;





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


- 15
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





·
            historical
      volatility of the fair value of the
security.





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





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





As of
June 30, 2010, all of our securities are in good standing and not impaired as
defined by FASB-issued guidance, except for our holdings in Blackrock Pfd, Inc.,
which continues to be impaired by $0.1 million as of June 30, 2010, compared to
the total $0.4 million as of December 31, 2009.





The
investments held as of June 30, 2010 and December 31, 2009, were comprised
mainly of corporate bonds held in various industries and municipal and United
States government bonds. As of June 30, 2010, 73% of the debt portfolio is in
diverse industries and 27% is in United States government bonds.  As of
June 30, 2010, approximately 81% of the equity holdings are in equities related
to diverse industries and 19% are in mutual funds.





As of
June 30, 2010, 43% of the investment portfolio is in corporate bonds, 16% is in
obligations of states and political subdivisions, and 22% is in United States
government bonds. Approximately 10% of the common stock holdings are related to
foreign entities.





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





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





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





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


- 16
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





(A)
Debt and Equity Securities





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





June30,2010
                
                
                December31,2009Carrying
                
                
                Percent
                
                
                Carrying
                
                
                PercentAmount
                
                
                ofTotal
                
                
                Amount
                
                
                ofTotal(Dollars in Thousands)Debt
      securities, at market:United
      States government obligations and authorities
                
                $
                12,214
                
                
                
                15.17
                %
                
                $
                10,152
                
                
                
                8.89
                %Obligations
      of states and political subdivisions
                
                
                12,693
                
                
                
                15.77
                %
                
                
                39,269
                
                
                
                34.38
                %Corporate
                
                
                34,795
                
                
                
                43.23
                %
                
                
                42,092
                
                
                
                36.85
                %International
                
                
                715
                
                
                
                0.89
                %
                
                
                -
                
                
                
                0.00
                %60,417
                
                
                
                75.06
                %
                
                
                91,513
                
                
                
                80.12
                %Debt
      securities, at amortized cost:United
      States government obligations and authorities
                
                
                5,787
                
                
                
                7.19
                %
                
                
                2,650
                
                
                
                2.32
                %Total
      debt securities
                
                
                66,204
                
                
                
                7.19
                %
                
                
                94,163
                
                
                
                2.32
                %Equity
      securities, at market
                
                
                14,289
                
                
                
                17.75
                %
                
                
                20,056
                
                
                
                17.56
                %Total
      investments
                
                $
                80,493
                
                
                
                100.00
                %
                
                $
                114,219
                
                
                
                100.00
                %





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





ThreeMonthsEndedJune30,2010
                
                
                2009Gains
                
                
                Fair Value
                
                
                Gains
                
                
                Fair Value(Losses)
                
                
                atSale
                
                
                (Losses)
                
                
                atSale(Dollars in Thousands)Debt
      securities
                
                $
                1,520
                
                
                $
                41,690
                
                
                $
                56
                
                
                $
                8,279Equity
      securities
                
                
                569
                
                
                
                4,699
                
                
                
                22
                
                
                
                951Total
      realized gains
                
                
                2,089
                
                
                
                46,389
                
                
                
                78
                
                
                
                9,230Debt
      securities
                
                
                (16
                )
                
                
                1,086
                
                
                
                (9
                )
                
                
                3,962Equity
      securities
                
                
                (474
                )
                
                
                2,442
                
                
                
                -
                
                
                
                883Total
      realized losses
                
                
                (490
                )
                
                
                3,528
                
                
                
                (9
                )
                
                
                4,845Net
      realized gains on investments
                
                $
                1,599
                
                
                $
                49,917
                
                
                $
                69
                
                
                $
                14,075


- 17
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





The
following table shows the realized gains (losses) for debt and equity securities
for the six months ended June 30, 2010 and 2009.





SixMonthsEndedJune30,2010
                
                
                2009Gains
                
                
                Fair Value
                
                
                Gains
                
                
                Fair Value(Losses)
                
                
                atSale
                
                
                (Losses)
                
                
                atSale(Dollars in Thousands)Debt
      securities
                
                $
                1,868
                
                
                $
                56,272
                
                
                $
                17
                
                
                $
                16,131Equity
      securities
                
                
                2,661
                
                
                
                18,047
                
                
                
                -
                
                
                
                1,102Total
      realized gains
                
                
                4,529
                
                
                
                74,319
                
                
                
                17
                
                
                
                17,233Debt
      securities
                
                
                (40
                )
                
                
                2,567
                
                
                
                (228
                )
                
                
                4,435Equity
      securities
                
                
                (665
                )
                
                
                3,881
                
                
                
                (257
                )
                
                
                1,664Total
      realized losses
                
                
                (705
                )
                
                
                6,448
                
                
                
                (485
                )
                
                
                6,099Net
      realized gains (losses) on investments
                
                $
                3,824
                
                
                $
                80,767
                
                
                $
                (468
                )
                
                $
                23,332


- 18
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





A summary
of the amortized cost, estimated fair value, gross unrealized gains and losses
of debt and equity securities at June 30, 2010 and December 31, 2009 is as
follows.





Gross
                
                
                GrossAmortized
                
                
                Unrealized
                
                
                Unrealized
                
                
                EstimatedCost
                
                
                Gains
                
                
                Losses
                
                
                FairValue(Dollars in Thousands)June
      30, 2010Debt
      Securities  - Available For Sale:United
      States government obligations and authorities
                
                $
                11,958
                
                
                $
                271
                
                
                $
                16
                
                
                $
                12,213Obligations
      of states and political subdivisions
                
                
                12,321
                
                
                
                404
                
                
                
                32
                
                
                
                12,693Corporate
                
                
                32,550
                
                
                
                2,262
                
                
                
                17
                
                
                
                34,795International
                
                
                697
                
                
                
                19
                
                
                
                -
                
                
                
                716$
                57,526
                
                
                $
                2,956
                
                
                $
                65
                
                
                $
                60,417Debt
      Securities  - Held To Maturity:United
      States government obligations and authorities
                
                $
                5,787
                
                
                $
                253
                
                
                $
                32
                
                
                $
                6,008Corporate
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -$
                5,787
                
                
                $
                253
                
                
                $
                32
                
                
                $
                6,008Equity
      securities - common stocks
                
                $
                16,547
                
                
                $
                213
                
                
                $
                2,471
                
                
                $
                14,289December
      31, 2009Debt
      Securities  - Available For Sale:Obligations
      of states and political subdivisions
                
                $
                49,041
                
                
                $
                695
                
                
                $
                315
                
                
                $
                49,421Corporate
                
                
                40,350
                
                
                
                1,798
                
                
                
                56
                
                
                
                42,092$
                89,391
                
                
                $
                2,493
                
                
                $
                371
                
                
                $
                91,513Debt
      Securities  - Held To Maturity:United
      States government obligations and authorities
                
                $
                2,650
                
                
                $
                148
                
                
                $
                5
                
                
                $
                2,793Corporate
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -$
                2,650
                
                
                $
                148
                
                
                $
                5
                
                
                $
                2,793Equity
      securities - common stocks
                
                $
                18,927
                
                
                $
                1,840
                
                
                $
                711
                
                
                $
                20,056


- 19
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





The table
below reflects our unrealized investment gains (losses) by investment
class, aged for length of time in a continuous unrealized gain (loss)
position as of June 30, 2010.





Unrealized Gains
                      (Losses)
                    
                    
                    Less than 12
                      months
                    
                    
                    12 months or
                      longer(Dollars in Thousands)Debt
      securities:United
      States government obligations and authorities
                    
                    $
                    256
                    
                    
                    $
                    173
                    
                    
                    $
                    83Obligations
      of states and political subdivisions
                    
                    
                    372
                    
                    
                    
                    24
                    
                    
                    
                    348Corporate
                    
                    
                    2,243
                    
                    
                    
                    288
                    
                    
                    
                    1,955International
                    
                    
                    17
                    
                    
                    
                    16
                    
                    
                    
                    12,888
                    
                    
                    
                    501
                    
                    
                    
                    2,387Equity
      securities:Common
      stocks
                    
                    
                    (2,255
                    )
                    
                    
                    (1,924
                    )
                    
                    
                    (331
                    )Total
      debt and equity securities
                    
                    $
                    633
                    
                    
                    $
                    (1,423
                    )
                    
                    $
                    2,056





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





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





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





June30,2010
                  
                  
                  December31,2009Amortized
                  
                  
                  Estimated
                  
                  
                  Amortized
                  
                  
                  EstimatedCost
                  
                  
                  FairValue
                  
                  
                  Cost
                  
                  
                  FairValue(Dollars in Thousands)Due
      in one year or less
                  
                  $
                  4,378
                  
                  
                  $
                  4,423
                  
                  
                  $
                  1,602
                  
                  
                  $
                  1,615Due
      after one through five years
                  
                  
                  28,680
                  
                  
                  
                  29,686
                  
                  
                  
                  49,821
                  
                  
                  
                  50,885Due
      after five through ten years
                  
                  
                  20,264
                  
                  
                  
                  21,622
                  
                  
                  
                  26,177
                  
                  
                  
                  27,217Due
      after ten years
                  
                  
                  9,991
                  
                  
                  
                  10,694
                  
                  
                  
                  14,441
                  
                  
                  
                  14,589Total
                  
                  $
                  63,313
                  
                  
                  $
                  66,425
                  
                  
                  $
                  92,041
                  
                  
                  $
                  94,306


- 20
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





United
States Treasury notes with a book value of $1,038,000 and $1,043,000, both
maturing in 2012, were on deposit with the Florida OIR as of June 30, 2010, as
required by law for American Vehicle and Federated National respectively, and
are included with other investments held until maturity.





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





ThreeMonthsEndedJune30,2010
                  
                  
                  2009(Dollars in Thousands)Interest
      on debt securities
                  
                  $
                  926
                  
                  
                  $
                  630Dividends
      on equity securities
                  
                  
                  82
                  
                  
                  
                  117Interest
      on cash and cash equivalents
                  
                  
                  3
                  
                  
                  
                  35Total
      investment income
                  
                  $
                  1,011
                  
                  
                  $
                  782Net
      realized gains (losses)
                  
                  $
                  1,599
                  
                  
                  $
                  69




Proceeds
from sales of debt and equity securities during the three months ended June 30,
2010 and 2009, were approximately $50.1 million and $14.1 million,
respectively.





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





SixMonthsEndedJune30,2010
                  
                  
                  2009(Dollars in Thousands)Interest
      on debt securities
                  
                  $
                  1,771
                  
                  
                  $
                  1,056Dividends
      on equity securities
                  
                  
                  169
                  
                  
                  
                  218Interest
      on cash and cash equivalents
                  
                  
                  5
                  
                  
                  
                  189Total
      investment income
                  
                  $
                  1,945
                  
                  
                  $
                  1,463Net
      realized gains (losses)
                  
                  $
                  3,824
                  
                  
                  $
                  (468
                  )





Proceeds
from sales of debt and equity securities during the six months ended June 30,
2010 and 2009, were approximately $81.1 million and $23.3 million,
respectively.





