FedNat Holding Co - Annual Report: 2009 (Form 10-K)

Unassociated Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

x Annual Report under Section 13 or 15(d) of the Securities Act of 1934

For the fiscal year ended December 31, 2009

¨ Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period of _____________to_______________

Commission file number: 0-2500111

21st Century Holding Company

(Exact name of registrant as specified in its Charter)

Florida		65-0248866
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No)

3661 West Oakland Park Boulevard, Suite 300, Lauderdale Lakes, Florida 33311
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code (954) 581-9993

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share		NASDAQ Global Market, LLC

Securities registered pursuant to Section 12(g) of the Exchange Act:

None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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. Yesx No ¨

Indicate by check mark whether the registrant has electronically submitted and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

The aggregate market value of the Registrant’s common stock held by non-affiliates was $21,916,901 on June 30, 2009, computed on the basis of the closing sale price of the Registrant’s common stock on that date.

As of March 26, 2010, the total number of common shares outstanding of Registrant's common stock was 7,946,384.

DOCUMENTS INCORPORATED BY REFERENCE

None.

21st Century Holding Company

Table of Contents

PART I		3

ITEM 1	BUSINESS	3

ITEM 1A	RISK FACTORS	25

ITEM 1B	UNRESOLVED STAFF COMMENTS	36

ITEM 2	PROPERTIES	36

ITEM 3	LEGAL PROCEEDINGS	36

ITEM 4	RESERVED	36

PART II		36

ITEM 5	MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS	36

ITEM 6	SELECTED FINANCIAL DATA	37

ITEM 7	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	40

ITEM 7A	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	70

ITEM 8	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	72

ITEM 9	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	112

ITEM 9A	CONTROLS AND PROCEDURES	112

ITEM 9B	OTHER INFORMATION	112

PART III		113

ITEM 10	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	113

ITEM 11	EXECUTIVE COMPENSATION	117

ITEM 12	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	123

ITEM 13	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	124

ITEM 14	PRINCIPAL ACCOUNTING FEES AND SERVICES	125

PART IV		126

ITEM 15	EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K	126

SIGNATURES		129

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21st Century Holding Company

PART I

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

Certain statements in this Annual Report on Form 10-K, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled “Risk Factors” in Part I, Item 1A of this Annual Report. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

ITEM 1 BUSINESS

GENERAL

21st Century Holding Company (“21st Century”, “Company”, “we”, “us”) is an insurance holding company, which, through our subsidiaries and our contractual relationships with our independent agents and general agents, controls substantially all aspects of the insurance underwriting, distribution and claims processes. We are authorized to underwrite homeowners’ multi-peril, commercial general liability, personal and commercial automobile, fire, allied lines, surety, commercial multi-peril and inland marine in various states on behalf of our wholly owned subsidiaries, Federated National Insurance Company (“Federated National”) and American Vehicle Insurance Company (“American Vehicle”) and other insurance carriers. We market and distribute our own and third-party insurers’ products and our other services through contractual relationships with a network of approximately 4,200 independent agents, of which approximately 300 actively sell and service our products. We also utilize a select number of general agents for the same purpose.

The insurable events during 2009, 2008 and 2007 did not include any weather related catastrophic events such as the well publicized series of hurricanes that occurred in Florida during 2005 and 2004. During 2009, 2008 and 2007 we processed property and liability claims stemming from our homeowners’, commercial general liability and private passenger automobile lines of business. Our reinsurance strategy serves to smooth the liquidity requirements imposed by most severe insurable events and for all other insurable events we manage, at a micro and macro perspective, in the normal course of business.

We are not certain how hurricanes and other insurable events will affect our future results of operations and liquidity. Loss and loss adjustment expenses (“LAE”) are affected by a number of factors including:

the quality of the insurable risks underwritten;

the nature and severity of the loss;

weather-related patterns;

the availability, cost and terms of reinsurance;

underlying settlement costs, including medical and legal costs;

legal and political factors such as legislative initiatives and public opinion;

macroeconomic issues.

We continue to manage the foregoing to the extent within our control. Many of the foregoing are partially, or entirely, outside our control.

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

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

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21st Century Holding Company

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

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

During 2009, 81.2%, 14.6%, 3.4% and 0.8% of the premiums we underwrote were for homeowners’ property and casualty insurance, commercial general liability insurance, federal flood, and personal automobile insurance, respectively. During the year ended December 31, 2008, 68.7%, 27.0%, 3.7% and 0.6% of the premiums we underwrote were for homeowners’ property and casualty insurance, commercial general liability insurance, federal flood, and personal automobile insurance, respectively.

Despite the effects of Florida’s mandated homeowners’ rate reductions and wind mitigation discounts, the Company’s sale of homeowners’ policies increased $24.0 million, or 39.5%, to $84.7 million in 2009, compared with $60.7 million in 2008. Included in our sale of homeowners’ policies during 2009, is $17.9 million from policies we assumed from Citizens Property Insurance Corporation (“Citizens”). The primary factor for the decrease in commercial general liability production is a slowdown in the economy which has a dramatic impact on the artisan contractor portfolio written by American Vehicle.

Our business, results of operations and financial condition are subject to fluctuations due to a variety of factors. Abnormally high severity or frequency of claims in any period could have a material adverse effect on our business, results of operations and financial condition. In addition, if our estimated liabilities for unpaid losses and LAE are less than actual losses and LAE, we will be required to increase reserves with a corresponding reduction in our net income in the period in which the deficiency is identified. We internally process claims made by our insureds through our wholly owned claims adjusting company, Superior Adjusting, Inc. (“Superior”).

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

Our internet web site is www.21stcenturyholding.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports are available, free of charge, through our website as soon as reasonably practicable after we electronically file or furnish such material to the Securities and Exchange Commission (“SEC”). Further, a copy of this annual report on Form 10-K is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov.

RECENT DEVELOPMENTS

Proposed Florida Legislation

Throughout 2009, industry leaders and lawmakers have met to discuss legislative options including a significant reduction of capacity in the Florida Hurricane Catastrophe Fund (“FHCF”), substantially increasing members’ co-insurance participation and the reorganization of the FHCF under the Florida Cabinet. Efforts by the Governor and Commissioner of Insurance at the federal level to secure post catastrophic event liquidity commitments remain ongoing.

Additionally, the Board of Directors of the Florida Insurance Guaranty Association (“FIGA”) held separate meetings to discuss their continued financial challenges in connection with the insolvency of a particular insurance company that was assumed subsequent to the 2005 – 2006 hurricane season. At this time, the Florida legislature has not adopted any new laws or regulations. However, the Florida legislators and regulators have discussed certain changes to the existing laws and regulations which would impact our property and casualty insurance business in fiscal 2010 or any subsequent years. One such change being discussed among regulators would consider limiting the amount of time available to report a claim from five years to three years.

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21st Century Holding Company

Another initiative among legislators would, with certain exceptions, prohibit public adjusters from making certain employment solicitations or unsolicited written communications. Those exceptions, which pertain to written communication, specify public adjusters conduct, the timing of their solicitation, and the form and permissible content of any solicitation that a public adjuster might employ. These changes are intended to restrict or limit public adjusters involvement in the claims process. There are no assurances that these regulatory initiatives will be successful during the 2010 legislative season.

BUSINESS STRATEGY

We expect that in 2010 we will capitalize on our operational efficiencies and business practices through:

continued development of business initiatives introduced in 2009, such as the commercial multi-peril and inland marine insurance in the State of Florida and commercial automobile into various states as a supporting line of business for our artisan commercial general liability program;

improved property analytical qualities such as a broader geographical dispersion of risks throughout the state of Florida and avoiding risks that do not yield an underwriting profit;

continued territorial expansion of our commercial general liability, inland marine, and private passenger automobile insurance products into additional states;

employing our business practices developed and used in Florida in our expansion to other selected states;

maintaining a commitment to provide high quality customer service to our agents and insureds;

expansion of our marketing efforts by retaining key personnel and implementing direct marketing technologies;

offering attractive incentives to our agents to place a high volume of quality business with our companies;

offering our employees continuing education classes appropriate to the respective discipline employed within this organization;

assumption of existing risks from other carriers; and

additional strategies that may include possible acquisitions or further dispositions of assets, and development of procedures to improve claims history and mitigate losses from claims.

There can be no assurances, however, that any of the foregoing strategies will be developed or successfully implemented or, if implemented, that they will positively affect our results of operations.

Additionally, State of Florida legislative initiatives, increased competition, softening general market conditions and additional loss development from catastrophic events over two years old suggest that continued financial challenges exist in 2010.

The Company expects the 19% average statewide rate increase that was implemented in late 2009, on those policies written on a direct basis, along with other pending rate and rule changes, to gain momentum and accrete throughout 2010. Furthermore, the Company anticipates favorable pricing terms on our upcoming reinsurance contracts because early indicators show that there is ample capital availability in the private reinsurance markets. Additionally, we will continue to seek improvements in our marketing strategies intended to attract profitable distribution channels while maintaining compliance with our underwriting guidelines.

INSURANCE OPERATIONS AND RELATED SERVICES

General

We are authorized to underwrite homeowners’ multi-peril, commercial general liability, personal and commercial automobile, fire, allied lines, surety, commercial multi-peril and inland marine in various states on behalf of our wholly owned subsidiaries, Federated National and American Vehicle.

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21st Century Holding Company

The following tables set forth the amount and percentages of our consolidated gross premiums written, premiums ceded to reinsurers and net premiums written by line of business for the periods indicated.

	Years Ended December 31,
	2009					2008					2007
	Premium		Percent			Premium		Percent			Premium		Percent
	(Dollars in Thousands)
Gross written premiums:
Automobile	$	836		0.8	%	$	487		0.6	%	$	1,867		1.4	%
Federal Flood		3,559		3.4	%		3,263		3.7	%		-		0.0	%
Homeowners'		84,705		81.2	%		60,708		68.7	%		99,502		74.5	%
Commercial General Liability		15,279		14.6	%		23,790		27.0	%		32,222		24.1	%
Total gross written premiums	$	104,379		100.0	%	$	88,248		100.0	%	$	133,591		100.0	%

Ceded premiums:
Automobile	$	14		0.0	%	$	-		0.0	%	$	-		0.0	%
Federal Flood		3,559		6.3	%		3,263		9.4	%		-		0.0	%
Homeowners'		52,518		93.5	%		31,290		90.6	%		44,551		100.0	%
Commercial General Liability		126		0.2	%		-		0.0	%		-		0.0	%
Total ceded premiums	$	56,217		100.0	%	$	34,553		100.0	%	$	44,551		100.0	%

Net written premiums
Automobile	$	822		1.7	%	$	487		0.9	%	$	1,867		2.1	%
Federal Flood		-		0.0	%		-		0.0	%		-		0.0	%
Homeowners'		32,187		66.8	%		29,418		54.8	%		54,952		61.7	%
Commercial General Liability		15,153		31.5	%		23,790		44.3	%		32,222		36.2	%
Total net written premiums	$	48,162		100.0	%	$	53,695		100.0	%	$	89,041		100.0	%

We marketed our insurance products through our network of approximately 4,200 independent agents, of which approximately 300 actively sell and service our products, and general agents during fiscal years 2009, 2008 and 2007.

Homeowners’ Property and Casualty Insurance

Federated National underwrites homeowners’ insurance primarily in the South, West and Central Florida regions. Homeowners’ insurance generally protects an owner of real and personal property against covered causes of loss to that property. The table that follows reflects the number of homeowner policies in-force by South Florida counties and all other Florida counties and reflects our concentrations of risk from catastrophic events.

	In-Force Policy Count
	Years Ended December 31,
	2009					2008					2007
County	Amount		Percentage			Amount		Percentage			Amount		Percentage

Dade		3,544		6.7	%		2,981		9.7	%		4,587		12.7	%
Broward		4,139		7.9	%		3,629		11.8	%		4,446		12.3	%
Pinellas		5,147		9.8	%	(a)			0.0	%	(a)			0.0	%
Hillsborough		4,505		8.6	%	(a)			0.0	%	(a)			0.0	%
West Palm Beach		14,543		27.6	%		14,152		45.7	%		14,969		41.3	%
All others		20,728		39.4	%		10,122		32.8	%		12,239		33.7	%
Total		52,606		100.0	%		30,884		100.0	%		36,241		100.0	%

(a) immaterial prior years amounts are included in "All Others"

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21st Century Holding Company

Our homeowner insurance products typically provide maximum dwelling coverage in the amount of approximately $0.8 million, with the aggregate maximum policy limit being approximately $1.5 million. We continually subject these limits to review; though there were no material changes during 2009. The approximate average premium on the policies currently in-force is $1,696, as compared with $2,016 for 2008. The typical deductible is either $2,500 or $1,000 for non-hurricane-related claims and generally 2% of the coverage amount for the structure for hurricane-related claims.

Premium rates charged to our homeowner insurance policyholders are continually evaluated to assure that they meet the expectation that they are actuarially sound and produce a reasonable level of profit (neither excessive nor inadequate). Premium rates are regulated and approved by the Florida Office of Insurance Regulation (“Florida OIR”).

During 2009, the Florida OIR granted Federated National an average statewide increase of 19% for new and renewal policies which were not part of the Citizens assumptions, effective November 1, 2009 and December 1, 2009, respectively. Previous to this filing was our May 2008 “file and use” rate filing that reflected an average rate decrease of 11.3%. The June 2007 rate filing resulted in an average rate reduction of 15.2%. We have requested a 14.9% rate increase in connection with our Citizens assumptions which is currently pending Florida OIR approval.

