**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-Q**


**x**  **QUARTERLY
            REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**
 **SECURITIES
            EXCHANGE ACT OF 1934**
 For
            the
            quarterly period ended June 30, 2005
 
 **o**  **TRANSITION
            REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**
 **SECURITIES
            EXCHANGE ACT OF 1934**
 
 **For
          the
          transition period fromto**
 Commission
          File Number 0-6964


**21ST
      CENTURY INSURANCE GROUP**


(Exact
      name of registrant as specified in its charter)




**Delaware**
            **95-1935264**(State
                or other jurisdiction of incorporation
                or organization)
            (I.R.S.
                Employer Identification
                No.)**6301
                Owensmouth Avenue****Woodland
                Hills, California**
            **91367**(Address
                of principal executive offices)
            (Zip
                Code)**(818)
                704-3700**
            **www.21st.com**(Registrant’s
                telephone number,including
                area code)
            (Registrant’s
                web site)




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
o





Indicate
      by check mark whether the registrant is an accelerated filer (as defined in
      Rule 12b-2 of the Exchange Act). Yes x No o





The
      number of shares outstanding of the issuer’s common stock as of July 11, 2005
      was 85,755,002.














**TABLE
      OF CONTENTS**




Description
            Page
                NumberPart
                I - Financial InformationItem
                1. Financial StatementsCondensed
                Consolidated Balance Sheets
            2Condensed
                Consolidated Statements of
                Operations
            3Condensed
                Consolidated Statement of Stockholders’
                Equity
            4Condensed
                Consolidated Statements of Cash
                Flows
            5Notes
                to Condensed Consolidated Financial
                Statements
            6Item
                2. Management’s Discussion and Analysis of Financial Condition andResults
                of Operations
            16Item
                3. Quantitative and Qualitative Disclosures About
                Market Risk
            30Item
                4. Controls and Procedures
            31Part
                II - Other Information
            32Item
                1. Legal Proceedings
            32Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            32Item
                3. Defaults Upon Senior Securities
            32Item
                4. Submission of Matters to a Vote of Security
                Holders
            32Item
                5. Other Information
            32Item
                6. Exhibits
            32Signatures
            33Exhibit
                Index
            3431.1
                Certification of President and Chief Executive
                Officer31.2
                Certification of Chief Financial
                Officer32.1
                Certification Pursuant to 18 U.S.C. Section 1350, as
                Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002





1
 Table
          of Contents





**PART
      I** **-** **FINANCIAL
      INFORMATION**





**Item
                1.**
            **FINANCIAL
                STATEMENTS**





**21ST
                CENTURY INSURANCE GROUP****CONDENSED
                CONSOLIDATED BALANCE SHEETS**Unaudited**June
                30,**
            December
                31,*AMOUNTS
                IN THOUSANDS, EXCEPT SHARE DATA*
            
            **2005**
            2004**Assets**Fixed
                maturity investments available-for-sale, at fair value(amortized
                cost: $1,346,379 and $1,320,592)
            
            **$**
            **1,369,612**
            
            $
            1,342,130Equity
                securities available-for-sale, at fair value (cost: $49,492 and
                $41,450)
            
            
            **49,088**
            
            
            42,085Total
                investments
            
            
            **1,418,700**
            
            
            1,384,215Cash
                and cash equivalents
            
            
            **41,322**
            
            
            34,697Accrued
                investment income
            
            
            **16,435**
            
            
            16,161Premiums
                receivable
            
            
            **105,580**
            
            
            105,814Reinsurance
                receivables and recoverables
            
            
            **5,760**
            
            
            7,160Prepaid
                reinsurance premiums
            
            
            **1,784**
            
            
            1,787Deferred
                income taxes
            
            
            **50,003**
            
            
            56,135Deferred
                policy acquisition costs
            
            
            **62,205**
            
            
            58,759Leased
                property under capital lease, net of deferred gain of$2,325
                and $3,116 and net of accumulated amortization of$30,584
                and $24,794
            
            
            **28,094**
            
            
            31,719Property
                and equipment, at cost less accumulated depreciation of$77,334
                and $68,529
            
            
            **132,376**
            
            
            129,372Other
                assets
            
            
            **30,158**
            
            
            38,495Total
                assets
            
            **$**
            **1,892,417**
            
            $
            1,864,314**Liabilities
                and stockholders’ equity**Unpaid
                losses and loss adjustment expenses
            
            **$**
            **495,522**
            
            $
            495,542Unearned
                premiums
            
            
            **336,243**
            
            
            331,036Debt
            
            
            **134,242**
            
            
            138,290Claims
                checks payable
            
            
            **38,567**
            
            
            38,737Reinsurance
                payable
            
            
            **606**
            
            
            633Other
                liabilities
            
            
            **77,234**
            
            
            85,675Total
                liabilities
            
            
            **1,082,414**
            
            
            1,089,913Commitments
                and contingenciesStockholders’
                equity:Common
                stock, par value $0.001 per share; 110,000,000 shares
                authorized;shares
                issued and outstanding 85,744,970 and 85,489,061
            
            
            **86**
            
            
            85Additional
                paid-in capital
            
            
            **422,514**
            
            
            420,425Retained
                earnings
            
            
            **374,281**
            
            
            341,196Accumulated
                other comprehensive income (loss):Net
                unrealized gains on available-for-sale investments, net ofdeferred
                income taxes of $7,990 and $7,760
            
            
            **14,839**
            
            
            14,412Minimum
                pension liability in excess of unamortized prior servicecost,
                net of deferred income taxes of $925 and $925
            
            
            **(1,717**
            **)**
            
            (1,717
            )Total
                stockholders’ equity
            
            
            **810,003**
            
            
            774,401Total
                liabilities and stockholders’ equity
            
            **$**
            **1,892,417**
            
            $
            1,864,314




*See
      accompanying Notes to Condensed Consolidated Financial
      Statements.*





2
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          of Contents




**21ST
                CENTURY INSURANCE GROUP****CONDENSED
              CONSOLIDATED STATEMENTS OF OPERATIONS**Unaudited*Three
                Months Ended June 30,*
            *Six
                Months Ended June 30,**AMOUNTS
                IN THOUSANDS, EXCEPT SHARE DATA*
            **2005**
            2004
            **2005**
            2004**Revenues**Net
                premiums earned
            
            **$**
            **336,845**
            
            $
            327,021
            
            **$**
            **673,209**
            
            $
            645,241Net
                investment income
            
            
            **17,006**
            
            
            14,315
            
            
            **34,043**
            
            
            27,461Other
            
            
            **367**
            
            
            —
            
            
            **367**
            
            
            —Net
                realized investment (losses) gains
            
            
            **(1,267**
            **)**
            
            1,337
            
            
            **(1,727**
            **)**
            
            8,983Total
                revenues
            
            
            **352,951**
            
            
            342,673
            
            
            **705,892**
            
            
            681,685**Losses
                and expenses**Net
                losses and loss adjustment expenses
            
            
            **248,284**
            
            
            244,556
            
            
            **499,315**
            
            
            492,070Policy
                acquisition costs
            
            
            **63,755**
            
            
            54,782
            
            
            **128,078**
            
            
            108,472Other
                operating expenses
            
            
            **8,765**
            
            
            9,844
            
            
            **16,123**
            
            
            16,244Interest
                and fees expense
            
            
            **2,031**
            
            
            2,185
            
            
            **4,088**
            
            
            4,411Total
                losses and expenses
            
            
            **322,835**
            
            
            311,367
            
            
            **647,604**
            
            
            621,197Income
                before provision for income taxes
            
            
            **30,116**
            
            
            31,306
            
            
            **58,288**
            
            
            60,488Provision
                for income taxes
            
            
            **9,621**
            
            
            9,932
            
            
            **18,356**
            
            
            19,289Net
                income
            
            **$**
            **20,495**
            
            $
            21,374
            
            **$**
            **39,932**
            
            $
            41,199**Earnings
                per common share**Basic
                and diluted
            
            **$**
            **0.24**
            
            $
            0.25
            
            **$**
            **0.47**
            
            $
            0.48Weighted
                average shares outstanding3⁄4basic
            
            
            **85,704,165**
            
            
            85,462,774
            
            
            **85,613,043**
            
            
            85,452,194Weighted
                average shares outstanding3⁄4diluted
            
            
            **85,890,984**
            
            
            85,611,192
            
            
            **85,803,214**
            
            
            85,614,711




*See
      accompanying Notes to Condensed Consolidated Financial
      Statements.*





3
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          of Contents




**21ST
      CENTURY INSURANCE GROUP**


**CONDENSED
      CONSOLIDATED STATEMENT OF STOCKHOLDERS’EQUITY**


Unaudited





*Common
                Stock**$0.001
                par value**AMOUNTS
                IN THOUSANDS,*
              *EXCEPT
                SHARE DATA*
            
            *Shares*
            *Amount*
            *Additional*
              *Paid-in
                Capital*
            *Retained*
              *Earnings*
            *Accumulated
                Other*
              *Comprehensive*
              *Income
                (Loss)*
            *Total*Balance
                - January 1, 2005
            
            
            85,489,061
            
            $
            85
            
            $
            420,425
            
            $
            341,196
            
            $
            12,695
            
            $
            774,401Comprehensive
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            39,932
            (1)
            
            427
            (2)
            
            40,359Cash
                dividends declared on common stock ($0.08 per share)
            
            
            —
            
            
            —
            
            
            —
            
            
            (6,847
            )
            
            —
            
            
            (6,847
            )Other
            
            
            255,909
            
            
            1
            
            
            2,089
            
            
            —
            
            
            —
            
            
            2,090Balance
                - June 30, 2005
            
            
            85,744,970
            
            $
            86
            
            $
            422,514
            
            $
            374,281
            
            $
            13,122
            
            $
            810,003





*(1)*
            *Net
                income.*


*(2)*
            *Net
                change in accumulated other comprehensive income (loss) for the six
                months
                ended June 30, 2005,**is
                as follows:*





*AMOUNTS
                IN THOUSANDS*Unrealized
                holding losses arising during the period, net of tax of
                $309
            
            $
            (574
            )Reclassification
                adjustment for investment losses included in net income, net of tax
                of
                $539
            
            
            1,001Total
            
            $
            427





*See
      accompanying Notes to Condensed Consolidated Financial
      Statements.*





4
 Table
          of Contents





**21ST
      CENTURY INSURANCE GROUP**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


Unaudited





*AMOUNTS
                IN THOUSANDS, EXCEPT SHARE DATA**Six
                Months Ended June 30,*
            
            **2005**
            2004**Operating
                activities**Net
                income
            
            **$**
            **39,932**
            
            $
            41,199Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            **14,995**
            
            
            10,682Net
                amortization of investment premiums and discounts
            
            
            **4,840**
            
            
            2,921Amortization
                of restricted stock grants
            
            
            **138**
            
            
            198Provision
                for deferred income taxes
            
            
            **5,903**
            
            
            14,276Realized
                losses (gains) on sale of investments
            
            
            **1,717**
            
            
            (8,983
            )**Changes
                in assets and liabilities:**Reinsurance
                balances
            
            
            **1,377**
            
            
            3,633Federal
                income taxes
            
            
            **(69**
            **)**
            
            5,851Other
                assets
            
            
            **2,029**
            
            
            (3,700
            )Unpaid
                losses and loss adjustment expenses
            
            
            **(20**
            **)**
            
            23,626Unearned
                premiums
            
            
            **5,207**
            
            
            17,873Claims
                checks payable
            
            
            **(170**
            **)**
            
            (3,578
            )Other
                liabilities
            
            
            **(5,638**
            **)**
            
            12,035Net
                cash provided by operating activities
            
            
            **70,241**
            
            
            116,033**Investing
                activities**Investments
                available-for-salePurchases
            
            
            **(237,305**
            **)**
            
            (693,343
            )Calls
                or maturities
            
            
            **17,225**
            
            
            27,524Sales
            
            
            **179,880**
            
            
            612,776Purchases
                of property and equipment
            
            
            **(12,591**
            **)**
            
            (18,978
            )Net
                cash used in investing activities
            
            
            **(52,791**
            **)**
            
            (72,021
            )**Financing
                activities**Repayment
                of debt
            
            
            **(5,953**
            **)**
            
            (5,617
            )Dividends
                paid (per share: $0.08 and $0.06)
            
            
            **(6,847**
            **)**
            
            (5,126
            )Proceeds
                from the exercise of stock options
            
            
            **1,975**
            
            
            407Net
                cash used in financing activities
            
            
            **(10,825**
            **)**
            
            (10,336
            )Net
                increase in cash and cash equivalents
            
            
            **6,625**
            
            
            33,676Cash
                and cash equivalents, beginning of period
            
            
            **34,697**
            
            
            65,010Cash
                and cash equivalents, end of period
            
            **$**
            **41,322**
            
            $
            98,686**Supplemental
                information:**Income
                taxes paid (refunded)
            
            **$**
            **9,434**
            
            $
            (10,480
            )Interest
                paid
            
            
            **4,017**
            
            
            4,439




*See
      accompanying Notes to Condensed Consolidated Financial
      Statements.*




5
 Table
          of Contents





**21ST
      CENTURY INSURANCE GROUP**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2005**


DOLLAR
      AMOUNTS IN THOUSANDS, EXCEPT WHERE NOTED





**NOTE****1** **.** **FINANCIAL
          STATEMENT PRESENTATION**





**General**





21st
      Century Insurance Group and subsidiaries (the “Company”) prepared the
      accompanying unaudited condensed consolidated financial statements in accordance
      with the rules and regulations of the Securities and Exchange Commission for
      interim reporting. As permitted under those rules and regulations, certain
      notes
      or other information that are normally required by accounting principles
      generally accepted in the United States of America (“GAAP”) have been condensed
      or omitted if they substantially duplicate the disclosures contained in the
      annual audited consolidated financial statements. The unaudited condensed
      consolidated financial statements 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, 2004.





