UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON, D.C.
20549


FORM
10-Q




x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





FOR
THE QUARTERLY PERIOD ENDED March 31, 2009


OR





 ̈ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





FOR
THE TRANSITION PERIOD FROM ___________________TO
_______________________




Commission
File number 0-2500111




21stCentury Holding
Company


(Exact
name of registrant as specified in its charter)





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





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


(Address
of principal executive offices) (Zip Code)





954-581-9993


(Registrant's
telephone number, including area code)




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





Yes x No  ̈





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





Yes  ̈ No  ̈





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





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





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


Yes  ̈ No x





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





Common
Stock, $.01par value – 8,013,894
outstanding as of May 11, 2009





21ST CENTURY
HOLDING COMPANY





INDEX





PAGEPART
      I: FINANCIAL INFORMATIONITEM
      1
                      Financial
      Statements and Supplementary Data
                      3ITEM
      2
                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                      22ITEM
      3
                      Quantitative
      and Qualitative Disclosures about Market Risk
                      37ITEM
      4
                      Controls
      and Procedures
                      37PART
      II: OTHER INFORMATIONITEM
      1
                      Legal
      Proceedings
                      38ITEM
      1A
                      Risk
      Factors
                      38ITEM
      2
                      Unregistered
      Sales of Equity Securities and Use of Proceeds
                      38ITEM
      3
                      Defaults
      upon Senior Securities
                      38ITEM
      4
                      Submission
      of Matters to a Vote of Security Holders
                      38ITEM
      5
                      Other
      Information
                      38ITEM
      6
                      Exhibits
                      39SIGNATURES
                      40


2


PART
I: FINANCIAL INFORMATION


Item
1





21stCENTURY
HOLDING COMPANY


CONSOLIDATED
BALANCE SHEETS


(UNAUDITED)





Period
      EndingMarch 31, 2009
                    
                    
                    December 31, 2008(Dollars in Thousands)ASSETSInvestmentsFixed
      maturities, available for sale, at fair value
                    
                    $
                    59,498
                    
                    
                    $
                    9,429Fixed
      maturities, held to maturity, at amortized cost
                    
                    
                    4,892
                    
                    
                    
                    13,496Equity
      securities, available for sale, at fair value
                    
                    
                    7,300
                    
                    
                    
                    3,140Total
      investments
                    
                    
                    71,690
                    
                    
                    
                    26,065Cash
      and short term investments
                    
                    
                    78,781
                    
                    
                    
                    124,577Prepaid
      reinsurance premiums
                    
                    
                    9,661
                    
                    
                    
                    5,537Premiums
      receivable, net of allowance for credit losses of $145 and $122,
      respectively
                    
                    
                    4,107
                    
                    
                    
                    3,353Reinsurance
      recoverable, net of allowance for credit losses of $199 and $226,
      respectively
                    
                    
                    17,688
                    
                    
                    
                    16,880Deferred
      policy acquisition costs
                    
                    
                    8,095
                    
                    
                    
                    6,558Deferred
      income taxes, net
                    
                    
                    9,074
                    
                    
                    
                    8,530Income
      taxes receivable
                    
                    
                    1,938
                    
                    
                    
                    2,275Property,
      plant and equipment, net
                    
                    
                    817
                    
                    
                    
                    855Other
      assets
                    
                    
                    2,826
                    
                    
                    
                    2,472Total
      assets
                    
                    $
                    204,676
                    
                    
                    $
                    197,102LIABILITIES
      AND SHAREHOLDERS' EQUITYUnpaid
      losses and LAE
                    
                    $
                    66,091
                    
                    
                    $
                    64,775Unearned
      premiums
                    
                    
                    46,637
                    
                    
                    
                    40,508Premiums
      deposits and customer credit balances
                    
                    
                    1,973
                    
                    
                    
                    1,700Bank
      overdraft
                    
                    
                    9,336
                    
                    
                    
                    8,694Deferred
      gain from sale of property
                    
                    
                    1,374
                    
                    
                    
                    1,495Accounts
      payable and accrued expenses
                    
                    
                    3,038
                    
                    
                    
                    3,699Total
      liabilities
                    
                    
                    128,448
                    
                    
                    
                    120,871Shareholders'
      equity:Common
      stock, $0.01 par value. Authorized 25,000,000 shares; issued and
      outstanding8,013,894
      and 8,013,894, respectively. Preferred stock, $0.01 par value. Authorized
      1,000,000 shares; none issued or outstanding.
                    
                    
                    80
                    
                    
                    
                    80Additional
      paid-in capital
                    
                    
                    50,125
                    
                    
                    
                    49,979Accumulated
      other comprehensive (deficit)
                    
                    
                    (1,158
                    )
                    
                    
                    (1,187
                    )Retained
      earnings
                    
                    
                    27,181
                    
                    
                    
                    27,359Total
      shareholders' equity
                    
                    
                    76,228
                    
                    
                    
                    76,231Total
      liabilities and shareholders' equity
                    
                    $
                    204,676
                    
                    
                    $
                    197,102





SEE
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


3


21ST CENTURY
HOLDING COMPANY


CONSOLIDATED
STATEMENTS OF OPERATIONS


(UNAUDITED)





Three Months Ended March 31,2009
                    
                    
                    2008(Dollars in Thousands except EPS and dividend data)Revenue:Gross
      premiums written
                    
                    $
                    28,431
                    
                    
                    $
                    27,603Gross
      premiums ceded
                    
                    
                    (328
                    )
                    
                    
                    -Net
      premiums written
                    
                    
                    28,103
                    
                    
                    
                    27,603Decrease
      in prepaid reinsurance premiums
                    
                    
                    (8,069
                    )
                    
                    
                    (11,154
                    )(Increase)
      Decrease in unearned premiums
                    
                    
                    (6,129
                    )
                    
                    
                    2,156Net
      change in prepaid reinsurance premiums and unearned
    premiums
                    
                    
                    (14,198
                    )
                    
                    
                    (8,998
                    )Net
      premiums earned
                    
                    
                    13,905
                    
                    
                    
                    18,606Commission
      income
                    
                    
                    238
                    
                    
                    
                    118Finance
      revenue
                    
                    
                    83
                    
                    
                    
                    86Managing
      general agent fees
                    
                    
                    431
                    
                    
                    
                    499Net
      investment income
                    
                    
                    644
                    
                    
                    
                    1,876Net
      realized investment losses
                    
                    
                    (537
                    )
                    
                    
                    (1,649
                    )Regulatory
      assessments recovered
                    
                    
                    548
                    
                    
                    
                    322Other
      income
                    
                    
                    312
                    
                    
                    
                    184Total
      revenue
                    
                    
                    15,624
                    
                    
                    
                    20,042Expenses:Losses
      and LAE
                    
                    
                    8,873
                    
                    
                    
                    7,874Operating
      and underwriting expenses
                    
                    
                    1,917
                    
                    
                    
                    1,555Salaries
      and wages
                    
                    
                    1,909
                    
                    
                    
                    1,759Policy
      acquisition costs, net of amortization
                    
                    
                    2,744
                    
                    
                    
                    3,836Total
      expenses
                    
                    
                    15,442
                    
                    
                    
                    15,024Income before provision for income tax
      (benefit) expense
                    
                    
                    181
                    
                    
                    
                    5,018Provision
      for income tax (benefit) expense
                    
                    
                    (122
                    )
                    
                    
                    709Net
      income
                    
                    $
                    303
                    
                    
                    $
                    4,309Basic
      net income per share
                    
                    $
                    0.04
                    
                    
                    $
                    0.54Fully
      diluted net income per share
                    
                    $
                    0.04
                    
                    
                    $
                    0.54Weighted
      average number of common shares outstanding
                    
                    
                    8,013,894
                    
                    
                    
                    7,912,692Weighted
      average number of common shares outstanding (assuming
      dilution)
                    
                    
                    8,013,894
                    
                    
                    
                    7,960,313Dividends
      paid per share
                    
                    $
                    0.18
                    
                    
                    $
                    0.18





SEE
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4


21ST CENTURY
HOLDING COMPANY


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(UNAUDITED)





Three Months Ended March 31,2009
                    
                    
                    2008(Dollars in Thousands)Cash
      flow from operating activities:Net
      income
                    
                    $
                    303
                    
                    
                    $
                    4,309Adjustments
      to reconcile net income to net cash provided by operating
      activities:Amortization
      of investment (discount), net
                    
                    
                    (38
                    )
                    
                    
                    (63
                    )Depreciation
      and amortization of property plant and equipment, net
                    
                    
                    47
                    
                    
                    
                    80Net
      realized investment losses
                    
                    
                    537
                    
                    
                    
                    1,649Provision
      for credit losses, net
                    
                    
                    12
                    
                    
                    
                    4(Recovery)
      provision for uncollectible premiums receivable
                    
                    
                    (24
                    )
                    
                    
                    81Non-cash
      compensation
                    
                    
                    119
                    
                    
                    
                    118Changes
      in operating assets and liabilities:Premiums
      receivable
                    
                    
                    (730
                    )
                    
                    
                    (1,328
                    )Prepaid
      reinsurance premiums
                    
                    
                    (4,124
                    )
                    
                    
                    2,958Reinsurance
      recoverable, net
                    
                    
                    (808
                    )
                    
                    
                    3,297Income
      taxes recoverable
                    
                    
                    336
                    
                    
                    
                    -Deferred
      income tax expense
                    
                    
                    (544
                    )
                    
                    
                    (1,554
                    )Policy
      acquisition costs, net of amortization
                    
                    
                    (1,537
                    )
                    
                    
                    204Other
      assets
                    
                    
                    (487
                    )
                    
                    
                    965Unpaid
      losses and LAE
                    
                    
                    1,316
                    
                    
                    
                    (1,987
                    )Unearned
      premiums
                    
                    
                    6,129
                    
                    
                    
                    (2,156
                    )Premium
      deposits and customer credit balances
                    
                    
                    273
                    
                    
                    
                    220Income
      taxes payable
                    
                    
                    -
                    
                    
                    
                    (1,046
                    )Bank
      overdraft
                    
                    
                    642
                    
                    
                    
                    318Accounts
      payable and accrued expenses
                    
                    
                    (662
                    )
                    
                    
                    (509
                    )Net
      cash provided by operating activities
                    
                    
                    761
                    
                    
                    
                    5,559Cash
      flow (used) provided by investing activities:Proceeds
      from sale of investment securities available for sale
                    
                    
                    12,256
                    
                    
                    
                    67,598Purchases
      of investment securities available for sale
                    
                    
                    (58,351
                    )
                    
                    
                    (46,907
                    )Purchases
      of property and equipment
                    
                    
                    (9
                    )
                    
                    
                    -Net
      cash (used) provided by in investing activities
                    
                    
                    (46,104
                    )
                    
                    
                    20,691Cash
      flow (used) by financing activities:Exercised
      stock options
                    
                    
                    -
                    
                    
                    
                    553Dividends
      paid
                    
                    
                    (481
                    )
                    
                    
                    (1,369
                    )Acquisition
      of Common Stock
                    
                    
                    -
                    
                    
                    
                    (144
                    )Tax
      benefit related to non-cash compensation
                    
                    
                    27
                    
                    
                    
                    44Net
      cash (used) by financing activities
                    
                    
                    (454
                    )
                    
                    
                    (916
                    )Net
      (decrease) increase in cash and short term investments
                    
                    
                    (45,796
                    )
                    
                    
                    25,335Cash
      and short term investments at beginning of period
                    
                    
                    124,577
                    
                    
                    
                    22,524Cash
      and short term investments at end of period
                    
                    $
                    78,781
                    
                    
                    $
                    47,859





SEE
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


5


21ST CENTURY
HOLDING COMPANY


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(UNAUDITED)





Three Months Ended March 31,(continued)
                
                2009
                
                
                2008(Dollars in Thousands)Supplemental
      disclosure of cash flow information:Cash
      paid during the period for:Income
      taxes
                
                $
                75
                
                
                $
                3,250Non-cash
      investing and finance activities:Accrued
      dividends payable
                
                $
                481
                
                
                $
                1,429





SEE
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


6


21st Century
Holding Company


Notes
to Consolidated Financial Statements





(1)
              Organization
      and Business





In this
Quarterly Report on Form 10-Q, “21st
Century” and the terms “Company”, “we”, “us” and “our” refer to 21st Century
Holding Company 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 fire, allied lines,
homeowners’ property and casualty insurance, commercial general liability
insurance, commercial multi peril, inland marine, personal automobile insurance
and commercial automobile insurance in various states with various lines of
authority through our wholly owned subsidiaries, Federated National Insurance
Company (“Federated National”) and American Vehicle Insurance Company (“American
Vehicle”). We market and distribute our own and third-party insurers’ products
and our other services primarily in Florida, through contractual relationships
with a network of approximately 1,500 independent agents and a select number of
general agents.