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





ThreeMonthsEndedJune30,2010
                  
                  
                  2009(Dollars in Thousands)Net
      realized gainsDebt
      securities
                  
                  $
                  1,504
                  
                  
                  $
                  47Equity
      securities
                  
                  
                  95
                  
                  
                  
                  22Total
                  
                  $
                  1,599
                  
                  
                  $
                  69


- 21
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





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





SixMonthsEndedJune30,2010
                  
                  
                  2009(Dollars in Thousands)Net
      realized gains (losses)Debt
      securities
                  
                  $
                  1,828
                  
                  
                  $
                  (211
                  )Equity
      securities
                  
                  
                  1,996
                  
                  
                  
                  (257
                  )Total
                  
                  $
                  3,824
                  
                  
                  $
                  (468
                  )





A summary of net unrealized gains
(losses) follows.





As of June 30, 2010
                  
                  
                  As of December 31, 2009(Dollars
      in Thousands)Net
      unrealized gains (losses)Debt
      securities
                  
                  $
                  2,888
                  
                  
                  $
                  2,122Equity
      securities
                  
                  
                  (2,255
                  )
                  
                  
                  1,128Total
                  
                  $
                  633
                  
                  
                  $
                  3,250





(6)
Fair Value Disclosure





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





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





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





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





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


- 22
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





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





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





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





AsofJune30,2010Level1
                      
                      
                      Level2
                      
                      
                      Level3
                      
                      
                      Total(Dollars in Thousands)Debt
      securities:United
      States government obligations and authorities
                      
                      $
                      -
                      
                      
                      $
                      12,213
                      
                      
                      $
                      -
                      
                      
                      $
                      12,213Obligations
      of states and political subdivisions
                      
                      
                      -
                      
                      
                      
                      12,693
                      
                      
                      
                      -
                      
                      
                      
                      12,693Corporate
                      
                      
                      34,795
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      34,795International
                      
                      
                      -
                      
                      
                      
                      716
                      
                      
                      
                      -
                      
                      
                      
                      71634,795
                      
                      
                      
                      25,622
                      
                      
                      
                      -
                      
                      
                      
                      60,417Equity
      securities:Common
      stocks
                      
                      
                      14,289
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      14,28914,289
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      14,289Total
      debt and equity securities
                      
                      $
                      49,084
                      
                      
                      $
                      25,622
                      
                      
                      $
                      -
                      
                      
                      $
                      74,706





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





AsofDecember31,2009Level1
                
                
                Level2
                
                
                Level3
                
                
                Total(Dollars in Thousands)Debt
      securities:United
      States government obligations and authorities
                
                $
                -
                
                
                $
                10,152
                
                
                $
                -
                
                
                $
                10,152Obligations
      of states and political subdivisions
                
                
                -
                
                
                
                39,269
                
                
                
                -
                
                
                
                39,269Corporate
                
                
                42,092
                
                
                
                -
                
                
                
                -
                
                
                
                42,09242,092
                
                
                
                49,421
                
                
                
                -
                
                
                
                91,513Equity
      securities:Common
      stocks
                
                
                20,056
                
                
                
                -
                
                
                
                -
                
                
                
                20,05620,056
                
                
                
                -
                
                
                
                -
                
                
                
                20,056Total
      debt and equity securities
                
                $
                62,148
                
                
                $
                49,421
                
                
                $
                -
                
                
                $
                111,569


- 23
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





(7)  Comprehensive
Income





For the three and six months ended June
30, 2010 and 2009, comprehensive income consisted of the
following.





ThreeMonthsEndedJune30,
                  
                  
                  SixMonthsEndedJune30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009(Dollars in Thousands)
                  
                  
                  (Dollars in Thousands)Net
      (loss) income
                  
                  $
                  (2,349
                  )
                  
                  $
                  784
                  
                  
                  $
                  (3,276
                  )
                  
                  $
                  1,087Change
      in net unrealized (losses) gains on investments available for
      sale
                  
                  
                  (1,748
                  )
                  
                  
                  1,503
                  
                  
                  
                  (2,617
                  )
                  
                  
                  1,549Comprehensive
      (loss) income, before tax
                  
                  
                  (4,097
                  )
                  
                  
                  2,287
                  
                  
                  
                  (5,893
                  )
                  
                  
                  2,636Income
      tax benefit (expense) related to items of other comprehensive
      income
                  
                  
                  658
                  
                  
                  
                  (566
                  )
                  
                  
                  985
                  
                  
                  
                  (583
                  )Comprehensive
      (loss) income
                  
                  $
                  (3,439
                  )
                  
                  $
                  1,721
                  
                  
                  $
                  (4,908
                  )
                  
                  $
                  2,053





(8)
Reinsurance Agreements





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





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





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





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


- 24
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





Our
property lines of business include homeowners’ multi-peril and fire. For the
2010-2011 hurricane season, the excess of loss and FHCF treaties will insure the
property lines for approximately $353.3 million of aggregate catastrophic losses
and LAE with a maximum single event coverage totaling approximately $270.2
million, with the Company retaining the first $5.0 million of losses and LAE for
each event. Our reinsurance program includes coverage purchased from the private
market, which affords optional reinstatement premium protection that provides
coverage beyond the first event, along with any remaining coverage from the
FHCF. Coverage afforded by the FHCF totals approximately $211.0 million, or
59.7% of the $353.3 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.





The
estimated cost to the Company for the excess of loss reinsurance products for
the 2010-2011 hurricane season, inclusive of approximately $18.4 million payable
to the FHCF and the prepaid automatic premium reinstatement protection, is
approximately $42.8 million.





The cost
and amounts of reinsurance were based on management's analysis of Federated
National's exposure to catastrophic risk. Our data will be subjected to exposure
level analysis as of September 30, 2010. This analysis of our exposure level, in
relation to the total exposures to the FHCF and excess of loss treaties, could
produce changes in limits and reinsurance premiums because of the potential
changes in our exposure level. Any change to management’s June 30, 2010 analysis
will be amortized over the remaining balance of the underlying policy term. The
Company’s retention will not change.


- 25
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





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





Reinsurer
                        
                        A.M. Best RatingUNITED
      STATESAmerican
      Agricultural Insurance
                        
                        A
                        
                        (2)Everest
      Reinsurance Company
                        
                        A+
                        
                        (2)Munich
      Reinsurance America, Inc.
                        
                        A+
                        
                        (2)QBE
      Reinsurance Corporation
                        
                        A
                        
                        (2)BERMUDAACE
      Tempest Reinsurance Ltd.
                        
                        A+
                        *
                        (2)Actua
      Re Limited
                        
                        NR
                        *
                        (1)Amlin
      Bermuda Limited
                        
                        A
                        
                        (2)Ariel
      Reinsurance Company Limited
                        
                        A-
                        *DaVinci
      Reinsurance Limited
                        
                        A
                        *
                        (2)Flagstone
      Reinsurance Limited
                        
                        A-Montpelier
      Reinsurance Ltd.
                        
                        A-
                        
                        (2)Nephila/
      Allianz Risk Trnsfr Zurich (BDA)
                        
                        NR-5
                        *
                        (2)Renaissance
      Reinsurance Limited
                        
                        A+
                        *
                        (2)Torus
      Insurance (Bermuda) Limited
                        
                        A-
                        *UNITED
      KINGDOMAntares
      Syndicate No. 1274 (AUL)
                        
                        A
                        
                        (2)Broadgate
      Underwriting Limited Syndicate No. 1301 (BGT)
                        
                        A
                        
                        (2)Arrow
      Syndicate No. 1910 (ARW)
                        
                        A
                        *
                        (2)Amlin
      Syndicate No. 2001 (AML)
                        
                        A
                        
                        (2)Novae
      Syndicate No. 2007 (NVA)
                        
                        A
                        
                        (2)Houson
      Casualty Co. (UK Branch)
                        
                        A+
                        
                        (2)EUROPELansforsakringar
      Sak Forsakringsaktiebolag
                        
                        NR-5
                        
                        (2)Liberty
      Syndicates Paris/Syndicate 4472
                        
                        A
                        
                        (2)





*
Reinstatement Premium Protection Program Participants





(1)
Participant has funded a trust agreement for their exposure with approximately
$3.8 million of cash and U.S. Government obligations of American institutions at
fair market value.





(2)
Standard & Poor's rated "A" or higher (investment grade - economic situation
can affect finance)





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


- 26
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





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





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





* 2009
Reinstatement Premium Protection Program Participants





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





(Blank)
Non admitted reinsurer in Florida.





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





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





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


- 27
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





As a
direct premium writer in the state of Florida, we are required to participate in
certain insurer solvency associations under Florida Statutes Section 631.57(3)
(a), administered by FIGA. Participation in these pools is based on our
written premium by line of business to total premiums written statewide by all
insurers. Participation has resulted in assessments against us, as it had
in 2006 and 2007, and again on October 30, 2009. There were no assessments
made during the six months ended June 30, 2010 or for the year ended December
31, 2008. Through 2007, we were assessed $6.6 million and in 2009 we were
assessed an additional $0.6 million in connection with the insolvencies of
domestic insurance companies. For statutory accounting these assessments
are not charged to operations, in contrast, GAAP treatment is to charge current
operations for the assessments. Through policyholder surcharges, as approved by
the Florida OIR, we have since recouped $6.8 million in connection with these
assessments.





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





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





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





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





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





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





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


- 28
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





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





(9) Stock Compensation
Plans





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





In 2002,
we implemented the 2002 Stock Option Plan.  The purpose of this plan
is to advance our interests by providing an additional incentive to attract,
retain and motivate highly qualified and competent persons who are key to the
Company, including employees, consultants, independent contractors, officers and
directors. Our success is largely dependent upon their efforts and judgment;
therefore, by authorizing the grant of options to purchase common stock, we
encourage stock ownership. Options outstanding under the plan were granted at
prices either equal to or above the market value of the stock on the date of
grant, typically vest over a five-year period, and expire six 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, 2010 and December 31, 2009, we
had outstanding exercisable options to purchase 638,718 and 736,951 shares,
respectively.