These
      condensed consolidated financial statements include all adjustments (including
      normal, recurring accruals) that are considered necessary for the fair
      presentation of our financial position and results of operations in accordance
      with GAAP. Intercompany accounts and transactions have been eliminated in
      consolidation. Operating results for the six-month period ended June 30, 2005
      are not necessarily indicative of results that may be expected for any other
      interim period or the year as a whole.





**Earnings
      Per Share**





For
      each
      of the quarters ended June 30, 2005 and 2004, the numerator for the calculation
      of both basic and diluted earnings per common share is equal to net income
      reported for that period. The difference between basic and diluted earnings
      per
      share denominators is due to dilutive stock options. Options
      to purchase an aggregate of 7,475,427 and 7,341,859 shares of common stock
      during the three and six months ended June 30, 2005, respectively, and 6,634,593
      and 5,850,135 shares of common stock during the three and six months ended
      June
      30, 2004, respectively, were not included in the computation of diluted earnings
      per share because the options’ exercise prices were greater than the average
      market price of the common stock for each respective period. These
      options expire at various points in time through June 2015.





**Stock-Based
      Compensation**





Statement
      of Financial Accounting Standard (“SFAS”) No. 148, *Accounting
      for Stock-Based Compensation-Transition and Disclosure* ,
      amends
      the disclosure requirements of SFAS No. 123, *Accounting
      for Stock-Based Compensation* ,
      to
      require prominent disclosures in both annual and interim financial statements
      about the method of accounting for stock-based employee compensation and the
      effect of the method used on reported results. As permitted by SFAS No. 123,
      the
      Company accounts for its fixed stock options using the intrinsic-value method,
      prescribed in Accounting Principles Board Opinion (“APB”) No. 25, *Accounting
      for Stock Issued to Employees* ,
      which
      generally does not result in compensation expense recognition for stock options.
      Under the intrinsic-value method, compensation cost for stock options is
      measured at the date of grant as the excess, if any, of the quoted market price
      of the Company’s stock over the exercise price of the options.





In
      addition to stock options, the Company also grants restricted stock awards
      to
      certain officers and employees. Upon issuance of grants under the plan, unearned
      compensation equivalent to the market value on the date of grant is charged
      to
      paid-in capital and subsequently amortized over the vesting period of the grant.
      The Company becomes entitled to an income tax deduction in an amount equal
      to
      the taxable income reported by the holders of the restricted shares when the
      restrictions are released.





6
 Table
          of Contents


**21ST
        CENTURY INSURANCE GROUP**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **June
        30, 2005**
 DOLLAR
        AMOUNTS IN THOUSANDS, EXCEPT WHERE NOTED


Restricted
      shares are forfeited if officers’ and employees’ employment with the Company is
      terminated prior to the lapsing of restrictions. We record forfeitures of
      restricted stock as treasury share repurchases and any compensation cost
      previously recognized with respect to unvested stock awards is reversed in
      the
      period of forfeiture. This accounting treatment results in compensation expense
      being recorded in a manner consistent with that required under SFAS No. 123,
      and
      therefore, proforma net income and earnings per share amounts for the Restricted
      Share Plan would be unchanged from those reported in the financial
      statements.





Had
      compensation cost for the Company’s stock-based compensation plans been
      determined based on the fair-value-based method for all awards, net income
      and
      earnings per share would have been reduced to the proforma amounts indicated
      below:





*Three
                Months Ended*
            *Six
                Months Ended**June
                30,*
            *June
                30,**AMOUNTS
                IN THOUSANDS, EXCEPT SHARE DATA*
            
            **2005**
            2004
            **2005**
            2004**Net
                income, as reported**
            
            **$**
            **20,495**
            
            $
            21,374
            
            **$**
            **39,932**
            
            $
            41,199*Add:*Stock-based employee compensation expense included in reported net
                income,
                net of related tax effects
            
            
            **68**
            
            
            65
            
            
            **90**
            
            
            130*Deduct*:
                Total stock-based employee compensation expense determined under
                fair-
                value-based method for all awards, net of related tax
                effects
            
            
            **(1,298**
            **)**
            
            (1,301
            )
            
            **(2,565**
            **)**
            
            (3,280
            )**Net
                income, proforma**
            
            **$**
            **19,265**
            
            $
            20,138
            
            **$**
            **37,457**
            
            $
            38,049Basic
                and diluted earnings per share:As
                reported
            
            **$**
            **0.24**
            
            $
            0.25
            
            **$**
            **0.47**
            
            $
            0.48Proforma
            
            **$**
            **0.22**
            
            $
            0.24
            
            **$**
            **0.44**
            
            $
            0.44





For
      proforma disclosure purposes, the fair value of stock options was estimated
      for
      grants during the six-month periods ended June 30 using the Black-Scholes
      valuation model with the following weighted-average assumptions:





*Six
                Months Ended*
              *June
                30,***2005**
            2004Risk-free
                interest rate:Minimum
            
            
            **3.74**
            **%**
            
            3.43
            %Maximum
            
            
            **4.28**
            **%**
            
            4.24
            %Dividend
                yield
            
            
            **1.13**
            **%**
            
            0.56
            %Volatility
                factor of the expected market priceof
                the Company’s common stock:Minimum
            
            
            **0.29**
            
            
            0.36Maximum
            
            
            **0.32**
            
            
            0.41Weighted-average
                expected life of the options
            
            
            **6
                years**
            
            
            6
                years




7
 Table
          of Contents




**21ST
        CENTURY INSURANCE GROUP**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **June
        30, 2005**
 DOLLAR
        AMOUNTS IN THOUSANDS, EXCEPT WHERE NOTED





**Recent
      Accounting Standards**





In
      May 2005, the Financial Accounting Standards Board (“FASB”)  issued
      SFAS No. 154, *Accounting
      Changes and Error Corrections* .
      SFAS
      No. 154 replaces APB No. 20, *Accounting
      Changes* ,
      and
      SFAS No. 3, *Reporting
      Accounting Changes in Interim Financial Statements* ,
      and
      establishes retrospective application as the required method for reporting
      a
      change in accounting principle. SFAS No. 154 provides guidance for determining
      whether retrospective application of a change in accounting principle is
      impracticable and for reporting a change when retrospective application is
      impracticable. The reporting of a correction of an error by restating previously
      issued financial statements is also addressed. SFAS No. 154 is effective for
      accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005. The Company does not anticipate that the adoption
      of SFAS No. 154 will have a material impact on its consolidated results of
      operations.




In
      March 2005, the Securities & Exchange Commission (the “SEC”) issued
      Staff Accounting Bulletin (“SAB”) No. 107, *Share-Based
      Payment* .
      SAB No.
      107 summarizes the views of the SEC staff regarding the interaction between
      SFAS
      No. 123 (Revised 2004), *Share-Based
      Payment* (“SFAS
      No. 123R”) and certain SEC rules and regulations, and is intended to assist in
      the initial implementation of SFAS No. 123R, which for the Company is required
      beginning in the first quarter 2006. As a result of SFAS No. 123R, the Company
      will be required to recognize the cost of its stock options as an expense in
      the
      consolidated statement of operations. The Company is currently assessing the
      impact that the adoption of SFAS No. 123R will have on its consolidated results
      of operations. Although this assessment is ongoing, management believes the
      effect of adopting SFAS No. 123R will be material to the Company’s consolidated
      results of operations.





**NOTE
          2.** **HOMEOWNER
          AND EARTHQUAKE LINES IN RUNOFF**





California
      Senate Bill 1899 (“SB 1899”), effective from January 1, 2001 to December 31,
      2001, allowed the re-opening of previously closed earthquake claims arising
      out
      of the 1994 Northridge earthquake. The discovery stay imposed in early 2002
      was
      lifted in the first quarter of 2003 and the Company obtained more information
      with which to estimate the ultimate cost of resolving its SB 1899 claims. Based
      on events occurring during the first quarter of 2003, the Company increased
      its
      SB 1899 reserves by $37.0 million, resulting in an after-tax charge of $24.1
      million. The revised estimate at that point was based on the pace and cost
      of
      settlements reached thus far, the actual costs incurred during that quarter,
      and
      the Company’s assessment of the expected length and intensity of the litigation
      arising out of the remaining claims. The estimate was subsequently increased
      by
      $1.0 million during the first quarter of 2004 based on the Company’s
      reassessment of its remaining estimated litigation costs. Based upon information
      obtained in connection with settlement discussions and mediations conducted
      during the fourth quarter of 2004, the Company updated its case-by-case review
      of the remaining cases and reevaluated remaining litigation costs for resolving
      outstanding matters. As a result of this reassessment, the Company increased
      its
      reserve by $1.2 million during the fourth quarter of 2004. The Company’s total
      reserve for SB 1899 claims as of June 30, 2005, was $1.5 million.





More
      than
      ninety-eight percent of the claims submitted and litigation brought against
      the
      Company as a result of SB 1899 have been resolved. All of the Company’s
      remaining 1994 Earthquake claims are in litigation. No class actions have been
      certified and the trial court has denied class action status for the two
      remaining cases seeking class action status. While the reserves established
      are
      the Company’s current best estimate of the cost of resolving its 1994 Earthquake
      claims, including claims arising as a result of SB 1899, these reserves continue
      to be highly uncertain because of the difficulty in predicting how the remaining
      litigated cases will be resolved.  The estimate currently recorded by the
      Company assumes that relatively few of the remaining cases will require a full
      trial to resolve, that any trial costs will approximate those encountered by
      the
      Company in the past, that most cases will be settled without need for extensive
      pre-trial preparation, and that the trial court’s denial of class action status
      for those cases seeking such status will be upheld on appeal. Current reserves
      contain no provisions for extra-contractual or punitive damages, bad faith
      judgments or similar unpredictable hazards of litigation that possibly could
      result in the event an adverse verdict were to be sustained against the Company.
      To the extent these and other underlying assumptions prove to be incorrect,
      the
      ultimate amount to resolve these claims could exceed the Company’s current
      reserves, possibly by a material amount. The Company continues to seek
      reasonable settlements of claims brought under SB 1899 and other Northridge
      earthquake related theories, but will vigorously defend itself against excessive
      demands and fraudulent claims. The Company may, however, settle cases in excess
      of its assessment of its contractual obligations in order to reduce the future
      cost of litigation.





8
 Table
          of Contents


**21ST
        CENTURY INSURANCE GROUP**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **June
        30, 2005**
 DOLLAR
        AMOUNTS IN THOUSANDS, EXCEPT WHERE NOTED


The
      Company has received some Northridge earthquake claims reported after the
      closing of the window established by SB 1899 which are based upon alternative
      legal theories. The Company is contesting these claims and the earthquake
      reserves include only nominal amounts for them. Should the courts ultimately
      determine that these claims, or additional claims brought in the future, are
      not
      barred by the applicable statute of limitations and the provisions of SB 1899,
      additional reserves may be needed to resolve them. A recent Court of Appeal
      decision, *Cordova
      v. 21st Century Insurance Company* ,
      found
      that SB 1899 does not automatically bar claims brought outside its specified
      time limitations and that, under certain conditions, a 1994 Northridge
      earthquake claimant might be able to assert that the Company is equitably
      estopped to assert a time limitation defense. The Company is seeking review
      of
      this decision by the California Supreme Court.





Loss
      and
      loss adjustment expenses for the homeowner and earthquake lines in runoff were
      $0.2 million and $0.4 million for
      the
      three and six months ended June 30, 2005, respectively, compared to $0.2 million
      and $0.5 million for the same periods in 2004.





**NOTE
          3** **.** **COMMITMENTS
          AND CONTINGENCIES**





*Litigation.* In the
      normal course of business, the Company is named as a defendant in lawsuits
      related to claims and insurance policy issues, both on individual policy files
      and by class actions seeking to attack the Company’s business practices. Many
      suits seek unspecified extra-contractual and punitive damages as well as
      contractual damages under the Company’s insurance policies in excess of the
      Company’s estimates of its obligations under such policies. The Company cannot
      estimate the amount or range of loss that could result from an unfavorable
      outcome on these suits and it denies liability for any such alleged damages.
      The
      Company has not established reserves for potential extra-contractual or punitive
      damages, or for contractual damages in excess of estimates the Company believes
      are correct and reasonable under its insurance policies. Nevertheless,
      extra-contractual and punitive damages, if assessed against the Company, could
      be material in an individual case or in the aggregate. The Company may choose
      to
      settle litigated cases for amounts in excess of its own estimate of contractual
      damages to avoid the expense and risk of litigation. Other than possibly for
      the
      contingencies discussed below, the Company does not believe the ultimate outcome
      of these matters will be material to its results of operations, financial
      condition, or cash flows. The Company denies liability and has not established
      a
      reserve for the matters discussed below. A range of potential losses in the
      event of a negative outcome is discussed where known.