Federated
National is authorized to underwrite fire, allied lines, personal automobile,
and homeowners’ property and casualty insurance in Florida as an admitted
carrier. American Vehicle is authorized to underwrite commercial multi peril,
inland marine and personal and commercial automobile insurance in Florida as an
admitted carrier. In addition, American Vehicle is authorized to underwrite
commercial general liability insurance in fifteen states, of which eleven states
had ongoing operations in 2009, as either an admitted or a non-admitted carrier.
American Vehicle is authorized as an admitted carrier in Alabama, Florida, and
Louisiana. American Vehicle is authorized as a non-admitted carrier in Arkansas,
California, Georgia, Kentucky, Maryland, Missouri, Nevada, Oklahoma, South
Carolina, Tennessee, and Virginia. As American Vehicle continues its expansion
of commercial general liability insurance into new states, we intend to retain
other general agents to market our commercial general liability insurance
products.





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





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





During
the three months ended March 31, 2009, 81.0%, 15.9%, 2.6% and 0.5% of the
premiums we underwrote were for homeowners’ property and casualty insurance,
commercial general liability insurance, federal flood, and personal automobile
insurance, respectively. During the three months ended March 31, 2008, 72.4%,
26.7% and 0.9% of the premiums we underwrote were for homeowners’ property and
casualty insurance, commercial general liability insurance and personal
automobile insurance, respectively.





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





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


- 7
-


21st Century
Holding Company


Notes
to Consolidated Financial Statements





Assurance
Managing General Agents, Inc. (“Assurance MGA”), a wholly owned subsidiary, acts
as Federated National’s and American Vehicle’s exclusive managing general agent
in the state of Florida. During the year ended December 31, 2008, Assurance MGA
became licensed as Federated National’s and American Vehicle’s exclusive
managing general agent in the states of Alabama, Arkansas, Georgia, Illinois,
Mississippi, Missouri, Nevada, North Carolina, Texas and Virginia.





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





Insure-Link,
Inc. (“Insure-Link”) was formed in March 2008 to serve as an independent
insurance agency. The insurance agency markets to the public to serve all of
their insurance needs. Insure-Link will expand its’ business through marketing
and acquiring other insurance agencies.





(2)
Basis of Presentation





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





(3)
Summary of Significant Accounting Policies and Practices





(A)  Critical Accounting
Policies





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





The most
significant accounting estimates inherent in the preparation of our financial
statements include estimates associated with management’s evaluation of the
determination of liability for unpaid losses and LAE and the amount and
recoverability of amortization of Deferred Policy Acquisition Costs (“DPAC”). In
addition, significant estimates form the basis for our reserves with respect to
finance contracts, premiums receivable and deferred income taxes. Various
assumptions and other factors underlie the determination of these significant
estimates, which are described in greater detail at Footnote 2 of the Company’s
audited financial statements for the fiscal year ended December 31, 2008 filed
on Form 10-K with the Securities and Exchange Commission (“SEC”) on March 16,
2009.





We
believe that during the first three months of fiscal 2009 there were no
significant changes in those critical accounting policies and estimates. Senior
management has reviewed the development and selection of our critical accounting
policies and estimates and their disclosure in this Form 10-Q with the Audit
Committee of our Board of Directors.


- 8
-


21st Century
Holding Company


Notes
to Consolidated Financial Statements





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





Accounting
for loss contingencies pursuant to Statements of Financial Accounting Standards
(“SFAS”) Number 5, Accounting
for Contingencies(“SFAS No. 5”) involves the existence of a condition,
situation or set of circumstances involving uncertainty as to possible loss that
will ultimately be resolved when one or more future event(s) occur or fail to
occur. Additionally, accounting for a loss contingency requires management to
assess each event as probable, reasonably possible or remote. Probable is
defined as the future event or events are likely to occur. Reasonably possible
is defined as the chance of the future event or events occurring is more than
remote but less than probable, while remote is defined as the chance of the
future event or events occurring is slight. An estimated loss in connection with
a loss contingency shall be recorded by a charge to current operations if both
of the following conditions are met: First, the amount can be reasonably
estimated, and second, the information available prior to issuance of the
financial statements indicates that it is probable that a liability has been
incurred at the date of the financial statements. It is implicit in this
condition that it is probable that one or more future events will occur
confirming the fact of the loss or incurrence of a liability.





SFAS
Number 115, Accounting for
Certain Investments in Debt and Equity Securities(“SFAS No. 115”)
addresses accounting and reporting for (a) investments in equity securities that
have readily determinable fair values and (b) all investments in debt
securities. SFAS No. 115 requires that these securities be classified into one
of three categories, Held-to-maturity, Trading securities or
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 the sale in the near term. The accounting treatment for trading securities
is to carry them at fair value with unrealized holding gains and losses included
in current period operations. Investments classified as available-for-sale
include debt and equity securities that are not classified as held-to-maturity
or as trading security investments. The accounting treatment for
available-for-sale securities is to carry them at fair value with unrealized
holding gains and losses excluded from earnings and reported as a separate
component of shareholders’ equity, namely “Other Comprehensive
Income”.





We are
required to review the contractual terms of all our reinsurance purchases to
ensure compliance with SFAS Number 113,Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts(SFAS No.
113”). The statement
establishes the conditions required for a contract with a reinsurer to be
accounted for as reinsurance and prescribes accounting and reporting standards
for those contracts. Contracts that do not result in the reasonable possibility
that the reinsurer may realize a significant loss from the insurance risk
assumed generally do not meet the conditions for reinsurance accounting and must
be accounted for as deposits. SFAS No. 113 also requires us to disclose the
nature, purpose and effect of reinsurance transactions, including the premium
amounts associated with reinsurance assumed and ceded. It also requires
disclosure of concentrations of credit risk associated with reinsurance
receivables and prepaid reinsurance premiums.





(B)
Impact of New Accounting Pronouncements





In April
2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position (“FSP”) FAS 141R-1, “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies”.  The purpose of FAS 147R-1 is to amend and clarify
FASB Statement No. 141, Business Combinations, to
address application issues raised by preparers, auditors, and members of the
legal profession on initial recognition and measurement, subsequent measurement
and accounting, and disclosure of assets and liabilities arising from
contingencies in a business combination.  FSP 147R-1 applies to all assets
acquired and liabilities assumed in a business combination that arise from
contingencies that would be within the scope of Statement 5 if not acquired or
assumed in a business combination, except for assets or liabilities arising from
contingencies that are subject to specific guidance in FASB 141R. The Company
has not determined the impact that SFAS No. 141R-1 will have on its financial
position and results of operations and believes that such determination will not
be meaningful until the Company enters into a business
combination.


- 9
-


21st Century
Holding Company


Notes
to Consolidated Financial Statements





In
December 2007, the FASB issued SFAS Number 141R, Business Combinations(“SFAS
No. 141R”). SFAS No. 141R clarifies the definitions of both a business
combination and a business. All business combinations will be accounted for
under the acquisition method (previously referred to as the purchase method).
This standard defines the acquisition date as the only relevant date for
recognition and measurement of the fair value of consideration paid. SFAS No.
141R requires the acquirer to expense all acquisition related costs. SFAS No.
141R also requires acquired loans to be recorded net of the allowance for loan
losses on the date of acquisition. SFAS No. 141R defines the measurement period
as the time after the acquisition date during which the acquirer may adjust the
“provisional” amounts recognized at the acquisition date. This period cannot
exceed one year, and any subsequent adjustments made to provisional amounts are
made retrospectively and restate prior period data. The provisions of this
statement are effective for business combinations during fiscal years beginning
after December 15, 2008. The Company has not determined the impact that
SFAS No. 141R will have on its financial position and results of operations and
believes that such determination will not be meaningful until the Company enters
into a business combination.





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





In
February 2008, FASB issued FSP FASB 157-2, Effective Date of FASB No.
157 (“FSP FASB 157-2”).  FSP FASB 157-2, which was effective upon
issuance and delayed the effective date of SFAS No. 157 for non-financial assets
and non-financial liabilities, except for items recognized or disclosed at fair
value at least once a year, to fiscal years beginning after November 15,
2008.  FSP FASB No. 157-2 also covers interim periods within the fiscal
years for items within the scope of this FSP.  We adopted SFAS No. 157
effective with the first interim period beginning after January 1,
2008.





In
September 2006, FASB issued SFAS No. 157, which enhances existing guidance for
measuring assets and liabilities using fair value and requires additional
disclosure about the use of fair value for measurement.  SFAS No. 157 was
originally effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. 
The adoption of SFAS No. 157 has not had a material impact, to date, on our
financial position or results of operations.





In
April 2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of
Intangible Assets”. FSP 142-3 amends the factors an entity should
consider in developing renewal or extension assumptions used in determining the
useful life of recognized intangible assets under FASB Statement No. 142,
“Goodwill and Other Intangible
Assets”. This new guidance applies prospectively to intangible assets
that are acquired individually or with a group of other assets in business
combinations and asset acquisitions. FSP 142-3 is effective for financial
statements issued for fiscal years and interim periods beginning after
December 15, 2008. Early adoption was prohibited.  SFAS
Number 142-3 Goodwill and
Other Intangible Assets(“SFAS No. 142-3”) did not have an impact on our
consolidated financial statements.





In
March 2008, the FASB issued SFAS Number 161, “Disclosures about Derivative
Instruments and Hedging Activities” (“SFAS No. 161”). SFAS No. 161
requires companies with derivative instruments to disclose information that
should enable financial-statement users to understand how and why a company uses
derivative instruments, how derivative instruments and related hedged items are
accounted for under FASB SFAS Number 133, “Accounting for Derivative
Instruments and Hedging Activities,” (“SFAS No. 133”) and how derivative
instruments and related hedged items affect a company’s financial position,
financial performance and cash flows. SFAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after
November 15, 2008.   The Company does not utilize derivative
instruments, and, accordingly the adoption of SFAS No. 161 did not have an
impact on our consolidated financial statements.


- 10
-


21st Century
Holding Company


Notes
to Consolidated Financial Statements





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





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





(C) Stock Options





Effective
January 1, 2006, the Company adopted the fair value recognition provisions of
SFAS Number 123R Share-Based
Payment (“SFAS No. 123R”) using the modified-prospective-transition
method. Under that transition method, compensation cost recognized during the
three months ended March 31, 2009 includes compensation cost for all share-based
payments granted subsequent to January 1, 2006, based on the grant date
fair-value estimated in accordance with the provisions of SFAS No.
123R.





(D)
Earnings per Share





Basic
earnings per share (“Basic EPS”) is computed by dividing net income by the
weighted average number of common shares outstanding during the period
presented.  Diluted earnings per share (“Diluted EPS”) is computed by
dividing net income by the weighted average number of shares of common stock and
common stock equivalents outstanding during the period presented; outstanding
warrants and stock options are considered common stock equivalents and are
included in the calculation using the treasury stock method. Additionally, when
applicable, we include in our computation of the weighted average number of
common shares outstanding all common stock issued in connection with the
repayment of our Subordinated note.