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





1998 Plan
                      
                      
                      2002 PlanNumber of
                        Shares
                      
                      
                      Weighted
                        Average
                        Option
                        ExercisePrice
                      
                      
                      Numberof
                        Shares
                      
                      
                      Weighted
                        Average
                        Option
                        ExercisePriceOutstanding
      at January 1, 2008
                      
                      
                      152,599
                      
                      
                      $
                      14.92
                      
                      
                      
                      660,309
                      
                      
                      $
                      13.78Granted
                      
                      
                      4,500
                      
                      
                      $
                      8.67
                      
                      
                      
                      162,500
                      
                      
                      $
                      8.92Exercised
                      
                      
                      (13,500
                      )
                      
                      $
                      6.67
                      
                      
                      
                      (141,458
                      )
                      
                      $
                      8.81Cancelled
                      
                      
                      (13,500
                      )
                      
                      $
                      10.03
                      
                      
                      
                      (23,200
                      )
                      
                      $
                      12.60Outstanding
      at January 1, 2009
                      
                      
                      130,099
                      
                      
                      $
                      16.07
                      
                      
                      
                      658,151
                      
                      
                      $
                      13.69Granted
                      
                      
                      -
                      
                      
                      $
                      -
                      
                      
                      
                      147,000
                      
                      
                      $
                      4.37Exercised
                      
                      
                      -
                      
                      
                      $
                      -
                      
                      
                      
                      -
                      
                      
                      $
                      -Cancelled
                      
                      
                      (5,500
                      )
                      
                      $
                      20.23
                      
                      
                      
                      (68,200
                      )
                      
                      $
                      11.58Outstanding
      at January 1, 2010
                      
                      
                      124,599
                      
                      
                      $
                      15.88
                      
                      
                      
                      736,951
                      
                      
                      $
                      12.03Granted
                      
                      
                      -
                      
                      
                      $
                      -
                      
                      
                      
                      30,000
                      
                      
                      $
                      4.36Exercised
                      
                      
                      -
                      
                      
                      $
                      -
                      
                      
                      
                      -
                      
                      
                      $
                      -Cancelled
                      
                      
                      (5,000
                      )
                      
                      $
                      13.70
                      
                      
                      
                      (128,233
                      )
                      
                      $
                      15.95Outstanding
      at June 30, 2010
                      
                      
                      119,599
                      
                      
                      $
                      15.97
                      
                      
                      
                      638,718
                      
                      
                      $
                      10.88


- 29
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





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





1998 Plan
                      
                      
                      2002 PlanOptions Exercisable at:
                      
                      Number of
                        Shares
                      
                      
                      Weighted
                        Average
                        Option
                        ExercisePrice
                      
                      
                      Numberof
                        Shares
                      
                      
                      Weighted
                        Average
                        Option
                        ExercisePriceJune
      30, 2010
                      
                      
                      67,889
                      
                      
                      $
                      15.97
                      
                      
                      
                      314,471
                      
                      
                      $
                      10.88December
      31, 2010
                      
                      
                      13,670
                      
                      
                      $
                      15.97
                      
                      
                      
                      78,208
                      
                      
                      $
                      10.88December
      31, 2011
                      
                      
                      18,670
                      
                      
                      $
                      15.97
                      
                      
                      
                      100,450
                      
                      
                      $
                      10.88December
      31, 2012
                      
                      
                      18,670
                      
                      
                      $
                      15.97
                      
                      
                      
                      75,889
                      
                      
                      $
                      10.88December
      31, 2013
                      
                      
                      700
                      
                      
                      $
                      15.97
                      
                      
                      
                      42,300
                      
                      
                      $
                      10.88December
      31, 2014
                      
                      
                      -
                      
                      
                      $
                      15.97
                      
                      
                      
                      21,400
                      
                      
                      $
                      10.88Thereafter
                      
                      
                      -
                      
                      
                      $
                      15.97
                      
                      
                      
                      6,000
                      
                      
                      $
                      10.88Total
      options exercisable
                      
                      
                      119,599
                      
                      
                      
                      
                      
                      
                      
                      638,718





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





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





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





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





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





As a
result of adopting FASB-issued guidance on January 1, 2006, the Company’s income
from continuing operations before provision for income taxes and net income for
the three months ended June 30, 2010 are lower by approximately $101,000 and
$63,000, respectively, than if it had continued to account for share-based
compensation under APB guidance.





As a
result of adopting FASB-issued guidance on January 1, 2006, the Company’s income
from continuing operations before provision for income taxes and net income for
the six months ended June 30, 2010 are lower by approximately $198,000 and
$123,000, respectively, than if it had continued to account for share-based
compensation under APB guidance.





As a
result of adopting FASB-issued guidance on January 1, 2006, the Company’s income
from continuing operations before provision for income taxes and net income for
the three months ended June 30, 2009 are lower by approximately $120,000 and
$75,000, respectively, than if it had continued to account for share-based
compensation under APB guidance.





As a
result of adopting FASB-issued guidance on January 1, 2006, the Company’s income
from continuing operations before provision for income taxes and net income for
the six months ended June 30, 2009 are lower by approximately $230,000 and
$143,000, respectively, than if it had continued to account for share-based
compensation under APB guidance.


- 30
-


21st Century
Holding Company


Notes
to Condensed Consolidated Financial Statements





Basic and
diluted earnings per share for the three months ended June 30, 2010 would have
been ($0.29), if the Company had not adopted FASB-issued guidance, compared with
reported basic and diluted earnings per share of ($0.30).  Basic and
diluted earnings per share for the six months ended June 30, 2010 would have
been ($0.40), if the Company had not adopted FASB-issued guidance, compared with
reported basic and diluted earnings per share of ($0.42).





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 FASB-issued guidance, compared with
reported basic and diluted earnings per share of $0.10. Basic and diluted
earnings per share for the six months ended June 30, 2009 would have been $0.16,
if the Company had not adopted FASB-issued guidance, compared with reported
basic and diluted earnings per share of $0.14.





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





There
were no options granted during the three months ended June 30,
2010.   During the same period 2009, the weighted average fair
value was $0.61 to $1.13, estimated on the date of grant using the Black-Scholes
option-pricing model.





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





June
      30, 2010
                              
                              June
      30, 2009Dividend
      yield
                              
                              
                              5.80%
                              
                              
                              7.20%
      - 17.30%Expected
      volatility
                              
                              
                              82.36%
                              
                              
                              57.54% - 70.68%Risk-free
      interest rate
                              
                              
                              1.33%
                              
                              
                              1.22%
      - 1.50%Expected
      life (in years)
                              
                              
                              3.06
                              
                              
                              3.53
      - 4.16





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





Weighted Average
                  
                  
                  WeightedRange of
                  
                  
                  Outstanding at
                  
                  
                  Contractual
                  
                  
                  Average
                  
                  
                  Exercisable atExercisePrice
                  
                  
                  June30,2010
                  
                  
                  PeriodsinYears
                  
                  
                  ExercisePrice
                  
                  
                  June30,20101998
      Plan
                  
                  $
                  6.67 - $27.79
                  
                  
                  
                  119,599
                  
                  
                  
                  2.84
                  
                  
                  $
                  15.97
                  
                  
                  
                  67,8892002
      Plan
                  
                  $
                  3.03 - $18.21
                  
                  
                  
                  638,718
                  
                  
                  
                  3.33
                  
                  
                  $
                  10.88
                  
                  
                  
                  314,471





(10)
Stockholders’ Equity





Capital Stock





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





(11)
Subsequent Events





None


- 31
-


21st Century
Holding Company


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





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





Item
2





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





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





Forward-Looking
Statements





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





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


- 32
-


21st Century
Holding Company


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





Overview





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





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





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





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





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





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





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





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


- 33
-


21st Century
Holding Company


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


During
the six months ended June 30, 2010, 79.3%, 12.3%, 3.4% and 5.0% of the premiums
we underwrote were for homeowners’ property and casualty, commercial general
liability, federal flood, and personal automobile insurance, respectively.
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, commercial
general liability, federal flood, and personal automobile insurance,
respectively.





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





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





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





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





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





In recent
years, approximately two-dozen new homeowner insurance companies
received authority by the Florida OIR to commence business as admitted carriers
in the state. At least one new carrier has been licensed to enter the
Florida homeowners’ market during 2009 and another in 2010.





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


- 34
-


21st Century
Holding Company


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


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





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





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





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





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





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





Critical
Accounting Policies





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





New
Accounting Pronouncements





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


- 35
-


21st Century
Holding Company


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


Analysis
of Financial Condition


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





Total Investments





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





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





Total
investments decreased $33.7 million, or 29.5%, to $80.5 million as of June
30, 2010, compared with $114.2 million as of December 31, 2009. The decrease is
due to our sale of investments for which the company recorded $3.8 million net
realized investment gains. The proceeds will be reinvested after evaluating long
and short-term investment options for the best yields that match our liquidity
needs.





The debt
and equity securities that are available for sale and carried at fair value
represent 93% of total investments as of June 30, 2010, compared with 98% as of
December 31, 2009.





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





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





UnrealizedGainsand(Losses)June30,2010
                  
                  
                  December31,2009(Dollars in Thousands)Debt
      securities:United
      States government obligations and authorities
                  
                  $
                  256
                  
                  
                  $
                  (120
                  )Obligations
      of states and political subdivisions
                  
                  
                  372
                  
                  
                  
                  500Corporate
                  
                  
                  2,243
                  
                  
                  
                  1,742International
                  
                  
                  17
                  
                  
                  
                  -2,888
                  
                  
                  
                  2,122Equity
      securities:Common
      stocks
                  
                  
                  (2,255
                  )
                  
                  
                  1,128Total
      debt and equity securities
                  
                  $
                  633
                  
                  
                  $
                  3,250





The
company’s investment in marketable equity securities consist primarily of
investments in common stock in diverse industries.  The $2.3 million
unrealized losses are from common stocks held in these diverse industries as of
June 30, 2010.  The Company evaluated the near-term prospects in
relation to the severity and duration of the impairment.  Based on
this evaluation and, the Company’s ability and intent to hold these investments
for a reasonable period of time sufficient for a forecasted recovery of fair
value, the Company does not consider these investments to be
other-than-temporarily impaired at June 30, 2010.


- 36
-


21st Century
Holding Company


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


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





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





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





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





·
            prospects
      for the issuer’s industry segment;





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





·
            historical
      volatility of the fair value of the
security.





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





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





As of
June 30, 2010, all of our securities are in good standing and not impaired,
except for our holdings in Blackrock Pfd, Inc., which continues to be impaired
by $0.1 million as of June 30, 2010, compared to the total $0.4 million as of
December 31, 2009.





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





The
investments held as of June 30, 2010 were comprised mainly of corporate bonds
held in various industries, municipal bonds and United States government bonds.
The investments held as of December 31, 2009, were comprised mainly of corporate
bonds held in various industries, municipal bonds and United States government
bonds.  As of June 30, 2010, 73% of the debt portfolio is in diverse
industries and 27% is in United States government bonds.  As of June 30,
2010, approximately 81% of the equity holdings are in equities related to
diverse industries and 19% are in mutual funds.





As of
June 30, 2010, 43% of the investment portfolio is in corporate bonds, 16% is in
obligations of states and political subdivisions, and 22% is in United States
government bonds. Approximately 10% of the common stock holdings are related to
foreign entities.