Commercial Residential Property Insurance

During 2009 the Florida OIR granted Federated National the authority to write commercial residential property insurance under the fire line of business. This class of business affords property coverage primarily to associations with property commonly owned by the tenants of the association. Aggregate policy limits ranged between $1.0 million and $6.5 million with operations beginning in the end of September 2009. Additionally, the Company has secured automatic facultative reinsurance for insured values up to $10.0 million with permission to individually submit attractive risks greater than $10 million to our reinsurers for quote and binding authority. Typically, Federated National retains the first $1.0 million of loss and cedes the remaining balance via our facultative treaty.

These risks are significantly different from the homeowner risks discussed previously in terms of insured value, frequency of covered loss and marketing techniques. We market this program directly to a select number of reputable agencies throughout the State of Florida.

Commercial General Liability and Inland Marine

We underwrite commercial general liability insurance for approximately 250 classes of artisan (excluding home-builders and developers) and mercantile trades (such as owners, landlords and tenants). The limits of liability range from $100,000 per occurrence with a $200,000 policy aggregate to $1.0 million per occurrence with a $2.0 million policy aggregate. We continually subject these limits to review, though there were no changes during 2009. We market the commercial general liability insurance products through independent agents and a limited number of general agencies unaffiliated with the Company. The average annual premium on policies currently in-force during 2009 is approximately $854, as compared with $798 in 2008.

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

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21st Century Holding Company

	Years Ended December 31,
	2009					2008					2007
	Amount		Percentage			Amount		Percentage			Amount		Percentage
						(Dollars in Thousands)
State
Alabama	$	76		0.50	%	$	117		0.49	%	$	26		0.08	%
Arkansas		4		0.03	%		12		0.05	%		-		0.00	%
California		49		0.32	%		269		1.13	%		23		0.07	%
Florida		12,341		80.77	%		16,011		67.30	%		21,192		65.77	%
Georgia		291		1.91	%		568		2.39	%		1,023		3.17	%
Kentucky		1		0.00	%		1		0.00	%		8		0.03	%
Louisiana		1,736		11.36	%		4,481		18.84	%		5,595		17.36	%
Maryland		-		0.00	%		2		0.01	%		-		0.00	%
South Carolina		2		0.01	%		70		0.29	%		182		0.57	%
Texas		778		5.09	%		2,252		9.47	%		4,127		12.81	%
Virginia		1		0.01	%		7		0.03	%		46		0.14	%
Total	$	15,279		100.00	%	$	23,790		100.00	%	$	32,222		100.00	%

During 2009 American Vehicle entered into a treaty to assume 50% of the business produced by Assurance Managing General Agents, Inc. (“Assurance MGA”) for United Specialty Insurance Company (“United Specialty”) and State National Insurance Company (“State National”). Both United Specialty and State National are “A” rated by A.M. Best. Under the terms of the treaty, Assurance MGA will underwrite several products within the commercial general liability and inland marine lines of business for United Specialty and State National. United Specialty and State National will cede 100 % of the book of business to an “A” rated reinsurer. American Vehicle has agreed to assume 50% of the business assumed by the “A” rated reinsurer under a retrocession agreement. The commercial general liability average premium is $855 with single limits up to $1.0 million and policy limits of $2.0 million. The inland marine average premium is $456 with policy limit amounts not to exceed $50,000 without specific underwriting approval from reinsurers.

Personal Automobile

Personal automobile insurance markets can be divided into two categories, standard automobile and nonstandard automobile. Standard personal automobile insurance is principally provided to insureds who present an average risk profile in terms of driving record, vehicle type and other factors. Nonstandard personal automobile insurance is principally provided to insureds that are unable to obtain standard insurance coverage because of their driving record, age, vehicle type or other factors, including market conditions. The average annual premium on policies currently in-force is approximately $1,196, as compared with $1,292 for 2008, and the nonstandard personal automobile insurance lines represents 100% of our written premiums for personal automobile insurance in 2009 and 2008.

Limits on standard personal automobile insurance are generally significantly higher than those for nonstandard coverage, but typically provide for deductibles and other restrictive terms. Underwriting criteria for standard coverage has become more restrictive, thereby requiring more insureds to seek nonstandard coverage and contributing to the increase in the size of the nonstandard automobile market. Nonstandard automobile insurance, however, generally involves the potential for increased loss exposure and higher claims experience. Loss exposure is mitigated because premiums usually are written at higher rates than those written for standard insurance coverage.

Both of our insurance subsidiaries currently underwrite nonstandard personal automobile insurance in Florida, where the maximum exposures are predominantly $10,000 per individual, $20,000 per accident for bodily injury, $10,000 per accident for property damage, and predominantly $50,000 for comprehensive and collision. In addition, American Vehicle writes commercial automobile insurance in Florida. The maximum exposure is predominantly $30,000 on a combined single limit basis.

Federated National and American Vehicle underwrite new and renewal policies for this coverage on primarily an annual basis and to a much lesser extent, on a semi-annual basis.

Due to the purchasing habits of nonstandard automobile insureds (for example, nonstandard automobile insureds tend to seek the least expensive insurance required of the policyholder by statute that satisfies the requirements of state laws to register a vehicle), policy renewal rates tend to be low compared with standard policies. Our experience has been that a significant number of existing nonstandard policyholders allow their policies to lapse and then reapply for insurance as new policyholders.

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21st Century Holding Company

American Vehicle underwrites standard personal automobile insurance policies providing coverage no higher than $100,000 per individual, $300,000 per accident for bodily injury, $50,000 per accident for property damage and comprehensive and collision up to $50,000 per accident, with deductibles ranging from $200 to $1,000. The average premium on the policies in-force was $1,220 for 2009.

Flood

Federated National writes flood insurance through the National Flood Insurance Program (“NFIP”). We write the policy for the NFIP, which assumes 100% of the flood risk while we retain a commission for our service. The average flood policy premium is approximately $450 with limits up to $250,000. Commissions in connection with this program totaled $0.1 million, $0.2 million and $0.3 million in 2009, 2008 and 2007, respectively. Pursuant to the Florida OIR regulations, we are required to report write-your-own-flood premiums on a direct and ceded basis for 2008 and subsequent years. Prior to 2008, we reported only the commissions income associated with this program.

Assurance MGA

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

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

The homeowner policy provides Assurance MGA the right to cancel any policy within a period of 90 days from the policy's inception with 25 days’ notice, or after 90 days from policy inception with 95 days’ notice, even if the risk falls within our underwriting criteria.

Superior

Superior processes claims made by insureds from Federated National and American Vehicle. Our agents have no authority to settle claims or otherwise exercise control over the claims process. Furthermore, we believe that the retention of independent adjusters, in addition to the employment of salaried claims personnel, results in reduced ultimate loss payments, lower LAE and improved customer service for our claimants and policyholders. We also employ an in-house legal department to cost-effectively manage claims-related litigation and to monitor our claims handling practices for efficiency and regulatory compliance.

Federated Premium Finance, Inc. (“Federated Premium”)

Federated Premium provides premium financing to Federated National's, American Vehicle’s and third-party’s insureds. Premium financing has been marketed through our distribution network of general agents and independent agents.

Premiums for property and casualty insurance, in certain circumstances, are payable at the time a policy is placed in- force or renewed. Federated Premium's services allow the insured to pay a portion of the premium when the policy is placed in-force and the balance in monthly installments over a specified term, generally between six and nine months. As security, Federated Premium retains a contractual right, if a premium installment is not paid when due, to cancel the insurance policy and to receive the unearned premium from the insurer, or in the event of insolvency of an insurer, from FIGA, subject to a $100 per policy deductible. In the event of cancellation, Federated Premium applies the unearned premium towards the payment obligation of the insured.

Finance contracts receivable increased $0.1 million, or 31.4%, to $0.3 million as of December 31, 2009, compared with $0.2 million as of December 31, 2008.

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21st Century Holding Company

The Company anticipates continued use of the direct bill feature associated with Federated National and American Vehicle lines of business. The direct billing opportunity is very similar to the premium finance arrangement with respect to down payments and scheduled monthly payments. Direct billing is when the insurance company accepts from the insured, as a receivable, a promise to pay the premium, as opposed to requiring payment of the full amount of the policy, either directly from the insured or from a premium finance company. We believe that the direct billing program does not increase our risk because the insurance policy, which serves as collateral, is managed by our computer system. Underwriting criteria are designed with down payment requirements and monthly payments that create policyholder equity in the insurance policy. The equity in the policy is collateral for the extension of credit to the insured.

Through our monitoring systems, we track delinquent payments and, in accordance with the terms of the extension of credit, cancel if payment is not made. If any excess premium remains after cancellation of the policy and deduction of applicable penalties, this excess is refunded to the policyholder. Similarly, we believe that the premium financing that we offer to our own insureds involves limited credit risk. By primarily financing policies underwritten by our own insurance carriers, our credit risks are reduced because we can more securely rely on the underwriting processes of our own insurance carriers. Furthermore, the direct bill program enables us to closely manage our risk while providing credit to our insureds.

Insure-Link, Inc. (“Insure-Link”)

Insure-Link was formed in March 2008 to serve as an independent insurance agency. The insurance agency markets direct to the public to provide a variety of insurance products and services to individual and business clients by offering a full line of insurance products including, but not limited to, homeowners’, personal and commercial automobile, commercial general liability and workers compensation insurance through their agency appointments with over fifty different carriers. Insure-Link intends on expanding its business through marketing and by acquiring other insurance agencies. Insure-Link has binding authority for Federated National and American Vehicle, as well as many national and local insurance carriers. There were no other agency relationships with affiliated captive or franchised agents in 2009, 2008 and 2007.

MARKETING AND DISTRIBUTION

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

Our independent agents and general agents have the authority to sell and bind insurance coverage in accordance with procedures established by Assurance MGA. Assurance MGA reviews all coverage bound by the agents promptly and generally accepts all coverage that falls within stated underwriting criteria. For automobile and commercial general liability policies, Assurance MGA also has the right, within a period that varies by state between 60 days and 120 days from a policy's inception, to cancel any policy, upon an advanced notice provided in accordance with statutory specific guidelines, even if the risk falls within our underwriting criteria.

We believe that our integrated computer systems, which allow for rapid automated premium quotation and policy issuance by our agents, is a key element in providing quality service to both our agents and insureds for various lines of our business. For example, upon entering a customer's basic personal information, the customer's driving record is accessed and a premium rate is quoted. If the customer chooses to purchase the insurance, the system can generate the policy on-site.

We believe that the management of our distribution system now centers on our ability to capture and maintain relevant data by producing agents, none of whom are affiliated with us. We believe that information management of agent production, coupled with loss experience, will enable us to maximize profitability.

REINSURANCE AGREEMENTS

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

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21st Century Holding Company

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

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

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

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

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

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

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

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21st Century Holding Company

Reinsurer	A.M. Best Rating

UNITED STATES
Everest Reinsurance Company	A+		**
Munich Reinsurance America, Inc.	A+		**
QBE Reinsurance Corporation	A		**

BERMUDA
ACE Tempest Reinsurance Limited	A+	*
Amlin Bermuda Limited	A
Ariel Reinsurance Company Limited	A-	*
DaVinci Reinsurance Limited	A	*
Flagstone Reinsurance Limited	A-
Hiscox Insurance Company Limited	A	*
Montpelier Reinsurance Limited	A-
Platinum Underwriters Bermuda Limited	A	*
Renaissance Reinsurance Limited	A+	*
Torus Insurance (Bermuda) Limited	A-	*

LONDON & EUROPE
Amlin Syndicate No. 2001 (AML)	A+		**
Antares Syndicate No. 1274 (AUL)	A		**
Arrow Syndicate No. 1910 (ARW)	A	*	**
Broadgate Syndicate No. 1301 (BGT)	A		**
Liberty Syndicates Services Limited, Paris for and on behalf of Lloyd's Syndicate No. 4472 (LIB)	A		**
Novae Syndicate No. 2007 (NVA)	A		**
SCOR Switzerland AG	A-

HEDGE FUNDS / COLLATERALIZED
Actua Re Limited	NR	*	(1)
Allianz Risk Transfer AG (Bermuda Branch)	NR-5	*	(2)

* 2009 Reinstatement Premium Protection Program Participants

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

(Blank) Non admitted reinsurer in Florida.

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

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

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

The cost to the Company for these reinsurance products for the 2008-2009 hurricane season, inclusive of approximately $8.0 million payable to the FHCF and the prepaid automatic premium reinstatement protection, was approximately $31.0 million. These reinsurance treaties afforded approximately $298.0 million of aggregate coverage with maximum single event coverage totaling approximately $232.0 million. Our retention in connection with the first two covered events would have been $3.0 million for each covered catastrophic event.