(E)
Reclassifications





No
reclassification of the 2008 financial statements was necessary to conform to
the 2009 presentation.





(4)
Commitments and Contingencies





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


- 11
-


21st Century
Holding Company


Notes
to Consolidated Financial Statements





(A)
Insured Claim Activity





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




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




The
Company also faces in the ordinary course of business lawsuits that seek damages
beyond policy limits, commonly known as bad faith claims. The Company
continually evaluates potential liabilities and reserves for litigation of these
types using the criteria established by SFAS Number 5 Accounting for Contingencies
(“SFAS No. 5”). Under this guidance, reserves for a loss are recorded if the
likelihood of occurrence is probable and the amount can be reasonably estimated.
If a loss, while not probable, is judged to be reasonably possible, management
will disclose, if it can be estimated, a possible range of loss or state that an
estimate cannot be made. Management considers each legal action using this
guidance and records reserves for losses as warranted.  Certain claims
and legal actions have been brought against the Company for which no loss has
been accrued, and for which an estimate of a possible range of loss cannot be
made under the rules described above. While it is not possible to predict the
ultimate outcome of these claims or lawsuits, management does not believe they
are likely to have a material effect on the Company’s financial condition or
liquidity. Losses incurred because of these cases could, however, have a
material adverse impact on net earnings.





(B)
Assessment Related Activity





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





As a
direct premium writer in the state of Florida, we are required to participate in
certain insurer solvency associations under Florida Statutes Section 631.57(3)
(a), administered by FIGA. Participation in these pools is based on our written
premium by line of business to total premiums written statewide by all insurers.
Participation may result in assessments against us as it did in 2006 and 2007.
Through 2007, we have been assessed $6.7 million in connection with the
association. For statutory accounting these assessments are not charged to
operations, in contrast GAAP treatment is to charge current operations for the
assessments. Through policyholder surcharges, as approved by the Florida Office
of Insurance Regulation (“Florida OIR”), we have since recouped $4.9 million in
connection with these assessments. There were no assessments made for the year
ended December 31, 2008 or the three months ended March 31, 2009.





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





During a
subsequent regularly scheduled meeting on or about December 18, 2006, Citizens
board determined an additional 2004 plan year deficit existed in the High Risk
Account. Citizens decided that a $515 million Regular Assessment was in the best
interest of Citizens and consistent with Florida Statutes. On this basis,
Citizens certified for a Regular Assessment. Federated National’s participation
in this assessment totaled $0.3 million. Provisions contained in our excess of
loss reinsurance policies provide for participation of our reinsurers totaling
$1.5 million. There was no assessment made for the year ended December 31, 2008
or the three months ended March 31, 2009.


- 12
-


21st Century
Holding Company


Notes
to Consolidated Financial Statements





Pursuant
to Florida Statutes Section 627.3512, insurers are permitted to recoup the
assessment by adding a surcharge to policies in an amount not to exceed the
amount paid by the insurer to Citizens. Federated National is currently
underwriting the recoupment in connection with the Citizens assessments and has
since recouped approximately $2.0 million. Federated National subrogated
approximately $1.5 million to the reinsurers.





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





In addition to the assessments noted
above, the Florida OIR has also issued Information Memorandum OIR -07-02M,
titled Information Regarding
Emergency Assessment by Citizens Property Insurance Corporation, dated
January 11, 2007, to all property and casualty insurers in the state of Florida
placing them on notice that an order had been approved for an emergency
assessment by Citizens for its High Risk Account. This order requires insurers
to begin collecting the emergency assessment for policies issued or renewed on
or after July 1, 2007. Similar to the FHCF assessment discussed above, the
Citizens emergency assessment will be remitted to the administrator of the
assessment as collected and therefore accounted for in a manner such that
amounts collected or receivable are not recorded as revenues and amounts due or
paid are not expensed.





Federated National and American Vehicle
are also required to participate in an insurance apportionment plan under
Florida Statutes Section 627.351, which is referred to as a JUA Plan. The JUA
Plan provides for the equitable apportionment of any profits realized, or losses
and expenses incurred, among participating automobile insurers. In the event of
an underwriting deficit incurred by the JUA Plan which is not recovered through
the policyholders in the JUA Plan, such deficit shall be recovered from the
companies participating in the JUA Plan in the proportion that the net direct
written premiums of each such member during the preceding calendar year bear to
the aggregate net direct premiums written in this state by all members of the
JUA Plan.





In 2009 and 2008, neither Federated
National nor American Vehicle was assessed by the JUA Plan.  In 2007,
Federated National was assessed $7,470 and American Vehicle recovered $842 by
and from the JUA Plan based on its December 2007 Cash Activity Report. These
charges are contained in operating and underwriting expenses in the Statement of
Operations. Future assessments by this association are undeterminable at this
time.





(C)
Operational Matters





The
Company’s consolidated federal income tax returns for 2004, 2003 and 2002 have
been examined by the Internal Revenue Service (“IRS”).  The IRS
concluded its’ examination for 2003 and 2002 and there were no material changes
in the tax liability for those years. The 2004 income tax return remains under
examination.





The
Company records valuation allowances to reduce deferred tax assets to the amount
that is more likely than not to be realized. When assessing the need for
valuation allowances, the Company considers future taxable income and ongoing
prudent and feasible tax planning strategies. Should a change in circumstances
lead to a change in judgment about the realizability of deferred tax assets in
future years, the Company would adjust related valuation allowances in the
period that the change in circumstances occurs, along with a corresponding
increase or charge to net income. The resolution of tax reserves and changes in
valuation allowances could be material to the Company’s results of operations
for any period, but is not expected to be material to the Company’s financial
position.


- 13
-


21st Century
Holding Company


Notes
to Consolidated Financial Statements





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





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





Fiscal Year
                                
                                Lease payments(Dollars in Thousands)2009
                                
                                $
                                4702010
                                
                                
                                6382011
                                
                                
                                650Total
                                
                                $
                                1,758





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





From July
27, 2007 to August 7, 2007, several securities class action lawsuits were filed
against the Company and certain of its executive officers in the United States
District Court for the Southern District of Florida (“District Court”) on behalf
of all persons and entities (the “plaintiff’s”) who purchased the Company's
securities during the various class periods specified in the complaints.  A
consolidated amended complaint was filed on behalf of the class on January 22,
2008.  The complaint alleges that the defendants made false and misleading
statements and failed to accurately project the Company's business and financial
performance during the putative class period. The plaintiffs seek an unspecified
amount of damages and claim violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5.





On November
7, 2008, the District Court granted in part and denied in part the
Company's motion to dismiss the consolidated class complaint with leave to amend
by December 8, 2009 or the allegations dismissed would be deemed dismissed
with prejudice without further order of the Court.  Lead plaintiffs did not
seek to amend the consolidated complaint and the defendants have answered. 
The action will proceed on allegations with respect to the company's setting of
loss reserves for the year ending 2006 and first quarter of 2007.





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





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





(5)
Fair Value Disclosure





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





In
September 2006, FASB issued SFAS No. 157. SFAS No. 157 defines fair value as the
exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date.  SFAS No. 157 also establishes a fair value
hierarchy that requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair
value.  SFAS No. 157 categorizes assets and liabilities at fair value
into one of three different levels depending on the observability of the inputs
employed in the measurement, as follows:


- 14
-


21st Century
Holding Company


Notes
to Consolidated Financial Statements





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





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





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





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





Assets
measured at fair value on a recurring basis, for which the Company has elected
the fair value option, are summarized below.





As of March 31, 2009Level 1
                
                
                Level 2
                
                
                Level 3
                
                
                Total(Dollars in Thousands)US
      government obligations and agencies
                
                $
                -
                
                
                $
                45
                
                
                $
                -
                
                
                $
                45Corporate
      securities and other
                
                
                15
                
                
                
                -
                
                
                
                -
                
                
                
                15$
                15
                
                
                $
                45
                
                
                $
                -
                
                
                $
                59Equity
      securities
                
                
                7
                
                
                
                -
                
                
                
                -
                
                
                
                7$
                7
                
                
                $
                -
                
                
                $
                -
                
                
                $
                7





(6)
Comprehensive Income





For the three months ended March 31,
2009 and 2008, comprehensive income consisted of the following.





Three Months Ended March 31,2009
                    
                    
                    2008(Dollars in Thousands)Net  income
                    
                    $
                    303
                    
                    
                    $
                    4,309Change
      in net unrealized gains on investments available for sale
                    
                    
                    45
                    
                    
                    
                    73Comprehensive
      income, before tax
                    
                    
                    349
                    
                    
                    
                    4,382Income
      tax (expense) benefit related to items of other comprehensive
      income
                    
                    
                    (16
                    )
                    
                    
                    45Comprehensive
      income
                    
                    $
                    332
                    
                    
                    $
                    4,427





(7)
Reinsurance Agreements





As is
common practice within the insurance industry, we transfer a portion of the
risks insured under our policies to other companies through the purchase of
reinsurance. This reinsurance is maintained to protect our insurance subsidiary
against the severity of losses on individual claims, unusually serious
occurrences in which a number of claims produce an aggregate extraordinary loss
and catastrophic events. Although reinsurance does not discharge our insurance
subsidiary from its primary obligation to pay for losses insured under the
policies it issues, reinsurance does make the assuming reinsurer liable to the
insurance subsidiary for the reinsured portion of the risk. A credit exposure
exists with respect to ceded losses to the extent that any reinsurer is unable
or unwilling to meet the obligations assumed under the reinsurance contracts.
The collectibility 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.


- 15
-


21st Century
Holding Company


Notes
to Consolidated Financial Statements





Our
reinsurance structure has significant risks, including the fact that the FHCF
may not be able to raise sufficient money to pay their claims or impair their
ability to pay their claims in a timely manner. This could result in significant
financial, legal and operational challenges to all companies, including
ours.





Therefore,
in the event of a catastrophic loss, we may become dependent upon the FHCF's
ability to pay, which may in turn, be dependent upon the FHCF's ability to issue
bonds in amounts that would be required to meet its reinsurance obligations in
the event of such a catastrophic loss. There is no assurance that the FHCF will
be able to do this. The Florida Senate Banking and Insurance Committee (“Senate
Committee”) recently published an insurance-related Interim Report entitled
Status of the Florida
Hurricane Catastrophe Fund. Notable findings in the report
include:





·
            The
      total liability of the FHCF could be up to $28.0 billion for a single
      season storm


·
            The
      FHCF has approximately $10.3 billion in liquidity, which includes the $4.0
      billion “put” option The “put” option is the guarantee arrangement with
      Berkshire Hathaway approved by the State Board of Administration this
      summer


·
            The
      FHCF has “potential obligations that it can not pay of approximately $14.5
      billion in the event of a major
storm”





Additionally,
the FHCF treaty contains an exclusion that specifically states “Losses in excess
of the sum of the Balance of the Fund as of December 31 of the Contract Year and
the amount the SBA is able to raise through the issuance of revenue bonds or by
the use of other financing mechanisms, up to the limit pursuant to Section
215.555(4) (c), Florida Statutes.”





The
availability and costs associated with the acquisition of reinsurance will vary
year to year. These fluctuations, which can be significant, are not subject to
our control and may limit our ability to purchase adequate coverage. For
example, FHCF has restricted its very affordable reinsurance capacity for the
2009 – 2010 hurricane season thus requiring us to replace that capacity with
more expensive private market reinsurance. The recovery of increased reinsurance
costs through rate action is not immediate and cannot be presumed, as it is
subject to Florida OIR approval.