*Poss
      v. 21st Century Insurance Company* ** was
      filed
      on June 13, 2003, in Los Angeles Superior Court. The complaint sought injunctive
      and unspecified restitutionary relief against the Company under Business and
      Professions Code (“B&P”) Sec. 17200 for alleged unfair business practices in
      violation of California Insurance Code (“CIC”) Sec. 1861.02(c) relating to
      company rating practices. Based on California’s Proposition 64, passed in
      November 2004, the court granted the Company’s motion to dismiss the complaint
      on March 22, 2005, but stayed the litigation pending appellate court decisions
      involving similar issues but other parties. Because this matter is in the
      pleading stages and no discovery has taken place, no estimate of the range
      of
      potential losses in the event of a negative outcome can be made at this
      time.





9
 Table
          of Contents




**21ST
        CENTURY INSURANCE GROUP**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **June
        30, 2005**
 DOLLAR
        AMOUNTS IN THOUSANDS, EXCEPT WHERE NOTED


*Cecelia
      Encarnacion, individually and as the Guardian Ad Litem for Nubia Cecelia
      Gonzalez, a Minor, Hilda Cecelia Gonzalez, a Minor, and Ramon Aguilera v. 20th
      Century Insurance* was
      filed on July 3, 1997, in Los Angeles Superior Court. Plaintiffs allege bad
      faith, emotional distress, and estoppel involving the Company’s (the Company was
      formerly named 20th Century Insurance) handling of a 1994 homeowner's claim.
      On
      March 1, 1994, Ramon Aguilera shot and killed Mr. Gonzalez (the minor children’s
      father) and was later sued by Ms. Encarnacion for wrongful death. On August
      30,
      1996, judgment was entered against Ramon Aguilera for $5.6 million. The Company
      paid for Aguilera's defense costs through the civil trial; however, the
      homeowner's policy did not provide indemnity coverage for the shooting incident,
      and the Company refused to pay the judgment. After the trial, Aguilera assigned
      a portion of his action against the Company to Encarnacion and the minor
      children. Aguilera and the Encarnacion family then sued the Company alleging
      that the Company had promised to pay its bodily injury policy limit if Aguilera
      pled guilty to involuntary manslaughter. In August 2003, the trial court held
      a
      bench trial on the limited issues of promissory and equitable estoppel, and
      policy forfeiture. On September 26, 2003, the trial court issued a ruling that
      the Company cannot invoke any policy exclusions as a defense to coverage. On
      May
      14, 2004, the court granted the Encarnacion plaintiffs’ motion for summary
      adjudication, ordering that the Company must pay the full amount of the
      underlying judgment of $5.6 million, plus interest, for a total of $10.5
      million. The Company disagrees with this ruling as it appears inconsistent
      with
      the court’s simultaneous ruling denying the Company’s motion for summary
      judgment on grounds that there are triable issues of material fact as to whether
      plaintiffs are precluded from recovering damages as a consequence of Aguilera’s
      inequitable conduct. The Company also believes that the court’s decision was not
      supported by the evidence in the case, demonstrating that no promise to settle
      was ever made. The Company has appealed the judgment as to the Encarnacions.
      The
      trial as to Aguilera is set for September 2005 on his claims for bad faith,
      emotional distress, punitive damages and attorney fees. The Company believes
      it
      has meritorious defenses to these additional claims, but expects plaintiff’s
      attorney fee claim alone to approach $4.0 million.





*Bryan
      Speck, individually, and on behalf of others similarly situated v.
      21* *st
      Century Insurance Company, 21st Century Casualty Company, and 21st Century
      Insurance Group* ,
      was
      filed on June 20, 2002, in Los Angeles Superior Court. Plaintiff seeks
      California class action certification, injunctive relief, and unspecified actual
      and punitive damages. The complaint contends that 21st Century uses “biased”
software in determining the value of total-loss automobiles. Plaintiff alleges
      that database providers use improper methodology to establish comparable auto
      values and populate their databases with biased figures and that the Company
      and
      other carriers allegedly subscribe to the programs to unfairly reduce claims
      costs. This case is consolidated with similar actions against other insurers
      for
      discovery and pre-trial motions. The Company intends to vigorously defend the
      suit with other defendants in the coordinated proceedings. This matter is in
      the
      pleading stage of litigation and no reasonable estimate of potential losses
      in
      the event of a negative outcome can be made at this time.





*Thomas
      Theis, on his own behalf and on behalf of all others similarly situated v.
      21st
      Century Insurance* was
      filed on June 17, 2002, in Los Angeles Superior Court. Plaintiff seeks
      California class action certification, injunctive relief, and unspecified actual
      and punitive damages. The complaint contends that after insureds receive medical
      treatment, the Company used a medical-review program to adjust expenses to
      reasonable and necessary amounts for a given geographic area. Plaintiff alleges
      that the adjusted amount is “predetermined” and “biased,” creating an unfair
      pretext for reducing claims costs. This case is consolidated with similar
      actions against other insurers for discovery and pre-trial motions. The Company
      intends to vigorously defend the suit with other defendants in the coordinated
      proceedings. This matter is in the discovery stage of litigation and no
      reasonable estimate of potential losses in the event of a negative outcome
      can
      be made at this time.





10
 Table
          of Contents




**21ST
        CENTURY INSURANCE GROUP**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **June
        30, 2005**
 DOLLAR
        AMOUNTS IN THOUSANDS, EXCEPT WHERE NOTED


**NOTE
          4** **.** **STOCK
          - BASED COMPENSATION**





**2004
      Stock Option Plan**





The
      stockholders approved the 2004 Stock Option Plan (the “2004 Plan”) at the Annual
      Meeting of Shareholders on May 26, 2004. The 2004 Plan supersedes the 1995
      Stock
      Option Plan, which will remain in effect only as to outstanding awards under
      it.
      The 2004 Plan authorizes a committee of the Board of Directors to grant stock
      options in respect of 4,000,000 shares to eligible employees and nonemployee
      directors, subject to the terms of the 2004 Plan. Additionally, under the 2004
      Plan, the aforementioned committee may grant stock options in respect of shares
      that were subject to outstanding awards under the 1995 Stock Option Plan to
      the
      extent such awards expire, are terminated, are cancelled, or are forfeited
      for
      any reason without shares being issued.





At
      June
      30, 2005, 4,047,137 stock options remain available for future grants under
      the
      2004 Plan. Options granted to employees generally have ten-year terms and vest
      over various periods, generally three years. Options granted to nonemployee
      directors expire one year after a nonemployee director ceases service with
      the
      Company, or ten years from the date of grant, whichever is sooner. Nonemployee
      director options vest over one year, provided that the nonemployee director
      is
      in the service of the Company at that time. Currently, the Company uses the
      intrinsic-value method to account for stock-based compensation paid to employees
      and nonemployee directors for their services.





A
      summary
      of securities issuable and issued for the Company’s stock option plans and the
      Restricted Shares Plan at June 30, 2005, follows:





*AMOUNTS
                IN THOUSANDS*
            
            *1995
                Stock Option Plan*
            *2004
                Stock Option Plan*
            *Restricted**Shares
                Plan*Total
                number of securities authorized
            
            
            10,000
            
            
            4,000
            
            
            1,422Number
                of securities issued
            
            
            (691
            )
            
            **—**
            
            
            (1,144
            )Number
                of securities issuable upon the exercise of all outstanding
                options
            
            
            (7,368
            )
            
            (1,894
            )
            
            **—**Number
                of securities forfeited
            
            
            (2,227
            )
            
            **—**
            
            
            **—**Number
                of securities forfeited and returned to plan
            
            
            2,227
            
            
            **—**
            
            
            156Unused
                options assumed by 2004 Stock Option Plan
            
            
            (1,941
            )
            
            1,941
            
            
            **—**Number
                of securities remaining available for future grants under each
                plan
            
            
            **—**
            
            
            4,047
            
            
            434





Exercise
      prices for options outstanding at June 30, 2005, ranged from $11.68 to $29.25.
      The weighted-average remaining contractual life of those options is 7.0
      years.





11
 Table
          of Contents




**21ST
          CENTURY INSURANCE GROUP**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **June
          30, 2005**
 DOLLAR
          AMOUNTS IN THOUSANDS, EXCEPT WHERE NOTED


A
      summary
      of the Company’s stock option activity for the six months ended June 30, 2005,
      and related information follows:





*AMOUNTS
                IN THOUSANDS, EXCEPT PRICE DATA*
            
            Number
                of
              Options
            *Weighted-*
                *Average*
                *Exercise
                  Price*Options
                outstanding December 31, 2004
            
            
            8,109
            
            $
            16.49Granted
                in 2005
            
            
            1,725
            
            
            14.19Exercised
                in 2005
            
            
            (166
            )
            
            14.02Forfeited
                in 2005
            
            
            (406
            )
            
            15.35Options
                outstanding June 30, 2005
            
            
            9,262
            
            
            16.16





Options
      exercisable numbered 6,018,007 and 5,171,468 at June 30, 2005 and 2004,
      respectively.





**NOTE** **5.** **EMPLOYEE
          BENEFIT PLANS**





The
      Company has both funded and unfunded non-contributory defined benefit pension
      plans, which together cover essentially all employees who have completed at
      least one year of service. For certain key employees designated by the Board
      of
      Directors, the Company sponsors an unfunded non-qualified supplemental executive
      retirement plan. The supplemental plan benefits are based on years of service
      and compensation during the three highest of the last ten years of employment
      prior to retirement and are reduced by the benefit payable from the pension
      plan
      and 50% of the social security benefit. For other eligible employees, the
      pension benefits are based on employees’ compensation during all years of
      service. The Company’s funding policy is to make annual contributions as
      required by applicable regulations.




**Components
      of Net Periodic Cost**





Net
      pension costs for all plans were comprised of the following:




*Three
                Months Ended*
              *June
                30,*
            *Six
                Months Ended*
              *June
                30,***2005**
            2004
            **2005**
            2004Service
                cost
            
            **$**
            **1,762**
            
            $
            1,490
            
            **$**
            **3,524**
            
            $
            2,979Interest
                cost
            
            
            **1,855**
            
            
            1,610
            
            
            **3,710**
            
            
            3,221Expected
                return on plan assets
            
            
            **(1,830**
            **)**
            
            (1,612
            )
            
            **(3,660**
            **)**
            
            (3,223
            )Amortization
                of prior service cost
            
            
            **27**
            
            
            26
            
            
            **54**
            
            
            52Amortization
                of net loss
            
            
            **507**
            
            
            494
            
            
            **1,014**
            
            
            989Total
            
            **$**
            **2,321**
            
            $
            2,008
            
            **$**
            **4,642**
            
            $
            4,018





12
 Table
          of Contents




**21ST
          CENTURY INSURANCE GROUP**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **June
          30, 2005**
 DOLLAR
          AMOUNTS IN THOUSANDS, EXCEPT WHERE NOTED


**Employer
      Contributions**





The
      Company previously disclosed in its financial statements for the year ended
      December 31, 2004, that it did not expect to contribute to its qualified defined
      benefit pension plan in 2005. As of June 30, 2005, no contributions have been
      made. After consideration of currently available information, the Company
      continues to anticipate that it will not contribute any funds to its qualified
      defined benefit pension plan in 2005. However, the amount and timing of future
      contributions to our qualified defined benefit pension plan depends on a number
      of unpredictable factors including statutory funding requirements, the market
      performance of the plan’s assets, cash requirements for benefit payments to
      retirees, and future changes in interest rates that affect the actuarial
      measurement of the plan’s obligations. Contributions to our non-qualified
      defined benefit pension plan generally are limited to amounts needed to make
      benefit payments to retirees, which are expected to total approximately $0.9
      million in 2005.





**NOTE
          6.** **SEGMENT
          INFORMATION**





The
      Company’s “Personal Auto Lines” reportable segment primarily markets and
      underwrites personal automobile, motorcycle and umbrella insurance. The
      Company’s “Homeowner and Earthquake Lines in Runoff” reportable segment, which
      is in runoff, manages the wind-down of the Company’s homeowner and earthquake
      programs. The Company has not written any earthquake coverage since 1994 and
      ceased writing homeowner policies in February 2002.





Insurers
      offering homeowner insurance in California are required to participate in the
      California FAIR Plan (“FAIR Plan”). FAIR Plan is a state administered pool of
      difficult to insure homeowners. Each participating insurer is allocated a
      percentage of the total premiums written and losses and loss adjustment expense
      (“LAE”) incurred by the pool according to its share of total homeowner direct
      premiums written in the state. Participation in FAIR Plan operations is based
      on
      the pool from two years prior. Since the Company ceased writing homeowners
      business in 2002, the Company no longer receives assignments.





The
      Company evaluates segment performance based on pre-tax underwriting profit
      (loss). The Company does not allocate assets, net investment income, net
      realized investment gains (losses), other revenues, nonrecurring items, interest
      and fees expense, or income taxes to operating segments. The accounting policies
      of the reportable segments are the same as those described in Note 2 of the
      Notes to Consolidated Financial Statements included in our Annual Report on
      Form
      10-K for the year ended December 31, 2004. All revenues are generated from
      external customers and the Company does not rely on any major
      customer.