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21st Century Holding Company

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

Reinsurer	A.M. Best Rating

UNITED STATES
Everest Reinsurance Company	A+		**
Munich Reinsurance America, Inc.	A+		**
QBE Reinsurance Corporation	A		**

BERMUDA
ACE Tempest Reinsurance Limited	A+	*
Amlin Bermuda Limited	A
Ariel Reinsurance Company Limited	A-	*
DaVinci Reinsurance Limited	A	*
Flagstone Reinsurance Limited	A-
Hiscox Insurance Company Limited	A	*
Montpelier Reinsurance Limited	A-
Platinum Underwriters Bermuda Limited	A	*
Renaissance Reinsurance Limited	A+	*
Torus Insurance (Bermuda) Limited	A-	*

LONDON & EUROPE
Amlin Syndicate No. 2001 (AML)	A+		**
Antares Syndicate No. 1274 (AUL)	A		**
Arrow Syndicate No. 1910 (ARW)	A	*	**
Broadgate Syndicate No. 1301 (BGT)	A		**
Liberty Syndicates Services Limited, Paris for and on behalf of Lloyd's Syndicate No. 4472 (LIB)	A		**
Novae Syndicate No. 2007 (NVA)	A		**
SCOR Switzerland AG	A-

HEDGE FUNDS / COLLATERALIZED
Actua Re Limited	NR	*	(1)
Allianz Risk Transfer AG (Bermuda Branch)	NR-5	*	(2)

* 2009 Reinstatement Premium Protection Program Participants

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

(Blank) Non admitted reinsurer in Florida.

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

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

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21st Century Holding Company

As a direct premium writer in the state of Florida, we are required to participate in certain insurer solvency associations under Florida Statutes Section 631.57(3) (a), administered by FIGA. Participation in these pools is based on our written premium by line of business to total premiums written statewide by all insurers. Participation has resulted in assessments against us, as it has in 2006 and 2007, and again on October 30, 2009. There were no assessments made for the year ended December 31, 2008. Through 2007, we have been assessed $6.7 million and in 2009 we were assessed an additional $0.6 million in connection with the insolvencies of domestic insurance companies. For statutory accounting these assessments are not charged to operations, in contrast, GAAP treatment is to charge current operations for the assessments. Through policyholder surcharges, as approved by the Florida OIR, we have since recouped $6.2 million in connection with these assessments.

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

The FHCF reimbursement contract and addendums are all effective June 1, 2009, and the private excess of loss type treaties are all effective July 1, 2009; all treaties have a term of one year. Our reinsurance treaty with the FHCF has a significant credit risk, including the fact that the FHCF may not be able to raise sufficient money to pay their claims or impair their ability to pay their claims in a timely manner. This could result in significant financial, legal and operational challenges to all companies, including ours. Additionally, the FHCF treaty contains an exclusion for “Losses in excess of the sum of the Balance of the Fund as of December 31 of the Contract Year and the amount the SBA is able to raise through the issuance of revenue bonds or by the use of other financing mechanisms, up to the limit pursuant to Section 215.555(4) (c), Florida Statutes.”

To date, there have been no claims asserted against the reinsurers in connection with the 2009–2010 and 2008–2009 excess of loss and FHCF treaties.

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

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

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

The quota-share retrocessionaire reinsurance agreements require American Vehicle to securitize credit, regulatory and business risk. As of December 31, 2009, irrevocable letters of credit fully collateralized by American Vehicle and further guaranteed by the parent company, 21st Century, were in place. Outstanding irrevocable letters of credit totaled $3.0 million for the years ended December 31, 2009 and 2008, respectively. The letters of credit will expire during the first quarter of 2010 and will be replaced with fully funded trust agreements for the same amounts.

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

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21st Century Holding Company

LIABILITY FOR UNPAID LOSSES AND LAE

We are directly liable for loss and LAE payments under the terms of the insurance policies that we write. In many cases, there may be a time lag between the occurrence and reporting of an insured loss and our payment of that loss. As required by insurance regulations and accounting rules, we reflect the liability for the ultimate payment of all incurred losses and LAE by establishing a liability for those unpaid losses and LAE for both reported and unreported claims, which represent estimates of future amounts needed to pay claims and related expenses.

When a claim, other than personal automobile, involving a probable loss is reported, we establish a liability for the estimated amount of our ultimate losses and LAE payments. The estimate of the amount of the ultimate loss is based upon such factors as the type of loss, jurisdiction of the occurrence, knowledge of the circumstances surrounding the claim, severity of injury or damage, potential for ultimate exposure, estimate of liability on the part of the insured, past experience with similar claims and the applicable policy provisions.

All newly reported claims received with respect to personal automobile policies are set up with an initial average liability. The average liability for these claims is determined by dividing the number of reported claims into the total amount paid during the same period. If a claim is open more than 45 days, that open case liability is evaluated and the liability is adjusted upward or downward according to the facts and circumstances of that particular claim.

In addition, management provides for a liability on an aggregate basis to provide for losses incurred but not yet reported (“IBNR”). We utilize independent actuaries to help establish liability for unpaid losses and LAE. We do not discount the liability for unpaid losses and LAE for financial statement purposes.

The estimates of the liability for unpaid losses and LAE are subject to the effect of trends in claims severity and frequency and are continually reviewed. As part of this process, we review historical data and consider various factors, including known and anticipated legal developments, inflation and economic conditions. As experience develops and other data become available, these estimates are revised, as required, resulting in increases or decreases to the existing liability for unpaid losses and LAE. Adjustments are reflected in results of operations in the period in which they are made and the liabilities may deviate substantially from prior estimates.

Among our classes of insurance, the automobile and homeowners’ liability claims historically tend to have longer time lapses between the occurrence of the event, the reporting of the claim and the final settlement, than do automobile physical damage and homeowners’ property claims. These liability claims often involve parties filing suit and therefore may result in litigation. By comparison, property damage claims tend to be reported in a relatively shorter period of time and settled in a shorter time frame with less occurrence of litigation.

There can be no assurance that our liability for unpaid losses and LAE will be adequate to cover actual losses. If our liability for unpaid losses and LAE proves to be inadequate, we will be required to increase the liability with a corresponding reduction in our net income in the period in which the deficiency is identified. Future loss experience substantially in excess of established liability for unpaid losses and LAE could have a material adverse effect on our business, results of operations and financial condition.

The following table sets forth a reconciliation of beginning and ending liability for unpaid losses and LAE as shown in our consolidated financial statements for the periods indicated.

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21st Century Holding Company

	Years Ended December 31,
	2009			2008			2007
	(Dollars in Thousands)

Balance at January 1	$	64,775		$	59,685		$	39,615
Less reinsurance recoverables		(12,713	)		(20,134	)		(12,382	)
Net balance at January 1	$	52,062		$	39,551		$	27,233

Incurred related to
Current year	$	41,988		$	37,398		$	38,452
Prior years		1,718			4,471			9,167
Total incurred	$	43,706		$	41,869		$	47,619

Paid related to
Current year	$	18,478		$	13,277		$	15,628
Prior years		18,274			16,080			19,673
Total paid	$	36,752		$	29,357		$	35,301

Net balance at year-end	$	59,016		$	52,062		$	39,551
Plus reinsurance recoverables		11,595			12,713			20,134
Balance at year-end	$	70,611		$	64,775		$	59,685

As shown above, and as a result of review of liability for losses and LAE, which includes a re-evaluation of the adequacy of reserve levels for prior year’s claims, we increased the liability for losses and LAE for claims occurring in prior years by $1.7 million, $4.5 million and $9.2 million for the years ended December 31, 2009, 2008 and 2007, respectively.

In 2009, we increased incurred losses and LAE for claims in connection with the hurricanes in 2005 and 2004 by approximately $2.0 million and decreased the incurred loss and LAE attributed to incurred events of prior years in connection with our automobile and commercial general liability lines of business by $0.3 million.

In 2008, we increased incurred losses and LAE for claims in connection with the hurricanes in 2005 and 2004 by approximately $0.4 million and increased the incurred loss and LAE in connection with our automobile and commercial general liability lines of business by $4.1 million.

There can be no assurance concerning future adjustments of reserves, positive or negative, for claims incurred through December 31, 2009.

Based upon discussions with our independent actuarial consultants and their statements of opinion on losses and LAE, we believe that the liability for unpaid losses and LAE is currently adequate to cover all claims and related expenses which may arise from incidents reported and IBNR as of December 31, 2009.

The following table presents total unpaid losses and LAE, net, and total reinsurance recoverable, on a run-off basis, due from our automobile reinsurers as shown in our consolidated financial statements for the periods indicated.

	As of December 31,
	2009		2008
	(Dollars in Thousands)
Transatlantic Reinsurance Company (A+ A.M. Best rated)
Reinsurance recoverable on paid losses and LAE	$	-	$	4
Unpaid losses and LAE		72		93
	$	72	$	97

In addition to reinsurance due from our automobile reinsurers, we also have reinsurance due from our catastrophic reinsurance companies. These reinsurance recoverables relate to Hurricane Katrina and Hurricane Wilma from 2005 and to the four hurricanes that occurred in August and September of 2004. The following table presents total unpaid losses and LAE, net, and total reinsurance recoverable due from our catastrophic reinsurers as shown in our consolidated financial statements.

- 16 -

21st Century Holding Company

	As of December 31,
	2009			2008
	(Dollars in Thousands)
Catastrophe Excess of Loss (various participants) and FHCF
Reinsurance recoverable on paid losses and LAE	$	3,669		$	4,262
Unpaid losses and LAE		11,666			12,613
	$	15,335		$	16,875

Amounts due from reinsurers consisted of amounts related to:
Unpaid losses and LAE	$	11,666		$	12,613
Reinsurance recoverable on paid LAE		3,669			4,262
Reinsurance payable		(16,468	)		(11,088	)
	$	(1,133	)	$	5,787

The following table presents the liability for unpaid losses and LAE for the years ended December 31, 2000 through 2009 and does not distinguish between catastrophic and non-catastrophic events. The top line of the table shows the estimated net liabilities for unpaid losses and LAE at the balance sheet date for each of the periods indicated. These figures represent the estimated amount of unpaid losses and LAE for claims arising in all prior years that were unpaid at the balance sheet date, including losses that had been IBNR. The portion of the table labeled "Cumulative paid as of" shows the net cumulative payments for losses and LAE made in succeeding years for losses incurred prior to the balance sheet date. The lower portion of the table shows the re-estimated amount of the previously recorded liability based on experience as of the end of each succeeding year.

- 17 -

21st Century Holding Company

	Years Ended December 31,
	(Dollars in Thousands)

	2009		2008			2007			2006			2005			2004			2003			2002			2001			2000

Balance Sheet Liability	$	59,016	$	52,070		$	39,551		$	27,259		$	25,733		$	37,390		$	15,314		$	9,422		$	6,207		$	6,976

Cumulative paid as of:
One year later				(8,328	)		17,019			19,347			25,238			35,433			10,908			8,629			5,280			8,139
Two years later							8,692			27,740			33,863			48,406			12,938			10,417			7,211			9,463
Three years later										16,769			39,529			53,760			13,921			11,083			7,707			10,069
Four years later													27,304			57,794			14,644			11,994			7,949			10,327
Five years later																56,509			14,964			12,355			8,167			10,451
Six years later																			16,474			12,523			8,292			10,616
Seven years later																						13,711			8,997			10,724
Eight years later																									9,001			11,422
Nine years later																												11,425

Re-estimated net liability as of:
End of year		59,016		52,070			39,551			27,259			25,733			37,390			15,314			9,422			6,207			6,976
One year later				35,764			44,402			35,370			35,625			44,690			14,594			11,014			6,954			9,445
Two years later							30,720			38,962			41,280			52,324			14,784			10,885			7,842			10,200
Three years later										28,981			45,131			56,658			15,402			11,236			8,069			10,425
Four years later													34,707			59,583			16,320			12,116			8,312			10,616
Five years later																60,413			16,304			12,365			8,542			10,782
Six years later																			18,509			12,410			8,621			10,945
Seven years later																						14,610			8,458			11,241
Eight years later																									8,439			10,644
Nine years later																												10,645

Cumulative redundancy (deficiency)				16,305			8,831			(1,722	)		(8,974	)		(23,023	)		(3,195	)		(5,188	)		(2,232	)		(3,669	)

Cumulative redundancy (-) deficiency as a % of reserves originally established				31.3	%		22.3	%		-6.3	%		-34.9	%		-61.6	%		-20.9	%		-55.1	%		-36.0	%		-52.6	%

The cumulative redundancy or deficiency represents the aggregate change in the estimates over all prior years. A deficiency indicates that the latest estimate of the liability for losses and LAE is higher than the liability that was originally estimated and a redundancy indicates that such estimate is lower. It should be emphasized that the table presents a run-off of balance sheet liability for the periods indicated rather than accident or policy loss development for those periods. Therefore, each amount in the table includes the cumulative effects of changes in liability for all prior periods. Conditions and trends that have affected liabilities in the past may not necessarily occur in the future.

As noted above, we have since experienced a $16.3 million cumulative redundancy in connection with the re-estimation of all loss that occurred in 2008 and a $8.8 million cumulative redundancy in connection with the re-estimation of all loss that occurred in 2007. Relative to the $16.3 million redundancy, our homeowner benefit totaled $20.2 million and our commercial general liability and automobile losses totaled $2.0 million and $1.9 million, respectively. Relative to the $8.8 million redundancy, our homeowner benefit totaled $16.0 million and our commercial general liability and automobile losses totaled $5.9 million and $1.3 million, respectively.

As noted last year, we had since experienced a $4.9 million cumulative deficiency in connection with the re-estimation of all loss that occurred in 2007 and a $13.5 million cumulative deficiency in connection with the re-estimation of all loss that occurred in 2006. Relative to the $4.9 million deficiency, our homeowner and commercial general liability losses totaled $1.1 million and $4.4 million, respectively, and our automobile benefit totaled $0.7 million. Relative to the $13.5 million deficiency, our homeowner and commercial general liability and automobile losses totaled $5.5 million, $6.6 million and $1.4 million, respectively.