- 37
-


21st Century
Holding Company


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


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





June30,2010
                
                
                December31,2009Carrying
                
                
                Percent
                
                
                Carrying
                
                
                PercentAmount
                
                
                ofTotal
                
                
                Amount
                
                
                ofTotal(Dollars in Thousands)Debt
      securities, at market:United
      States government obligations and authorities
                
                $
                12,213
                
                
                
                15.17
                %
                
                $
                10,152
                
                
                
                8.89
                %Obligations
      of states and political subdivisions
                
                
                12,693
                
                
                
                15.77
                %
                
                
                39,269
                
                
                
                34.38
                %Corporate
                
                
                34,795
                
                
                
                43.23
                %
                
                
                42,092
                
                
                
                36.85
                %International
                
                
                716
                
                
                
                0.89
                %
                
                
                -
                
                
                
                0.00
                %60,417
                
                
                
                75.06
                %
                
                
                91,513
                
                
                
                80.12
                %Debt
      securities, at amortized cost:United
      States government obligations and authorities
                
                
                5,787
                
                
                
                7.19
                %
                
                
                2,650
                
                
                
                2.32
                %Total
      debt securities
                
                
                66,204
                
                
                
                7.19
                %
                
                
                94,163
                
                
                
                2.32
                %Equity
      securities, at market
                
                
                14,289
                
                
                
                17.75
                %
                
                
                20,056
                
                
                
                17.56
                %Total
      investments
                
                $
                80,493
                
                
                
                100.00
                %
                
                $
                114,219
                
                
                
                100.00
                %





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





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





Cash and Short-Term
Investments





Cash and
short-term investments, which include cash, certificates of deposits, and money
market accounts, increased $39.1 million, or 138.7%, to $67.3 million as of
June 30, 2010, compared with $28.2 million as of December 31, 2009. The increase
in cash and short-term investments is from normal portfolio turnover wherein
investments were sold; we evaluate on an ongoing basis long and short-term
investment options for the best yields that match our liquidity
needs.





Prepaid Reinsurance
Premiums





Prepaid
reinsurance premiums decreased $8.2 million, or 80.0%, to $2.1 million as of
June 30, 2010, compared with $10.3 million as of December 31,
2009.  The change is due to our payments and amortization of prepaid
reinsurance premiums associated with our homeowners’ insurance book of business.
We believe concentrations of credit risk associated with our prepaid reinsurance
premiums are not significant.





Premiums Receivable, Net of Allowance
for Credit Losses





Premiums
receivable, net of allowance for credit losses, decreased $4.1 million, or
40.1%, to $6.2 million as of June 30, 2010, compared with $10.3 million as of
December 31, 2009.





Our
homeowners’ insurance premiums receivable decreased $5.4 million, or 60.3%, to
$3.6 million as of June 30, 2010, compared with $9.0 million as of December 31,
2009. The balance at December 31, 2009 included $5.4 million receivable in
connection with our Citizens’ assumed policies.


- 38
-


21st Century
Holding Company


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


Our
commercial general liability insurance premiums receivable increased $0.4
million, or 44.9%, to $1.3 million as of June 30, 2010, compared with $0.9
million as of December 31, 2009.





Premiums receivable in connection with
our automobile line of business increased $0.9 million, or 215.8%, to $1.4
million as of June 30, 2010, compared with $0.5 million as of December 31,
2009. See “Results of Operations-Six Months Ended June 30, 2010” for a
discussion regarding the increase in the Company’s sale of auto insurance during
2010.





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





Reinsurance Recoverable,
Net





Reinsurance
recoverable, net, decreased $1.4 million, or 9.0%, to $13.9 million as of June
30, 2010, compared with $15.3 million as of December 31, 2009. The
change is due to payment patterns by our reinsurers. All amounts are
current and deemed collectable. We believe concentrations of credit risk
associated with our reinsurance recoverables, net, are not
significant.





Deferred Policy Acquisition Costs
(“DPAC”)





DPAC
increased $0.8 million, or 10.4%, to $9.1 million as of June 30, 2010,
compared with $8.3 million as of December 31, 2009. The change is due to
increased homeowner’s direct written and unearned premium.





Deferred Income Taxes, Net





Deferred
income taxes, net, decreased $0.3 million, or 5.0%, to $4.4 million as of June
30, 2010, compared with $4.7 million as of December 31, 2009. Deferred income
taxes, net, is comprised of approximately $6.9 million and $9.1 million of
deferred tax assets, net of approximately $2.5 million and $4.4 million of
deferred tax liabilities as of June 30, 2010 and December 31, 2009,
respectively.





Income Taxes Receivable





Income
taxes receivable increased $2.9 million, or 41.0%, to $10.0 million as of June
30, 2010, compared with $7.1 million as of December 31, 2009. The change is due
to our net loss as discussed within “Results of Operations-Six Months Ended June
30, 2010”.




Other Assets





Other
assets decreased $1.3 million, or 35.1%, to $2.4 million as of June 30, 2010,
compared with $3.7 million as of December 31, 2009. Major components of other
assets are shown in the following table; the accrued interest income receivable
is primarily investment related.





June30,2010
                  
                  
                  December31,2009(Dollars in Thousands)Accrued
      interest income receivable
                  
                  $
                  740
                  
                  
                  $
                  1,162Notes
      receivable
                  
                  
                  483
                  
                  
                  
                  599Deposits
                  
                  
                  324
                  
                  
                  
                  334Prepaid
      expenses
                  
                  
                  491
                  
                  
                  
                  644Receivable
      for investments sold
                  
                  
                  -
                  
                  
                  
                  567Other
                  
                  
                  344
                  
                  
                  
                  365Total
                  
                  $
                  2,382
                  
                  
                  $
                  3,671


- 39
-


21st Century
Holding Company


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


Unpaid
Losses and LAE





Unpaid
losses and LAE decreased $4.2 million, or 6.0%, to $66.4 million as of June 30,
2010, compared with $70.6 million as of December 31, 2009. The composition of
unpaid losses and LAE by product line is as follows.





June30,2010
                
                
                December31,2009Case
                
                
                Bulk
                
                
                Total
                
                
                Case
                
                
                Bulk
                
                
                Total(Dollars in Thousands)
                
                
                (Dollars in Thousands)Homeowners'
                
                $
                8,714
                
                
                $
                15,657
                
                
                $
                24,371
                
                
                $
                8,705
                
                
                $
                19,298
                
                
                $
                28,003Commercial
      General Liability
                
                
                8,414
                
                
                
                27,207
                
                
                
                35,621
                
                
                
                7,885
                
                
                
                29,346
                
                
                
                37,231Automobile
                
                
                3,187
                
                
                
                3,187
                
                
                
                6,374
                
                
                
                2,612
                
                
                
                2,765
                
                
                
                5,377Total
                
                $
                20,315
                
                
                $
                46,051
                
                
                $
                66,366
                
                
                $
                19,202
                
                
                $
                51,409
                
                
                $
                70,611





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





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





Unearned Premium





Unearned
premiums increased $4.2 million, or 8.4%, to $55.1 million as of June 30, 2010,
compared with $50.9 million as of December 31, 2009. The change was due to a
$3.0 million increase in unearned homeowners’ insurance premiums, a $0.3 million
decrease in unearned commercial general liability premiums, a less than $0.1
million increase in unearned flood insurance premiums, and a $1.5 million
increase in unearned automobile premiums. Generally, as is in this case, an
increase in unearned premium directly relates to an increase in written premium
on a rolling twelve-month basis. Competition could negatively affect our
unearned premium.





Premium Deposits and Customer Credit
Balances





Premium
deposits and customer credit balances increased $0.5 million, or 20.2%, to $2.6
million as of June 30, 2010, compared with $2.1 million as of December 31, 2009.
Premium deposits are monies received on policies not yet in-force as of March
31, 2010.





Bank
Overdraft





Bank
overdraft decreased $0.8 million, or 9.1%, to $7.5 million as of June 30,
2010, compared with $8.3 million as of December 31, 2009. The bank overdraft
relates primarily to losses and LAE disbursements paid but not presented for
payment by the policyholder or vendor. The change relates to our payment
patterns in relationship to the rate at which those cash disbursements are
presented to the bank for payment.





Deferred Gain from Sale of
Property





Deferred
gain from sale of property decreased $0.2 million, or 24.7%, to $0.8 million as
of June 30, 2010, compared with $1.0 million as of December 31, 2009. As
required by FASB guidance, we are amortizing the deferred gain over the term of
the leaseback, which is scheduled to end in December 2011.


- 40
-


21st Century
Holding Company


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


Accounts Payable and Accrued
Expenses





Accounts payable and accrued expenses
decreased $0.6 million, or 23.3%, to $2.0 million as of June 30, 2010, compared
with $2.6 million as of December 31, 2009.





Results
of Operations


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





Gross
Premiums Written





Gross
premiums written decreased $6.0 million, or 17.9%, to $27.6 million for the
three months ended June 30, 2010, compared with $33.6 million for the three
months ended June 30, 2009.  The following table denotes gross
premiums written by major product line. This decline reflected primarily
decreases in the sale of homeowners’ and commercial general liability policies,
as described below.





ThreeMonthsEndedJune30,2010
                  
                  
                  2009(Dollars in Thousands)Amount
                  
                  
                  Percentage
                  
                  
                  Amount
                  
                  
                  PercentageHomeowners'
                  
                  $
                  22,205
                  
                  
                  
                  80.46
                  %
                  
                  $
                  28,660
                  
                  
                  
                  85.30
                  %Commercial
      General Liability
                  
                  
                  3,240
                  
                  
                  
                  11.74
                  %
                  
                  
                  3,895
                  
                  
                  
                  11.59
                  %Federal
      Flood
                  
                  
                  1,052
                  
                  
                  
                  3.81
                  %
                  
                  
                  1,018
                  
                  
                  
                  3.03
                  %Automobile
                  
                  
                  1,100
                  
                  
                  
                  3.99
                  %
                  
                  
                  28
                  
                  
                  
                  0.08
                  %Gross
      written premiums
                  
                  $
                  27,597
                  
                  
                  
                  100.00
                  %
                  
                  $
                  33,601
                  
                  
                  
                  100.00
                  %





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





On April 16, 2010, Federated National
announced it received approval from the Florida OIR for a premium rate increase
for its assumed homeowner's program from Citizens within the State of Florida.
The premium rate increase, which averaged approximately 15%, will be deployed on
Citizens take-out policies only with an effective date of July 1,
2010.





We
continue to offer premium discounts for wind mitigation efforts by
policyholders, as required by Florida law. These discounts have had a
significant effect on both written and earned premium. During the three months
ended June 30, 2010 and 2009, the change to the cumulative wind mitigation
credits afforded our policyholders totaled ($1.7) million and
$4.2 million, respectively. As of June 30, 2010, 57.6% of our
in-force homeowners’ policyholders were receiving wind mitigation credits
totaling approximately $27.1 million (a 24.6% reduction of in-force
premium), while 61.8 % of our in-force homeowners’ policyholders were
receiving wind mitigation credits totaling approximately $23.3 million, (a
27.9 % reduction of in-force premium), as of June 30, 2009.




Due in part to Florida’s mandated
homeowners’ rates reduction and wind mitigation discounts, the Company’s sale of
homeowners’ policies decreased $6.5 million, or 22.5%, to $22.2 million for the
three months ended June 30, 2010, compared with $28.7 million for the three
months ended June 30, 2009, gross of reinsurance costs. Our number of in-force
homeowners’ policies increased by approximately 14,458, or 42.3%, to
approximately 48,605 as of June 30, 2010, as compared to approximately 34,147 as
of June 30, 2009.