13
 Table
          of Contents


**21ST
        CENTURY INSURANCE GROUP**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **June
        30, 2005**
 DOLLAR
        AMOUNTS IN THOUSANDS, EXCEPT WHERE NOTED


The
      following table presents net premiums earned, depreciation and amortization
      expense, and segment profit (loss) for the Company’s segments.





Personal
                Auto Lines
            Homeowner
                and
              Earthquake
                Lines
              inRunoff
                1
            Total*Three
                Months Ended June 30, 2005*Net
                premiums earned
            
            **$**
            **336,842**
            
            **$**
            **3**
            
            **$**
            **336,845**Depreciation
                and amortization expense
            
            
            **8,426**
            
            
            **2**
            
            
            **8,428**Segment
                profit (loss)
            
            
            **16,239**
            
            
            **(198**
            **)**
            
            **16,041***Three
                Months Ended June 30, 2004*Net
                premiums earned
            
            $
            326,965
            
            $
            56
            
            $
            327,021Depreciation
                and amortization expense
            
            
            5,364
            
            
            30
            
            
            5,394Segment
                profit (loss)
            
            
            18,007
            
            
            (168
            )
            
            17,839*Six
                Months Ended June 30, 2005*Net
                premiums earned
            
            **$**
            **673,203**
            
            **$**
            **6**
            
            **$**
            **673,209**Depreciation
                and amortization expense
            
            
            **14,990**
            
            
            **5**
            
            
            **14,995**Segment
                profit (loss)
            
            
            **30,063**
            
            
            **(370**
            **)**
            
            **29,693***Six
                Months Ended June 30, 2004*Net
                premiums earned
            
            $
            645,130
            
            $
            111
            
            $
            645,241Depreciation
                and amortization expense
            
            
            10,612
            
            
            70
            
            
            10,682Segment
                profit (loss)
            
            
            28,843
            
            
            (388
            )
            
            28,455







The
      following table reconciles segment profit to consolidated income before
      provision for income taxes:





*Three
                  Months Ended**June 30,*
            *Six
                  Months Ended**June 30,***2005**
            2004
            **2005**
            2004Segment
                profit
            
            **$**
            **16,041**
            
            $
            17,839
            
            **$**
            **29,693**
            
            $
            28,455Net
                investment income
            
            
            **17,006**
            
            
            14,315
            
            
            **34,043**
            
            
            27,461Other
                income
            
            
            **367**
            
            
            —
            
            
            **367**
            
            
            —Realized
                investment (losses) gains
            
            
            **(1,267**
            **)**
            
            1,337
            
            
            **(1,727**
            **)**
            
            8,983Interest
                and fees expense
            
            
            **(2,031**
            **)**
            
            (2,185
            )
            
            **(4,088**
            **)**
            
            (4,411
            )Income
                before provision for income taxes
            
            **$**
            **30,116**
            
            $
            31,306
            
            **$**
            **58,288**
            
            $
            60,488




1  ** *Segment
      revenue represents premium earned as a result of the Company’s participation in
      the California FAIR Plan.*




14
 Table
          of Contents


**21ST
            CENTURY INSURANCE GROUP**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **June
            30, 2005**
 DOLLAR
            AMOUNTS IN THOUSANDS, EXCEPT WHERE NOTED


**NOTE
          7.** **VARIABLE
          INTEREST ENTITIES**





In
      January 2003, the FASB issued FASB Interpretation No. 46, *Consolidation
      of Variable Interest Entities, an interpretation of Accounting Research Bulletin
      No. 51* (“FIN
      46”), and amended it in December 2003. An entity is subject to the consolidation
      rules of FIN 46 and is referred to as a variable interest entity (“VIE”) if it
      lacks sufficient equity to finance its activities without additional financial
      support from other parties or if its equity holders lack adequate decision
      making ability based on criteria set forth in the interpretation.





FIN
      46
      also requires disclosures about VIEs that a company is not required to
      consolidate but in which a company has a significant variable interest. On
      August 29, 2003, the Company funded a revolving loan agreement with Impact
      C.I.L., LLC (“Impact C.I.L.”), a VIE. At present, the Company has contributed
      $5.1 million to be used to purchase mortgage loans in economically disadvantaged
      areas. The Company is not the primary beneficiary of the VIE and participates
      at
      an 11.11% level in the entity’s funding activities. Potential losses are limited
      to the amount invested as well as associated operating fees.





The
      Company’s maximum commitment is for up to 11.11% ($24.0 million) of $216.0
      million of participation. The mortgages purchased with these funds may be
      securitized. Otherwise, the loans will be liquidated in 10 years from the
      initial date of the respective agreement.





Impact
      C.I.L. is a subsidiary of Impact Community Capital, LLC (“Impact”), whose
      charter is to provide real estate loans in economically disadvantaged areas.
      At
      present, the Company has a $2.0 million note receivable from an Impact
      subsidiary in addition to the $5.1 million investment noted above. The Company
      has voting rights and ownership of Impact in proportion to its investment
      (approximately 10%).





The
      Company has also committed $2.0 million to other Impact affiliates for other
      community investment purposes. No amounts have been contributed to these other
      investment programs as of June 30, 2005.





The
      Company does not have any other material VIEs that it needs, or will need,
      to
      consolidate or disclose.




15
 Table
          of Contents


**ITEM2.**
              **MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND********RESULTS
                  OF OPERATIONS**


**Overview**





Founded
      in 1958, 21st Century Insurance Group is a direct-to-consumer provider of
      personal auto insurance. With $1.3 billion of revenue in 2004, the Company
      insures over 1.5 million vehicles in California, Texas, Illinois and six other
      states. We also provide motorcycle and personal umbrella insurance in
      California. We believe that we deliver superior policy features and customer
      service at a competitive price.





Our
      long-term financial goals include achieving a 96% combined ratio and 15% annual
      growth in premiums written in our personal auto lines. Our direct premiums
      written grew 1.2% ($3.9 million) to $328.7 million in the second quarter ended
      June 30, 2005, from $324.8 million in the second quarter of 2004. All of the
      second quarter 2005 growth in direct premiums written was generated outside
      of
      California. California direct premiums written decreased by 1.6% ($5.0 million)
      to $309.2 million, compared to $314.2 million for the same period in 2004,
      which
      is indicative of the high level of competitor marketing activity in the state.
      Non-California direct premiums written increased by 81.3% ($8.8 million) to
      $19.5 million, compared to $10.7 million for the same period in 2004.





Underwriting
      profit decreased 10.1% to $16.0 million in the second quarter of 2005, compared
      to $17.8 million for the same period in 2004. For the six months ended June
      30,
      2005, underwriting profit was $29.7 million, an increase of 4.2% over
      underwriting profit of $28.5 million for same period in 2004. The second quarter
      2005 underwriting profit includes $11.9 million of favorable development related
      to prior accident years’ reserves, compared to a $0.2 million of reserve
      strengthening in the same period of 2004. The six months ended June 30, 2005
      underwriting profit includes $19.6 million of favorable development related
      to
      prior accident years’ reserves, compared to $0.5 million of reserve
      strengthening in the same period of 2004.





The
      combined ratio increased 0.7% to 95.2% for the quarter ended June 30, 2005,
      from
      94.5% for the same period in 2004. For the six months ended June 30, 2005,
      the
      combined ratio remained stable at 95.6% compared to 95.6% in 2004.





Net
      income for the quarter ended June 30, 2005, was $20.5 million, or $0.24 per
      share, compared to net income of $21.4 million, or $0.25 per share, for the
      same
      period in 2004. The second quarter 2005 results include net realized capital
      losses of $1.3 million, compared to net realized capital gains of $1.3 million
      for the same period in 2004. For the six months ended June 30, 2005, net income
      was $39.9 million, or $0.47 per share, compared to $41.2 million, or $0.48
      per
      share, for the same period in 2004. The 2005 six months results include net
      realized capital losses of $1.7 million, compared to net realized capital gains
      of $9.0 million for the same period in 2004.





For
      the
      quarter ended June 30, 2005, cash flow from operations decreased 47.4% to $30.8
      million, compared to $58.5 million for the same period in 2004. For the six
      months ended June 30, 2005, cash flow from operations decreased by 39.5% to
      $70.2 million from $116.0 million for the same period in 2004. The $45.8 million
      decrease in operating cash flow is primarily attributable to income tax related
      items and increased underwriting expense payments. In February 2005, the Company
      filed its California amended tax returns under California legislation AB 263
      and
      paid an associated tax liability of $6.8 million, which contrasts with the
      $10.5
      million in income taxes refunded during the six-month period ended June 30,
      2004. Underwriting expenses and payments increased in 2005 as
      a
      result of our investments in the state expansion strategy, the conversion to
      our
      new technology platform (which currently services approximately 85% of
      outstanding claims and over 65% of California policies) and the build-up of
      our
      Dallas service center.





Total
      assets were $1,892.4 million at June 30, 2005 compared to $1,864.3 million
      at
      December 31, 2004. Statutory surplus increased 3.7% to $637.5 million at June
      30, 2005 from $614.9 million at December 31, 2004. The net premiums written
      to
      statutory surplus ratio improved to 2.1 at June 30, 2005, compared to 2.2 at
      December 31, 2004.





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Premiums
      written and statutory surplus have been presented to enhance investors’
understanding of the Company’s operations. These financial measures are not
      presented in accordance with accounting principles generally accepted in the
      United States of America (“GAAP”). Premiums written represent the premiums
      charged on policies issued during a fiscal period. Premiums earned, the most
      directly comparable GAAP measure, represents the portion of premiums written
      that is recognized as income in the financial statements for the periods
      presented and earned on a pro-rata basis over the term of the policies.
      Statutory surplus represents equity as of the end of a fiscal period for the
      Company’s insurance subsidiaries, determined in accordance with statutory
      accounting principles prescribed by insurance regulatory authorities.
      Stockholders’ equity is the most directly comparable GAAP measure. ** The
      reconciliations of these financial measures to the most directly comparable
      GAAP
      measure are located in “Results of Operations” and “Liquidity and Capital
      Resources,” respectively. These financial measures are not intended to replace,
      and should be read in conjunction with, the GAAP financial results.





See
      “Results of Operations” for more details as to our overall and personal auto
      lines results.





The
      remainder of our Management’s Discussion and Analysis of Financial Condition and
      Results of Operations should be read in conjunction with the accompanying
      financial statements. It includes the following sections:





·
            Financial
                Condition


·
            Liquidity
                and Capital Resources


·
            Contractual
                Obligations and Commitments


·
            Results
                of Operations


·
            Underwriting
                Results


·
            Investment
                Income


·
              Other
                  Revenues
 ·
              Critical
                  Accounting Estimates


·
            Forward-Looking
                Statements








**Financial
      Condition**





Investments
      and cash increased $41.1 million (2.9%) since December 31, 2004, due to $70.2
      million of operating cash flow primarily offset by cash outflows of $12.6
      million for property and equipment, $6.8 million in shareholder dividends,
      and
      $6.0 million of debt repayment.





At
      June
      30, 2005, investment-grade bonds comprised substantially all of the carrying
      value of the fixed maturity portfolio. As of June 30, 2005, three positions
      in
      fixed maturity securities were rated below BBB. These securities represent
      approximately 0.5% of our total investments.




Increased
      advertising, sales and customer service costs through June 30, 2005 contributed
      to an increase in deferred policy acquisition costs (“DPAC”) of $3.4 million to
      $62.2 million, compared to $58.8 million at December 31, 2004. Our DPAC is
      estimated to be fully recoverable (see *Critical
      Accounting Estimates - Deferred Policy Acquisition Costs* ).





The
      following table summarizes unpaid losses and loss adjustment expenses (“LAE”)
      with respect to our lines of business:





***June 30, 2005***
            
            *December 31, 2004**AMOUNTS
                IN THOUSANDS*
            
            **Gross**
            **Net**
            Gross
            NetUnpaid
                Losses and LAEPersonal
                auto lines
            
            **$**
            **492,420**
            
            **$**
            **487,854**
            
            $
            489,411
            
            $
            485,759Homeowner
                and earthquake lines in runoff
            
            
            **3,102**
            
            
            **2,269**
            
            
            6,131
            
            
            5,138Total
            
            **$**
            **495,522**
            
            **$**
            **490,123**
            
            $
            495,542
            
            $
            490,897




17
 Table
          of Contents





The
      following table summarizes losses and LAE incurred, net of applicable
      reinsurance, for the periods indicated:





*Three
                  Months Ended**June
                30,*
            *Six
                  Months Ended**June
                30,**AMOUNTS
                IN THOUSANDS*
            
            **2005**
            2004
            **2005**
            2004Net
                losses and LAE:Current
                accident year:Personal
                auto lines
            
            **$**
            **260,200**
            
            $
            244,406
            
            **$**
            **518,902**
            
            $
            491,540Homeowner
                and earthquake lines in runoff
            
            
            **—**
            
            
            —
            
            
            **—**
            
            
            —Total
                current accident year
            
            
            **260,200**
            
            
            244,406
            
            
            **518,902**
            
            
            491,540Prior
                accident years:Personal
                auto lines
            
            
            **(12,116**
            **)**
            
            (73
            )
            
            **(19,963**
            **)**
            
            32Homeowner
                and earthquake lines in runoff
            
            
            **200**
            
            
            223
            
            
            **376**
            
            
            498Total
                prior accident years
            
            
            **(11,916**
            **)**
            
            150
            
            
            **(19,587**
            **)**
            
            530Total
                net losses and LAE
            
            **$**
            **248,284**
            
            $
            244,556
            
            **$**
            **499,315**
            
            $
            492,070





At
      June
      30, 2005, gross unpaid losses and LAE increased $3.0 million for our personal
      auto lines and decreased $3.0 million for the homeowner and earthquake lines
      in
      runoff from the prior year end. The methods used to determine such estimates
      and
      to establish the resulting reserves are continually reviewed and updated. Any
      adjustments resulting therefrom are reflected in current operating income.
      It is
      management’s belief that the unpaid losses and LAE are adequate to cover unpaid
      losses and LAE as of June 30, 2005. While we perform quarterly reviews of the
      adequacy of established unpaid losses and LAE, there can be no assurance that
      our ultimate unpaid losses and LAE will not develop redundancies or deficiencies
      and materially differ from our unpaid losses and LAE as of June 30, 2005. In
      the
      future, if the unpaid losses and LAE develop redundancies or deficiencies,
      such
      redundancy or deficiency would have a positive or adverse impact, respectively,
      on future results of operations.