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21st Century Holding Company

As noted in our Form 10-K for the fiscal year ended December 31, 2007, we experienced an $8.2 million cumulative deficiency in connection with the re-estimation of all loss that occurred in 2006 and a $15.7 million cumulative deficiency in connection with the re-estimation of all loss that occurred in 2005. Relative to the $8.2 million deficiency, our homeowner, commercial general liability and automobile losses totaled $2.2, $4.0 and $2.0, respectively. Relative to the $15.7 million deficiency, our homeowner and commercial general liability and automobile losses totaled $9.4 million, $3.4 million and $2.8 million, respectively.

The table below sets forth the differences between loss and LAE reserves as disclosed for Generally Accepted Accounting Principles (“GAAP”) basis compared with Statutory Accounting Principles (“SAP”) basis of presentation for the years ended 2009, 2008 and 2007.

	Years Ended December 31,
	2009		2008		2007
	(Dollars in Thousands)

GAAP basis Loss and LAE reserves	$	70,611	$	64,775	$	59,685
Less unpaid Losses and LAE ceded		11,594		12,705		20,133
Balance Sheet Liability		59,017		52,070		39,552
Add Insurance Apportionment Plan		12		24		37
SAP basis Loss and LAE reserves	$	59,029	$	52,094	$	39,589

The table below sets forth the differences between loss and LAE incurred as disclosed for GAAP basis compared with SAP basis presentation for the years ended 2009, 2008 and 2007.

	Years Ended December 31,
	2009			2008		2007
	(Dollars in Thousands)

GAAP basis Loss and LAE incurred	$	43,706		$	41,869	$	47,619
Intercompany adjusting and other expenses		4,239			4,312		7,361
Insurance apportionment plan		(7	)		4		12
SAP basis Loss and LAE incurred	$	47,938		$	46,185	$	54,992

Underwriting results of insurance companies are frequently measured by their Combined Ratios. However, investment income, federal income taxes and other non-underwriting income or expense are not reflected in the Combined Ratio. The profitability of property and casualty insurance companies depends on income from underwriting, investment and service operations. Underwriting results are considered profitable when the Combined Ratio is under 100% and unprofitable when the Combined Ratio is over 100%.

The following table sets forth Loss Ratios, Expense Ratios and Combined Ratios for the periods indicated for the insurance business of Federated National and American Vehicle for 2009, 2008 and 2007. The ratios, inclusive of Unallocated Loss Adjustment Expenses (“ULAE”), are shown in the table below.

	Years Ended December 31,
	2009			2008			2007
Loss Ratio		86.9	%		64.3	%		48.0	%
Expense Ratio		44.0	%		38.2	%		26.1	%
Combined Ratio		130.9	%		102.5	%		74.1	%

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21st Century Holding Company

COMPETITION

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

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

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

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

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

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

In 2006, the state of Florida created the Insurance Capital Build-Up Incentive Program in response to the catastrophic events that occurred during 2004 and 2005. This program provided matching capital funds to any new or existing carrier licensed to write homeowners insurance in the state of Florida under certain conditions. This program resulted in a significant erosion of our homeowners' property insurance market in 2009 and 2008, as compared with 2007. We did not participate in the Insurance Capital Build-Up Incentive Program. Although our pricing is inevitably influenced to some degree by that of our competitors, we believe that it is generally not in our shareholders’ best interest to compete solely on price.

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

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

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21st Century Holding Company

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

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

REGULATION

General

We are, or will be, subject to the laws and regulations in Alabama, Arkansas, California, Florida, Georgia, Kentucky, Louisiana, Maryland, Missouri, Nevada, North Carolina, Ohio, Oklahoma, South Carolina, Tennessee, Texas and Virginia and regulations of any other states in which we seek to conduct business in the future. The regulations cover all aspects of our business and are generally designed to protect the interests of insurance policyholders, as opposed to the interests of shareholders. Such regulations relate to authorized lines of business, capital and surplus requirements, allowable rates and forms, investment parameters, underwriting limitations, transactions with affiliates, dividend limitations, changes in control, market conduct, maximum amount allowable for premium financing service charges and a variety of other financial and non-financial components of our business. Our failure to comply with certain provisions of applicable insurance laws and regulations could have a material adverse effect on our business, results of operations or financial condition. In addition, any changes in such laws and regulations, including the adoption of consumer initiatives regarding rates charged for coverage, could materially and adversely affect our operations or our ability to expand.

An example of such consumer initiatives may be found with Florida’s property insurers operating under a new emergency rule which requires existing premium rates as of January 25, 2007, to remain in effect until a rate filing reflecting the provisions as provided in Florida’s enacted property insurance legislation. The legislation, which among other issues, provided low cost reinsurance to member insurance companies, accelerated rate filings to reflect the reduced reinsurance costs and expanded the role of Citizens in the market place. Other provisions contained in the emergency rule prevented non-renewals and cancellation (except for material misrepresentation and non-payment of premium) and new restrictions on coverage are prohibited. We are aware of the continued financial challenges that face the State of Florida in connection with the current consumer initiatives. The consumer initiatives stem from the catastrophic hurricanes during 2004 and 2005. The financial challenges have affected our business, results of operations and financial condition in the past and there can be no assurance that they will not continue to affect business, results of operations and financial condition in the future. We are unaware of any other jurisdictions with similar consumer initiatives that could have a material adverse effect on our business, results of operations or financial condition.

Most states have also enacted laws which restrict an insurer’s underwriting discretion, such as the ability to terminate policies, terminate agents or reject insurance coverage applications, and many state regulators have the power to reduce, or to disallow increases, in premium rates. These laws may adversely affect the ability of an insurer to earn a profit on its underwriting operations.

Most states also have insurance laws requiring that rate schedules and other information be filed with the state's insurance regulatory authority, either directly or through a rating organization with which the insurer is affiliated. The regulatory authority may disapprove a rate filing if it finds that the rates are inadequate, excessive or unfairly discriminatory. Rates, which are not necessarily uniform for all insurers, vary by class of business, hazard covered, and size of risk. Certain states have recently adopted laws or are considering proposed legislation which, among other things, limit the ability of insurance companies to effect rate increases or to cancel, reduce or non-renew insurance coverage with respect to existing policies, particularly personal automobile insurance. As discussed above, the consumer initiatives with Florida’s property insurers demonstrate the State of Florida’s ability to adopt such laws. Also, the Florida legislature may adopt additional laws of this type in the future, which may adversely affect the Company's business.

Most states require licensure or regulatory approval prior to the marketing of new insurance products. Typically, licensure review is comprehensive and includes a review of a company’s business plan, solvency, reinsurance, character of its officers and directors, rates, forms and other financial and non-financial aspects of a company. The regulatory authorities may prohibit entry into a new market by not granting a license or by withholding approval.

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21st Century Holding Company

All insurance companies must file quarterly and annual statements with certain regulatory agencies and are subject to regular and special examinations by those agencies. Most recently the Florida OIR subjected Federated National to a balance sheet audit as of December 31, 2009. The findings by the independent auditors of this examination are unknown at this time. The previous regulatory examination conducted by the Florida OIR on Federated National covered the three-year period ended on December 31, 2004. The last regulatory examination conducted by the Florida OIR on American Vehicle covered the three-year period ended on December 31, 2005.

We may be the subject of additional targeted examinations or analysis. These examinations or analysis may result in one or more corrective orders being issued by the Florida OIR.

Federated National anticipates a regularly scheduled statutory examination by the Florida OIR to occur during 2010 for the five years ended December 31, 2009. American Vehicle anticipates a regularly scheduled statutory examination by the Florida OIR to occur during 2011 for the five years ended December 31, 2010. We have not received any notice of such examinations for American Vehicle.

In some instances, various states routinely require deposits of assets for the protection of policyholders either in those states or for all policyholders. As an example, the Florida OIR requires Federated National and American Vehicle to have securities with a fair market value of $1.0 million held in escrow. As of December 31, 2009, Federated National and American Vehicle held investment securities with a fair value of approximately $1.1 million, each as deposits with the State of Florida. Additionally, as of December 31, 2009 American Vehicle has cash deposits totaling $409,100 with the State of Alabama, $159,800 with the State of Arkansas and $119,300 with the State of Louisiana.

As of December 31, 2008, Federated National and American Vehicle held investment securities with a fair value of approximately $1.1 million, each as deposits with the State of Florida. Additionally, as of December 31, 2008 American Vehicle has cash deposits totaling $409,640 with the State of Alabama, $167,109 with the State of Arkansas and $116,715 with the State of Louisiana.

Restrictions in Payments of Dividends by Domestic Insurance Companies

Under Florida law, a domestic insurer may not pay any dividend or distribute cash or other property to its shareholders except out of that part of its available and accumulated capital surplus funds which is derived from realized net operating profits on its business and net realized capital gains. A Florida domestic insurer may not make dividend payments or distributions to shareholders without prior approval of the Florida OIR if the dividend or distribution would exceed the larger of (i) the lesser of (a) 10.0% of its capital surplus or (b) net income, not including realized capital gains, plus a two-year carryforward, (ii) 10.0% of capital surplus with dividends payable constrained to unassigned funds minus 25% of unrealized capital gains or (iii) the lesser of (a) 10.0% of capital surplus or (b) net investment income plus a three-year carryforward with dividends payable constrained to unassigned funds minus 25.0% of unrealized capital gains.

Alternatively, a Florida domestic insurer may pay a dividend or distribution without the prior written approval of the Florida OIR (i) if the dividend is equal to or less than the greater of (a) 10.0% of the insurer’s capital surplus as regards policyholders derived from realized net operating profits on its business and net realized capital gains or (b) the insurer’s entire net operating profits and realized net capital gains derived during the immediately preceding calendar year, (ii) the insurer will have policy holder capital surplus equal to or exceeding 115.0% of the minimum required statutory capital surplus after the dividend or distribution, (iii) the insurer files a notice of the dividend or distribution with the Florida OIR at least ten business days prior to the dividend payment or distribution and (iv) the notice includes a certification by an officer of the insurer attesting that, after the payment of the dividend or distribution, the insurer will have at least 115% of required statutory capital surplus as to policyholders. Except as provided above, a Florida domiciled insurer may only pay a dividend or make a distribution (i) subject to prior approval by the Florida OIR or (ii) 30 days after the Florida OIR has received notice of such dividend or distribution and has not disapproved it within such time.

No dividends were paid by Federated National or American Vehicle in 2009, 2008 or 2007, and none are anticipated in 2010. Although we believe that amounts required to meet our financial and operating obligations will be available from sources other than dividends from our insurance subsidiaries, there can be no assurance in this regard. Further, there can be no assurance that, if requested, the Florida OIR will allow any dividends in excess of the amount available, to be paid by Federated National and American Vehicle to us, the parent company, in the future. The maximum dividends permitted by state law are not necessarily indicative of an insurer’s actual ability to pay dividends or other distributions to a parent company, which also may be constrained by business and regulatory considerations, such as the impact of dividends on capital surplus, which could affect an insurer’s competitive position, the amount of premiums that can be written and the ability to pay future dividends. Further, state insurance laws and regulations require that the statutory capital surplus of an insurance company following any dividend or distribution by it be reasonable in relation to its outstanding liabilities and adequate for its financial needs.

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21st Century Holding Company

While the non-insurance company subsidiaries (Assurance MGA, Superior and any other affiliate) are not subject directly to the dividend and other distribution limitations, insurance holding company regulations govern the amount that any affiliate within the holding company system may charge any of the insurance companies for service (e.g., management fees and commissions).

National Association of Insurance Commissioners (“NAIC”) Risk Based Capital Requirements

In order to enhance the regulation of insurer solvency, the NAIC established risk-based capital requirements for insurance companies that are designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policy holders. These requirements measure three major areas of risk facing property and casualty insurers: (i) underwriting risks, which encompass the risk of adverse loss developments and inadequate pricing; (ii) declines in asset values arising from credit risk; and (iii) other business risks from investments. Insurers having less statutory surplus than required will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. The Florida OIR, which follows these requirements, could require Federated National or American Vehicle to cease operations in the event they fail to maintain the required statutory capital.

Based upon the 2009 statutory financial statements for Federated National and American Vehicle, statutory surplus exceeded all regulatory action levels established by the NAIC’s risk-based capital requirements.

Based upon the 2008 statutory financial statements for Federated National and American Vehicle, statutory surplus exceeded all regulatory action levels established by the NAIC’s risk-based capital requirements.

Based on risk-based capital requirements, the extent of regulatory intervention and action increases as the ratio of an insurer’s statutory surplus to its Authorized Control Level (“ACL”), as calculated under the NAIC’s requirements, decreases. The first action level, the Company Action Level, requires an insurer to submit a plan of corrective actions to the insurance regulators if statutory surplus falls below 200.0% of the ACL amount. The second action level, the Regulatory Action Level, requires an insurer to submit a plan containing corrective actions and permits the insurance regulators to perform an examination or other analysis and issue a corrective order if statutory surplus falls below 150.0% of the ACL amount. The third action level, ACL, allows the regulators to rehabilitate or liquidate an insurer in addition to the aforementioned actions if statutory surplus falls below the ACL amount. The fourth action level is the Mandatory Control Level, which requires the regulators to rehabilitate or liquidate the insurer if statutory surplus falls below 70.0% of the ACL amount. Federated National’s ratio of statutory surplus to its ACL was 245.1%, 739.4 % and 653.0% at December 31, 2009, 2008 and 2007, respectively. American Vehicle’s ratio of statutory surplus to its ACL was 426.9%, 402.5% and 448.5% at December 31, 2009, 2008 and 2007, respectively.