For the
2008-2009 hurricane season, the excess of loss and FHCF treaties will insure us
for approximately $310.0 million of aggregate catastrophic losses and LAE with a
maximum single event coverage totaling approximately $245.0 million, with the
Company retaining the first $3.0 million of losses and LAE. Our reinsurance
program included coverage purchased from the private market, which afforded
optional Reinstatement Premium Protection that provides coverage beyond the
first event, along with coverage from the FHCF. Coverage afforded by the FHCF
totals approximately $167.0 million or 54% of the $310.0 million of aggregate
catastrophic losses and LAE. The FHCF affords coverage for the entire season,
subject to maximum payouts, without regard to any particular insurable
event.


- 16
-


21st Century
Holding Company


Notes
to Consolidated Financial Statements





The
2008-2009 private reinsurance companies and their respective A. M. Best rating
are listed in the table as follows.





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




During
the three months ended March 31, 2009 and pursuant to the provisions of our
reinsurance treaties, we elected to cancel the contract with New Castle
Reinsurance Company Limited (“New Castle”). New Castle’s participation in our
reinsurance program represented approximately 1% of the aggregate catastrophic
loss exposure.





For the
2007-2008 hurricane season, the excess of loss and FHCF treaties insured us for
approximately $403.0 million of aggregate catastrophic losses and LAE with a
maximum single event coverage totaling approximately $320.0 million, with the
Company retaining the first $3.0 million of losses and LAE. Our reinsurance
program included coverage purchased from the private market, which afforded
optional Reinstatement Premium Protection that provided coverage beyond the
first event, along with coverage from the FHCF. Coverage afforded by the FHCF
totaled approximately $261.0 million or 65% of the $403.0 million of aggregate
catastrophic losses and LAE. The FHCF afforded coverage for the entire season,
subject to maximum payouts, without regard to any particular insurable
event.





The cost
to the Company for these reinsurance products for the 2008–2009 and 2007–2008
hurricane seasons, including the prepaid automatic premium reinstatement
protection totals approximately $30.1 million and $44.6 million,
respectively.


- 17
-


21st Century
Holding Company


Notes
to Consolidated Financial Statements





Our
reinsurance structure has significant risks, including the fact that the FHCF
may not be able to raise sufficient money to pay their claims or impair their
ability to pay their claims in a timely manner. This could result in significant
financial, legal and operational challenges to all companies, including ours. It
is our understanding, based upon a memo from The Florida House of
Representatives, Committee on Insurance, to House Speaker Marco Rubio, dated
April 2, 2008, that it is probable, under the current FHCF structure, that
hundreds of millions of dollars of FHCF claims in Florida will go unpaid for
some time. The FHCF currently has limited cash available to pay claims in
connection with a catastrophic event. The FHCF has the authority to raise
additional cash to pay claims through the issuance of FHCF bonds. The retirement
of these bonds would be funded by imposing additional assessments on future
insurance premiums written in the state. In the current economic climate, it is
not clear if FHCF would be able to raise funds through a bond
issuance.





To date,
there have been no claims asserted against the reinsurers in connection with
either the 2008–2009 or the 2007-2008 excess of loss and FHCF
treaties.





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.





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





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





(8) Stock Compensation
Plans





We implemented a stock option plan in
September 1998, which expired in September 2008, and provided for the granting
of stock options to officers, key employees and consultants.  The
objectives of this plan included attracting and retaining the best personnel,
providing for additional performance incentives, and promoting our success by
providing employees the opportunity to acquire common stock. Options outstanding
under this plan were granted at prices either equal to or above the market value
of the stock on the date of grant, typically vest over a four-year or five-year
period and expire six or ten years after the grant date. Under this plan, we
were authorized to grant options to purchase up to 900,000 common shares, and,
as of March 31, 2009 and December 31, 2008, we had outstanding exercisable
options to purchase 127,099 and 130,099 shares, respectively.





In 2001,
we implemented a franchisee stock option plan that was terminated during
September 2008, and provided for the granting of stock options to individuals
purchasing Company owned agencies that were then converted to franchised
agencies.  The purpose of the plan was to advance our interests by
providing an additional incentive to encourage managers of Company owned
agencies to purchase the agencies and convert them to franchises. Options
outstanding under the plan were granted at prices, which were above the market
value of the stock on the date of grant, vested over a ten-year period, and
expired ten years after the grant date. Under this plan, we were authorized to
grant options to purchase up to 988,500 common shares, and, as of March 31,
2009, we had no outstanding exercisable options to purchase
shares.


- 18
-


21st Century
Holding Company


Notes
to Consolidated Financial Statements





In 2002,
we implemented the 2002 Stock Option Plan.  The purpose of this plan
is to advance our interests by providing an additional incentive to attract,
retain and motivate highly qualified and competent persons who are key to the
Company, including employees, consultants, independent contractors, officers and
directors. Our success is largely dependent upon their efforts and judgment
therefore, by authorizing the grant of options to purchase common stock we
encourage stock ownership. Options outstanding under the plan were granted at
prices that are above the market value of the stock on the date of grant,
typically vest over a five-year period, and expire six years after the grant
date. Under this plan, we are authorized to grant options to purchase up to
1,800,000 common shares, and, as of March 31, 2009 and December 31, 2008, we had
outstanding exercisable options to purchase 786,851 and 658,151 shares,
respectively.





During
the three months ended March 31, 2009, we granted 38,071 qualified stock options
and 96,929 non-qualified stock options under our 2002 Stock Option Plan to
employees, executive officers and directors with an average option price of
$4.47 per share. Like all other outstanding stock options, these stock options
contain service conditions and do not contain any performance conditions. For a
further discussion regarding the provisions of SFAS No. 123R and its effect on
our operations, please refer to Footnote 6, Stock Compensation
Plans.





Activity
in the Company’s stock option plans for the period from January 1, 2007 to March
31, 2009, is summarized below.





1998 Plan
                
                
                2002 PlanNumber of Shares
                
                
                Weighted
                  Average
                  Option
                  Exercise Price
                
                
                Number of Shares
                
                
                Weighted
                  Average
                  Option
                  Exercise PriceOutstanding
      at January 1, 2007
                
                
                44,750
                
                
                $
                18.47
                
                
                
                637,358
                
                
                $
                13.80Granted
                
                
                109,849
                
                
                $
                13.32
                
                
                
                57,151
                
                
                $
                13.18Exercised
                
                
                (2,000
                )
                
                $
                6.67
                
                
                
                (16,300
                )
                
                $
                10.02Cancelled
                
                
                -
                
                
                $
                -
                
                
                
                (17,900
                )
                
                $
                15.82Outstanding
      at 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 December 31, 2008
                
                
                130,099
                
                
                $
                16.07
                
                
                
                658,151
                
                
                $
                13.69Granted
                
                
                -
                
                
                $
                -
                
                
                
                135,000
                
                
                $
                4.47Exercised
                
                
                -
                
                
                $
                -
                
                
                
                -
                
                
                $
                -Cancelled
                
                
                (3,000
                )
                
                $
                21.38
                
                
                
                (6,300
                )
                
                $
                12.69Outstanding
      at March 31, 2009
                
                
                127,099
                
                
                $
                15.94
                
                
                
                786,851
                
                
                $
                12.12





Options outstanding as of March 31,
2009 are exercisable as follows.





1998 Plan
                
                
                2002 PlanOptions Exercisable at:
                
                Number of Shares
                
                
                Weighted
                  Average
                  Option
                  ExercisePrice
                
                
                Number of Shares
                
                
                Weighted
                  Average
                  Option
                  ExercisePriceMarch
      31, 2009
                
                
                47,219
                
                
                $
                15.94
                
                
                
                322,354
                
                
                $
                12.12December
      31, 2009
                
                
                19,770
                
                
                $
                15.94
                
                
                
                112,727
                
                
                $
                12.12December
      31, 2010
                
                
                19,770
                
                
                $
                15.94
                
                
                
                140,694
                
                
                $
                12.12December
      31, 2011
                
                
                19,770
                
                
                $
                15.94
                
                
                
                98,787
                
                
                $
                12.12December
      31, 2012
                
                
                19,770
                
                
                $
                15.94
                
                
                
                70,389
                
                
                $
                12.12December
      31, 2013
                
                
                800
                
                
                $
                15.94
                
                
                
                35,900
                
                
                $
                12.12Thereafter
                
                
                -
                
                
                $
                15.94
                
                
                
                6,000
                
                
                $
                12.12Total
      options exercisible
                
                
                127,099
                
                
                
                
                
                
                
                786,851


- 19
-


21st Century
Holding Company


Notes
to Consolidated Financial Statements





Prior to
January 1, 2006, we accounted for those plans under the recognition and
measurement provisions of stock-based compensation using the intrinsic value
method prescribed by APB Opinion No. 25, Accounting for Stock Issued to
Employees,and related Interpretations, as permitted by SFAS Number 123
Accounting for Stock-Based
Compensation (“SFAS No. 123”).Under these provisions, no
stock-based employee compensation cost was recognized in the Statement of
Operations as all options granted under those plans had an exercise price equal
to or less than the market value of the underlying common stock on the date of
grant.





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





Effective
January 1, 2006, the Company adopted the fair value recognition provisions of
SFAS No. 123R using the modified-prospective-transition method. Under that
transition method, compensation cost recognized during the three months ended
March 31, 2009 and 2008 includes:





·
            Compensation
      cost for all share-based payments granted prior to, but not yet vested as
      of January 1, 2006, based on the grant date fair value estimated in
      accordance with the original provisions of Statement 123,
    and





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





As a
result of adopting SFAS No. 123R on January 1, 2006, the Company’s income from
continuing operations before provision for income taxes and net income for the
three months ended March 31, 2009 are lower by approximately $146,000 and
$119,000, respectively, than if it had continued to account for share-base
compensation under ABP Opinion No. 25.





As a
result of adopting SFAS No. 123R on January 1, 2006, the Company’s income from
continuing operations before provision for income taxes and net income for the
three months ended March 31, 2008, are lower by approximately $138,000 and
$118,000, respectively, than if it had continued to account for share-base
compensation under ABP Opinion No. 25.





Basic and
diluted earnings per share for the three months ended March 31, 2009 would have
been $0.06 if the Company had not adopted SFAS No. 123R, compared with reported
basic and diluted earnings per share of $0.04.





Basic and
diluted earnings per share for the three months ended March 31, 2008 would have
been $0.56 if the Company had not adopted SFAS No. 123R, compared with reported
basic and diluted earnings per share of $0.54.





Because
the change in income taxes payable includes the effect of excess tax benefits,
those excess tax benefits also must be shown as a separate operating cash
outflow so that operating cash flows exclude the effect of excess tax benefits.
SFAS No. 123R requires the cash flows resulting from the tax benefits resulting
from tax deductions in excess of the compensation cost recognized for those
options (excess tax benefits) to be classified as financing cash
flows.





The
weighted average fair value of options granted during the three months ended
March 31, 2009 and 2008 estimated on the date of grant using the Black-Scholes
option-pricing model was $3.30 to $4.73 and $3.22 to $3.56,
respectively.


- 20
-


21st Century
Holding Company


Notes
to Consolidated Financial Statements





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





March 31, 2009
                    
                    March 31, 2008Dividend
      yield
                    7.20%
      - 17.30%
                    
                    5.50%Expected
      volatility
                    57.54%
      - 70.68%
                    
                    54.83%Risk-free
      interest rate
                    1.22%
      - 1.50%
                    
                    1.6%
      - 2.24%Expected
      life (in years)
                    3.53
      - 4.16
                    
                    3.19





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





Summary
information about the Company’s stock options outstanding as of March 31, 2009
is as follows.