The
      process of making quarterly changes to unpaid losses and LAE begins with the
      preparation of several point estimates, a review of the actual claims experience
      in the quarter, actual rate changes achieved, actual changes in coverage, mix
      of
      business, and changes in certain other factors such as weather and recent tort
      activity that may affect the loss and LAE ratio. Our actuaries prepare several
      point estimates of unpaid losses and LAE for each of the coverages, and they
      use
      their experience and judgment to arrive at an overall actuarial point estimate
      of the unpaid losses and LAE for that coverage.





Meetings
      are held with appropriate departments to discuss significant issues as a result
      of the review. This process culminates in a reserve meeting to review the unpaid
      losses and LAE. The basis for carried unpaid losses and LAE is the overall
      actuarial point estimate. Other relevant internal and external factors
      considered include a qualitative assessment of inflation and other economic
      conditions, changes in the legal, regulatory, judicial and social environments,
      underlying policy pricing, exposure and policy forms, claims handling, and
      geographic distribution shifts. As a result of the meeting, unpaid losses and
      LAE are finalized and we record quarterly changes in unpaid losses and LAE
      for
      each of our coverages. The change in unpaid losses and LAE for the quarter
      for
      each coverage is the difference between net ultimate losses and LAE and the
      net
      paid losses and LAE recorded through the end of the quarter. The overall change
      in our unpaid losses and LAE is based on the sum of these coverage level
      changes.





The
      point
      estimate methods include the use of paid loss triangles, incurred loss
      triangles, claim count triangles, severity triangles, as well as expected loss
      ratio methods. Quantitative techniques frequently have to be supplemented by
      subjective consideration, including managerial judgment, to assure management
      satisfaction that the overall unpaid losses and LAE are adequate to meet
      projected losses. For example, in property damage coverages, repair cost trends
      by geographic region vary significantly. These factors are periodically reviewed
      and subsequently adjusted, as appropriate, to reflect emerging trends that
      are
      based upon past loss experience. Thus, many factors are implicitly considered
      in
      estimating loss costs to be recognized for the quarter.





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Judgment
      is required in analyzing the appropriateness of the various methods and factors
      to avoid overreacting to data anomalies that may distort such prior trends.
      For
      example, changes in limits distributions or development in the most recent
      accident quarters would require more actuarial judgment. We do not believe
      disclosure of specific point estimates calculated by the actuaries would be
      meaningful. Any one actuarial point estimate is based on a particular series
      of
      judgments and assumptions of the actuary. Another actuary may make different
      assumptions, and therefore reach a different point estimate.





There
      is
      a potential for significant variation in developing unpaid losses and LAE.
      Most
      automobile claims are reported within two to three months, whereas the estimates
      of ultimate severities exhibit greater variability at the same maturity.
      Generally, historical loss development factors are used to project future loss
      development, and there can be no assurance that future loss development patterns
      will be the same as in the past. However, we believe that our reserving
      methodologies are in line with other personal lines insurers and would normally
      expect ultimate unpaid losses and LAE development to vary approximately 5%
      from
      the carried unpaid losses and LAE.





As
      a
      result of the significant growth in the non-Los Angeles County regions, the
      Company has experienced changes in the mix of business relative to geography
      and
      policy limits. We believe that the assumption with the highest likelihood of
      change that could materially affect carried unpaid losses and LAE is property
      damage and collision severity in the San Francisco and Bay Area regions of
      California. These areas have significantly different repair costs and have
      exhibited significant policy growth. A 5% change in the severity assumption
      for
      these regions would result in an increase or decrease in total unpaid losses
      and
      LAE of 0.13%, or $1.9 million.





While
      we
      have settled over ninety-eight percent of reported earthquake claims and are
      making progress in resolving the remaining litigation, estimates of both the
      litigation costs and ultimate settlement or judgment amounts related to these
      claims are subject to a high degree of uncertainty. Please see Note 2 of the
      Notes to Condensed Consolidated Financial Statements for additional background
      on the Northridge Earthquake and SB 1899.





Debt
      of
      $134.2 million consists of $34.3 m illion
      of
      capital lease obligations and $99.9 million of senior notes, net of discount,
      issued in December 2003. The primary purpose of both borrowings was to increase
      the statutory surplus of 21st Century Insurance Company, our wholly-owned
      subsidiary. The decrease in debt of $4.1 million during the six months ended
      June 30, 2005 is primarily attributable to principal payments on the capital
      lease.





Stockholders’
      equity and book value per share increased to $810.0 million and $9.45,
      respectively, at June 30, 2005, compared to $774.4 million and
      $9.06 at December 31, 2004, respectively. The increase in stockholders’ equity
      for the six months ended June 30, 2005 was primarily due to net income of $39.9
      million and $2.1 million in proceeds from stock option exercises, offset by
      dividends to stockholders of $6.8 million.





**Liquidity
      and Capital Resources**





*21st
      Century Insurance Group* .
      Our
      holding company’s main sources of liquidity historically have been dividends
      received from our insurance subsidiaries and proceeds from issuance of debt
      or
      equity securities. Apart from the exercise of stock options and restricted
      stock
      grants to employees, the effects of which have not been significant, we have
      not
      issued any equity securities since 1998 when American International Group,
      Inc.
      (“AIG”) exercised its warrants to purchase common stock for cash of $145.6
      million. Our insurance subsidiaries have not paid any dividends to our holding
      company since 2001 due to the previous uncertainty that surrounded the
      taxability of dividends received by holding companies from their insurance
      subsidiaries in California. See further discussion of the *Ceridian* case in *Critical
      Accounting Estimates - Income Taxes* .





In
      December 2003, we completed a private offering of $100 million principal amount
      of 5.9 percent Senior Notes due in December 2013. The effective interest rate
      on
      the Senior Notes when all offering costs are taken into account and amortized
      over the term of the Senior Notes is approximately 6 percent per annum. Of
      the
      $99.2 million net proceeds from the offering, $85.0 million was used to increase
      the statutory surplus of our wholly-owned insurance subsidiary, 21st Century
      Insurance Company, and the balance was retained by our holding company. On
      July
      8, 2004, the Company completed an exchange offer in which all of the private
      offering notes were exchanged for publicly registered notes having the same
      terms.





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Effective
      December 31, 2003, the California Department of Insurance (“CDI”) approved an
      intercompany lease whereby 21st Century Insurance Company has leased certain
      computer software from our holding company. The monthly lease payment, currently
      $0.7 million, started in January 2004 and is subject to upward adjustment based
      on the cost incurred by the holding company to complete certain enhancements
      to
      the software.





Our
      holding company’s significant cash obligations over the next several years,
      exclusive of any dividends to stockholders that our directors may declare,
      consist of interest payments on the Senior Notes (approximately $5.9 million
      annually), costs to develop our California policy servicing system and the
      repayment of the $100 million principal on the Senior Notes due in 2013. We
      expect to be able to meet those obligations from sources of cash currently
      available (i.e., cash and investments at the holding company, which totaled
      $20.8 million at June 30, 2005, and payments received from the intercompany
      lease, borrowing from our insurance subsidiary), additional
      funds obtainable from the capital markets or from dividends received from our
      insurance subsidiaries. California currently levies state income taxes of
      approximately 1.8% on the amount of any such dividends received.





In
      2005,
      our insurance subsidiaries could pay $109.8 million as dividends to the holding
      company without prior written approval from insurance regulatory authorities.





*Insurance
      Subsidiaries* .
      We have
      achieved underwriting profits in our core auto insurance operations for the
      last
      fourteen quarters and have thereby enhanced our liquidity. Our cash flow from
      operations and short-term cash position generally are more than sufficient
      to
      meet obligations for claim payments, which by the nature of the personal
      automobile insurance business tend to have an average duration of less than
      a
      year. In California, where approximately 94.3% of our premiums were written
      for
      the six months ended June 30, 2005, underwriting profit improved in 2004 and
      2005 without additional rate increases. We implemented a 3.9% auto premium
      rate
      increase effective March 31, 2003 and a 5.7% rate increase in May of 2002,
      both
      of which continued a series of actions we began taking in 2000 to restore
      underwriting profitability.





Although
      in the past years we have been successful in gaining California regulatory
      approval for rate increases, there can be no assurance that insurance regulators
      will grant future rate increases that may be necessary to offset possible future
      increases in claims cost trends. Further, we could be required to liquidate
      investments to pay claims, possibly during unfavorable market conditions, which
      could lead to the realization of losses on sales of investments. Adverse
      outcomes to any of the foregoing uncertainties would create some degree of
      downward pressure on the insurance subsidiaries’ earnings or cash flows, which
      in turn, could negatively impact our liquidity.





As
      of
      June 30, 2005, our insurance subsidiaries had a combined statutory surplus
      of
      $637.5 million compared to $614.9 million at December 31, 2004. The increase
      in
      statutory surplus was primarily due to statutory net income of $47.8 million
      offset by an increase in nonadmitted assets of $14.9 million, an increase in
      net
      unrealized investment losses of $0.7 million, and a $9.6 million decrease in
      the
      deferred income tax asset. The net premiums written to statutory surplus ratio
      improved to 2.1 at June 30, 2005, compared to 2.2 at December 31,
      2004.





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The
      following is a reconciliation of our stockholders’ equity to statutory
      surplus:





*AMOUNTS
                IN THOUSANDS*
            
            **June
                30,**
              **2005**
            December
                31,
              2004Stockholders’
                equity - GAAP
            
            **$**
            **810,003**
            
            $
            774,401Condensed
                adjustments to reconcile GAAP equityto
                statutory surplus:Net
                book value of fixed assets under capital leases
            
            
            **(30,418**
            **)**
            
            (34,834
            )Deferred
                gain under capital lease transactions
            
            
            **(762**
            **)**
            
            (610
            )Capital
                lease obligation
            
            
            **34,351**
            
            
            38,405Nonadmitted
                net deferred tax assets
            
            
            **(60,205**
            **)**
            
            (67,260
            )Net
                deferred tax assets related to items nonadmitted under SAP
            
            
            **47,401**
            
            
            50,712Intercompany
                receivables
            
            
            **(48,640**
            **)**
            
            (19,917
            )Fixed
                assets
            
            
            **(23,738**
            **)**
            
            (25,017
            )Equity
                in non-insurance subsidiaries
            
            
            **17,597**
            
            
            8,082Unrealized
                gains on bonds
            
            
            **(23,304**
            **)**
            
            (21,709
            )Deferred
                policy acquisition costs
            
            
            **(62,205**
            **)**
            
            (58,759
            )Prepaid
                pension costs and intangible pension asset
            
            
            **(14,429**
            **)**
            
            (17,253
            )Other
                prepaid expenses
            
            
            **(9,522**
            **)**
            
            (12,235
            )Other,
                net
            
            
            **1,333**
            
            
            887Statutory
                surplus
            
            **$**
            **637,462**
            
            $
            614,893





*Transactions
      with Related Parties.* Since
      1995, we have entered into several transactions with AIG subsidiaries, including
      various reinsurance agreements. At June 30, 2005, reinsurance recoverables,
      net
      of payables, from AIG subsidiaries were $0.2 million, compared to $1.4 million
      at December 31, 2004. Other transactions with AIG subsidiaries have resulted
      from competitive bidding processes for certain corporate insurance coverages
      and
      certain software and data processing services. In October 2003, as a result
      of a
      competitive bidding process, we entered into an agreement with an AIG subsidiary
      to provide investment management and accounting services to the Company. This
      agreement was approved by the California Department of Insurance. ****




**Contractual
      Obligations and Commitments**





There
      were no material changes outside the ordinary course of our business in our
      contractual obligations during the three and six months ended June 30,
      2005.




**Results
      of Operations**





*Overall
      Results.* We
      reported net income of $20.5 million, or earnings **** per
      share
      (basic and diluted) of $0.24, on direct premiums written of $328.7 million
      in
      the quarter ended June 30, 2005, compared to a net income of $21.4 million,
      or
      earnings per share (basic and diluted) of $0.25, on direct premiums written
      of
      $324.8 million for the same quarter last year. For the six months ended June
      30,
      2005, net income was $39.9 million, or earnings per share (basic and diluted)
      of
      $0.47, on direct premiums written of $680.8 million. Net income for the six
      months ended June 30, 2004, was $41.2 million, or earnings per share (basic
      and
      diluted) of $0.48, on direct premiums written of $665.5 million.