NAIC Insurance Regulatory Information Systems (“IRIS”) Ratios

The NAIC has also developed IRIS ratios to assist state insurance departments in identifying companies which may be developing performance or solvency problems, as signaled by significant changes in the companies’ operations. Such changes may not necessarily result from any problems with an insurance company, but may merely indicate changes in certain ratios outside the ranges defined as normal by the NAIC. When an insurance company has four or more ratios falling outside “usual ranges,” state regulators may investigate to determine the reasons for the variance and whether corrective action is warranted.

As of December 31, 2009, Federated National was outside NAIC’s usual range for four of thirteen IRIS ratios. Three exceptions related to underwriting operations and one related to lower than expected investment yields. The operations ratios relate to the timing of premium rate corrections and elevated reinsurance costs. The Florida OIR granted Federated National an average statewide increase of 19.0% for policies that went into effect November 1, 2009 and December 1, 2009 for new and renewed homeowner insurance policies, respectively. As of December 31, 2008, Federated National was outside NAIC’s usual ranges with respect to its tests on two out of thirteen IRIS ratios. There was one exception in connection with change in net written premium and one in connection with two year reserve development to policyholders’ surplus.

As of December 31, 2009, American Vehicle was outside NAIC’s usual range for three of thirteen IRIS ratios. These ratios reflect the decline in premium volume and operating results. The third ratio related to lower than expected investment yields. As of December 31, 2008, American Vehicle was outside NAIC’s usual range for two of thirteen IRIS ratios. There was one exception in connection with the two year overall operating ratio and one in connection with two year reserve development to policyholders’ surplus.

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21st Century Holding Company

There was no action taken by the Florida OIR in connection with the December 31, 2008 IRIS ratio results. We do not currently believe that the Florida OIR will take any significant action with respect to Federated National or American Vehicle regarding the 2009 IRIS ratios, although there can be no assurance that will be the case.

Insurance Holding Company Regulation

We, the parent company, are subject to laws governing insurance holding companies in Florida where Federated National and American Vehicle are domiciled. These laws, among other things, (i) require us to file periodic information with the Florida OIR, including information concerning our capital structure, ownership, financial condition and general business operations, (ii) regulate certain transactions between us and our affiliates, including the amount of dividends and other distributions, the terms of surplus notes and amounts that our affiliates can charge the holding company for services such as management fees or commissions, (iii) restrict the ability of any one person to acquire certain levels of our voting securities without prior regulatory approval. Any purchaser of 5% or more of the outstanding shares of our Common Stock will be presumed to have acquired control of Federated National and American Vehicle unless the Florida OIR, upon application, determines otherwise.

Finance Company Regulation

Our financing program remains subject to certain laws governing the operation of premium finance companies. These laws pertain to such matters as books and records that must be kept, forms, licensing, fees and charges. For example, in Florida, the maximum late payment fee Federated Premium may charge for personal line policies is $10 per month.

Underwriting and Marketing Restrictions

During the past several years, various regulatory and legislative bodies have adopted or proposed new laws or regulations to address the cyclical nature of the insurance industry, catastrophic events and insurance capacity and pricing. These regulations include (i) the creation of "market assistance plans" under which insurers are induced to provide certain coverages, (ii) restrictions on the ability of insurers to rescind or otherwise cancel certain policies in mid-term, (iii) advance notice requirements or limitations imposed for certain policy non-renewals and (iv) limitations upon or decreases in rates permitted to be charged.

Legislation

From time to time, new regulations and legislation are proposed to limit damage awards, to control plaintiffs' counsel fees, to bring the industry under regulation by the Federal government, to control premiums, policy terminations and other policy terms and to impose new taxes and assessments. It is not possible to predict whether, in what form or in what jurisdictions, any of these proposals might be adopted, or the effect, if any, on us.

Currently, the Florida House of Representatives and the Florida Senate are both considering pending bills, HB 949 and SB 1460, designed to provide a remedy for the FHCF contract year, which, after being legislatively curtailed in 2009, has created unintended consequences for insurers due to the way in which the cost of reinsurance is amortized on their financial statements.

Without passage of either HB 949 or SB 1460, our 2010 financial statement will show a larger-than-normal expense associated with the purchase of FHCF reinsurance. Specifically, the statement will show an expense equal to five months of FHCF reinsurance costs from January 1, 2010 to May 31, 2010. The statement also will show an expense equal to 12 months of FHCF reinsurance costs over the seven-month period from June 1, 2010 to December 31, 2010, which will result in a reduction of the pre-tax income and Federated National's surplus by more than what it is historically reduced each year for the purchase of FHCF reinsurance. This reduction would impact Federated National's financial solvency, as well as negatively impact our Demotech Financial Stability Rating (“FSR”).

To remedy the negative financial impact of the transitional FHCF contract year, both HB 949 and SB 1460 would return the FHCF contract year to June 1 through May 31, beginning June 1, 2010.

Industry Ratings Services

Third-party rating agencies assess and rate the ability of insurers to pay their claims. These financial strength ratings are used by the insurance industry to assess the financial strength and quality of insurers. These ratings are based on criteria established by the rating agencies and reflect evaluations of each insurer's profitability, debt and cash levels, customer base, adequacy and soundness of reinsurance, quality and estimated market value of assets, adequacy of reserves, and management. Ratings are based upon factors of concern to agents, reinsurers and policyholders and are not directed toward the protection of investors, such as purchasers of our common stock.

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21st Century Holding Company

Federated National and American Vehicle are currently rated by Demotech as "A" ("Exceptional"), which is the third of six FSR ratings, and defined as “insurers earning an FSR of “A” have “Exceptional” ability to maintain liquidity of invested assets, quality reinsurance, acceptable financial leverage and realistic pricing while simultaneously establishing loss and loss adjustment expense reserves at reasonable levels”. Demotech’s ratings are based upon factors of concern to agents, reinsurers and policyholders and are not primarily directed toward the protection of investors. However, our Demotech rating could be jeopardized by such other factors including adverse development and various surplus related ratio exceptions. As recently as December 10, 2009, Demotech reaffirmed American Vehicle's and Federated National’s FSR of “A” (“Exceptional”).

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

On March 22, 2010, Federated National received notice from Demotech that it would require a capital infusion of $10 million by March 31, 2010 in order for Federated National to maintain its’ “A” rating with the agency. We are working to comply with this requirement; however there can be no assurance that we will be able to do so. Any additional capital contribution to Federated National must be approved by the Florida OIR.

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

EMPLOYEES

As of December 31, 2009, we had 121 employees, including two executive officers. We are not a party to any collective bargaining agreement and we have not experienced work stoppages or strikes as a result of labor disputes. We consider relations with our employees to be satisfactory.

ITEM 1A RISK FACTORS

We are subject to certain risks in our business operations which are described below. Careful consideration of these risks should be made before making an investment decision. The risks and uncertainties described below are not the only ones facing 21st Century. Additional risks and uncertainties not presently known or currently deemed immaterial may also impair our business operations.

Risks Related to Our Business

Our financial condition could be adversely affected by the occurrence of natural and man-made disasters.

We write insurance policies that cover homeowners, business owners and automobile owners for losses that result from, among other things, catastrophes and sinkholes. Catastrophic losses can be caused by hurricanes, tropical storms, tornadoes, wind, hail, fires, riots and explosions, and their incidence and severity are inherently unpredictable. The extent of losses from a catastrophe is a function of two factors: the total amount of the insurance company's exposure in the area affected by the event and the severity of the event. Our policyholders are currently concentrated in South and Central Florida, which is especially subject to adverse weather conditions such as hurricanes and tropical storms.

In 2004 and 2005, the state of Florida experienced nine hurricanes. One of our subsidiaries, Federated National, incurred significant losses relative to its homeowners’ and mobile homeowners’ insurance lines of business in connection with these catastrophic weather events. Aggregate losses in connection with these storms involved over 23,000 claims at a cost in excess of $71.9 million, net of our reinsurance participation.

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21st Century Holding Company

The occurrence of claims from catastrophic events could result in substantial volatility in our results of operations or financial condition for any fiscal quarter or year. Increases in the values and concentrations of insured property may also increase the severity of these occurrences in the future. Although we attempt to manage our exposure to such events through the use of underwriting controls and the purchase of third-party reinsurance, catastrophic events are inherently unpredictable and the actual nature of such events when they occur could be more frequent or severe than contemplated in our pricing and risk management expectations. As a result, the occurrence of one or more catastrophic events could have a material adverse effect on our results of operations or financial condition.

We have used 99.2% of the reinsurance coverage available for Hurricane Wilma and if any claims exceed this coverage amount, it could adversely impact our business, results of operations and/or financial condition.

As of December 31, 2009, the loss experience (both paid and not yet paid) in connection with Hurricane Wilma which occurred in October 2005 has exhausted approximately 99.2% of the $194.8 million reinsurance coverage which is available to us. If we incur any additional losses relating to Hurricane Wilma which exceed our reinsurance coverage, we will be responsible for paying these claims out of our available operating funds. If any of these payments to settle the Hurricane Wilma claims (which exceed our reinsurance coverage) are material, it will have an adverse impact on our business, results of operations and financial condition.

Although we follow the industry practice of reinsuring a portion of our risks, our costs of obtaining reinsurance fluctuates and we may not be able to successfully alleviate risk through reinsurance arrangements.

The state of Florida has a history of exposure to extremely volatile weather related catastrophic events including hurricanes and tornados. The frequency and severity of these events can have a profound impact on our balance sheet and statements of operations and cash flows. Though the Company attempts to mitigate the impact of these events, there can be no assurance that we will be successful.

We have a reinsurance structure that is a combination of private reinsurance and the FHCF. Our reinsurance structure is comprised of several reinsurance companies with varying levels of participation providing coverage for loss and LAE at pre-established minimum and maximum amounts. Losses incurred in connection with a catastrophic event below the minimum and above the maximum are the responsibility of Federated National. For example, the loss experience incurred (both paid and not yet paid) in connection with Hurricane Wilma in October 2005 has exhausted approximately 99.2% of the $194.8 million reinsurance coverage available. There can be no assurance that we will not exceed the coverage purchased.

As a result of the nine hurricanes experienced in Florida during the fourteen month period between August 2004 and October 2005, and changes in Florida law in 2007 regarding the pricing and availability of reinsurance, we continue to review, and may determine to modify, our reinsurance structure.

Though there has been no occurrence of hurricanes in Florida within the last four hurricane seasons, some weather analysts believe that we have entered a period of greater hurricane activity while others suggest a diminished expectation for the near future. To address this risk, we are exploring alternatives to reduce our exposure to these types of storms. Although these measures may increase operating expenses, management believes that they will assist us in protecting long-term profitability, although there can be no assurances that will be the case.

The availability and costs associated with the acquisition of reinsurance will vary year to year. These fluctuations, which can be significant, are not subject to our control and may limit our ability to purchase adequate coverage. The recovery of increased reinsurance costs through rate action is not immediate and cannot be presumed, as it is subject to Florida OIR approval.

Insolvency of our primary reinsurer or any of our other current or future reinsurers including the FHCF, or their inability otherwise to pay claims, would increase the claims that we must pay, thereby potentially harming significantly our balance sheet, results of operations and cash flow. In addition, prevailing market conditions have increased the availability and limited the cost of reinsurance, although there can be no assurances that these conditions will persist.

We face a risk of non-collectibility of reinsurance, which could materially and adversely affect our business, results of operations and/or financial condition.

As is common practice within the insurance industry, we transfer a portion of the risks insured under our policies to other companies through the purchase of reinsurance. This reinsurance is maintained to protect our insurance subsidiary against the severity of losses on individual claims, unusually serious occurrences in which a number of claims produce an aggregate extraordinary loss and catastrophic events. Although reinsurance does not discharge our insurance subsidiary from its primary obligation to pay for losses insured under the policies it issues, reinsurance does make the assuming reinsurer liable to the insurance subsidiary for the reinsured portion of the risk. A credit exposure exists with respect to ceded losses to the extent that any reinsurer is unable or unwilling to meet the obligations assumed under the reinsurance contracts. The collectibility of reinsurance is subject to the solvency of the reinsurers, interpretation of contract language and other factors. A reinsurer's insolvency or inability to make payments under the terms of a reinsurance contract could have a material adverse effect on our results of operations and financial condition.

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21st Century Holding Company

The availability and costs associated with the acquisition of reinsurance will vary year to year. These fluctuations, which can be significant, are not subject to our control and may limit our ability to purchase adequate coverage. The recovery of increased reinsurance costs through rate action is not immediate and cannot be presumed, as it is subject to Florida OIR approval.

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

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

Therefore, in the event of a catastrophic loss, we may become dependent upon the FHCF's ability to pay, which may, in turn, be dependent upon the FHCF's ability to issue bonds in amounts that would be required to meet its reinsurance obligations in the event of such a catastrophic loss. In this economic climate, there is no assurance that the FHCF will be able to do this.

Please see “Business-Reinsurance” for more information about FHCF.