Weighted Average
                      
                      
                      WeightedRange of
                      
                      
                      Outstanding at
                      
                      
                      Contractual
                      
                      
                      Average
                      
                      
                      Exercisable atExercise Price
                      
                      
                      March 31, 2009
                      
                      
                      Periods in Years
                      
                      
                      ExercisePrice
                      
                      
                      March 31, 20091998
      Plan
                      
                      $6.67
      - $27.79
                      
                      
                      
                      127,099
                      
                      
                      
                      4.06
                      
                      
                      $
                      15.94
                      
                      
                      
                      47,2192002
      Plan
                      
                      $3.30
      - $18.21
                      
                      
                      
                      786,851
                      
                      
                      
                      3.50
                      
                      
                      $
                      12.12
                      
                      
                      
                      322,354





(9)
Stockholder’s Equity





Capital Stock





The Company’s authorized capital
consists of 1,000,000 shares of preferred stock, par value $0.01 per share, and
25,000,000 shares of common stock, par value $0.01 per share. As of March 31,
2009, there were no preferred shares issued or outstanding and there were
8,013,894 shares of common stock outstanding. We do not reserve for common stock
shares in connection with the exercise of issued and unissued common stock
options.





(10)
Subsequent Events





None


- 21
-


21st Century
Holding Company


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





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





Item
2





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





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




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


Forward-Looking
Statements





Statements
in this Quarterly Report on Form 10-Q for the three months ended March 31, 2009
(“Form 10-Q”)  or in documents that are incorporated by reference that
are not historical fact are forward-looking statements that are subject to
certain risks and uncertainties that could cause actual events and results to
differ materially from those discussed herein.  Without limiting the
generality of the foregoing, words such as “may,” “will,” “expect,” “believe,”
“anticipate,” “intend,” “could,” “would,” “estimate,” or “continue” or the
negative other variations thereof or comparable terminology are intended to
identify forward-looking statements.  The risks and uncertainties
include, without limitation, uncertainties related to estimates, assumptions and
projections relating to unpaid losses and loss adjustment expenses and other
accounting policies, losses from the nine hurricanes that occurred in fiscal
years 2005 and 2004 and in other estimates, assumptions and projections
contained in this Form 10-Q; inflation and other changes in economic conditions
(including changes in interest rates and financial markets); the impact of new
regulations adopted in Florida which affect the property and casualty insurance
market; the costs of reinsurance, assessments charged by various governmental
agencies; pricing competition and other initiatives by competitors; our ability
to obtain regulatory approval for requested rate changes and the timing thereof;
legislative and regulatory developments; the outcome of various litigation
matters pending against us, including the terms of any settlements; risks
related to the nature of our business; dependence on investment income and the
composition of our investment portfolio; the adequacy of our liability for loss
and loss adjustment expense; insurance agents; claims experience; ratings by
industry services; catastrophe losses; reliance on key personnel; weather
conditions (including the severity and frequency of storms, hurricanes,
tornadoes and hail); changes in driving patterns and loss trends; acts of war
and terrorist activities; court decisions and trends in litigation and health
care and auto repair costs; and other matters described from time to time by us
in this report, and our other  filings with the SEC, including the
Company’s Annual Report on Form 10-K for the year ended December 31,
2008.





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 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.


- 22
-





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 fire, allied lines,
homeowners’ property and casualty insurance, commercial general liability
insurance, commercial multi peril, inland marine, personal automobile insurance
and commercial automobile insurance in various states with various lines of
authority through our wholly owned subsidiaries, Federated National Insurance
Company (“Federated National”) and American Vehicle Insurance Company (“American
Vehicle”). We market and distribute our own and third-party insurers’ products
and our other services primarily in Florida, through contractual relationships
with a network of approximately 1,500 independent agents and a select number of
general agents.





Federated
National is authorized to underwrite fire, allied lines, personal automobile,
and homeowners’ property and casualty insurance in Florida as an admitted
carrier. American Vehicle is authorized to underwrite commercial multi peril,
inland marine and personal and commercial automobile insurance in Florida as an
admitted carrier. In addition, American Vehicle is authorized to underwrite
commercial general liability insurance in fifteen states, of which eleven states
had ongoing operations in 2009, as either an admitted or a non-admitted carrier.
American Vehicle is authorized as an admitted carrier in Alabama, Florida, and
Louisiana. American Vehicle is authorized as a non-admitted carrier in Arkansas,
California, Georgia, Kentucky, Maryland, Missouri, Nevada, Oklahoma, South
Carolina, Tennessee, and Virginia. As American Vehicle continues its expansion
of commercial general liability insurance into new states, we intend to retain
other general agents to market our commercial general liability insurance
products.





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
contribute financially to the state guarantee fund, which is used to pay for
losses if an insurance carrier becomes insolvent or unable to pay the losses due
their policyholders.





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





During
the three months ended March 31, 2009, 81.0%, 15.9%, 2.6% and 0.5% of the
premiums we underwrote were for homeowners’ property and casualty insurance,
commercial general liability insurance, federal flood, and personal automobile
insurance, respectively. During the three months ended March 31, 2008, 72.4%,
26.7% and 0.9% of the premiums we underwrote were for homeowners’ property and
casualty insurance, commercial general liability insurance and personal
automobile insurance, respectively.





Our
business, results of operations and financial condition are subject to
fluctuations due to a variety of factors. Abnormally high severity or frequency
of claims in any period could have a material adverse effect on our business,
results of operations and financial condition. In addition, if our estimated
liabilities for unpaid losses and LAE are less than actual losses and LAE, we
will be required to increase reserves with a corresponding reduction in our net
income in the period in which the deficiency is identified.





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





Assurance
Managing General Agents, Inc. (“Assurance MGA”), a wholly owned subsidiary, acts
as Federated National’s and American Vehicle’s exclusive managing general agent
in the state of Florida. During the year ended December 31, 2008, Assurance MGA
became licensed as Federated National’s and American Vehicle’s exclusive
managing general agent in the states of Alabama, Arkansas, Georgia, Illinois,
Mississippi, Missouri, Nevada, North Carolina, Texas and
Virginia.


- 23
-


21st Century
Holding Company


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





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





Insure-Link
was formed in March 2008 to serve as an independent insurance agency. The
insurance agency markets to the public to serve all of their insurance needs.
Insure-Link will expand its’ business through marketing and by acquiring other
insurance agencies.





We
operate in highly competitive markets and face competition from national,
regional and residual market insurance companies in the property and casualty,
commercial general liability and automobile markets, many of whom are larger,
have greater financial and other resources, have better ratings, and offer more
diversified insurance coverage. Our competitors include companies that market
their products through agents, as well as companies that sell insurance directly
to their customers. Large national writers may have certain competitive
advantages over agency writers, including increased name recognition, increased
loyalty of their customer base and reduced policy acquisition costs. Competition
is having a material adverse effect on our business, results of operations and
financial condition.





Significant
competition has emerged because of the January 2007 emergency Florida
legislation session wherein it passed, and the Governor signed into law, a bill
known as “CS/HB-1A.”. This law made fundamental changes to the property and
casualty insurance business in Florida and undertook a multi-pronged approach to
address the cost of residential property insurance in Florida. First, the law
increased the capacity of reinsurance that stabilized the reinsurance market to
the benefit of the insurance companies writing properties lines in the state of
Florida. Secondly, the law provided for rate relief to all
policyholders.





The law
also authorized the state-owned insurance company, Citizens Property Insurance
Corporation (“Citizens”), which is free of many of the restraints on private
carriers such as surplus, ratios, income taxes and reinsurance expense, to
reduce its premium rates and begin competing against private insurers in the
residential property insurance market and expands the authority of Citizens to
write commercial insurance.





Additionally,
in an effort to foster competition in the Florida homeowners’ property insurance
market, the State of Florida created a Capital Build-Up incentive program in
response to the catastrophic events that occurred during 2004 and 2005. This
program provides matching statutory capital to any new or existing carrier
licensed to write homeowners insurance in the state of Florida. This Capital
Build-Up incentive program has certain default covenants that require
participating carriers to maintain minimum net written premium
ratios.





Finally,
during 2007 and during 2008, approximately two dozen new homeowner insurance
companies have received authority by the Florida Office of Insurance Regulation
(“Florida OIR”) to commence business as admitted carriers in the state of
Florida. At least one new carrier has been licensed to enter the Florida
homeowners’ market during the quarter ended March 31, 2009.





We
believe that these aggressive marketplace changes have forced some carriers to
pursue market share based on “best case” pricing models that may ultimately
prove unprofitable from an underwriting perspective.





We have
not participated in the Capital Build-Up incentive program and therefore have
been able to remain committed to the discipline of writing business that is
profitable from an underwriting perspective. This commitment has resulted in a
significant erosion of our homeowners’ property insurance market share in 2007,
2008 and 2009. Although our pricing is inevitably influenced to some degree by
that of our competitors, we believe that it is generally not in our
shareholders’ best interest to compete solely on price. We compete based on
underwriting criteria, our distribution network and superior service to our
agents and insureds.





In
Florida, more than 200 companies are authorized to underwrite homeowners’
insurance. National and regional companies that compete with us in the
homeowners’ market include Allstate Insurance Company and First Floridian
Insurance Company. In addition to these nationally recognized names, we also
compete with several Florida domestic property and casualty companies such as
Universal Insurance Company of North America, Universal Property and Casualty
Insurance Company, Royal Palm Insurance Company, Edison Insurance Company,
Olympus Insurance Company, St. Johns Insurance Company, Cypress Property and
Casualty Insurance Company, Tower Hill Insurance Company, Florida Family
Insurance Company and American Strategic Insurance Company.


- 24
-


21st Century
Holding Company


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





Comparable
companies that compete with us in the commercial general liability insurance
market include Century Surety Insurance Company, Atlantic Casualty Insurance
Company, Colony Insurance Company and Burlington/First Financial Insurance
Companies. We also face new competition in Florida from such companies as
Seminole Property and Casualty Insurance Company, Cypress Property and Casualty
Company and U.S. Security Insurance Company.





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





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





Critical
Accounting Policies





See Note 3, “Summary of
Significant Accounting Policies” in the Notes to the Company’s consolidated
financial statements for the quarter ended March 31, 2009 included in Item I of
this Report on 10-Q for a discussion of the Company’s critical accounting
policies.





New
Accounting Pronouncements





See Note
3, “Summary of Significant Accounting Policies” in the Notes to the Company’s
consolidated financial statements for the quarter ended March 31, 2009 included
in Item I of this Report on 10-Q for a discussion of recent accounting
pronouncements and their effect, if any, on the Company.





Analysis
of Financial Condition


As
of March 31, 2009 Compared with December 31, 2008





Total Investments





SFAS No.
115 addresses accounting and reporting for (a) investments in equity securities
that have readily determinable fair values and (b) all investments in debt
securities. SFAS No. 115 requires that these securities be classified into one
of three categories: (i) held-to-maturity, (ii) trading securities or (iii)
available-for-sale.





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





Total
Investments increased $45.6 million, or 175.0%, to $71.7 million as of March 31,
2009, compared with $26.1 million as of December 31, 2008. Our fixed income
portfolio contained callable features exercised in 2008.  The proceeds from
our called securities were in cash and short-term investments as of December 31,
2008. During the three months ended March 31, 2009, we invested $45.6 million in
longer-term investments.  We are currently evaluating long and short-term
investment options for the best yields that match our liquidity
needs.





The fixed
maturities and the equity securities that are available for sale and carried at
fair value represent 93% of total investments as of March 31, 2009, compared
with 48% as of December 31, 2008.





We did
not hold any trading investment securities during the three months ended March
31, 2009.


- 25
-


21st Century
Holding Company


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





Below is
a summary of net unrealized gains and losses at March 31, 2009 and December 31,
2008 by category.  Of the $1.4 million unrealized losses for equity
securities, $0.4 million is from Western Asset / Claymore Inflation Linked
Securities and Income Fund (“WIA”).  The fund invests at least 80% of its
total assets in inflation- linked securities and at least 60% of its total
managed assets in U.S. Treasury Inflation-Protected Securities.