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





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


- 41
-


21st Century
Holding Company


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


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





The
Company’s sale of commercial general liability policies decreased by $0.7
million to $3.2 million for the three months ended June 30, 2010, compared with
$3.9 million for the three months ended June 30, 2009. The primary factor for
this decrease has been the slowdown in the economy, which had a dramatic impact
on the artisan contractor portfolio written by American Vehicle. An additional
factor is our decision to restrict underwriting authority within specific
commercial general liability classes and geographic areas.





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





Three Months Ended June 30,2010
                    
                    
                    2009Amount
                    
                    
                    Percentage
                    
                    
                    Amount
                    
                    
                    Percentage(Dollars
      in Thousands)StateAlabama
                    
                    $
                    12
                    
                    
                    
                    0.37
                    %
                    
                    $
                    23
                    
                    
                    
                    0.60
                    %Arkansas
                    
                    
                    -
                    
                    
                    
                    0.00
                    %
                    
                    
                    1
                    
                    
                    
                    0.04
                    %California
                    
                    
                    7
                    
                    
                    
                    0.23
                    %
                    
                    
                    9
                    
                    
                    
                    0.24
                    %Florida
                    
                    
                    2,650
                    
                    
                    
                    81.80
                    %
                    
                    
                    3,040
                    
                    
                    
                    78.06
                    %Georgia
                    
                    
                    27
                    
                    
                    
                    0.82
                    %
                    
                    
                    68
                    
                    
                    
                    1.74
                    %Kentucky
                    
                    
                    -
                    
                    
                    
                    0.00
                    %
                    
                    
                    1
                    
                    
                    
                    0.02
                    %Louisiana
                    
                    
                    298
                    
                    
                    
                    9.20
                    %
                    
                    
                    435
                    
                    
                    
                    11.17
                    %Oklahoma
                    
                    
                    3
                    
                    
                    
                    0.09
                    %
                    
                    
                    -
                    
                    
                    
                    0.00
                    %South
      Carolina
                    
                    
                    -
                    
                    
                    
                    0.00
                    %
                    
                    
                    2
                    
                    
                    
                    0.06
                    %Texas
                    
                    
                    242
                    
                    
                    
                    7.47
                    %
                    
                    
                    314
                    
                    
                    
                    8.07
                    %Virginia
                    
                    
                    1
                    
                    
                    
                    0.02
                    %
                    
                    
                    2
                    
                    
                    
                    0.00
                    %Total
                    
                    $
                    3,240
                    
                    
                    
                    100.00
                    %
                    
                    $
                    3,895
                    
                    
                    
                    100.00
                    %





The
Company’s sale of auto insurance policies increased by $1.1 million to $1.1
million for the three months ended June 30, 2010, compared with less than $0.1
million for the three months ended June 30, 2009. The Company’s sale of auto
insurance included new and renewal policies during the three months ended June
30, 2010, but was limited to renewal policies during the three months ended June
30, 2009.





Gross
Premiums Ceded





Gross
premiums ceded increased to $20.9 million for the three months ended June 30,
2010, compared with $19.6 million for the three months ended June 30, 2009.
Gross premiums ceded to the Florida Hurricane Catastrophe Fund (“FHCF”) totaled
$18.3 million, gross premiums ceded to the write-your-own flood program totaled
$1.1 million and gross premiums ceded relating to our commercial automobile
program totaled $1.5 for the three months ended June 30, 2010.


- 42
-


21st Century
Holding Company


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


Increase in Prepaid Reinsurance
Premiums





The
increase in prepaid reinsurance premiums was $6.4 million for the three months
ended June 30, 2010, compared with an increase of $10.3 million for the three
months ended June 30, 2009. The decreased charge to written premium 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 $2.2 million for the three months ended June
30, 2010, compared with an increase of $10.1 million for the three months ended
June 30, 2009. The change was due to a $2.0 million increase in unearned
homeowners’ insurance premiums, a $0.2 million decrease in unearned commercial
general liability premiums, a $0.3 million increase in unearned automobile
premiums, net of a $0.1 million increase in unearned flood premiums during the
three months ended June 30, 2010. These changes are a result of differences in
written premium volume during this period as compared with the same period last
year. See “Gross Premiums Written” above.





Net
Premiums Earned





Net
premiums earned decreased $3.4 million, or 23.7%, to $10.9 million for the three
months ended June 30, 2010, compared with $14.3 million for the three months
ended June 30, 2009.





The
following table denotes net premiums earned by product line.





ThreeMonthsEndedJune30,2010
                  
                  
                  2009Amount
                  
                  
                  Percentage
                  
                  
                  Amount
                  
                  
                  Percentage(Dollars in Thousands)Homeowners'
                  
                  $
                  7,039
                  
                  
                  
                  64.62
                  %
                  
                  $
                  9,239
                  
                  
                  
                  64.77
                  %Commercial
      General Liability
                  
                  
                  3,378
                  
                  
                  
                  31.02
                  %
                  
                  
                  4,978
                  
                  
                  
                  34.90
                  %Automobile
                  
                  
                  475
                  
                  
                  
                  4.36
                  %
                  
                  
                  48
                  
                  
                  
                  0.33
                  %Net
      premiums earned
                  
                  $
                  10,892
                  
                  
                  
                  100.00
                  %
                  
                  $
                  14,265
                  
                  
                  
                  100.00
                  %





The
change in homeowners’ net premiums earned is due to a $6.5 million decrease in
gross written premium as discussed, a $0.2 million change in gross premiums
ceded and a $4.1 million decrease in the net change to prepaid reinsurance
premiums and unearned premium.





The
change in commercial general liability net premiums earned is a result of a $0.7
million decrease in gross written premium, reflecting the impact of the economic
slowdown on the artisan contractor portfolio written by American Vehicle and our
decision to restrict underwriting authority within specific commercial general
liability classes and geographic areas.





The
change in automobile net premiums earned is a result of a $1.0 million increase
in gross written premium as discussed, a $1.4 million change in gross premiums
ceded and a $0.8 million decrease in the change to unearned
premium.





Commission
Income





Commission
income increased $0.2 million, or 45.7%, to $0.6 million for the three months
ended June 30, 2010, compared with $0.4 million for the three months
ended June 30, 2009. The primary sources of our commission income are our
managing general agent services, write-your-own-flood premiums and our
independent insurance agency, Insure-Link.


- 43
-


21st Century
Holding Company


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


Net
Investment Income





Net
investment income increased $0.2 million, or 29.2%, to $1.0 million for the
three months ended June 30, 2010, compared with $0.8 million for three months
ended June 30, 2009.  Our investment yield, net and gross of investment
expenses, excluding equities and including cash, were 2.6% and 2.8%,
respectively, for the three months ended June 30, 2010. Our investment yield,
net and gross of investment expenses, excluding equities and including
cash, were 2.5% and 2.7%, respectively, for the three months ended June 30,
2009.





Our
investment yield, net and gross of investment expenses measured against debt
securities, excluding equities and cash, were 3.8% and 4.2%, respectively, for
the three months ended June 30, 2010.  Our investment yield, net and gross
of investment expenses measured against debt securities, excluding equities and
cash, were 3.5% and 3.8%, respectively, for the three months ended June 30,
2009.





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





Net
Realized Investment Gains





Net
realized investment gains were $1.6 million for the three months ended June 30,
2010, compared with net realized investment gains of $0.1 million for the three
months ended June 30, 2009.  Realized investment gains recognized for the
three months ended June 30, 2010 were higher in 2010 than in 2009 because of an
overweight in corporate bonds, which have performed well during the first half
of 2010, and were sold to lock in gains and bolster surplus.





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





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





ThreeMonthsEndedJune30,2010
                  
                  
                  2009(Dollars in Thousands)Realized
      gains:Debt
      securities
                  
                  $
                  1,520
                  
                  
                  $
                  56Equity
      securities
                  
                  
                  569
                  
                  
                  
                  22Total
      realized gains
                  
                  
                  2,089
                  
                  
                  
                  78Realized
      losses:Debt
      securities
                  
                  
                  (16
                  )
                  
                  
                  (9
                  )Equity
      securities
                  
                  
                  (474
                  )
                  
                  
                  -Total
      realized losses
                  
                  
                  (490
                  )
                  
                  
                  (9
                  )Net
      realized gains on investments
                  
                  $
                  1,599
                  
                  
                  $
                  69





Regulatory
Assessments Recovered





Regulatory
assessments recovered decreased $1.1 million, or 95.7%, to $0.1 million for the
three months ended June 30, 2010, compared with $1.2 million for the three
months ended June 30, 2009.


- 44
-


21st Century
Holding Company


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


Other
Income





Other
income increased $0.3 million, or 446.6%, to $0.4 million for the three months
ended June 30, 2010, compared with $0.1 million for the three months ended June
30, 2009.





The major
component of other income for the three months ended June 30, 2010 is
approximately $0.1 million in partial recognition of our gain on the sale of our
Lauderdale Lakes property and $0.2 million in recognition of our gain on the
sale of other retail property.





Losses
and LAE





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





Losses
and LAE increased by $1.2 million, or 13.6%, to $10.2 million for the three
months ended June 30, 2010, compared with $9.0 million for the three months
ended June 30, 2009. The overall change includes a $1.4 million increase in our
homeowners’ program, a $1.0 million decrease in our commercial general liability
program and a $0.8 million increase in connection with our automobile
program.





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





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





June 30, 2010
                
                
                December 31, 2009Case
                
                
                Bulk
                
                
                Total
                
                
                Case
                
                
                Bulk
                
                
                Total(Dollars
      in Thousands)
                
                
                (Dollars
      in Thousands)Homeowners'
                
                $
                8,714
                
                
                $
                15,657
                
                
                $
                24,371
                
                
                $
                8,705
                
                
                $
                19,298
                
                
                $
                28,003Commercial
      General Liability
                
                
                8,414
                
                
                
                27,207
                
                
                
                35,621
                
                
                
                7,885
                
                
                
                29,346
                
                
                
                37,231Automobile
                
                
                3,187
                
                
                
                3,187
                
                
                
                6,374
                
                
                
                2,612
                
                
                
                2,765
                
                
                
                5,377Total
                
                $
                20,315
                
                
                $
                46,051
                
                
                $
                66,366
                
                
                $
                19,202
                
                
                $
                51,409
                
                
                $
                70,611





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





Management
revises its estimates based on the results of its analysis. This process assumes
that experience, adjusted for the effects of current developments and
anticipated trends, is an appropriate basis for estimating the ultimate
settlement of all claims. There is no precise method for subsequently evaluating
the impact of any specific factor on the adequacy of the reserves, because the
eventual redundancy or deficiency is affected by multiple factors. Because of
our process, reserves were decreased by approximately $4.2 million during the
three months ended June 30, 2010.





In
accordance with GAAP, our loss ratio is computed as losses and LAE divided by
net premiums earned. A lower loss ratio generally results in higher operating
income. Our loss ratio for the three-month period ended June 30, 2010 was 92.6%
compared with 62.9% for the same period in 2009.