We may experience financial exposure from climate change.

Our financial exposure from climate change is most notably associated with losses in connection with the occurrence of hurricanes striking Florida. We mitigate the risk of financial exposure from climate change by restrictive underwriting criteria, sensitivity to geographic concentrations and reinsurance.

Restrictive underwriting criteria can include, but are not limited to, higher premiums and deductibles and more specifically excluded policy risks such as fences and screened-in enclosures. New technological advances in computer generated geographical mapping afford us an enhanced perspective as to geographic concentrations of policyholders and proximity to flood prone areas. Our amount of maximum reinsurance coverage is determined by subjecting our homeowner and mobile homeowner exposures to statistical forecasting models that are designed to quantify a catastrophic event in terms of the frequency of a storm occurring once in every “n” years. Our reinsurance coverage contemplated a catastrophic event occurring once every 100 years. Our amount of losses retained (our deductible) in connection with a catastrophic event is determined by market capacity, pricing conditions and surplus preservation.

Our loss reserves may be inadequate to cover our actual liability for losses, causing our results of operations to be adversely affected.

We maintain reserves to cover our estimated ultimate liabilities for loss and LAE. These reserves are estimates based on historical data and statistical projections of what we believe the settlement and administration of claims will cost based on facts and circumstances then known to us. Actual loss and LAE reserves, however, may vary significantly from our estimates.

Factors that affect unpaid losses and LAE include the estimates made on a claim-by-claim basis known as “case reserves” coupled with bulk estimates known as IBNR. Periodic estimates by management of the ultimate costs required to settle all claim files are based on our analysis of historical data and estimations of the impact of numerous factors such as (i) per claim information; (ii) company and industry historical loss experience; (iii) legislative enactments, judicial decisions, legal developments in the awarding of damages, and changes in political attitudes; and (iv) trends in general economic conditions, including the effects of inflation. Management revises its estimates based on the results of its analysis. This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for estimating the ultimate settlement of all claims. There is no precise method for subsequently evaluating the impact of any specific factor on the adequacy of the reserves, because the eventual redundancy or deficiency is affected by multiple factors.

Because of the uncertainties that surround estimated loss reserves, we cannot be certain that our reserves will be adequate to cover our actual losses. If our reserves for unpaid losses and LAE are less than actual losses and LAE, we will be required to increase our reserves with a corresponding reduction in our net income in the period in which the deficiency is identified. Future loss experience substantially in excess of our reserves for unpaid losses and LAE could substantially harm our results of operations and financial condition.

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21st Century Holding Company

Our revenues and operating performance will fluctuate due to statutorily approved assessments that support property and casualty insurance pools and associations.

We operate in a regulatory environment where certain entities and organizations have the authority to require us to participate in assessments. Currently these entities and organizations include, but are not limited to, the Florida Joint Underwriters Association (“JUA”), FIGA, Citizens and the FHCF. The current assessments stem from the catastrophic effects to the property insurance industry in the state of Florida from the hurricanes that occurred during the fourteen months between August 2004 and October 2005.

Several of the assessments resulted in a charge to current operations. The insurance companies currently pass the assessments on to insurance policies, in the form of a policy surcharge, and reflect the collection of these assessments as fully earned credits to operations in the period collected. The collection of these fees may adversely affect our overall marketing strategy due to the competitive landscape in Florida. All other pricing considerations remaining the same, a newly formed property insurance company would not be subject to the recoupment of previously imposed assessments.

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

Future assessments are likely, however the impact of these assessments on our balance sheet, results of operations or cash flow are undeterminable at this time.

Our investment portfolio may suffer reduced returns or losses, which would significantly reduce our earnings.

As do other insurance companies, we depend on income from our investment portfolio for a substantial portion of our earnings. During the time that normally elapses between the receipt of insurance premiums and any payment of insurance claims, we invest the funds received, together with our other available capital, primarily in debt securities and to a lesser extent in equity securities, in order to generate investment income.

In connection with our equity securities, we determined that certain securities qualified for other than temporary impairment status in 2008. In connection with this process we charged to operations a net realized investment loss that totaled approximately $9.9 million, net of an estimated provisional tax effect of approximately $3.7 million. Most of these investments were subsequently sold during the third and fourth quarter of the year, and, we recognized an additional $0.2 million loss, net of an estimated tax benefit of approximately $0.1 million. In connection with our equity securities, we determined that no securities qualified for other than temporary impairment in 2009.

Our investment portfolio contains interest rate sensitive instruments, such as bonds, which may be adversely affected by changes in interest rates. A significant increase in interest rates or decrease in credit worthiness could have a material adverse effect on our financial condition or results of operations. Generally, bond prices decrease as interest rates rise. Changes in interest rates could also have an adverse effect on our investment income and results of operations. For example, if interest rates decline, investment of new premiums received and funds reinvested will earn less than expected.

We may experience a loss due to the concentration of credit risk.

Financial instruments that potentially subject the Company to significant concentration of credit risk consist of cash and cash equivalents held in a mutual fund money market account. Management believes that the financial institution holding the Company’s mutual fund money market account is credit worthy and accordingly minimal credit risk exists with respect to those investments.

The Company had approximately $19.2 million and $121.4 million invested in the MTB Prime Money Market-Inst Fund Number 142, for which the NAIC classification is Class 1, as of December 31, 2009 and 2008, respectively. A money market fund is eligible for listing on the Class 1 list if the fund meets the following conditions:

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21st Century Holding Company

The fund maintains a rating of “A” or better from Standard and Poor’s or a rating of “A” or better from Moody’s Investor’s Services (“Moody’s”) or an equivalent or better rating from another NAIC Acceptable Rating Organizations (“ARO”);

The fund maintains a constant net asset value of $1.00 at all times;

The fund allows a maximum of seven-day redemption of proceeds; and

The fund invests at least ninety-five percent (95%) of its total assets in any combination of: the United States Government securities listed in Section 14 of the Appendix, securities rated in the highest short term rating category by an NAIC ARO, unrated securities determined by the fund’s Board to be of comparable quality, securities of money market funds that are registered investment companies and collateralized repurchase agreements comprised of such obligations at all times. The remaining five percent (5%) may be invested in Second Tier Securities as that phrase is defined by Rule 2a-7 of the Investment Company Act of 1940 (17 CFR 270.2a-7).

We face risks in connection with potential material weakness resulting from our Sarbanes-Oxley Section 404 management report and any related remedial measures that we undertake.

In conjunction with our ongoing reporting obligations as a public company and the requirements of Section 404 of the Sarbanes-Oxley Act, management reported on the effectiveness of our internal control over financial reporting as of December 31, 2009. In order to identify any material weaknesses in our internal control over financial reporting, we engaged in a process to document, evaluate and test our internal controls and procedures, including corrections to existing controls and implement additional controls and procedures that we may deem necessary. As a result of this evaluation and testing process, no material financial reporting deficiencies were noted.

Although we did not have any material weaknesses in our internal controls for our fiscal year ended December 31, 2009, we cannot be certain that there will be none in the future. In future periods, if the process required by Section 404 of the Sarbanes-Oxley Act reveals significant deficiencies or material weaknesses, the correction of any such significant deficiencies or material weaknesses could require additional remedial measures that could be costly and time-consuming. In addition, the discovery of material weaknesses could also require the restatement of prior period operating results. If a material weakness exists as of a future period year-end (including a material weakness identified prior to year-end for which there is an insufficient period of time to evaluate and confirm the effectiveness of the corrections or related new procedures), our management will be unable to report favorably as of such future period year-end as to the effectiveness of our control over financial reporting and we could lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price and potentially subject us to litigation.

The failure of any of the loss limitation methods we employ could have a material adverse effect on our financial condition or our results of operations.

Various provisions of our policies, such as limitations or exclusions from coverage which have been negotiated to limit our risks, may not be enforceable in the manner we intend. At the present time we employ a variety of endorsements to our policies that limit exposure to known risks, including, but not limited to, exclusions relating to types of vehicles we insure, specific artisan activities and homes in close proximity to the coast line.

In addition, the policies we issue contain conditions requiring the prompt reporting of claims to us and our right to decline coverage in the event of a violation of that condition. While our insurance product exclusions and limitations reduce the loss exposure to us and help eliminate known exposures to certain risks, it is possible that a court or regulatory authority could nullify or void an exclusion or legislation could be enacted modifying or barring the use of such endorsements and limitations in a way that would adversely affect our loss experience, which could have a material adverse effect on our financial condition or results of operations.

The effects of emerging claim and coverage issues on our business are uncertain.

As industry practices and legal, judicial, social and other conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the number or size of claims. In some instances, these changes may not become apparent until sometime after we have issued insurance contracts that are affected by the changes. As a result, the full extent of liability under our insurance contracts may not be known for many years after a contract is issued.

An example of such emerging change is the influence public adjusters have had on property claim patterns. Public adjusters represented the vast majority of new and reopened claims filed during 2009 where the cause of loss was asserted as hurricane related. Although the legitimacy of the claim may not prevail we are still required to research, review, and sometimes mediate these claims. Several legislative actions in the state of Florida, such as limiting the time a claim can be filed subsequent to the cause of loss, have either passed or remain in legislative sub-committees. Each of these actions is designed to enhance the legitimacy of the public adjusters’ influence on the claim process.

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21st Century Holding Company

The Company’s operating results in 2009 were also influenced by legislative enactments relating to claims payments. Following the 2004 and 2005 hurricane seasons, the Florida legislature required all insurers issuing replacement cost policies to pay the full replacement cost of damaged properties without deducting depreciation whether or not the insureds repaired or replaced the damaged property. Under prior law, insurers would pay the depreciated amount of the property until insureds commenced repairs or replacement. The new law has led to an increase in disagreements regarding the scope of damage and has resulted in insureds’ not repairing damage. Despite our efforts to adjust claims and promptly pay meritorious amounts, our operating results have been be affected by a claims environment in Florida that produces opportunities for fraudulent or overstated claims.

Our failure to pay claims accurately could adversely affect our business, financial results and capital requirements.

We must accurately evaluate and pay claims that are made under our policies. Many factors affect our ability to pay claims accurately, including the training and experience of our claims representatives, the culture of our claims organization and the effectiveness of our management, our ability to develop or select and implement appropriate procedures and systems to support our claims functions and other factors. Our failure to pay claims accurately could lead to material litigation, undermine our reputation in the marketplace, impair our image and negatively affect our financial results.

In addition, if we do not train new claims adjusting employees effectively or if we lose a significant number of experienced claims adjusting employees, our claims department’s ability to handle an increasing workload as we grow could be adversely affected. In addition to potentially requiring that growth be slowed in the affected markets, we could suffer decreased quality of claims work, which in turn could lower our operating margins.

If we are unable to continue our growth because our capital must be used to pay greater than anticipated claims, our financial results may suffer.

Our future growth will depend on our ability to expand the types of insurance products we offer and the geographic markets in which we do business, both balanced by the business risks we choose to assume and cede. We believe that our Company is sufficiently capitalized to operate our business as it now exists and as we currently plan to expand it. Our existing sources of funds include possible sales of our investment securities and our earnings from operations and investments. Unexpected catastrophic events in our market areas, such as the hurricanes experienced in Florida, have resulted and may result in greater claims losses than anticipated, which could require us to limit or halt our growth while we redeploy our capital to pay these unanticipated claims.

We may require additional capital in the future which may not be available or only available on unfavorable terms.

Our future capital requirements depend on many factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. To the extent that our present capital is insufficient to meet future operating requirements and/or cover losses, we may need to raise additional funds through financings or curtail our growth. Based on our current operating plan, we believe current capital, together with our anticipated retained earnings, will support our operations without the need to raise additional capital. However, we cannot provide any assurance in that regard, since many factors will affect our capital needs and their amount and timing, including our growth and profitability, our claims experience, and the availability of reinsurance, as well as possible acquisition opportunities, market disruptions and other unforeseeable developments.

If we had to raise additional capital, equity or debt financing may not be available at all or may be available only on terms that are not favorable to us. In the case of equity financings, dilution to our stockholders’ ownership could result, and in any case such securities may have rights, preferences and privileges that are senior to those of existing shareholders. If we cannot obtain adequate capital on favorable terms or at all, our business, financial condition or results of operations could be materially adversely affected.

Our business is heavily regulated, and changes in regulation may reduce our profitability and limit our growth.

We are subject to extensive regulation in the states in which we conduct business. This regulation is generally designed to protect the interests of policyholders, as opposed to shareholders and other investors, and relates to authorization for lines of business, capital and surplus requirements, investment limitations, underwriting limitations, transactions with affiliates, dividend limitations, changes in control, premium rates and a variety of other financial and non-financial components of an insurance company’s business. The NAIC and state insurance regulators are constantly reexamining existing laws and regulations, generally focusing on modifications to holding company regulations, interpretations of existing laws and the development of new laws.

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21st Century Holding Company

From time to time, some states in which we conduct business have considered or enacted laws that may alter or increase state authority to regulate insurance companies and insurance holding companies. In other situations, states in which we conduct business have considered or enacted laws that impact the competitive environment and marketplace for property and casualty insurance. For example, in 2007 Florida enacted legislation that required us to charge rates for homeowners insurance that we believe are inadequate to cover the related underwriting risk. This same legislation authorizes a state-owned insurance company to reduce its premium rates and begin competing against private insurers in the Florida residential property insurance market.