Unrealized Gains and (Losses)March 31, 2009
                    
                    
                    December 31, 2008(Dollars in Thousands)Fixed maturities:U.S.
      government obligations
                    
                    $
                    268
                    
                    
                    $
                    -Obligations
      of states and political subdivisions
                    
                    
                    (188
                    )
                    
                    
                    (148
                    )81
                    
                    
                    
                    (148
                    )Corporate
      securities:Communications
                    
                    
                    -
                    
                    
                    
                    (279
                    )Financial
                    
                    
                    -
                    
                    
                    
                    (661
                    )Other
                    
                    
                    (534
                    )
                    
                    
                    3(534
                    )
                    
                    
                    (936
                    )Equity
      securities:Common
      stocks
                    
                    
                    (1,404
                    )
                    
                    
                    (819
                    )Total
      fixed, corporate and equity securities
                    
                    $
                    (1,858
                    )
                    
                    $
                    (1,903
                    )





Pursuant
to FASB SFAS No. 115, the Company records the unrealized losses, net of
estimated income taxes that are associated with that part of our portfolio
classified as available for sale through the shareholders' equity account titled
“Other Comprehensive Income”. Management periodically reviews the individual
investments that comprise our portfolio in order to determine whether a decline
in fair value below our cost either is other than temporary or permanently
impaired. Factors used in such consideration include, but are not limited to,
the extent and length of time over which the market value has been less than
cost, the financial condition and near-term prospects of the issuer and our
ability and intent to keep the investment for a period sufficient to allow for
an anticipated recovery in market value.





In
reaching a conclusion that a security is either other than temporary or
permanently impaired we consider such factors as the timeliness and completeness
of expected dividends, principal and interest payments, ratings from nationally
recognized statistical rating organizations such as Standard and Poor’s and
Moody’s Investors Service, Inc. (“Moody’s”), as well as information released via
the general media channels. During the three months ended March 31, 2009, in
connection with this process, we have not charged any net realized investment
loss to operations.





The
investments held at March 31, 2009 and December 31, 2008 were comprised mainly
of United States government and agency bonds, as well as municipal bonds which
are viewed by the Company as conservative and less risky holdings, though
sensitive to interest rate changes. There is a smaller concentration of
corporate bonds, predominantly held in the financial and conglomerate
industries. At March 31, 2009, approximately 36% of the equity holdings are in
mutual funds and 64% are in equities related to diverse industries.





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





During
the three months ended March 31, 2009, we categorized $5.0 million to
available-for-sale from held-to-maturity because a collateralized requirement
was reduced.





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


- 26
-


21st Century
Holding Company


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





As of
December 31, 2008, we reclassified $13.5 million of our bond portfolio as
held-to-maturity. The decision to classify this layer of our bond portfolio as
held-to-maturity was predicated on our intention and ability to hold these
securities until maturity. Additionally, we have and may continue to use this
position to secure irrevocable letters of credit to facilitate business
opportunities in connection with our commercial general liability
program.




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





Cash and Short Term
Investments





Cash and
short-term investments, which include cash, certificates of deposits, and money
market accounts, decreased $45.8 million, or 36.8%, to $78.8 million as of March
31, 2009, compared with $124.6 million as of December 31, 2008.





Our fixed
income portfolio contained callable features exercised in 2008.  The
proceeds from these called securities were in cash and short-term investments as
of December 31, 2008. During the three months ended March 31, 2009, we invested
$45.6 million in longer-term investments.  We are currently evaluating long
and short-term investment options for the best yields that match our liquidity
needs.





Our
excess cash and cash equivalents are invested in accordance with our long-term
liquidity requirements. Our daily closing cash balance of approximately $1.0
million is swept into an overnight repurchase agreement account backed by U.S.
Government securities.





Prepaid Reinsurance
Premiums





Prepaid
reinsurance premiums increased $4.1 million, or 74.5%, to $9.7 million as of
March 31, 2009, compared with $5.5 million as of December 31,
2008.  The increase is due to our payments and amortization of prepaid
reinsurance premiums associated with our homeowners’ book of business. We
believe concentrations of credit risk associated with our prepaid reinsurance
premiums are not significant.





Premiums Receivable, Net of Allowance
for Credit Losses





Premiums
receivable, net of allowance for credit losses, increased $0.8 million, or
22.5%, to $4.1 million as of March 31, 2009, compared with $3.4 million as of
December 31, 2008.





Our
homeowners’ insurance premiums receivable increased $0.6 million, or 35.5%, to
$2.3 million as of March 31, 2009, compared with $1.7 million as of December 31,
2008.  The increase can be attributed to the seasonality of the
purchasing patterns of our policyholders.





Our
commercial general liability insurance premiums receivable increased less than
$0.1 million, or 2.0%, to $1.7 million as of March 31, 2009, compared with $1.7
million as of December 31, 2008.





Premiums
receivable in connection with our automobile line of business increased $0.1
million, or 133.6%, to $0.3 million as of March 31, 2009, compared with $0.1
million as of December 31, 2008.





Reinsurance Recoverable,
net





Reinsurance
recoverable, net, increased $0.8 million, or 4.8%, to $17.7 million as of March
31, 2009, compared with $16.9 million as of December 31, 2008. The increase is
due to payment patterns by our reinsurers. All amounts are current and deemed
collectable, except for a particular reinsurer in connection with the 2005 –
2006 reinsurance treaties, for whom we have recorded a $0.2 million pretax
valuation allowance. We believe concentrations of credit risk associated with
our reinsurance recoverables, net are not significant.


- 27
-


21st Century
Holding Company


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





Deferred Policy Acquisition
Costs





Deferred
policy acquisition costs increased $1.5 million, or 23.4%, to $8.1 million as of
March 31, 2009, compared with $6.6 million as of December 31, 2008. The increase
is due to increased homeowner’s written and unearned premium, net of decreased
commercial general liability premium.





Deferred Income Taxes, net





Deferred
income taxes, net, increased $0.5 million, or 6.4%, to $9.1 million as of March
31, 2009, compared with $8.5 million as of December 31, 2008. Deferred income
taxes, net is comprised of approximately $12.0 million and $10.8 million of
deferred tax assets, net of approximately $2.9 million and $2.3 million of
deferred tax liabilities as of March 31, 2009 and December 31, 2008,
respectively.





Income Taxes Receivable





Income
taxes receivable decreased $0.3, or 14.8%, to $1.9 million as of March 31, 2009,
compared with $2.3 million as of December 31, 2008. The change is due to tax
payment patterns in connection with our tax liabilities.





Property, Plant and Equipment,
net





Property,
plant and equipment, net, decreased less than $0.1 million, or 4.4%, to $0.8
million as of March 31, 2009 compared with $0.9 million as of December 31, 2008.
The decrease is primarily due to depreciation and amortization of our existing
property, plant and equipment.




Other Assets





Other
assets increased $0.4 million, or 14.3%, to $2.8 million as of March 31, 2009,
compared with $2.5 million as of December 31, 2008. Major components of other
assets are as follows.





March 31, 2009
                  
                  
                  December 31, 2008(Dollars in Thousands)Accrued
      interest income receivable
                  
                  $
                  512
                  
                  
                  $
                  243Notes
      receivable
                  
                  
                  577
                  
                  
                  
                  703Prepaid
      expenses
                  
                  
                  685
                  
                  
                  
                  748Revenue
      sharing due from reinsurer
                  
                  
                  423
                  
                  
                  
                  282Other
                  
                  
                  629
                  
                  
                  
                  496Total
                  
                  $
                  2,826
                  
                  
                  $
                  2,472





Unpaid Losses and LAE





Unpaid
losses and LAE increased $1.3 million, or 2.0%, to $66.1 million as of March 31,
2009, compared with $64.8 million as of December 31, 2008. The composition of
unpaid losses and LAE by product line is as follows.





March 31, 2009
                
                
                
                
                
                
                
                
                December 31, 2008Case
                
                
                Bulk
                
                
                Total
                
                
                Case
                
                
                Bulk
                
                
                Total(Dollars in Thousands)
                
                
                (Dollars in Thousands)Homeowners'
                
                $
                7,533
                
                
                $
                21,073
                
                
                $
                28,607
                
                
                $
                8,029
                
                
                $
                19,682
                
                
                $
                27,711Commercial
      General Liability
                
                
                7,766
                
                
                
                27,717
                
                
                
                35,483
                
                
                
                7,531
                
                
                
                27,303
                
                
                
                34,834Automobile
                
                
                570
                
                
                
                1,431
                
                
                
                2,001
                
                
                
                667
                
                
                
                1,564
                
                
                
                2,231Total
                
                $
                15,870
                
                
                $
                50,221
                
                
                $
                66,091
                
                
                $
                16,227
                
                
                $
                48,548
                
                
                $
                64,775





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


- 28
-


21st Century
Holding Company


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





Management
revises its estimates based on the results of its analysis. This process assumes
that experience, adjusted for the effects of current developments and
anticipated trends, is an appropriate basis for estimating the ultimate
settlement of all claims. There is no precise method for subsequently evaluating
the impact of any specific factor on the adequacy of the reserves, because the
eventual redundancy or deficiency is affected by multiple factors. Because of
our process, reserves were increased by approximately $1.3 million during the
three months ended March 31, 2009.





Unearned Premium





Unearned
premiums increased $6.1 million, or 15.1%, to $46.6 million as of March 31,
2009, compared with $40.5 million as of December 31, 2008. The increase was due
to a $7.2 million increase in unearned homeowners’ insurance premiums of which
$6.0 million is associated with our assumption of risks from Citizens, a $1.0
million decrease in unearned commercial general liability premiums, and less
than a $0.1 million decrease in unearned automobile premiums. Generally, as is
in this case, an increase in unearned premium directly relates to an increase in
written premium on a rolling twelve-month basis. Competition could negatively
affect our unearned premium.





Premium Deposits and Customer Credit
Balances





Premium
deposits and customer credit balances increased $0.3 million, or 16.0%, to $2.0
million as of March 31, 2009, compared with $1.7 million as of December 31,
2008. Premium deposits are monies received on policies not yet in force as of
March 31, 2009.





Bank Overdraft





Bank
overdraft increased $0.6 million, or 7.4%, to $9.3 million as of March 31, 2009,
compared with $8.7 million as of December 31, 2008. The bank overdraft relates
primarily to losses and LAE disbursements paid but not presented for payment by
the policyholder or vendor. The increase relates to our payment patterns in
relationship to the rate at which those cash disbursements are presented to the
bank for payment.





Deferred Gain from Sale of
Property





Deferred
gain from sale of property decreased $0.1 million, or 8.1%, to $1.4 million as
of March 31, 2009, compared with $1.5 million as of December 31, 2008. In
accordance with the provisions of SFAS Number 13 Accounting for Leases (“SFAS
No. 13”), we are amortizing the deferred gain over the term of the leaseback,
which is scheduled to end in December 2011.





Accounts Payable and Accrued
Expenses





Accounts
payable and accrued expenses decreased $0.7 million, or 17.9%, to $3.0 million
as of March 31, 2009, compared with $3.7 million as of December 31,
2008.  This decrease is due to our cash management efforts and timing
of payments with our trade vendors.


- 29
-


21st Century
Holding Company


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





Results
of Operations


Three
Months Ended March 31, 2009 Compared with Three Months Ended March 31,
2008





Gross
Premiums Written





Gross
premiums written increased $0.8 million, or 3.0%, to $28.4 million for the three
months ended March 31, 2009, compared with $27.6 million for the three months
ended March 31, 2008.  The following table denotes gross premiums
written by major product line.