21
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*Personal
      Auto Lines Results.*  The
      following table presents the components of our personal auto lines underwriting
      profit and the components of the combined ratio:





*Three
                  Months Ended**June
                30,*
            *Six
                  Months Ended**June
                30,**AMOUNTS
                IN THOUSANDS*
            
            **2005**
            2004
            **2005**
            2004Direct
                premiums written
            
            **$**
            **328,669**
            
            $
            324,750
            
            **$**
            **680,786**
            
            $
            665,343Net
                premiums written
            
            **$**
            **327,479**
            
            $
            323,613
            
            **$**
            **678,420**
            
            $
            663,017Net
                premiums earned
            
            **$**
            **336,842**
            
            $
            326,965
            
            **$**
            **673,203**
            
            $
            645,130Net
                losses and loss adjustment expenses
            
            
            **248,083**
            
            
            244,332
            
            
            **498,939**
            
            
            491,571Underwriting
                expenses incurred
            
            
            **72,520**
            
            
            64,626
            
            
            **144,201**
            
            
            124,716Personal
                auto lines underwriting profit
            
            **$**
            **16,239**
            
            $
            18,007
            
            **$**
            **30,063**
            
            $
            28,843Ratios:Loss
                and LAE ratio
            
            
            **73.7**
            **%**
            
            74.7
            %
            
            **74.1**
            **%**
            
            76.2
            %Underwriting
                expense ratio
            
            
            **21.5**
            **%**
            
            19.8
            %
            
            **21.4**
            **%**
            
            19.3
            %Combined
                ratio
            
            
            **95.2**
            **%**
            
            94.5
            %
            
            **95.5**
            **%**
            
            95.5
            %





The
      following table reconciles our personal auto lines underwriting profit to our
      consolidated net income:





*Three
                Months Ended*
            *Six
                Months Ended**June
                30,*
            *June
                30,**AMOUNTS
                IN THOUSANDS*
            
            **2005**
            2004
            **2005**
            2004Personal
                auto lines underwriting profit
            
            **$**
            **16,239**
            
            $
            18,007
            
            **$**
            **30,063**
            
            $
            28,843Homeowner
                and earthquake lines in runoff, underwriting loss
            
            
            **(198**
            **)**
            
            (168
            )
            
            **(370**
            **)**
            
            (388
            )Net
                investment income
            
            
            **17,006**
            
            
            14,315
            
            
            **34,043**
            
            
            27,461Other
                income
            
            
            **367**
            
            
            **—**
            
            
            **367**
            
            
            **—**Realized
                investment (losses) gains
            
            
            **(1,267**
            **)**
            
            1,337
            
            
            **(1,727**
            **)**
            
            8,983Interest
                and fees expense
            
            
            **(2,031**
            **)**
            
            (2,185
            )
            
            **(4,088**
            **)**
            
            (4,411
            )Provision
                for income taxes
            
            
            **(9,621**
            **)**
            
            (9,932
            )
            
            **(18,356**
            **)**
            
            (19,289
            )Net
                income
            
            **$**
            **20,495**
            
            $
            21,374
            
            **$**
            **39,932**
            
            $
            41,199








The
      following table reconciles our direct premiums written to net premiums
      earned:





*Three
                Months Ended*
            *Six
                Months Ended**June
                30,*
            *June
                30,**AMOUNTS
                IN THOUSANDS*
            
            **2005**
            2004
            **2005**
            2004Direct
                premiums written
            
            **$**
            **328,669**
            
            $
            324,750
            
            **$**
            **680,786**
            
            $
            665,343Ceded
                premiums written
            
            
            **(1,190**
            **)**
            
            (1,137
            )
            
            **(2,366**
            **)**
            
            (2,326
            )Net
                premiums written
            
            
            **327,479**
            
            
            323,613
            
            
            **678,420**
            
            
            663,017Net
                change in unearned premiums
            
            
            **9,363**
            
            
            3,352
            
            
            **(5,217**
            **)**
            
            (17,887
            )Net
                premiums earned
            
            **$**
            **336,842**
            
            $
            326,965
            
            **$**
            **673,203**
            
            $
            645,130





Comments
      relating to the underwriting results of the personal auto and the homeowner
      and
      earthquake lines in runoff are presented below.




22
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**Underwriting
        Results**





*Personal
      Auto.* Personal
      automobile insurance is our primary line of business. Vehicles insured outside
      of California accounted for 3.3% and 3.0% of our direct premiums written in
      the
      three and six months ended June 30, 2004, respectively, but increased to 5.9%
      and 5.7% for our direct premiums written for the three and six months ended
      June
      30, 2005, respectively.





Direct
      premiums written in the three months ended June 30, 2005, increased $3.9 million
      (1.2%) to $328.7 million compared to $324.8 million for the same period in
      2004.
      This increase was primarily due to a higher number of insured vehicles from
      non-California states. Direct premiums written for the six months ended June
      30,
      2005, increased $15.5 million (2.3%) to $680.8 million, compared to $665.3
      million for the same period in 2004, primarily due to a higher number of insured
      vehicles from non-California states.





Net
      premiums earned increased $9.8 million (3.0%) to $336.8 million for the three
      months ended June 30, 2005, compared to $327.0 million for the same period
      a
      year ago, attributable to the higher number of insured vehicles, as previously
      mentioned. Net premiums earned increased $28.1 million (4.4%) to $673.2 million
      for the six months ended June 30, 2005, compared to $645.1 million for the
      same
      period in 2004.





Auto
      retention was 92% for the quarter ended June 30, 2005, compared to 92% for
      the
      three months ended June 30, 2004. Auto retention for the six months ended June
      30, 2005, was 93%, compared to 93% for the same period in 2004.





Net
      losses and LAE incurred increased $3.8 million (1.5%) to $248.1 million for
      the
      three months ended June 30, 2005, compared to $244.3 million for the same period
      last year. For the six months ended June 30, 2005, net losses and LAE incurred
      increased $7.3 million (1.5%) to $498.9 million, compared to $491.6 million
      for
      the same period in 2004. The second quarter 2005 underwriting profit includes
      $11.9 million of favorable development related to prior accident years, compared
      to a $0.2 million of reserve strengthening in the same period of 2004. The
      six
      months ended June 30, 2005 underwriting profit includes $19.6 million of
      favorable development related to prior accident years, compared to $0.5 million
      of reserve strengthening in the same period of 2004. The effect on the loss
      and
      LAE ratios of changes in estimates relating to insured events of prior years
      during the second quarter of 2005 was approximately 3.6%, compared to 0.0%
      in
      the same quarter last year. For the six months ended June 30, 2005, the effect
      on the loss and LAE ratios of changes in estimates relating to uninsured events
      in prior years was 2.9%, compared to 0.0% for the same period in 2004. Changes
      in estimates are recorded in the period in which new information becomes
      available indicating that a change is warranted, usually in conjunction with
      our
      quarterly actuarial review.





The
      ratios of net underwriting expenses to net premiums earned were 21.5% and 19.8%
      for the quarters ended June 30, 2005 and 2004, respectively. The ratios of
      net
      underwriting expenses to net premiums earned were 21.4% and 19.3% for the six
      months ended June 30, 2005 and 2004, respectively. The increase was primarily
      due to growth in advertising costs, investments in the development of new
      markets, costs associated with the conversion to our new technology platform,
      and facility and support costs.





The
      combined ratio was 95.2% for the quarter ended June 30, 2005, compared to 94.5%
      for the same period a year ago. The combined ratios for the six months ended
      June 30, 2005 and 2004 were 95.5% and 95.5%, respectively.





*Homeowner
      and Earthquake Lines in Runoff.* Underwriting
      results of the homeowner and earthquake lines, which are in runoff, were losses
      and LAE incurred of $0.2 million for the three months ended June 30, 2005,
      compared to $0.2 million for the same period a year ago. For the six months
      ended June 30, 2005 and 2004, losses and LAE for those same lines were $0.4
      million and $0.5 million, respectively, of which the earthquake lines accounted
      for $0.0 million and $1.0 million, respectively. We have not written any
      earthquake policies since 1994 and we exited the homeowners insurance business
      at the beginning of 2002. Earthquake LAE incurred was $1.0 million in the first
      quarter of 2004, as reserves were increased to provide for additional legal
      defense costs expected to be incurred in settling outstanding
      claims.





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We
      have
      executed various transactions to exit from our homeowner line. Under a January
      1, 2002 agreement with Balboa Insurance Company (“Balboa”), a subsidiary of
      Countrywide Financial Corporation (“Countrywide”), 100% of homeowner unearned
      premium reserves and losses on or after that date were ceded to Balboa. Under
      the terms of this agreement, we retain certain loss adjustment expenses. We
      began non-renewing homeowner policies expiring on February 21, 2002 and
      thereafter. Substantially all of these customers were offered homeowner coverage
      through an affiliate of Countrywide. We have completed this process and no
      longer have any homeowner policies in force.





**Investment
      Income**





We
      utilize a conservative investment philosophy. No derivatives or nontraditional
      securities are held in our investment portfolio and only 3.5% of the portfolio
      consists of equity securities. Substantially the entire fixed maturity portfolio
      is investment grade. Net investment income was $17.0 million for the three
      months ended June 30, 2005 compared to $14.3 million for the same period in
      2004. Net
      investment income for the six months ended June 30, 2005 and 2004, was $34.0
      million and $27.5 million, respectively. The increase in net investment income
      is the result of higher average investment balances and higher pre-tax
      yields.





At
      June
      30, 2005, $287.8 million, or 21.0%, of our total fixed maturity investments
      at
      fair value were invested in tax-exempt bonds with the remainder, representing
      79.0% of the portfolio, invested in taxable securities, compared to 22.3% and
      77.7%, respectively, at December 31, 2004.





The
      average annual yields on invested assets for the three and six months ended
      June
      30, were as follows:





*Three
                Months Ended*
            *Six
                Months Ended**June
                30,*
            *June
                30,***2005**
            2004
            **2005**
            2004Pre-tax
            
            
            **4.8**
            **%**
            
            4.4
            %
            
            **4.8**
            **%**
            
            4.3
            %After-tax
            
            
            **3.5**
            **%**
            
            3.3
            %
            
            **3.5**
            **%**
            
            3.3
            %





Net
      realized losses on the sale of investments 1 were
      $1.3
      million (realized gains of $1.9 million and realized losses of $3.2 million)
      and
      $1.7 million (realized gains were $3.3 million and realized losses were $5.0
      million) for the three and six months ended June 30, 2005, compared to a $1.3
      million gain (realized gains were $2.3 million and realized losses were $1.0
      million) and $9.0 million gain (realized gains were $11.3 million and realized
      losses were $2.3 million) for the second quarter and six months ended June
      30,
      2004. Our policy is to investigate, on a quarterly basis, an investment for
      possible “other-than-temporary” impairment in the event the fair value of the
      security falls below its amortized cost, based on all relevant facts and
      circumstances. No such impairments were recorded in the three and six months
      ended June 30, 2005 or 2004.





**Other
      Revenues**





Other
      revenue in the second quarter of 2005 included interest income of $0.4 million
      relating to a refund claim with the IRS.





**Critical
      Accounting Estimates**





Our
      financial statements are prepared in accordance with GAAP. The financial
      information contained within those statements is, to a significant extent,
      financial information that is based on approximate measures of the financial
      effects of transactions and events that have already occurred. Our significant
      accounting policies are essential to understanding Management’s Discussion and
      Analysis of Financial Condition and Results of Operations. Some of our
      accounting policies require significant judgment to estimate values of either
      assets or liabilities. In addition, significant judgment may be needed to apply
      what often are complex accounting principles to individual transactions to
      determine the most appropriate treatment. We have established procedures and
      processes to facilitate making the judgments necessary to prepare financial
      statements.


1  Includes
        loss on disposal of fixed assets of $187 and $609 in 2005 and 2004,
        respectively.


24
 Table
          of Contents





The
      following is a summary of the more judgmental and complex accounting estimates
      and principles. In each area, we have discussed the assumptions most important
      in the estimation process. We have used the best information available to
      estimate the related items involved. Actual performance that differs from our
      estimates and future changes in the key assumptions could change future
      valuations and materially impact our financial condition and results of
      operations.





Management
      has discussed our critical accounting policies and estimates, together with
      any
      changes therein, with the Audit Committee of our Board of Directors.





*Losses
      and Loss Adjustment Expenses.* **** The
      estimated liabilities for losses and LAE include estimates of losses for known
      claims reported on or prior to the balance sheet dates, estimates of losses
      for
      claims incurred but not reported, and estimates of expenses for investigating,
      adjusting and settling all incurred claims. Amounts reported are estimates
      of
      the ultimate costs of settlement, net of estimated salvage and subrogation.
      The
      estimated liabilities are necessarily subject to the outcome of future events,
      such as changes in medical and repair costs, as well as economic and social
      conditions that impact the settlement of claims. In addition, time can be a
      critical part of reserving determinations since the longer the span between
      the
      incidence of a loss and the payment or settlement of the claim, the more
      variable the ultimate settlement amount can be. Accordingly, short-tail claims,
      such as property damage claims, tend to be more reasonably predictable than
      relatively longer-tail liability claims. For our current mix of auto exposures,
      which include both property and liability exposures, on average approximately
      80% of the ultimate losses are settled within twelve months of the date of
      loss.
      Given the inherent variability in the estimates, management believes the
      aggregate reserves are adequate. The methods of estimating losses and
      establishing the resulting reserves are reviewed and updated monthly and any
      resulting adjustments are reflected in current operations.