Currently the federal government does not directly regulate the insurance business. However, in recent years the state insurance regulatory framework has come under increased federal scrutiny. Congress and some federal agencies from time to time investigate the current condition of insurance regulation in the United States to determine whether to impose federal regulation or to allow an optional federal charter, similar to banks. In addition, changes in federal legislation and administrative policies in several areas, including changes in the Gramm-Leach-Bliley Act, financial services regulation and federal taxation, can significantly impact the insurance industry and us.

We cannot predict with certainty the effect any enacted, proposed or future state or federal legislation or NAIC initiatives may have on the conduct of our business. Furthermore, there can be no assurance that the regulatory requirements applicable to our business will not become more stringent in the future or result in materially higher costs than current requirements. Changes in the regulation of our business may reduce our profitability, limit our growth or otherwise adversely affect our operations.

Our insurance companies are subject to minimum capital and surplus requirements, and our failure to meet these requirements could subject us to regulatory action.

Our insurance companies are subject to risk-based capital standards and other minimum capital and surplus requirements imposed under applicable state laws, including the laws of their state of domicile, Florida. The risk-based capital standards, based upon the Risk Based Capital Model Act adopted by the NAIC require our insurance companies to report their results of risk-based capital calculations to state departments of insurance and the NAIC. These risk-based capital standards provide for different levels of regulatory attention depending upon the ratio of an insurance company’s total adjusted capital, as calculated in accordance with NAIC guidelines, to its authorized control level risk-based capital. Authorized control level risk-based capital is the number determined by applying the NAIC’s risk-based capital formula, which measures the minimum amount of capital that an insurance company needs to support its overall business operations.

Any failure by one of our insurance companies to meet the applicable risk-based capital or minimum statutory capital requirements imposed by the laws of Florida or other states where we do business could subject it to further examination or corrective action imposed by state regulators, including limitations on our writing of additional business, state supervision or liquidation. As of December 31, 2009, American Vehicle and Federated National were in compliance with the NAIC risk-based capital requirements (see “Business-Regulation” for further discussion).

Any changes in existing risk-based capital requirements or minimum statutory capital requirements may require us to increase our statutory capital levels, which we may be unable to do.

Our revenues and operating performance may fluctuate with business cycles in the property and casualty insurance industry.

Historically, the financial performance of the property and casualty insurance industry has tended to fluctuate in cyclical patterns characterized by periods of significant competition in pricing and underwriting terms and conditions, which is known as a "soft" insurance market, followed by periods of lessened competition and increasing premium rates, which is known as a "hard" insurance market. Although an individual insurance company's financial performance is dependent on its own specific business characteristics, the profitability of most property and casualty insurance companies tends to follow this cyclical market pattern, with profitability generally increasing in hard markets and decreasing in soft markets. At present, we are experiencing a soft market in the property and casualty market in Florida because of regulatory changes. We cannot predict, however, how long these market conditions will persist. We do not compete entirely on price or targeted market share. Our ability to compete is governed by our ability to assess and price an insurance product with an acceptable risk for obtaining profit.

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21st Century Holding Company

We may not obtain the necessary regulatory approvals to expand the types of insurance products we offer or the states in which we operate.

The insurance industry is highly regulated. Prior to selling a new insurance product in a state, we must obtain approval from the applicable state insurance regulators. The insurance regulators in states to which we might apply may request additional information, add conditions to the license that we find unacceptable, or deny our application. This would delay or prevent us from operating in that state. If we want to operate in any additional states, we must file similar applications for licenses, which we may not be successful in obtaining.

Adverse ratings by insurance rating agencies may adversely impact our ability to write new policies, renew desirable policies or obtain adequate insurance, which could limit or halt our growth and harm our business.

Demotech has publicly stated that the potential inability of the FHCF to honor its obligations to carriers in Florida who are dependent on its reinsurance has impacted its ratings process. See Business-Ratings. Furthermore, on March 22, 2010, Federated National received notice from Demotech that it would require a capital infusion of $10 million by March 31, 2010 in order for Federated National to maintain its’ “A” rating with the agency. We are working to comply with this requirement; however there can be no assurance that we will be able to do so. Any additional capital contribution to Federated National must be approved by the Florida OIR. The withdrawal of our ratings could limit or prevent us from writing or renewing desirable insurance policies, from competing with insurers who have higher ratings, from obtaining adequate reinsurance, or from borrowing on a line of credit. The withdrawal of our ratings could have a material adverse effect on the Company’s results of operations and financial position because the Company’s insurance products might no longer be acceptable to the secondary marketplace and mortgage lenders. Furthermore, a withdrawal of our ratings could prevent independent agents from selling and servicing our insurance products.

We rely on independent and general agents to write our insurance policies, and if we are not able to attract and retain independent and general agents, our revenues would be negatively affected.

We currently market and distribute Federated National's and American Vehicle's products and services through contractual relationships with a network of approximately 4,200 independent agents, of which approximately 300 actively sell and service our products, and a selected number of general agents. Our independent agents are our primary source for our automobile and property insurance policies. Many of our competitors also rely on independent agents. As a result, we must compete with other insurers for independent agents' business. Our competitors may offer a greater variety of insurance products, lower premiums for insurance coverage, or higher commissions to their agents. If our products, pricing and commissions do not remain competitive, we may find it more difficult to attract business from independent agents to sell our products. A material reduction in the amount of our products that independent agents sell could negatively affect our revenues.

We rely on our information technology and telecommunications systems, and the failure of these systems could disrupt our operations.

Our business is highly dependent upon the successful and uninterrupted functioning of our current information technology and telecommunications systems. We rely on these systems to process new and renewal business, provide customer service, make claims payments and facilitate collections and cancellations, as well as to perform actuarial and other analytical functions necessary for pricing and product development. As a result, the failure of these systems could interrupt our operations and adversely affect our financial results.

Nonstandard automobile insurance historically has a higher frequency of claims than standard automobile insurance, thereby increasing our potential for loss exposure beyond what we would be likely to experience if we offered only standard automobile insurance.

Nonstandard automobile insurance is provided to insureds that are unable to obtain preferred or standard insurance coverage because of their payment histories, driving records, age, vehicle types, or prior claims histories. This type of automobile insurance historically has a higher frequency of claims than does preferred or standard automobile insurance policies, although the average dollar amount of the claims is usually smaller under nonstandard insurance policies. As a result, we are exposed to the possibility of increased loss exposure and higher claims experience than would be the case if we offered only standard automobile insurance.

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21st Century Holding Company

Florida's personal injury protection insurance statute contains provisions that favor claimants, causing us to experience a higher frequency of claims than might otherwise be the case if we operated only outside of Florida.

Florida's personal injury protection insurance statute limits an insurer's ability to deny benefits for medical treatment that is unrelated to the accident, that is unnecessary, or that is fraudulent. In addition, the statute allows claimants to obtain awards for attorney's fees. Although this statute has been amended several times in recent years, primarily to address concerns over fraud, the Florida legislature has been only marginally successful in implementing effective mechanisms that allow insurers to combat fraud and other abuses. We believe that this statute contributes to a higher frequency of claims under nonstandard automobile insurance policies in Florida, as compared with claims under standard automobile insurance policies in Florida and nonstandard and standard automobile insurance policies in other states. Although we believe that we have successfully offset these higher costs with premium increases, because of competition, we may not be able to do so with as much success in the future.

Our success depends on our ability to accurately price the risks we underwrite.

The results of our operations and the financial condition of our insurance companies depend on our ability to underwrite and set premium rates accurately for a wide variety of risks. Rate adequacy is necessary to generate sufficient premiums to pay losses, LAE and underwriting expenses and to earn a profit. In order to price our products accurately, we must collect and properly analyze a substantial amount of data; develop, test and apply appropriate rating formulas; closely monitor and timely recognize changes in trends; and project both severity and frequency of losses with reasonable accuracy. Our ability to undertake these efforts successfully, and as a result price our products accurately, is subject to a number of risks and uncertainties, some of which are outside our control, including:

the availability of sufficient reliable data and our ability to properly analyze available data;

the uncertainties that inherently characterize estimates and assumptions;

our selection and application of appropriate rating and pricing techniques;

changes in legal standards, claim settlement practices, medical care expenses and restoration costs; and

legislatively imposed consumer initiatives.

Consequently, we could under-price risks, which would negatively affect our profit margins, or we could overprice risks, which could reduce our sales volume and competitiveness. In either event, the profitability of our insurance companies could be materially and adversely affected.

Current operating resources are necessary to develop future new insurance products.

We currently intend to expand our product offerings by underwriting additional insurance products and programs, and marketing them through our distribution network. Expansion of our product offerings will result in increases in expenses due to additional costs incurred in actuarial rate justifications, software and personnel. Offering additional insurance products may also require regulatory approval, further increasing our costs. There can be no assurance that we will be successful bringing new insurance products to our marketplace.

Increased competition, competitive pressures, industry developments and market conditions could affect the growth of our business and adversely impact our financial results.

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

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21st Century Holding Company

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

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

Competition could have a material adverse effect on our business, results of operations and financial condition. If we do not meet the prices offered by our competitors, we may lose business in the short term, which could also result in reduced revenues.

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21st Century Holding Company

Our senior management team is critical to the strategic direction of our company. If there were an unplanned loss of service by any of our officers our business could be harmed.

We depend, and will continue to depend, on the services of our executive management team which includes Michael Braun, our Chief Executive Officer and President of 21st Century Holding Company and Federated National, and Peter Prygelski, our Chief Financial Officer. Our success also will depend in part upon our ability to attract and retain qualified executive officers, experienced underwriting talent and other skilled employees who are knowledgeable about our business. If we were to lose the services of members of our executive management team, our business could be adversely affected. We believe we have been successful in attracting and retaining key personnel throughout our history. We have employment agreements with select members of our executive management team.

Nevertheless, because of the executive management role and involvement in developing and implementing our current business strategy, any unplanned loss of service could substantially harm our business.

Risks Related to an Investment in Our Shares

We have authorized but unissued preferred stock, which could affect rights of holders of common stock.

Our articles of incorporation authorize the issuance of preferred stock with designations, rights and preferences determined from time to time by our board of directors. Accordingly, our board of directors is empowered, without shareholder approval, to issue preferred stock with dividends, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of common stock. In addition, the preferred stock could be issued as a method of discouraging a takeover attempt. Although we do not intend to issue any preferred stock at this time, we may do so in the future.

Our articles of incorporation, bylaws and Florida law may discourage takeover attempts and may result in entrenchment of management.

Our articles of incorporation and bylaws contain provisions that may discourage takeover attempts and may result in entrenchment of management.

Our board of directors is elected in classes, with only two or three of the directors elected each year. As a result, shareholders would not be able to change the membership of the board in its entirety in any one year. Shareholders would also be unable to bring about, through the election of a new board of directors, changes in our officers.

Our articles of incorporation prohibit shareholders from acting by written consent, meaning that shareholders will be required to conduct a meeting in order to vote on any proposals or take any action.

Our bylaws require at least 60 days' notice if a shareholder desires to submit a proposal for a shareholder vote or to nominate a person for election to our board of directors.

In addition, Florida has enacted legislation that may deter or frustrate takeovers of Florida corporations, such as our company.

The Florida Control Share Act provides that shares acquired in a "control share acquisition" will not have voting rights unless the voting rights are approved by a majority of the corporation's disinterested shareholders. A "control share acquisition" is an acquisition, in whatever form, of voting power in any of the following ranges: (a) at least 20% but less than 33-1/3% of all voting power, (b) at least 33-1/3% but less than a majority of all voting power; or (c) a majority or more of all voting power.

The Florida Affiliated Transactions Act requires supermajority approval by disinterested shareholders of certain specified transactions between a public company and holders of more than 10% of the outstanding voting shares of the corporation (or their affiliates).

As a holding company, we depend on the earnings of our subsidiaries and their ability to pay management fees and dividends to the holding company as the primary source of our income.

We are an insurance holding company whose primary assets are the stock of our subsidiaries. Our operations, and our ability to service future potential debt, are limited by the earnings of our subsidiaries and their payment of their earnings to us in the form of management fees, commissions, dividends, loans, advances or the reimbursement of expenses. These payments can be made only when our subsidiaries have adequate earnings. In addition, dividend payments made to us by our insurance subsidiaries are restricted by Florida law governing the insurance industry. Generally, Florida law limits the dividends payable by insurance companies under complicated formulas based on the subsidiary's available capital and earnings.

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21st Century Holding Company

We may not continue making dividend payments on our common stock.

During 2008 and 2007, we paid quarterly dividends of $0.18 per share. In the first quarter of 2009, we lowered our dividend to $0.06 per share. We cannot assure you that we will continue to make quarterly dividend payments. Payment of dividends in the future will depend on our earnings, financial position and such other factors, as our Board of Directors deems relevant. Moreover, our ability to continue to pay dividends may be restricted by regulatory limits on the amount of dividends that Federated National and American Vehicle are permitted to pay the parent company.

ITEM 1B UNRESOLVED STAFF COMMENTS

None

ITEM 2 PROPERTIES

Our executive offices are located at 3661 West Oakland Park Boulevard, Lauderdale Lakes, Florida in a 39,250 square feet office facility. All of our operations are consolidated within this facility.