- 45
-


21st Century
Holding Company


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


The table below reflects the loss
ratios by product line.





ThreeMonthsEndedJune30,2010
                  
                  
                  2009Homeowners'
                  
                  
                  103.34
                  %
                  
                  
                  65.58
                  %Commercial
      General Liability
                  
                  
                  58.32
                  %
                  
                  
                  60.32
                  %Automobile
                  
                  
                  235.77
                  %
                  
                  
                  -65.35
                  %Fire
                  
                  
                  16.37
                  %
                  
                  
                  0.00
                  %Inland
      Marine
                  
                  
                  54.58
                  %
                  
                  
                  0.00
                  %All
      lines
                  
                  
                  92.62
                  %
                  
                  
                  62.91
                  %





Operating and Underwriting
Expenses





Operating
and underwriting expenses increased $0.5 million, or 11.9%, to $3.0 million for
the three months ended June 30, 2010, compared with $2.5 million for the three
months ended June 30, 2009.  The change is partially due to a $0.2
million increase in consulting fees and a $0.2 million increase in surveys and
underwriting reports.





Salaries
and Wages





Salaries
and wages increased $0.3 million, or 14.7%, to $2.2 million for the three
months ended June 30, 2010, compared with $1.9 million for the three months
ended June 30, 2009. The increase is due to staffing for additional lines of
business.





The
charge to operations for stock-based compensation, in accordance with FASB
guidance, was approximately $102,000 during the three months ended June 30,
2010 compared with approximately $110,000 for the three months ended June 30,
2009.





Policy
Acquisition Costs, Net of Amortization





Policy
acquisition costs, net of amortization, increased $0.1 million, or 4.1%, to $3.0
million for the three months ended June 30, 2010, compared with $2.9 million for
the three months ended June 30, 2009.





Policy
acquisition costs, net of amortization, consists of the actual policy
acquisition costs, including commissions, payroll and premium taxes, less
commissions earned on reinsurance ceded and policy fees earned. The
increase to policy acquisition costs, net of amortization, is due to the higher
acquisition costs associated with our new premium composition.





Provision
for Income Tax (Benefit) Expense





The
provision for income tax benefit was $1.0 million for the three months ended
June 30, 2010, compared with a provision for income tax expense of $0.3 million
for the three months ended June 30, 2009. The effective rate for income taxes
was 30.6% for the three months ended June 30, 2010.





Net
(Loss) Income





As a result of the foregoing, the
Company’s net loss for the three months ended June 30, 2010 was $2.3 million
compared with net income of $0.8 million for the three months ended June 30,
2009.


- 46
-


21st Century
Holding Company


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


Results
of Operations


Six
Months Ended June 30, 2010 Compared with Six Months Ended June 30,
2009





Gross
Premiums Written





Gross
premiums written decreased $7.4 million, or 12.0%, to $54.6 million for the six
months ended June 30, 2010, compared with $62.0 million for the six months ended
June 30, 2009.  The following table denotes gross premiums written by
major product line. This decline reflected primarily decreases in the sale of
homeowners’ and commercial general liability policies, as described
below.





SixMonthsEndedJune30,2010
                  
                  
                  2009(Dollars in Thousands)Amount
                  
                  
                  Percentage
                  
                  
                  Amount
                  
                  
                  PercentageHomeowners'
                  
                  $
                  43,304
                  
                  
                  
                  79.28
                  %
                  
                  $
                  51,688
                  
                  
                  
                  83.32
                  %Commercial
      General Liability
                  
                  
                  6,739
                  
                  
                  
                  12.34
                  %
                  
                  
                  8,418
                  
                  
                  
                  13.57
                  %Federal
      Flood
                  
                  
                  1,862
                  
                  
                  
                  3.41
                  %
                  
                  
                  1,754
                  
                  
                  
                  2.83
                  %Automobile
                  
                  
                  2,714
                  
                  
                  
                  4.97
                  %
                  
                  
                  172
                  
                  
                  
                  0.28
                  %Gross
      written premiums
                  
                  $
                  54,619
                  
                  
                  
                  100.00
                  %
                  
                  $
                  62,032
                  
                  
                  
                  100.00
                  %





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





During
the six months ended June 30, 2010 and 2009, the change to the cumulative wind
mitigation credits afforded our
policyholders totaled ($0.5) million and $5.5 million,
respectively. As of June 30, 2010, 57.6% of our in-force homeowners’
policyholders were receiving wind mitigation credits totaling approximately
$27.1 million (a 24.6% reduction of in-force premium), while
61.8 % of our in-force homeowners’ policyholders were receiving wind
mitigation credits totaling approximately $23.3 million (a 27.9 % reduction
of in-force premium), as of June 30, 2009.





Due in part to Florida’s mandated
homeowners’ rates reduction and wind mitigation discounts, the Company’s sale of
homeowners’ policies decreased $8.4 million, or 16.2%, to $43.3 million for the
six months ended June 30, 2010, compared with $51.7 million for the six months
ended June 30, 2009, gross of reinsurance costs. Our number of in-force
homeowners’ policies decreased by approximately 4,001, or 7.6%, to approximately
48,605 as of June 30, 2010, as compared to approximately 52,606 as of December
31, 2009.





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





The
Company’s sale of commercial general liability policies decreased by $1.7
million to $6.7 million for the six months ended June 30, 2010, compared with
$8.4 million for the six months ended June 30, 2009. The primary factor for this
decrease has been the slowdown in the economy, which had a dramatic impact on
the artisan contractor portfolio written by American Vehicle. An additional
factor is our decision to restrict underwriting authority within specific
commercial general liability classes and geographic areas.


- 47
-


21st Century
Holding Company


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


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





SixMonthsEndedJune30,2010
                    
                    
                    2009Amount
                    
                    
                    Percentage
                    
                    
                    Amount
                    
                    
                    Percentage(Dollars in Thousands)StateAlabama
                    
                    $
                    29
                    
                    
                    
                    0.42
                    %
                    
                    $
                    47
                    
                    
                    
                    0.56
                    %Arkansas
                    
                    
                    1
                    
                    
                    
                    0.01
                    %
                    
                    
                    3
                    
                    
                    
                    0.03
                    %California
                    
                    
                    8
                    
                    
                    
                    0.11
                    %
                    
                    
                    54
                    
                    
                    
                    0.64
                    %Florida
                    
                    
                    5,558
                    
                    
                    
                    82.49
                    %
                    
                    
                    6,452
                    
                    
                    
                    76.65
                    %Georgia
                    
                    
                    49
                    
                    
                    
                    0.73
                    %
                    
                    
                    154
                    
                    
                    
                    1.82
                    %Kentucky
                    
                    
                    -
                    
                    
                    
                    0.00
                    %
                    
                    
                    1
                    
                    
                    
                    0.01
                    %Louisiana
                    
                    
                    685
                    
                    
                    
                    10.17
                    %
                    
                    
                    1,227
                    
                    
                    
                    14.58
                    %Oklahoma
                    
                    
                    4
                    
                    
                    
                    0.06
                    %
                    
                    
                    -
                    
                    
                    
                    0.00
                    %South
      Carolina
                    
                    
                    1
                    
                    
                    
                    0.01
                    %
                    
                    
                    3
                    
                    
                    
                    0.04
                    %Texas
                    
                    
                    403
                    
                    
                    
                    5.99
                    %
                    
                    
                    476
                    
                    
                    
                    5.65
                    %Virginia
                    
                    
                    1
                    
                    
                    
                    0.01
                    %
                    
                    
                    1
                    
                    
                    
                    0.02
                    %Total
                    
                    $
                    6,739
                    
                    
                    
                    100.00
                    %
                    
                    $
                    8,418
                    
                    
                    
                    100.00
                    %





The
Company’s sale of auto insurance policies increased by $2.5 million to $2.7
million for the six months ended June 30, 2010, compared with $0.2 million for
the six months ended June 30, 2009. The Company’s sale of auto insurance
included new and renewal policies during the six months ended June 30, 2010, but
was limited to renewal policies during the six months ended June 30,
2009.





Gross
Premiums Ceded





Gross
premiums ceded increased to $21.8 million for the six months ended June 30,
2010, compared with $19.9 million for the six months ended June 30, 2009. Gross
premiums ceded to the FHCF totaled $18.3 million, gross premiums ceded to the
write-your-own flood program totaled $1.9 million and gross premiums ceded
relating to our commercial automobile program totaled $1.6 for the six months
ended June 30, 2010.





(Decrease) Increasein Prepaid Reinsurance Premiums





The
decrease in prepaid reinsurance premiums was $6.6 million for the six months
ended June 30, 2010, compared with an increase of $2.2 million for the six
months ended June 30, 2009. The increased charge to written premium is primarily
associated with the timing of our reinsurance payments measured against the term
of the underlying reinsurance policies.





Increase
in Unearned Premiums





The
increase in unearned premiums was $4.2 million for the six months ended June 30,
2010, compared with an increase of $16.2 million for the six months ended June
30, 2009. The change was due to a $3.0 million increase in unearned homeowners’
insurance premiums, a $0.3 million decrease in unearned commercial general
liability premiums, and a $1.5 million increase in unearned automobile premiums,
net of a less than $0.1 million increase in unearned flood premiums during the
six months ended June 30, 2010. These changes are a result of differences in
written premium volume during this period as compared with the same period last
year.  See “Gross Premiums Written” discussion above.


- 48
-


21st Century
Holding Company


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


Net
Premiums Earned





Net
premiums earned decreased $6.3 million, or 22.2%, to $21.9 million for the six
months ended June 30, 2010, compared with $28.2 million for the six months ended
June 30, 2009.





The
following table denotes net premiums earned by product line.





SixMonthsEndedJune30,2010
                  
                  
                  2009Amount
                  
                  
                  Percentage
                  
                  
                  Amount
                  
                  
                  Percentage(Dollars in Thousands)Homeowners'
                  
                  $
                  14,066
                  
                  
                  
                  64.20
                  %
                  
                  $
                  17,515
                  
                  
                  
                  62.17
                  %Commercial
      General Liability
                  
                  
                  6,973
                  
                  
                  
                  31.83
                  %
                  
                  
                  10,504
                  
                  
                  
                  37.29
                  %Automobile
                  
                  
                  869
                  
                  
                  
                  3.97
                  %
                  
                  
                  151
                  
                  
                  
                  0.54
                  %Net
      premiums earned
                  
                  $
                  21,908
                  
                  
                  
                  100.00
                  %
                  
                  $
                  28,170
                  
                  
                  
                  100.00
                  %





The
change in homeowners’ net premiums earned is due to an $8.4 million decrease in
gross written premium as discussed, a $0.3 million change in gross premiums
ceded and a $5.3 million decrease in the net change to prepaid reinsurance
premiums and unearned premium.





The
change in commercial general liability net premiums earned is due to a $1.7
million decrease in gross written premium, reflecting the impact of the economic
slowdown on the artisan contractor portfolio written by American Vehicle and our
decision to restrict underwriting authority within specific commercial general
liability classes and geographic areas.