Three Months Ended March 31,2009
                  
                  
                  2008(Dollars in Thousands)Amount
                  
                  
                  Percentage
                  
                  
                  Amount
                  
                  
                  PercentageHomeowners'
                  
                  $
                  23,028
                  
                  
                  
                  80.99
                  %
                  
                  $
                  19,990
                  
                  
                  
                  72.42
                  %Commercial
      General Liability
                  
                  
                  4,523
                  
                  
                  
                  15.91
                  %
                  
                  
                  7,355
                  
                  
                  
                  26.64
                  %Federal
      Flood
                  
                  
                  736
                  
                  
                  
                  2.59
                  %
                  
                  
                  -
                  
                  
                  
                  -Automobile
                  
                  
                  144
                  
                  
                  
                  0.51
                  %
                  
                  
                  259
                  
                  
                  
                  0.94
                  %Gross
      written premiums
                  
                  $
                  28,431
                  
                  
                  
                  100.00
                  %
                  
                  $
                  27,603
                  
                  
                  
                  100.00
                  %





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





We
continue to afford premium discounts in response to wind mitigation efforts by
policyholders.  Such discounts, which were required by the Florida
Legislature and became effective on December 15, 2007 for new business and
renewal business, have also had a significant effect on both written and earned
premium.  As of March 31, 2009, 56.4 % of our homeowners’ policyholders
were receiving wind mitigation credits totaling approximately $19.1 million, (a
32.7% reduction of in-force premium), while 38.1% of our homeowners’
policyholders were receiving wind mitigation credits totaling approximately $7.4
million, (an 8.8% reduction of in-force premium), as of March 31,
2008.





Despite
effects of Florida’s mandated homeowner’s rates reduction and wind mitigation
discounts the Company’s sale of homeowners’ policies increased $3.0 million, or
15.2%, to $23.0 million for the three months ended March 31, 2009, compared with
$20.0 million for the three months ended March 31, 2008. Included in our sale of
homeowners’ policies during the three months ended March 31, 2009, is $7.3
million we assumed from Citizens.





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





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


- 30
-


21st Century
Holding Company


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





In a
letter from Demotech’s Chief Executive Officer, dated January 15, 2009, Demotech
warned Florida policymakers, including Florida Insurance Council representatives
that “The potential inability of the FHCF to honor meritorious claims related to
a significant event adversely influences the Financial Stability Rating of each
of the carriers that are heavily dependent on the reinsurance provided by the
FHCF. Under current circumstances and conditions, we will provide, monitor and
support Financial Stability Ratings through the period ending May 15, 2009. An
extension of financial Stability Ratings beyond May 15, 2009, will require
definitive financial information regarding participation in the FHCF,
documentation of bridge loans or alternative financing mechanisms that provide
liquidity during a period in which the FHCF would be raising capital and other
precaution or protection regarding reinsurance collectibility or catastrophe
reinsurance.”





The
withdrawal of our ratings could limit or prevent us from writing or renewing
desirable insurance policies, from competing with insurers who have higher
ratings, from obtaining adequate reinsurance, or from borrowing on a line of
credit. Furthermore, a withdrawal of the rating could cause the Company’s
insurance policies to no longer be acceptable to the secondary marketplace and
mortgage lenders, which could cause a material adverse effect of the Company’s
results of operations and financial position.





The
Company’s sale of commercial general liability policies decreased by $2.8
million to $4.5 million for the three months ended March 31, 2009, compared with
$7.4 million for the three months ended March 31, 2008. The primary factor for
the decrease is a slowdown in the economy which has a dramatic impact on the
artisan contractor portfolio written by American Vehicle. An additional factor
is our decision to restrict underwriting authority within specific commercial
general liability classes and geographic areas. The following table sets forth
the amounts and percentages of our gross premiums written in connection with our
commercial general liability program by state.





Three Months Ended March 31,2009
                    
                    
                    2008Amount
                    
                    
                    Percentage
                    
                    
                    Amount
                    
                    
                    Percentage(Dollars in Thousands)StateAlabama
                    
                    $
                    24
                    
                    
                    
                    0.53
                    %
                    
                    $
                    44
                    
                    
                    
                    0.59
                    %Arkansas
                    
                    
                    1
                    
                    
                    
                    0.02
                    %
                    
                    
                    8
                    
                    
                    
                    0.11
                    %California
                    
                    
                    45
                    
                    
                    
                    0.99
                    %
                    
                    
                    95
                    
                    
                    
                    1.30
                    %Florida
                    
                    
                    3,412
                    
                    
                    
                    75.44
                    %
                    
                    
                    4,883
                    
                    
                    
                    66.40
                    %Georgia
                    
                    
                    86
                    
                    
                    
                    1.90
                    %
                    
                    
                    187
                    
                    
                    
                    2.55
                    %Louisiana
                    
                    
                    792
                    
                    
                    
                    17.51
                    %
                    
                    
                    1,184
                    
                    
                    
                    16.09
                    %South
      Carolina
                    
                    
                    1
                    
                    
                    
                    0.03
                    %
                    
                    
                    32
                    
                    
                    
                    0.43
                    %Texas
                    
                    
                    162
                    
                    
                    
                    3.58
                    %
                    
                    
                    910
                    
                    
                    
                    12.37
                    %Virginia
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    12
                    
                    
                    
                    0.16
                    %Total
                    
                    $
                    4,523
                    
                    
                    
                    100.00
                    %
                    
                    $
                    7,355
                    
                    
                    
                    100.00
                    %





The
Company’s sale of auto insurance policies decreased by $0.1 million, or 44.3%,
to $0.1 million for the three months ended March 31, 2009, compared with $0.3
million for the three months ended March 31, 2008. With respect to automobile
insurance in Florida, we intentionally market only to our existing policyholders
by offering to renew existing policies.





Gross
Premiums Ceded





Gross
premiums ceded increased to $0.3 million for the three months ended March 31,
2009, compared with nothing for the three months ended March 31,
2008.





Decrease in Prepaid Reinsurance
Premiums





The
decrease in prepaid reinsurance premiums was $8.1 million for the three months
ended March 31, 2009, compared with $11.2 million for the three months ended
March 31, 2008. 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.


- 31
-


21st Century
Holding Company


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





(Increase)
Decrease in Unearned Premiums





The
increase in unearned premiums was $6.1 million for the three months ended March
31, 2009, compared with $2.2 million for the three months ended March 31, 2008.
The change was due to a $7.2 million increase in unearned homeowners’ insurance
premiums of which $6.0 million is associated with our assumption of policies
from Citizens, and a $1.0 million decrease in unearned commercial general
liability premiums during the three months ended March 31, 2009.





Net
Premiums Earned





Net
premiums earned decreased $4.7 million, or 25.3%, to $13.9 million for the three
months ended March 31, 2009, compared with $18.6 million for the three months
ended March 31, 2008. The following table denotes net premiums earned by product
line.





Three Months Ended March 31,2009
                      
                      
                      2008Amount
                      
                      
                      Percentage
                      
                      
                      Amount
                      
                      
                      Percentage(Dollars
      in Thousands)Homeowners'
                      
                      $
                      8,275
                      
                      
                      
                      59.51
                      %
                      
                      $
                      10,971
                      
                      
                      
                      58.97
                      %Commercial
      General Liability
                      
                      
                      5,526
                      
                      
                      
                      39.75
                      %
                      
                      
                      7,352
                      
                      
                      
                      39.51
                      %Automobile
                      
                      
                      103
                      
                      
                      
                      0.74
                      %
                      
                      
                      283
                      
                      
                      
                      1.52
                      %Net
      premiums earned
                      
                      $
                      13,905
                      
                      
                      
                      100.00
                      %
                      
                      $
                      18,606
                      
                      
                      
                      100.00
                      %





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





The
change in homeowners’ net premiums earned is a result of a $7.2 million increase
in unearned premiums, of which $6.0 million is associated with our assumption of
risks from Citizens, and a $3.0 million increase in premium volume, of which
$7.3 million is associated with Citizens.





Commission
Income





Commission
income increased $0.1 million, or 101.4%, to $0.2 million for the three months
ended March 31, 2009, compared with $0.1 million for the three months ended
March 31, 2008. The primary component of our commission income is in connection
with our reinsurance treaties and write-your-own-flood premiums.





Finance Revenue





Finance
revenue remained unchanged at $0.1 million for the three months ended March 31,
2009, compared with $0.1 million for the three months ended March 31, 2008. This
is primarily due to the Company’s decreased emphasis on automobile insurance and
the finance revenue derived there-from.





Managing
General Agent Fees





Managing
general agent fees decreased $0.1 million, or 13.7%, to $0.4 million for the
three months ended March 31, 2009, compared with $0.5 million for the three
months ended March 31, 2008.





Net
Investment Income





Net
investment income decreased $1.2 million, or 65.7%, to $0.6 million for the
three months ended March 31, 2009, compared with $1.9 million for the three
months ended March 31, 2008.





Net
investment income on corporate bonds, which generally provide a higher yield
than U.S. government bonds, decreased $0.4 million, to $0.2 million for the
three months ended March 31, 2009, compared with less than $0.9 million for the
three months ended March 31, 2008. Net investment income on U.S. government
bonds decreased $0.3 million, to less than $0.2 million for the three months
ended March 31, 2009, compared with $0.5 million for the three months ended
March 31, 2008.


- 32
-


21st Century
Holding Company


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





Affecting
our net investment income was a decrease in the overall yield to 1.71% for the
three months ended March 31, 2009 compared with a yield of 4.59% for the three
months ended March 31, 2008.





Net
investment income and the overall yield were adversely affected by having
approximately $75.4 million in the Prime Money Market account that provides less
than a 1.0% yield.





Net
Realized Investment Losses





Net
realized investment losses were $0.5 million for the three months ended March
31, 2009, compared with $1.6 million for the three months ended March 31, 2008.
Realized investment losses recognized for the three months ended March 31, 2009
were a result of sales of non-performing investments in Citigroup and
Nextel.  Realized investment losses recognized for the three months ended
March 31, 2008 were a result of SFAS No.115 impairments for PDL Biopharma, Inc.
and Citigroup, Inc. The table below depicts the net realized investment losses
by investment category for the three months ended March 31, 2009 as compared
with the same period during 2008.





Net Realized (Losses) GainsThree Months Ended March 31,2009
                  
                  
                  2008(Dollars in Thousands)Fixed maturities:U.S.
      government obligations and agencies
                  
                  $
                  26
                  
                  
                  $
                  16Obligations
      of states and political subdivisions
                  
                  
                  0
                  
                  
                  
                  (4
                  )Corporate
                  
                  
                  (284
                  )
                  
                  
                  -Equity
      securities:Common
      stocks
                  
                  
                  (280
                  )
                  
                  
                  (1,662
                  )Total
      net realized (losses)
                  
                  $
                  (537
                  )
                  
                  $
                  (1,649
                  )





Regulatory Assessments
Recovered





Regulatory
assessments recovered increased $0.2 million, or 70.1%, to $0.5 million for the
three months ended March 31, 2009, compared with $0.3 million for the three
months ended March 31, 2008.





Other Income





Other
income increased $0.1 million, or 69.4%, to $0.3 million for the three months
ended March 31, 2009, compared with $0.2 million for the three months ended
March 31, 2008.





Major
components of other income for the three months ended March 31, 2009 included
approximately $0.1 million in partial recognition of our gain on the sale of our
Lauderdale Lakes property and $0.2 million in connection with rental income,
note receivable interest income and miscellaneous income.





Losses
and LAE





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





Losses
and LAE increased by $1.0 million, or 12.7%, to $8.9 million for the three
months ended March 31, 2009, compared with $7.9 million for the three months
ended March 31, 2008. The overall change includes a $0.5 million increase in our
homeowners’ program, less than a $0.1 million increase in our commercial general
liability program and a $0.4 million increase in connection with our automobile
program.