Changes
      in these recorded reserves flow directly to the income statement on a
      dollar-for-dollar basis. For example, an upward revision of $1 million in the
      estimated recorded liability for unpaid losses and LAE would decrease
      underwriting profit, and pre-tax income, by the same $1 million amount.
      Conversely, a downward revision of $1 million would increase pre-tax income
      by
      the same $1 million amount.





*Property
      and Equipment.* Accounting standards require a write-off to be recognized when an asset is
      abandoned or an asset group’s carrying value exceeds its fair value. For
      purposes of recognition and measurement of an impairment loss, a long-lived
      asset or assets are grouped with other assets and liabilities at the lowest
      level for which identifiable cash flows are largely independent of the cash
      flows of other assets and liabilities. Accounting standards require asset groups
      to be tested for possible impairment under certain conditions. There have been
      no events or circumstances in 2005 that would require a reassessment of any
      asset group for impairment.





*Income
      Taxes* .
      Determining the consolidated provision for income tax expense, deferred tax
      assets and liabilities and any related valuation allowance involves judgment.
      GAAP requires deferred tax assets and liabilities (“DTAs” and “DTLs,”
respectively) to be recognized for the estimated future tax effects attributed
      to temporary differences and carryforwards based on provisions of the enacted
      tax law. The effects of future changes in tax laws or rates are not anticipated.
      Temporary differences are differences between the tax basis of an asset or
      liability and its reported amount in the financial statements. For example,
      we
      have a DTA because the tax bases of our loss and LAE reserves are smaller than
      their book bases. Similarly, we have a DTL because the book basis of our
      capitalized software exceeds its tax basis. Carryforwards include such items
      as
      alternative minimum tax credits, which may be carried forward indefinitely,
      and
      net operating losses (“NOLs”), which can be carried forward 15 years for losses
      incurred before 1998 and 20 years thereafter.





At
      June
      30, 2005, our DTAs totaled $131.7 million and our DTLs totaled $81.7 million.
      The net of those amounts, $50.0 million, represents the net deferred tax asset
      reported in the condensed consolidated balance sheet.





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We
      are
      required to reduce DTAs (but not DTLs) by a valuation allowance to the extent
      that, based on the weight of available evidence, it is “more likely than not”
(i.e., a likelihood of more than 50%) that any DTAs will not be realized.
      Recognition of a valuation allowance would decrease reported earnings on a
      dollar-for- dollar basis in the year in which any such recognition were to
      occur. The determination of whether a valuation allowance is appropriate
      requires the exercise of management judgment. In making this judgment,
      management is required to weigh the positive and negative evidence as to the
      likelihood that the DTAs will be realized.





Portions
      of our NOL carryforward are scheduled to expire beginning in 2017, as shown
      in
      the table below (amounts in thousands):





**Year
                of**
              **Expiration**
            **NOL
                Excluding**
              **21st
                of the**
              **Southwest**
            **SRLY****2****NOL
                of**
              **21st
                of the**
              **Southwest**
            **Consolidated**
              **NOL**2017
            $            —
            $  
                1,684
            $      1,6842018
            —
            1,068
            1,0682019
            —
            1,466
            1,4662020
            —
            3,172
            3,1722021
            106,876
            2,180
            109,0562022
            37,316
            —
            37,316Totals
            $ 
                  144,192
            $   
                9,570
            $  
                153,762




Our
      auto
      business has generated an underwriting profit for the past fourteen quarters.
      Management believes it is reasonable to expect future underwriting profits
      and
      to conclude it is at least more likely than not that we will be able to realize
      the benefits of our DTAs. If necessary, we believe we could implement
      tax-planning strategies to generate sufficient future taxable income to utilize
      the NOL carryforwards prior to their expiration. Accordingly, no valuation
      allowance has been recognized as of June 30, 2005. However, generating future
      taxable income is dependent on a number of factors, including regulatory and
      competitive influences that may be beyond our ability to control. Future
      underwriting losses could possibly jeopardize our ability to utilize our NOLs.
      In the event adverse development or underwriting losses due to either SB 1899
      matters or other causes were to occur, management might reach a different
      conclusion about the realization of the DTAs and, if so, recognize a valuation
      allowance at that time.





In
      a
      December 21, 2000 court ruling, *Ceridian
      Corporation v. Franchise Tax Board* ,
      a
      California statute that allowed a tax deduction for the dividends received
      from
      wholly-owned insurance subsidiaries was held unconstitutional on the grounds
      that it discriminated against out-of-state insurance holding companies.
      Subsequent to the court ruling, the staff of the California Franchise Tax Board
      (“FTB”) took the position that the discriminatory sections of the statute are
      not severable and the entire statute is invalid. As a result, the FTB began
      disallowing dividends-received deductions for all insurance holding companies,
      regardless of domicile, for open tax years ending on or after December 1, 1997.
      Although the FTB made no formal assessment, the Company anticipated a
      retroactive disallowance that would result in additional tax assessments and
      recorded a provision for this contingency in a prior year.





In
      the
      third quarter of 2004, California enacted AB 263, which allowed the Company
      to
      file certain amended California tax returns and claim a dividends-received
      deduction. As a result, the Company re-estimated its liability and reduced
      its
      tax provision by approximately $4.9 million in the third quarter of 2004, which
      reduced the effective tax rate for 2004. In the first quarter of 2005, the
      Company filed amended California tax returns and paid the State of California
      approximately $6.8 million to cover all issues outstanding with the FTB,
      including certain matters paid under protest as to which the Company has
      reserved all its rights to file for refunds and appeal any adverse rulings
      the
      FTB may make in the course of finalizing its audit.


2  “SRLY”
        stands for Separate Return Limitation Year. Under the Federal tax code, only
        future income generated by 21st Century Insurance Company of the Southwest
        (“21st of the Southwest”) (formerly 21st Century Insurance Company of Arizona)
        may be utilized against this portion of our NOL.


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*Deferred
      Policy Acquisition Costs* .
      Deferred policy acquisition costs (“DPAC”) primarily include premium taxes,
      advertising, and other variable costs incurred with writing business. These
      costs are deferred and amortized over the 6-month policy period in which the
      related premiums are earned.





Management
      assesses the recoverability of deferred policy acquisition costs on a quarterly
      basis. The assessment calculates the relationship of actuarially estimated
      costs
      incurred to premiums from contracts issued or renewed for the period. We do
      not
      consider anticipated investment income in determining the recoverability of
      these costs. Based on current indications, no reduction in DPAC is required.





The
      loss
      and LAE ratio used in the recoverability estimate is based primarily on expected
      ultimate ratios provided by our actuaries. While management believes that is
      a
      reasonable assumption, actual results could differ materially from such
      estimates.





*Investments* .
      Unrealized investment gains and losses, net of applicable tax effects, are
      included as an element of accumulated other comprehensive income (loss), which
      is classified as a separate component of stockholders’ equity. For investments
      with unrealized losses due to market conditions or industry-related events,
      where the Company has the positive intent and ability to hold the investment
      for
      a period of time sufficient to allow a market recovery or to maturity, declines
      in value below cost are not assumed to be other-than-temporary.





Where
      declines in values of securities below cost or amortized cost are considered
      to
      be other-than-temporary, a charge is required to be reflected in income for
      the
      difference between cost or amortized cost and the fair value. The determination
      of whether a decline in market value is “other-than-temporary” is a matter of
      subjective judgment. No such charges were recorded in the three or six months
      ended June 30, 2005 and 2004. The timing and amount of realized losses and
      gains
      reported in income could vary if conclusions other than those made by management
      were to determine whether an other-than-temporary impairment exists. However,
      there would be no impact on equity because any unrealized losses are already
      included in accumulated other comprehensive income.





The
      following is a summary by issuer of non-investment grade fixed maturity
      securities and unrated securities held at June 30, 2005 and December 31, 2004
      (at fair value):





**June
                30,**
            December
                31,*AMOUNTS
                IN THOUSANDS*
            
            **2005**
            2004Non-investment
                grade securities (i.e., rated below BBB):Cox
                Communications, Inc.
            
            **$**
            **2,238**
            
            $
            2,240Ford
                Motor Credit Company
            
            
            —
            
            
            4,615General
                Motors Acceptance Corp
            
            
            —
            
            
            5,643News
                America, Inc.
            
            
            **1,627**
            
            
            —Xcel
                Energy, Inc.
            
            
            **2,924**
            
            
            —Unrated
                securities:Impact
                Community Capital LLC3
            
            
            **2,024**
            
            
            2,023Impact
                C.I.L. Parent
            
            
            **4,977**
            
            
            5,111Total
                non-investment grade and unrated securities4
            
            **$**
            **13,790**
            
            $
            19,632


3  Impact
        Community Capital LLC is a limited liability corporation that was voluntarily
        established by a group of California insurers to provide funding for low-income
        communities.
 4 The
        total net unrealized (loss) gain for these securities as of June 30, 2005
        and
        December 31, 2004 was $0.1 million and $0.4 million,
        respectively.


27
 Table
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The
      following table summarizes investments held by us having an unrealized loss
      of
      $0.1 million or more and aggregate information relating to all other investments
      in unrealized loss positions as of June 30, 2005 and December 31,
      2004:





**June
                30, 2005**
            December
                31, 2004*AMOUNTS
              IN THOUSANDS,*
              *EXCEPT
                NUMBER OF ISSUES*
            
            ***#******issues***
            
            ***Carrying
                Value***
            
            ***Unrealized******Loss***
            
            *#**issues*
            
            *Carrying**Value*
            
            *Unrealized**Loss*Investments
                with unrealized losses:Fixed
                maturity securities:Exceeding
                $0.1 million and for:Less
                than 6 months
            
            
            **2**
            
            **$**
            **13,536**
            
            **$**
            **370**
            
            
            7
            
            $
            88,258
            
            $
            1,0456-12
                months
            
            
            **1**
            
            
            **9,775**
            
            
            **150**
            
            
            15
            
            
            154,284
            
            
            3,415More
                than 1 year
            
            
            **15**
            
            
            **170,339**
            
            
            **2,615**
            
            
            2
            
            
            4,765
            
            
            326Less
                than $0.1 million
            
            
            **112**
            
            
            **401,075**
            
            
            **2,519**
            
            
            91
            
            
            306,984
            
            
            2,387Total
                fixed maturity securities with unrealized losses
            
            
            **130**
            
            
            **594,725**
            
            
            **5,654**
            
            
            115
            
            
            554,291
            
            
            7,173Equity
                securities:Exceeding
                $0.1 million and for less than 6 months:
            
            
            **2**
            
            
            **368**
            
            
            **349**
            
            
            —
            
            
            —
            
            
            —Less
                than $0.1 million
            
            
            **148**
            
            
            **25,386**
            
            
            **543**
            
            
            64
            
            
            15,479
            
            
            293Total
                equity securities withunrealized
                losses
            
            
            **150**
            
            
            **25,754**
            
            
            **892**
            
            
            64
            
            
            15,479
            
            
            293Total
                investments with unrealized losses5
            
            
            **280**
            
            **$**
            **620,479**
            
            **$**
            **6,546**
            
            
            179
            
            $
            569,770
            
            $
            7,466





A
      summary
      by contractual maturity of fixed maturity securities in an unrealized loss
      position by year of maturity follows:





**June
                30, 2005**
            
            December
                31, 2004*AMOUNTS
                IN THOUSANDS*
            
            ***Amortized
                Cost***
            
            ***Carrying
                Value***
            
            ***Unrealized
                Loss***
            
            *Amortized
                Cost*
            
            *Carrying
                Value*
            
            *Unrealized
                Loss*Fixed
                maturity securitiesDue
                in one year or less
            
            **$**
            **4,737**
            
            **$**
            **4,716**
            
            **$**
            **21**
            
            $
            9,778
            
            $
            9,738
            
            $
            40Due
                after one year through five years
            
            
            **84,931**
            
            
            **84,029**
            
            
            **902**
            
            
            26,537
            
            
            26,073
            
            
            464Due
                after five years through ten years
            
            
            **328,442**
            
            
            **324,651**
            
            
            **3,791**
            
            
            318,644
            
            
            314,898
            
            
            3,746Due
                after ten years
            
            
            **182,269**
            
            
            **181,329**
            
            
            **940**
            
            
            206,505
            
            
            203,582
            
            
            2,923Total
                fixed maturity securities with unrealized losses
            
            **$**
            **600,379**
            
            **$**
            **594,725**
            
            **$**
            **5,654**
            
            $
            561,464
            
            $
            554,291
            
            $
            7,173





*Stock-based
      compensation* .
      Under
      the provisions of Statement of Financial Accounting Standard (“SFAS”) No. 123, *Accounting
      for Stock-Based Compensation* ,
      we have
      elected to continue using the intrinsic-value method of accounting for
      stock-based awards granted to employees in accordance with Accounting Principles
      Board Opinion No. 25, *Accounting
      for Stock Issued to Employees* .
      Accordingly, we have not recognized in income any compensation expense for
      the
      fair value of stock options awarded to employees. Companies electing to continue
      to follow the intrinsic-value method must make proforma disclosures, as if
      the
      fair-value-based method of accounting had been applied. A summary of the expense
      that would have been recorded, together with the underlying assumptions, had
      compensation cost for the Company’s stock-based compensation plans been
      determined based on the fair value based method for of all awards, is included
      in Note 1 of the Notes to Condensed Consolidated Financial
      Statements.