The
change in automobile net premiums earned is a result of a $2.5 million increase
in gross written premium as discussed, a $1.4 million change in gross premiums
ceded and a $0.4 million increase in the change to unearned
premium.





Commission
Income





Commission
income increased $0.3 million, or 52.1%, to $0.9 million for the six months
ended June 30, 2010, compared with $0.6 million for the six months
ended June 30, 2009. The primary sources of our commission income are our
managing general agent services, write-your-own-flood premiums and our
independent insurance agency, Insure-Link.





Net
Investment Income





Net
investment income increased $0.4 million, or 32.9%, to $1.9 million for the six
months ended June 30, 2010, compared with $1.5 million for six months ended June
30, 2009.  Our investment yield, net and gross of investment expenses,
excluding equities and including cash, were 2.7% and 2.9%, respectively, for the
six months ended June 30, 2010. Our investment yield, net and gross of
investment expenses, excluding equities and including cash, were 1.6% and 1.7%,
respectively, for the six months ended June 30, 2009.





Our
investment yield, net and gross of investment expenses measured against debt
securities, excluding equities and cash, were 3.9% and 4.2%, respectively, for
the six months ended June 30, 2010.  Our investment yield, net and gross of
investment expenses measured against debt securities, excluding equities
and  cash, were 3.9% and 4.1%, respectively, for the six months ended
June 30, 2009.





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


- 49
-


21st Century
Holding Company


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


Net
Realized Investment Gains (Losses)





Net
realized investment gains were $3.8 million for the six months ended June 30,
2010, compared with net realized investment losses of $0.5 million for the six
months ended June 30, 2009.  Realized investment gains recognized for the
six months ended June 30, 2010 were higher in 2010 than in 2009 because of an
overweight in corporate bonds, which have performed well during the first half
of 2010, and were sold to lock in gains and bolster surplus.





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





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





SixMonthsEndedJune30,2010
                  
                  
                  2009(Dollars in Thousands)Realized
      gains:Debt
      securities
                  
                  $
                  1,868
                  
                  
                  $
                  17Equity
      securities
                  
                  
                  2,661
                  
                  
                  
                  -Total
      realized gains
                  
                  
                  4,529
                  
                  
                  
                  17Realized
      losses:Debt
      securities
                  
                  
                  (40
                  )
                  
                  
                  (228
                  )Equity
      securities
                  
                  
                  (665
                  )
                  
                  
                  (257
                  )Total
      realized losses
                  
                  
                  (705
                  )
                  
                  
                  (485
                  )Net
      realized gains (losses) on investments
                  
                  $
                  3,824
                  
                  
                  $
                  (468
                  )





Regulatory Assessments
Recovered





Regulatory
assessments recovered decreased $1.1 million, or 67.4%, to $0.6 million for the
six months ended June 30, 2010, compared with $1.7 million for the six months
ended June 30, 2009.





Other Income





Other
income increased $0.1 million, or 35.7%, to $0.5 million for the six months
ended June 30, 2010, compared with $0.4 million for the six months ended June
30, 2009.





The major
component of other income for the six months ended June 30, 2010 is
approximately $0.2 million in partial recognition of our gain on the sale of our
Lauderdale Lakes property and $.02 million in recognition of our gain on the
sale of other retail property.





Losses
and LAE





Losses
and LAE increased by $1.5 million, or 7.9%, to $19.3 million for the six months
ended June 30, 2010, compared with $17.8 million for the six months ended June
30, 2009. The overall change includes a $2.7 million increase in our homeowners’
program, a $2.4 million decrease in our commercial general liability program and
a $1.1 million increase in connection with our automobile program. See
“Results of Operations-Three Months Ended June 30, 2010” for a further
explanation of losses and LAE.


- 50
-


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, 2010
                
                
                December 31, 2009Case
                
                
                Bulk
                
                
                Total
                
                
                Case
                
                
                Bulk
                
                
                Total(Dollars
      in Thousands)
                
                
                (Dollars
      in Thousands)Homeowners'
                
                $
                8,714
                
                
                $
                15,657
                
                
                $
                24,371
                
                
                $
                8,705
                
                
                $
                19,298
                
                
                $
                28,003Commercial
      General Liability
                
                
                8,414
                
                
                
                27,207
                
                
                
                35,621
                
                
                
                7,885
                
                
                
                29,346
                
                
                
                37,231Automobile
                
                
                3,187
                
                
                
                3,187
                
                
                
                6,374
                
                
                
                2,612
                
                
                
                2,765
                
                
                
                5,377Total
                
                $
                20,315
                
                
                $
                46,051
                
                
                $
                66,366
                
                
                $
                19,202
                
                
                $
                51,409
                
                
                $
                70,611





Reserves
for unpaid losses and LAE decreased by approximately $4.2 million during the six
months ended June 30, 2010, as a result of our process of estimating claims. See
“Results of Operations-Three Months Ended June 30, 2010” for a further
explanation of losses and LAE.





Our loss
ratio for the six-month period ended June 30, 2010 was 87.0% compared with 63.4%
for the same period in 2009.





The table below reflects the loss
ratios by product line.





SixMonthsEndedJune30,2010
                  
                  
                  2009Homeowners'
                  
                  
                  96.72
                  %
                  
                  
                  63.89
                  %Commercial
      General Liability
                  
                  
                  64.05
                  %
                  
                  
                  63.31
                  %Automobile
                  
                  
                  159.03
                  %
                  
                  
                  18.71
                  %Fire
                  
                  
                  15.69
                  %
                  
                  
                  0.00
                  %Inland
      Marine
                  
                  
                  51.59
                  %
                  
                  
                  0.00
                  %All
      lines
                  
                  
                  87.02
                  %
                  
                  
                  63.35
                  %





Operating and Underwriting
Expenses





Operating
and underwriting expenses increased $1.2 million, or 23.8%, to $5.7 million for
the six months ended June 30, 2010, compared with $4.5 million for the six
months ended June 30, 2009.  The change is partially due to a $0.2
million increase in consulting fees, a $0.2 million increase in surveys and
underwriting reports, a $0.1 million increase in bad debts expense, a $0.1
million increase in licenses and fees and a $0.1 million increase in accounting
fees. The change is also due to a less than $0.1 million increase in computer
maintenance fees, a less than $0.1 million increase in actuarial fees and a less
than $0.1 million increase in boards and bureaus expense.





Salaries
and Wages





Salaries
and wages increased $0.4 million, or 11.6%, to $4.2 million for the six
months ended June 30, 2010, compared with $3.8 million for the six months ended
June 30, 2009. The increase is due to staffing for additional lines of
business.





The
charge to operations for stock-based compensation, in accordance with
FASB guidance, was approximately $198,000 during the six months ended June
30, 2010 compared with approximately $230,000 for the six months ended June 30,
2009.





Policy
Acquisition Costs, Net of Amortization





Policy
acquisition costs, net of amortization, increased $0.8 million, or 14.8%, to
$6.5 million for the six months ended June 30, 2010, compared with $5.7 million
for the six months ended June 30, 2009.





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


- 51
-


21st Century
Holding Company


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


The
increase to policy acquisition costs, net of amortization, is primarily due to
commissions related to our voluntary homeowners’ gross written premium, which
increased $6.9 million, or 18.3%, to $44.3 million for the six months ended June
30, 2010, compared with $37.4 million for the six months ended June 30,
2009.





Provision
for Income Tax (Benefit) Expense





The
provision for income tax benefit was $1.6 million for the six months ended June
30, 2010, compared with a provision for income tax expense of $0.1 million for
the six months ended June 30, 2009. The effective rate for income taxes was
33.4% for the six months ended June 30, 2010.





Net
(Loss) Income





As a
result of the foregoing, the Company’s net loss for the six months ended June
30, 2010 was $3.3 million compared with net income of $1.1 million for the six
months ended June 30, 2009.





Liquidity
and Capital Resources





During the six months ended June 30,
2010, our primary sources of capital included proceeds from the sale of
investment securities, decreased prepaid reinsurance premiums, increased
unearned premiums, decreased premiums receivable, decreased reinsurance
recoverable and decreased deferred income tax expense, net. Additional sources
of capital included decreased other assets, increased premium deposits and
customer credit balances, amortization of investment premium, non-cash
compensation, depreciation and amortization and decreased property, plant and
equipment, net.





During
the six months ended June 30, 2010, operations provided net operating cash flow
of $5.0 million, compared with having provided net operating cash flow of $15.7
million for the six months ended June 30, 2009.





During the six months ended June 30,
2010, operations generated $21.5 million of gross cash flow, due to an $8.3
million decrease in prepaid reinsurance premiums, a $4.3 million increase in
unearned premiums, a $4.2 million decrease in premiums receivable, a $1.4
million decrease in reinsurance recoverable and a $1.2 million decrease in
deferred income tax expense. Additional sources of cash included a $1.0 million
decrease in other assets, a $0.4 million increase in premium deposits and
customer credit balances, $0.4 million of amortization of investment premium,
net, $0.2 million of non-cash compensation and $0.1 million of depreciation and
amortization.





During the six months ended June 30,
2010, operations used $16.5 million of gross cash flow, due to a $4.2 million
decrease in unpaid losses and LAE, $3.8 million net realized investment gains
and a $2.9 million increase in income taxes recoverable. Additional uses of cash
included $0.9 million policy acquisition costs, net of amortization, a $0.8
million decrease in bank overdraft, a $0.6 million decrease in accounts payable
and accrued expenses, all in conjunction with a $3.3 million net
loss.





During
the six months ended June 30, 2010, net cash provided by investing activities
was $34.5 million, compared with net cash used by investing activities of $76.2
million during the six months ended June 30, 2009. Our available-for-sale
investment portfolio is highly liquid as it consists entirely of readily
marketable securities. During the six months ended June 30, 2010, investing
activities generated $81.1 million and used $46.6 million.





During
the six months ended June 30, 2010, net financing activities used $0.4 million,
as compared with having used $0.9 million during the six months ended June 30,
2009. In 2010, the sources of cash in connection with financing activities
included a less than $0.1 million tax benefit related to non-cash compensation.
The uses of cash in connection with financing activities included $0.5 million
in dividends paid.





The
Company’s Board of Directors determined to temporarily suspend payment of
dividends on the Company’s common stock. Please see “Results of Operations—Six
Months Ended June 30, 2010 Compared with Six Months Ended June 30, 2009—Gross
Premiums Written”. Because of the capital infusion from American Vehicle, the
Company is currently working with the Florida OIR to establish the parameters
for the resumption of the Company’s common stock dividends.


- 52
-


21st Century
Holding Company


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


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





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





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





Impact
of Inflation and Changing Prices





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





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


- 53
-


21st Century
Holding Company





Item
3





Quantitative
and Qualitative Disclosures about Market Risk





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





Our
investment policy is established by our Board’s Investment Committee and is
reviewed on a regular basis. Pursuant to this investment policy, as of June 30,
2010, approximately 90% of investments were in debt securities and cash and
cash equivalents, which are considered to be either held until maturity or
available for sale, based upon our estimates of required liquidity.
Approximately 91% of the debt securities are considered available for sale and
are marked to market. We may in the future consider additional debt securities
to be held to maturity and carried at amortized cost. We do not use any swaps,
options, futures or forward contracts to hedge or enhance our investment
portfolio.