- 33
-


21st Century
Holding Company


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





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





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





March 31, 2009
                                          
                                          
                                          December 31, 2008Case
                                          
                                          
                                          Bulk
                                          
                                          
                                          Total
                                          
                                          
                                          Case
                                          
                                          
                                          Bulk
                                          
                                          
                                          Total(Dollars in Thousands)
                                          
                                          
                                          (Dollars in Thousands)Homeowners'
                                          
                                          $
                                          7,533
                                          
                                          
                                          $
                                          21,073
                                          
                                          
                                          $
                                          28,607
                                          
                                          
                                          $
                                          8,029
                                          
                                          
                                          $
                                          19,682
                                          
                                          
                                          $
                                          27,711Commercial
      General Liability
                                          
                                          
                                          7,766
                                          
                                          
                                          
                                          27,717
                                          
                                          
                                          
                                          35,483
                                          
                                          
                                          
                                          7,531
                                          
                                          
                                          
                                          27,303
                                          
                                          
                                          
                                          34,834Automobile
                                          
                                          
                                          570
                                          
                                          
                                          
                                          1,431
                                          
                                          
                                          
                                          2,001
                                          
                                          
                                          
                                          667
                                          
                                          
                                          
                                          1,564
                                          
                                          
                                          
                                          2,231Total
                                          
                                          $
                                          15,870
                                          
                                          
                                          $
                                          50,221
                                          
                                          
                                          $
                                          66,091
                                          
                                          
                                          $
                                          16,227
                                          
                                          
                                          $
                                          48,548
                                          
                                          
                                          $
                                          64,775





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





Management
revises its estimates based on the results of its analysis. This process assumes
that experience, adjusted for the effects of current developments and
anticipated trends, is an appropriate basis for estimating the ultimate
settlement of all claims. There is no precise method for subsequently evaluating
the impact of any specific factor on the adequacy of the reserves, because the
eventual redundancy or deficiency is affected by multiple factors. Because of
our process, reserves were increased by approximately $1.3 million during the
three months ended March 31, 2009.





In accordance with GAAP, our loss ratio
is computed as losses and LAE divided by net premiums earned. A lower loss ratio
generally results in higher operating income. Our loss ratio for the three-month
period ended March 31, 2009 was 63.8% compared with 42.3% for the same period in
2008. The table below reflects the loss ratios by product
line.





Three Months Ended March 31,2009
                  
                  
                  2008Homeowners'
                  
                  
                  62.01
                  %
                  
                  
                  38.58
                  %Commercial
      General Liability
                  
                  
                  65.98
                  %
                  
                  
                  49.93
                  %Automobile
                  
                  
                  91.01
                  %
                  
                  
                  2.24
                  %All
      lines
                  
                  
                  63.81
                  %
                  
                  
                  42.32
                  %





Operating and Underwriting
Expenses





Operating
and underwriting expenses increased $0.4 million, or 23.2%, to $1.9 million for
the three months ended March 31, 2009, compared with $1.6 million for the three
months ended March 31, 2008. The change is primarily due to an unusual $0.5
million credit to premium tax expense during the three months ended March 31,
2008.





Salaries
and Wages





Salaries
and wages increased less than $0.2 million, or 8.5%, to $1.9 million for the
three months ended March 31, 2009, compared with $1.8 million for the three
months ended March 31, 2008. The change is primarily due to the addition of
Insure-Link, created to serve as an independent insurance agency.





The
charge to operations for stock based compensation, in accordance with the
provisions of SFAS No. 123R, was approximately $120,000 during the three months
ended March 31, 2009 compared with approximately $138,000 for the three months
ended March 31, 2008.


- 34
-


21st Century
Holding Company


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





Policy Acquisition Costs, Net of
Amortization





Policy
acquisition costs, net of amortization, decreased $1.1 million, or 28.5%, to
$2.7 million for the three months ended March 31, 2009, compared with $3.8
million for the three months ended March 31, 2008. Policy acquisition costs, net
of amortization, consists of the actual policy acquisition costs, including
commissions, payroll and premium taxes, less commissions earned on reinsurance
ceded and policy fees earned.  The change is due to increased homeowner’s
written and unearned premium, net of decreased commercial general liability
premium.





Provision for Income Tax (Benefit)
Expense





The
provision for income tax benefit was $0.1 million for the three months ended
March 31, 2009, compared with a provision for income tax expense of $0.7 million
for the three months ended March 31, 2008.  The provision for income
tax benefit for the three months ended March 31, 2009 is primarily due to our
tax-exempt interest and dividend received deduction. The provision for income
tax expense for the three months ended March 31, 2008 included a one-time $0.6
million benefit in connection with the estimation of the previous years’ income
taxes.





Net
Income





Because
of the foregoing, the Company’s net income for the three months ended March 31,
2009, was $0.3 million compared with net income of $4.3 million for the three
months ended March 31, 2008.





Liquidity
and Capital Resources





For the
three months ended March 31, 2009, our primary sources of capital were revenues
generated from operations, including increased unearned premiums, increased
unpaid losses and LAE, increased bank overdraft, decreased net realized
investment losses, income taxes recoverable, increased premium deposits and
customer credit balances, non-cash compensation, depreciation and amortization
and an increase in the provision for credit losses, net. Also contributing to
our liquidity were proceeds from the sale of investments and the tax benefit
related to non-cash compensation. Because we are a holding company, we are
largely dependent upon fees and commissions from our subsidiaries for cash
flow.





For the
three months ended March 31, 2009, operations provided net operating cash flow
of $0.8 million, compared with $2.3 million for the three months ended March 31,
2008.





For the
three months ended March 31, 2009, operations generated $9.7 million of gross
cash flow due to a $6.1 million increase in unearned premiums, a $1.3 million
increase in unpaid losses and LAE, a $0.6 million increase in bank overdraft,
$0.5 million in net realized investment losses, a $0.3 million decrease in
income taxes recoverable, a $0.3 million increase in premium deposits and
customer credit balances,  $0.1 million in non-cash compensation, less
than $0.1 million in depreciation and amortization, all in conjunction with net
income of $0.3 million.





For the
three months ended March 31, 2009, operations used $9.0 million of gross cash
flow primarily due to a $4.1 million increase in prepaid reinsurance premiums, a
$1.5 million increase in policy acquisition costs, net of amortization, $0.8
million increase in reinsurance recoverable, net, a $0.7 million increase in
premiums receivable and a $0.6 million decrease in accounts payable and accrued
expenses. To a much less significant extent, operations used additional sources
of cash via a $0.5 million increase in deferred income tax expense, a $0.5
million increase in other assets, less than $0.1 million in amortization of
investment discount, net, and less than $0.1 million decrease in the provision
for uncollectible premiums receivable.





For the
three months ended March 31, 2009, net investing activities used $46.1 million,
compared with having provided $24.0 million for the three months ended March 31,
2008. Our available for sale investment portfolio is highly liquid as it
consists entirely of readily marketable securities.


- 35
-


21st Century
Holding Company


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





For the
three months ended March 31, 2009, investing activities generated $12.3 million
and used $58.4 million mainly from the sale and purchase activity in our bond
portfolio. Our fixed income portfolio contained callable features exercised in
2008.  The proceeds from these called securities were in cash and
short-term investments as of December 31, 2008.  During the three months
ended March 31, 2009, we invested $45.0 million in longer-term investments. We
are currently evaluating long and short-term investment options for best yields
that match our liquidity needs.





For the
three months ended March 31, 2009, net financing activities used $0.5 million,
compared with $0.9 million for the three months ended March 31, 2008. For the
three months ended March 31, 2009, the uses of cash in connection with financing
activities included $0.5 million in dividends paid.





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





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





As of
March 31, 2009, we did not have any relationships with unconsolidated entities
or financial partnerships, such as entities often referred to as “structured
finance” or “special purpose” entities, which were established for facilitating
off-balance-sheet arrangements or other contractually narrow or limited
purposes. As such, management believes that we currently are not exposed to any
financing, liquidity, market or credit risks that could arise if we had engaged
in transactions of that type requiring disclosure herein.





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.


- 36
-


21st Century
Holding Company





Item
3





Quantitative
and Qualitative Disclosures about Market Risk





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





Our investment portfolio is available
for sale and carried at fair value, except for that portion deemed as held to
maturity.  Gains that represent securities with a fair value in excess
of amortized cost, and losses (amortized cost is in excess of fair value) that
are deemed temporary by management are recorded in shareholders’ equity in
accumulated other comprehensive income. Losses deemed other than temporary by
management are recorded as net realized losses in the consolidated statement of
operations. A summary of the investment portfolio as of March 31, 2009
follows.





Book Value
                
                
                Fair / Amortized Value
                
                
                Unrealized
                  Gain (Loss)(Dollars
      in Thousands)Fixed
      maturities:U.S.
      government obligations and agencies available for sale
                
                $
                16,799
                
                
                
                22.84
                %
                
                $
                17,067
                
                
                
                23.81
                %
                
                $
                268U.S.
      government obligations and agencies held to maturity
                
                
                2,643
                
                
                
                3.59
                %
                
                
                2,643
                
                
                
                3.69
                %
                
                
                -Obligations
      of states and political subdivisions available for sale
                
                
                27,222
                
                
                
                37.01
                %
                
                
                27,034
                
                
                
                37.71
                %
                
                
                (188
                )46,664
                
                
                
                63.44
                %
                
                
                46,744
                
                
                
                65.21
                %
                
                
                81Corporate
      securities:Financial
      available for sale
                
                
                7,353
                
                
                
                10.00
                %
                
                
                6,800
                
                
                
                9.49
                %
                
                
                (552
                )Other
      available for sale
                
                
                8,578
                
                
                
                11.66
                %
                
                
                8,596
                
                
                
                11.98
                %
                
                
                18Other
      held to maturity
                
                
                2,249
                
                
                
                3.06
                %
                
                
                2,249
                
                
                
                3.14
                %
                
                
                -18,179
                
                
                
                24.72
                %
                
                
                17,645
                
                
                
                24.61
                %
                
                
                (534
                )Equity
      securities:Common
      stocks available for sale
                
                
                8,704
                
                
                
                11.84
                %
                
                
                7,300
                
                
                
                10.18
                %
                
                
                (1,404
                )Total
      fixed, corporate and equity securities
                
                $
                73,548
                
                
                
                100.00
                %
                
                $
                71,690
                
                
                
                100.00
                %
                
                $
                (1,858
                )





For our
held to maturity portfolio as of March 31, 2009, the unrealized gain totaled
approximately $223,000 and was almost entirely in connection with our U.S.
government obligations and agencies.





As of
March 31, 2009, there were no concentrations greater than 5% of total
investments in any single investment other than United States government and
agency obligations and obligations of states and political
subdivisions.





Item
4





Controls
and Procedures




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





Our
management, with the participation of its Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures as defined in Rules 13a-15(e) under the Securities Exchange Act
of 1934, as of March 31, 2009.  Based upon their evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures, as of March 31, 2009, were effective to
provide reasonable assurance that information required to be disclosed by the
Company in the reports filed or submitted by it under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms, and to provide reasonable assurance that
information required to be disclosed by the Company in such reports is
accumulated and communicated to our management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.  There were no changes during the
quarter that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.


- 37
-


21st Century
Holding Company





Part
II: OTHER INFORMATION





Item
1





Legal
Proceedings





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





Item
1A





Risk
Factors





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





Additional
Risk Factors





The risks described in this Quarterly
Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2008 are not the only risks facing our Company. Additional
risks and uncertainties not currently known to us or that we currently deem to
be immaterial also may materially adversely affect our business, financial
condition and/or operating results.





Item
2





(a)
Unregistered Sales of Equity Securities and Use of Proceeds





During
the three months ended March 31, 2009, we have issued an aggregate of 135,000
options to certain executive and non-executive employees of the Company under
our 2002 stock option plan. The options have an exercise price between $3.30 and
$4.73 per share, vest over three or five years and expire six years from the
grant date.





(b)
None





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





Item
3





Defaults
upon Senior Securities





None





Item
4





Submission
of Matters to a Vote of Security Holders





None





Item
5





Other
Information


- 38
-





21st Century
Holding Company





Item
6





Exhibits





31.1  Certification
of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act*





31.2  Certification
of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act*





32.1  Certification
of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act*





32.2  Certification
of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act*




*Filed
herewith


- 39
-


21st Century
Holding Company





Signatures





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





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





Date: May
11, 2009


- 40
-


21st Century
Holding Company





EXHIBIT
INDEX





31.1
Certification of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act





31.2
Certification of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act





32.1
Certification of the Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act





32.2
Certification of the Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act


- 41
-