5  Unrealized
        losses represent 1.1% and 1.3% of the total carrying value of investments
        with
        unrealized losses at June 30, 2005 and December 31, 2004,
        respectively.


28
 Table
          of Contents





**Forward-Looking
      Statements**





This
      report contains statements that constitute forward-looking information.
      Investors are cautioned that these forward-looking statements are not guarantees
      of future performance or results and involve risks and uncertainties, and that
      actual results or developments may differ materially from the forward-looking
      statements as a result of various factors. You should not rely on
      forward-looking statements in this quarterly report on Form 10-Q.
      Forward-looking statements are statements not based on historical information
      and which relate to future operations, strategies, financial results or other
      developments. You can usually identify forward-looking statements by terminology
      such as “may,”  “will,”  “should,”  “expect,”  “plan,” 
“anticipate,”  “believe,”  “estimate,”  “predict,” 
“intend,”  “potential,” or “continue” or with the negative of these terms
      or other comparable terminology.





Although
      we believe that the expectations reflected in these forward-looking statements
      are reasonable, we cannot guarantee our future results, level of activity,
      performance or achievements. Forward-looking statements include, among other
      things, discussions concerning our potential expectations, beliefs, estimates,
      forecasts, projections and assumptions. Forward-looking statements may address,
      among other things:





·
            Our
                strategy for growth;


·
            Underwriting
                results;


·
            Our
                expected combined ratio and growth of written
                premiums;


·
            Product
                development;


·
            Computer
                systems;


·
            Regulatory
                approvals;


·
            Market
                position;


·
            Financial
                results;


·
            Dividend
                policy; and


·
            Reserves.





It
      is
      possible that our actual results, actions and financial condition may differ,
      possibly materially, from the anticipated results, actions and financial
      condition indicated in these forward-looking statements. Other important factors
      that could cause our actual results and actions to differ, possibly materially,
      from those in the specific forward-looking statements include those discussed
      in
      this report under the heading “Management’s Discussion and Analysis of Financial
      Condition and Results of Operations” as well as:





·
            The
                effects of competition and competitors’ pricing
                actions;


·
            Adverse
                underwriting and claims experience, including experience as a result
                of
                revived earthquake claims under SB 1899;


·
            Customer
                service problems;


·
            The
                impact on our operations of natural disasters, principally earthquake,
                or
                civil disturbance, due to the concentration of our facilities and
                employees in Southern California;


·
            Information
                system problems, including failures to implement information technology
                projects on time and within budget;


·
            Control
                environment failures;


·
            Adverse
                developments in financial markets or interest rates;


·
            Results
                of legislative, regulatory or legal actions, including the inability
                to
                obtain approval for necessary licenses, rate increases and product
                changes
                and possible adverse actions taken by state regulators in market
                conduct
                examinations; and


·
            Our
                ability to service our debt, including our ability to receive dividends
                and/or sufficient payments from our subsidiaries to service our
                obligations.





We
      do not
      undertake any obligation to update or revise any forward-looking statements,
      whether as a result of new information, future events or otherwise.




29
 Table
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**ITEM
                  3.**
              **QUANTITATIVE
                  AND QUALITATIVE DISCLOSURES ABOUT MARKET
                  RISK**


Market
      risk is the risk of loss from adverse changes in market prices and interest
      rates. In addition to market risk we are exposed to other risks, including
      the
      credit risk related to the issuers of our financial instruments, the underlying
      insurance risk related to our core business and the exposure of the personal
      lines insurance business, as a regulated industry, to legal, legislative,
      judicial, political and regulatory action. Financial instruments are not used
      for trading purposes. The following disclosure reflects estimated changes in
      value that may result from selected hypothetical changes in market rates and
      prices. Actual results may differ.





Our
      cash
      flow from operations and short-term cash position generally are more than
      sufficient to meet our projected obligations for claim payments, which by the
      nature of the personal automobile insurance business tend to have an average
      duration of less than one year. As a result, it has been unnecessary for us
      to
      employ elaborate market risk management techniques involving complicated asset
      and liability duration matching or hedging strategies. Accordingly, the Company
      primarily invests in fixed maturity investments, which at June 30, 2005,
      comprised 96.5% of the fair value of the Company’s total investments. The
      remainder of the Company’s investments, representing approximately 3.5% of total
      investments at market value, is held in equity securities.





For
      all
      of our fixed maturity investments, we seek to provide for liquidity and
      diversification while maximizing income, without sacrificing investment quality.
      The value of the fixed maturity portfolio is subject to interest rate risk
      where
      the value of the fixed maturity portfolio decreases as market interest rates
      increase, and conversely, when market interest rates decrease, the value of
      the
      fixed maturity portfolio increases. Duration is a common measure of the
      sensitivity of a fixed maturity security’s value to changes in interest rates.
      The higher the duration, the more sensitive a fixed maturity security is to
      market interest rate fluctuations. Effective duration also measures this
      sensitivity, but it takes into account call terms, as well as changes in
      remaining term, coupon rate, and cash flow.





Since
      fixed maturity investments with longer remaining terms to maturity tend to
      realize higher yields, the Company’s investment philosophy typically resulted in
      a portfolio with an effective duration of over 6 years. Due to the current
      interest rate environment, management, in consultation with the Investment
      Committee, targeted a lower duration for the Company’s fixed maturity investment
      portfolio to reduce the negative impact of potential increases in interest
      rates. As a result, the effective duration of the fixed maturity portfolio
      declined from 5.4 years as of December 31, 2004 to 5.0 years at June 30,
      2005.





The
      Company has also obtained long-term fixed rate financing as a means of
      increasing the statutory surplus of the Company’s largest insurance
      subsidiary.





The
      following table shows the financial statement carrying values of our fixed
      maturity investments, which are reported at fair value, and our debt, which
      is
      reported at amortized cost. The table also presents estimated carrying values
      at
      adjusted market rates assuming a 100 basis point increase in market interest
      rates, given the effective duration noted above, for the fixed maturity
      investment portfolio and a 100 basis point decrease in market interest rates
      for
      the debt determined from a present value calculation. The following sensitivity
      analysis summarizes only the exposure to market interest rate risk:




*DOLLAR
                  AMOUNTS IN MILLIONS*
                *June
                  30, 2005*
              
              *Carrying**Value*
              *Estimated
                  Carrying*
                *Value
                  at Adjusted*
                *Market
                  Rates/Prices*
                *Indicated
                  Above*
              *Change
                  in**Value*
                *as
                  a**Percentage
                  of*
                *Carrying
                  Value*Fixed
                  maturity investments available for sale, at fair value
              
              $
              1,369.6
              
              $
              1,273.1
              
              
              (7.05
              %)Debt
              
              
              134.2
              
              
              141.8
              
              
              5.66
              %




30
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The
      equity securities portfolio, which represents approximately 3.5% of total
      investments at market value, consists primarily of financial services,
      industrial, and miscellaneous stocks. Beta is a measure of a security’s
      systematic (non-diversifiable) risk, which is the percentage change in an
      individual security’s price for a 1% change in the return of the market. The
      average Beta for the Company’s common stock holdings was 0.57.





The
      following table presents the financial statement carrying value of our equity
      securities portfolio and the effect of a hypothetical 20% reduction in the
      overall value of the stock market using the Beta noted above and accordingly
      summarizes only the exposure to equity price risk for the Company’s equity
      securities portfolio:


*DOLLAR
                    AMOUNTS IN MILLIONS*
                  *June
                    30, 2005*
                
                *Carrying**Value*
                *Estimated
                    Carrying*
                  *Value
                    at Hypothetical*
                  *20%
                    Reduction in*
                  *Overall
                    Value of*
                  *Stock
                    Market*
                *Change
                    in**Value*
                  *as
                    a**Percentage
                    of*
                  *Carrying
                    Value*Equity
                      securities available for sale
                
                $
                49.1
                
                $
                43.5
                
                
                (11.4
                %)


The
      discussion above provides only a limited, point-in-time view of the market
      risk
      sensitivity of our financial instruments. The actual impact of market interest
      rate and price changes on the financial instruments may differ significantly
      from those shown.





**ITEM
                4.**
            **CONTROLS
                AND PROCEDURES**





We
      have
      established disclosure controls and procedures to ensure that material
      information relating to the Company, including its consolidated subsidiaries,
      is
      communicated to our management, including the Chief Executive Officer and Chief
      Financial Officer, to allow timely decisions regarding required
      disclosure.




Based
      on
      their evaluation of the effectiveness of 21st Century Insurance Group’s
      disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
      under the Securities Exchange Act of 1934) as of June 30, 2005, the Chief
      Executive Officer and Chief Financial Officer of 21st Century Insurance Group
      have concluded that such disclosure controls and procedures are effective to
      ensure that the information required to be disclosed by 21st Century Insurance
      Group in reports that it files or submits under the Securities Exchange Act
      of
      1934 is recorded, processed, summarized and reported within the time periods
      specified in SEC rules and forms.





Management,
      with the participation of the Chief Executive Officer and Chief Financial
      Officer, has evaluated any changes in 21st Century Insurance Group’s internal
      control over financial reporting that occurred during the most recent fiscal
      quarter. Based on the evaluation, management, including the Chief Executive
      Officer and Chief Financial Officer, have concluded that no change in our
      internal control over financial reporting (as defined in Rule 13a-15(f) under
      the Securities Exchange Act of 1934) occurred during the quarter ended June
      30,
      2005 that has materially affected, or is reasonably likely to materially affect,
      our internal control over financial reporting.




31
 Table
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PART II-OTHER
      INFORMATION




**ITEM
                1.**
            **LEGAL
                PROCEEDINGS**





In
      the
      normal course of business, the Company is named as a defendant in lawsuits
      related to claims and insurance policy issues, both on individual policy files
      and by class actions seeking to attack the Company’s business practices. A
      description of the legal proceedings to which the Company and its subsidiaries
      are a party is contained in Note 3 of the Notes to Condensed Consolidated
      Financial Statements.





**ITEM
                2.**
            **UNREGISTERED
                SALES OF EQUITY SECURITIES AND USE OF
                PROCEEDS**





None.





**ITEM
                3.**
            **DEFAULTS
                UPON SENIOR SECURITIES**





None.




**ITEM
                4.**
            **SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY
                HOLDERS**




The
      annual meeting of shareholders occurred on May 25, 2005, in which the following
      individuals were elected as directors: Steven
      J.
      Bensinger, John
      B.
      De Nault, III, Carlene M. Ellis, R. Scott Foster, M.D., Roxani M. Gillespie,
      Jeffrey L. Hayman, Phillip L. Isenberg, Bruce W. Marlow, James P. Miscoll,
      Keith
      W. Renken and Robert M. Sandler. The shareholders also ratified the appointment
      of PricewaterhouseCoopers LLP as the Company’s independent registered
      public accounting firm for 2005.





The
      shareholders voted as follows:





*Proposals*
            *For*
            *Against*
            *Withhold*
              *or
                Abstain*Election
                of DirectorsS.
                J. Bensinger
            69,474,704
            7,622,565J.
                B. De Nault, III
            76,565,429
            537,840C.
                M. Ellis
            71,036,705
            6,066,564R.
                S. Foster, M.D.
            71,037,014
            6,066,255R.
                M. Gillespie
            68,470,687
            8,632,582J.
                L. Hayman
            70,026,192
            7,077,077P.
                L. Isenberg
            71,788,807
            5,314,462B.
                W. Marlow
            69,679,225
            7,424,044J.
                P. Miscoll
            68,984,546
            8,118,723K.
                W. Renken
            71,817,685
            5,285,584R.
                M. Sandler
            68,735,030
            8,368,239Appointment
                of PricewaterhouseCoopers LLP
            76,212,591
            817,453
            73,223





**ITEM
                5.**
            **OTHER
                INFORMATION**





None.





**ITEM
                6.**
            **EXHIBITS**





See
      accompanying exhibit index.





32
 Table
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**SIGNATURES**





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




21ST
                  CENTURY INSURANCE GROUP(Registrant)Date:
              July
                  21, 2005
              
              /s/
                  Bruce W. MarlowBRUCE
                  W. MARLOWPresident
                  and Chief Executive OfficerDate:
              July
                  21, 2005
              
              /s/
                  Lawrence P. BascomLAWRENCE
                  P. BASCOMSr.
                  Vice President and Chief Financial
                  Officer




33
 Table
          of Contents




**EXHIBIT
      INDEX**





Exhibit
                  No.
              Description


31.1
              Certification
                  of President and Chief Executive Officer Pursuant to Exchange Act
                  Rule
                  13a-14(a).
 31.2
              Certification
                  of Chief Financial Officer Pursuant to Exchange Act Rule
                  13a-14(a).
 32.1
              Certification
                  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002.




34