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





June30,2010
                
                
                December31,2009Carrying
                
                
                Percent
                
                
                Carrying
                
                
                PercentAmount
                
                
                ofTotal
                
                
                Amount
                
                
                ofTotal(Dollars in Thousands)Debt
      securities, at market:United
      States government obligations and authorities
                
                $
                12,214
                
                
                
                15.17
                %
                
                $
                10,152
                
                
                
                8.89
                %Obligations
      of states and political subdivisions
                
                
                12,693
                
                
                
                15.77
                %
                
                
                39,269
                
                
                
                34.38
                %Corporate
                
                
                34,795
                
                
                
                43.23
                %
                
                
                42,092
                
                
                
                36.85
                %International
                
                
                715
                
                
                
                0.89
                %
                
                
                -
                
                
                
                0.00
                %60,417
                
                
                
                75.06
                %
                
                
                91,513
                
                
                
                80.12
                %Debt
      securities, at amortized cost:United
      States government obligations and authorities
                
                
                5,787
                
                
                
                7.19
                %
                
                
                2,650
                
                
                
                2.32
                %Total
      debt securities
                
                
                66,204
                
                
                
                7.19
                %
                
                
                94,163
                
                
                
                2.32
                %Equity
      securities, at market
                
                
                14,289
                
                
                
                17.75
                %
                
                
                20,056
                
                
                
                17.56
                %Total
      investments
                
                $
                80,493
                
                
                
                100.00
                %
                
                $
                114,219
                
                
                
                100.00
                %





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





June30,2010
                  
                  
                  December31,2009Carrying
                  
                  
                  Percent
                  
                  
                  Carrying
                  
                  
                  PercentAmount
                  
                  
                  ofTotal
                  
                  
                  Amount
                  
                  
                  ofTotal(Dollars in Thousands)AAA
                  
                  $
                  25,917
                  
                  
                  
                  39.14
                  %
                  
                  $
                  40,390
                  
                  
                  
                  42.90
                  %AA
                  
                  
                  9,150
                  
                  
                  
                  13.82
                  %
                  
                  
                  18,619
                  
                  
                  
                  19.77
                  %A
                  
                  
                  24,070
                  
                  
                  
                  36.36
                  %
                  
                  
                  24,286
                  
                  
                  
                  25.79
                  %BBB
                  
                  
                  6,677
                  
                  
                  
                  10.09
                  %
                  
                  
                  9,954
                  
                  
                  
                  10.57
                  %Not
      rated
                  
                  
                  390
                  
                  
                  
                  0.59
                  %
                  
                  
                  914
                  
                  
                  
                  0.97
                  %$
                  66,204
                  
                  
                  
                  100.00
                  %
                  
                  $
                  94,163
                  
                  
                  
                  100.00
                  %


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21st Century
Holding Company





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





June30,2010
                  
                  
                  December31,2009Carrying
                  
                  
                  Percent
                  
                  
                  Carrying
                  
                  
                  PercentAmount
                  
                  
                  ofTotal
                  
                  
                  Amount
                  
                  
                  ofTotal(Dollars in Thousands)Matures
      In:One
      year or less
                  
                  $
                  5,027
                  
                  
                  
                  7.59
                  %
                  
                  $
                  1,615
                  
                  
                  
                  1.72
                  %One
      year to five years
                  
                  
                  34,992
                  
                  
                  
                  52.86
                  %
                  
                  
                  50,781
                  
                  
                  
                  53.93
                  %Five
      years to 10 years
                  
                  
                  20,453
                  
                  
                  
                  30.89
                  %
                  
                  
                  27,178
                  
                  
                  
                  28.86
                  %More
      than 10 years
                  
                  
                  5,732
                  
                  
                  
                  8.66
                  %
                  
                  
                  14,589
                  
                  
                  
                  15.49
                  %Total
      debt securities
                  
                  $
                  66,204
                  
                  
                  
                  100.00
                  %
                  
                  $
                  94,163
                  
                  
                  
                  100.00
                  %





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





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





2010
                  
                  
                  2011
                  
                  
                  2012
                  
                  
                  2013
                  
                  
                  2014
                  
                  
                  2015
                  
                  
                  Thereafter
                  
                  
                  Total
                  
                  
                  Amount(Dollars
      in Thousands)Principal
      amount by expected maturity:United
      States government obligations and authorities
                  
                  $
                  -
                  
                  
                  $
                  3,560
                  
                  
                  $
                  4,465
                  
                  
                  $
                  2,500
                  
                  
                  $
                  500
                  
                  
                  $
                  -
                  
                  
                  $
                  3,157
                  
                  
                  $
                  14,182
                  
                  
                  $
                  14,411Obligations
      of states and political subdivisions
                  
                  
                  1,125
                  
                  
                  
                  225
                  
                  
                  
                  990
                  
                  
                  
                  1,250
                  
                  
                  
                  1,040
                  
                  
                  
                  270
                  
                  
                  
                  6,660
                  
                  
                  
                  11,560
                  
                  
                  
                  12,693Corporate
      securities
                  
                  
                  200
                  
                  
                  
                  3,775
                  
                  
                  
                  7,250
                  
                  
                  
                  1,485
                  
                  
                  
                  4,159
                  
                  
                  
                  150
                  
                  
                  
                  14,467
                  
                  
                  
                  31,486
                  
                  
                  
                  34,795International
      securities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  200
                  
                  
                  
                  -
                  
                  
                  
                  121
                  
                  
                  
                  145
                  
                  
                  
                  200
                  
                  
                  
                  666
                  
                  
                  
                  716Collateralized
      mortgage obligations
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,575
                  
                  
                  
                  769
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,343
                  
                  
                  
                  3,589Equity
      securities, at market
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  14,289All
      investments
                  
                  $
                  1,325
                  
                  
                  $
                  7,560
                  
                  
                  $
                  15,480
                  
                  
                  $
                  6,004
                  
                  
                  $
                  5,820
                  
                  
                  $
                  565
                  
                  
                  $
                  24,484
                  
                  
                  $
                  61,237
                  
                  
                  $
                  80,493Weighted
      average interest rate by expected maturity:United
      States government obligations and authorities
                  
                  
                  0.00
                  %
                  
                  
                  1.25
                  %
                  
                  
                  2.59
                  %
                  
                  
                  3.66
                  %
                  
                  
                  1.75
                  %
                  
                  
                  0.00
                  %
                  
                  
                  3.42
                  %
                  
                  
                  2.60
                  %Obligations
      of states and political subdivisions
                  
                  
                  5.11
                  %
                  
                  
                  5.25
                  %
                  
                  
                  5.35
                  %
                  
                  
                  4.17
                  %
                  
                  
                  4.88
                  %
                  
                  
                  5.00
                  %
                  
                  
                  5.46
                  %
                  
                  
                  5.21
                  %Corporate
      securities
                  
                  
                  7.25
                  %
                  
                  
                  4.04
                  %
                  
                  
                  3.69
                  %
                  
                  
                  4.32
                  %
                  
                  
                  5.37
                  %
                  
                  
                  5.20
                  %
                  
                  
                  6.57
                  %
                  
                  
                  5.34
                  %International
      securities
                  
                  
                  0.00
                  %
                  
                  
                  0.00
                  %
                  
                  
                  4.50
                  %
                  
                  
                  0.00
                  %
                  
                  
                  4.10
                  %
                  
                  
                  4.50
                  %
                  
                  
                  5.00
                  %
                  
                  
                  4.58
                  %Collateralized
      mortgage obligations
                  
                  
                  0.00
                  %
                  
                  
                  0.00
                  %
                  
                  
                  5.43
                  %
                  
                  
                  5.50
                  %
                  
                  
                  0.00
                  %
                  
                  
                  0.00
                  %
                  
                  
                  0.00
                  %
                  
                  
                  5.45
                  %Equity
      securities, at market
                  
                  
                  0.00
                  %
                  
                  
                  0.00
                  %
                  
                  
                  0.00
                  %
                  
                  
                  0.00
                  %
                  
                  
                  0.00
                  %
                  
                  
                  0.00
                  %
                  
                  
                  0.00
                  %
                  
                  
                  0.00
                  %All
      investments
                  
                  
                  5.43
                  %
                  
                  
                  2.76
                  %
                  
                  
                  3.78
                  %
                  
                  
                  4.17
                  %
                  
                  
                  4.95
                  %
                  
                  
                  4.92
                  %
                  
                  
                  5.85
                  %
                  
                  
                  4.68
                  %


- 55
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21st Century
Holding Company





Item
4





Controls
and Procedures






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





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





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


- 56
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21st Century
Holding Company





Part
II: OTHER INFORMATION





Item
1





Legal
Proceedings





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





Item
1A





Risk
Factors





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





Additional
Risk Factors





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





Item
2





(a)





None





(b)





None





(c)





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





As of January 1, 2009, the Company may
purchase up to an additional $1.1 million of its common stock.  On October
28, 2009, the Company’s Board of Directors authorized, pursuant to Section 12 of
the Securities and Exchange Act, the repurchase of up to an additional $4.0
million of its common stock.  Acting upon the Board’s authorization, the
Company repurchased, for $38,758, a total 8,400 shares for an average price of
$4.57 between October 29 and October 30, 2009 and for $217,618, a total 52,110
shares for an average price of $4.17 between November 1 and November 30, 2009.
The Company also repurchased for $31,926, a total 7,000 shares for an average
price of $4.24 between December 1 and December 2, 2009.  As of December 31,
2009, the Company may purchase up to an additional $4.8 million of its common
stock.





During
the six months ended June 30, 2010, the Company did not repurchase any of its
common stock because the Company suspended the shares purchase program, as
directed by the OIR.





Item
3





Defaults
upon Senior Securities





None





Item
4





(Removed
and Reserved)





None


- 57
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21st Century
Holding Company





Item
5





Other
Information





None





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, 2010 (incorporated
by reference from Exhibit 10.1 in the Company’s Form 8-K filed with the SEC on
June 4, 2010).





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, 2010 (incorporated
by reference from Exhibit 10.2 in the Company’s Form 8-K filed with the SEC on
June 4, 2010).





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, 2010
(incorporated by reference from Exhibit 10.3 in the Company’s Form 8-K filed
with the SEC on June 4, 2010).





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


- 58
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21st Century
Holding Company





Signatures





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





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





Date:
August 16, 2010


- 59
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21st Century
Holding Company





EXHIBIT
INDEX





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, 2010 (incorporated
by reference from Exhibit 10.1 in the Company’s Form 8-K filed with the SEC on
June 4, 2010).





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, 2010 (incorporated
by reference from Exhibit 10.2 in the Company’s Form 8-K filed with the SEC on
June 4, 2010).





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, 2010
(incorporated by reference from Exhibit 10.3 in the Company’s Form 8-K filed
with the SEC on June 4, 2010).





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.


- 60
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