Effective March 1, 2005, Federated National sold its interest in the Lauderdale Lakes property to 21st Century at the property’s net book value of approximately $2.9 million. Effective on or about March 1, 2006, 21st Century sold the property to an unrelated party for approximately $5.0 million cash and a $0.9 million six year 5% note. As part of the transaction, 21st Century has agreed to lease the same facilities for a six year term. Our lease for this office space expires in December 2011.

We believe that the facilities are well maintained, in substantial compliance with environmental laws and regulations, and adequately covered by insurance. We also believe that these leased facilities are not unique and could be replaced, if necessary, at the end of the lease term.

ITEM 3 LEGAL PROCEEDINGS

See Item 8 of Part II, “Financial Statements and Supplementary Data – Footnote 11 – Commitments and Contingencies.”

ITEM 4 RESERVED

PART II

ITEM 5 MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock has been listed for trading on the NASDAQ Global Market, LLC under the symbol “TCHC” since November 5, 1998. The following table sets out the high and low closing sale prices as reported on the NASDAQ Global Market, LLC. These reported prices reflect inter-dealer prices without adjustments for retail markups, markdowns or commissions.

Quarter Ended	High		Low
March 31, 2009	$	5.07	$	1.63
June 30, 2009	$	4.20	$	2.86
September 30, 2009	$	4.98	$	3.03
December 31, 2009	$	4.82	$	3.78

March 31, 2008	$	14.05	$	10.98
June 30, 2008	$	12.98	$	8.17
September 30, 2008	$	8.88	$	5.19
December 31, 2008	$	5.42	$	3.62

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21st Century Holding Company

As of March 26, 2010, there were 31 holders of record of our common stock. We believe that the number of beneficial owners of our common stock is in excess of 4,600.

DIVIDENDS

During 2008 and 2007, we paid quarterly dividends of $0.18 per share. In the first quarter of 2009, we lowered our dividend to $0.06 per share. Payment of dividends in the future will depend on our earnings and financial position and such other factors, as our Board of Directors deems relevant. Moreover, our ability to continue to pay dividends may be restricted by regulatory limits on the amount of dividends that Federated National and American Vehicle are permitted to pay to the parent company.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following table summarizes our equity compensation plans as of December 31, 2009. All equity compensation plans were approved by our shareholders. We have not granted any options, warrants or rights to our shareholders outside of these equity compensation plans.

Equity Compensation Plan Information

Number of securities to

be issued upon exercise of

outstanding options,

warrants and rights

Weighted-average

exercise price of

outstanding options,

warrants and rights

Number of securities

remaining available for

future issuance under

equity compensation plans

(excluding securities

reflected in column (a))

Plan category

(a)

(b)

(c)

Equity compensation plans approved by stock holders*

861,550

12.59

68,197

* Includes options from the 1998 Stock Option Plan and the 2002 Stock Option Plan.

For additional information concerning our capitalization please see Footnote 16 to our Consolidated Financial Statements included under Item 8 of this Report on Form 10-K.

ISSUER REPURCHASES

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

SALES OF UNREGISTERED SECURITIES

During 2009, there were no options exercised under our various stock option plans.

ITEM 6 SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual Report on Form 10-K.

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21st Century Holding Company

	As of the years ended December 31,
	(Amounts in Thousands except Book Value Per Share)
	2009		2008		2007		2006		2005
Balance Sheet Data

Total assets	$	202,889	$	197,102	$	219,361	$	207,897	$	290,155
Investments		114,219		26,065		136,224		124,834		100,086
Cash and short term investments		28,197		124,577		22,524		17,917		6,071

Finance contracts, consumer loans and pay advances receivable, net		-		-		420		1,831		7,313

Total liabilities		135,447		120,871		138,104		141,704		249,387
Unpaid losses and LAE		70,611		64,775		59,685		39,615		154,039
Unearned premiums		50,857		40,508		56,394		77,829		61,839

Total shareholders' equity		67,442		76,231		81,257		66,193		40,767

Book value per share	$	8.48	$	9.51	$	10.32	$	8.38	$	6.02

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21st Century Holding Company

	Years Ended December 31,
	(Amounts in Thousands except EPS and Dividends)
	2009			2008			2007			2006			2005
Operations Data:
Revenue:
Gross premiums written	$	104,379		$	88,248		$	133,591		$	152,665		$	119,440
Gross premiums ceded		(56,217	)		(34,553	)		(44,550	)		(67,520	)		(31,414	)

Net premiums written		48,162			53,695			89,041			85,145			88,026

Increase (Decrease) in prepaid reinsurance premiums		10,163			(4,451	)		(11,251	)		20,193			6,623
(Increase) Decrease in unearned premiums		(10,349	)		15,886			21,435			(15,990	)		(11,686	)

Net change in prepaid reinsurance premiums and unearned premiums		(186	)		11,435			10,184			4,203			(5,063	)

Net premiums earned		47,976			65,130			99,224			89,348			82,963
Commission income		1,362			1,612			7,214			1,679			409
Finance revenue		294			350			545			1,686			3,567
Managing general agent fees		1,620			1,745			2,035			2,625			2,420
Net investment income		3,397			6,461			8,038			5,933			3,841
Net realized investment gains (losses)		1,117			(10,593	)		(145	)		1,063			458
Regulatory assessments recovered		2,333			2,104			1,655			132			-
Other income		755			655			642			1,449			1,010

Total revenue		58,854			67,464			119,208			103,915			94,669

Expenses:
Losses and LAE		43,706			41,869			47,619			44,400			48,336
Operating and underwriting expenses		9,681			7,209			12,758			13,160			8,219
Salaries and wages		7,930			7,428			6,732			7,011			6,384
Interest expense		-			-			173			656			1,398
Policy acquisition costs, net of amortization		13,747			14,760			19,420			17,395			14,561

Total expenses		75,064			71,266			86,702			82,622			78,899

(Loss) income from continuing operations before provision for income tax (benefit) expense		(16,210	)		(3,802	)		32,506			21,293			15,771
Provision for income tax (benefit) expense		(5,921	)		(1,324	)		11,226			7,396			4,690

Net (loss) income from continuing operations		(10,289	)		(2,478	)		21,280			13,896			11,081

Discontinued operations:

Income from discontinued operations (including 2005 and 2004 gain on disposal of $1,630 and $5,384, respectively)		-			-			-			-			1,630
Provision for income tax expense		-			-			-			-			595
Income from discontinued operations		-			-			-			-			1,035
Net (loss) income	$	(10,289	)	$	(2,478	)	$	21,280		$	13,896		$	12,116

Earnings per share data

Basic net (loss) income per share from continuing operations	$	(1.29	)	$	(0.31	)	$	2.69		$	1.84		$	1.78

Basic net income per share from discontinued operations	$	-		$	-		$	-		$	-		$	0.17
Basic net (loss) income per share	$	(1.29	)	$	(0.31	)	$	2.69		$	1.84		$	1.95

Fully diluted net (loss) income per share from continuing operations	$	(1.29	)	$	(0.31	)	$	2.65		$	1.72		$	1.67

Fully diluted net income per share from discontinued operations	$	-		$	-		$	-		$	-		$	0.16
Fully diluted net (loss) income per share	$	(1.29	)	$	(0.31	)	$	2.65		$	1.72		$	1.83
Dividends paid per share	$	0.36		$	0.72		$	0.72		$	0.48		$	0.32

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21st Century Holding Company

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

ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The insurable events during 2009, 2008 and 2007 did not include any weather related catastrophic events such as the well publicized series of hurricanes that occurred in Florida during 2005 and 2004. During 2009, 2008 and 2007 we processed property and liability claims stemming from our homeowners’, commercial general liability and private passenger automobile lines of business. Our reinsurance strategy serves to smooth the liquidity requirements imposed by the most severe insurable events and for all other insurable events we manage, at a micro and macro perspective, in the normal course of business.

the quality of the insurable risks underwritten;

the nature and severity of the loss;

weather-related patterns;

the availability, cost and terms of reinsurance;

underlying settlement costs, including medical and legal costs;

legal and political factors such as legislative initiatives and public opinion;

macroeconomic issues.

We continue to manage the foregoing to the extent within our control. Many of the foregoing are partially, or entirely, outside our control.

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21st Century Holding Company

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

During 2009, 81.2%, 14.6%, 3.4% and 0.8% of the premiums we underwrote were for homeowners’ property and casualty insurance, commercial general liability insurance, federal flood, and personal automobile insurance, respectively. During the year ended December 31, 2008, 68.8%, 27.0%, 3.7% and 0.6% of the premiums we underwrote were for homeowners’ property and casualty insurance, commercial general liability insurance, federal flood, and personal automobile insurance, respectively.

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

CRITICAL ACCOUNTING POLICIES

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

The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with management’s evaluation of the determination of (i) liability for unpaid losses and LAE, (ii) the amount and recoverability of amortization of deferred policy acquisition costs (“DPAC”), and (iii) estimates for our reserves with respect to finance contracts, premiums receivable and deferred income taxes. Various assumptions and other factors underlie the determination of these significant estimates, which are described in greater detail at Footnote 2 in this Form 10-K.

Except as described below, we believe that in 2009 there were no significant changes in those critical accounting policies and estimates. Senior management has reviewed the development and selection of our critical accounting policies and estimates and their disclosure in this Form 10-K with the Audit Committee of our Board of Directors.

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21st Century Holding Company

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

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

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

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

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

The following is an overview of management’s loss reserving process

The Company’s loss reserves can generally be categorized into two distinct groups. One group is short-tail classes of business consisting principally of property risks in connection with homes and automobiles. The other group is long-tail casualty classes of business which include primarily commercial general liability and to a much lesser extent, homeowner and automobile liability. For operations writing short-tail coverages our loss reserves were generally geared toward determining an expected loss ratio for current business rather than maintaining a reserve for the outstanding exposure. Estimations of ultimate net loss reserves for long-tail casualty classes of business is a more complex process and depends on a number of factors including class and volume of business involved. Experience in the more recent accident years of long-tail casualty classes of business shows limited statistical credibility in reported net losses because a relatively low proportion of net losses would be reported claims and expenses and even smaller percentage would be net losses paid. Therefore, incurred but not yet reported (“IBNR”) would constitute a relatively high proportion of net losses.

Additionally, the different methodologies are utilized the same, regardless of the line of business. However, the final selection of ultimate loss and LAE is certain to vary by both line of business and by accident period maturity. There is no prescribed combination of line of business, accident year maturity, and methodologies; consistency in results of the different methodologies and reasonableness of the result are the primary factors that drive the final selection of ultimate loss and LAE.

Methods used to estimate Loss & LAE reserves

The methods we use for our short-tail business do not differ from the methods we use for our long-tail business. The Incurred and Paid Development Methods intrinsically recognize the unique development characteristics contained within the historical experience of each material short-tail and long-tail line of business. The Incurred and Paid Cape Cod Methods reflect similar historical development unique to each material short-tail and long-tail line of business.

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21st Century Holding Company

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

We apply the following general methods in projecting loss and LAE reserves:

Paid and Incurred Loss Development Method

Paid and Incurred Cape Cod Method

Description of ultimate loss estimation methods

The estimated Ultimate Loss and Defense & Cost Containment Expense (“DCCE”) is based on an analysis by line of business, coverage and by accident quarter performed using data as of December 31, 2009. The analysis relies primarily on four actuarial methods: Incurred Loss & DCCE Development Method, Paid Loss & DCCE Development Method, Bornhuetter-Ferguson Incurred Method, and Bornhuetter-Ferguson Paid Method. Each method relies on company experience, and, where relevant, the analysis includes comparisons to industry experience. The following is a description of each of these methods:

Incurred Loss & DCCE Development Method – This reserving method is based on the assumption that the historical incurred loss & DCCE development pattern as reflected by the Company is appropriate for estimating the future loss & DCCE development. Incurred paid plus case amounts separated by accident quarter of occurrence and at quarterly evaluations are used in this analysis. Case reserves do not have to be adequately stated for this method to be effective; they only need to have a fairly consistent level of adequacy at all stages of maturity. Historical “age-to-age” loss development factors were calculated to measure the relative development of an accident quarter from one maturity point to the next. Loss & DCCE development factors (“LDF”) are selected based on a review of the historical relationships between incurred loss & DCCE at successive valuations and based on industry patterns. The LDFs are multiplied together to derive cumulative LDF’s that, when multiplied by actual incurred loss & DCCE, produce estimates of ultimate loss & DCCE.

Paid Loss & DCCE Development Method – This method is similar to the Incurred Loss & DCCE Development Method only paid loss & DCCE and paid patterns are substituted for the incurred loss & DCCE and incurred patterns.

Bornhuetter-Ferguson Incurred Method – This reserving method combines estimated initial expected unreported loss & DCCE with the actual loss & DCCE to yield the ultimate loss & DCCE estimate. Expected unreported loss & DCCE are equal to expected total loss & DCCE times the expected unreported percentage of loss & DCCE for each policy year. The incurred loss & DCCE emergence pattern used to determine the unreported percentages in our projections is based on the selected LDF’s from the Incurred Loss & DCCE Development Method described above. The estimate of initial expected total loss & DCCE is based on the historical loss ratio for more mature accident years. While this approach reduces the independence of the Bornhuetter-Ferguson Method from the loss & DCCE development methods for older policy years, it is used primarily for estimating ultimate loss & DCCE for more recent, less mature, policy years.

Bornhuetter-Ferguson Paid Method – This method is similar to the Bornhuetter-Ferguson Incurred Method only paid loss & DCCE and paid patterns are substituted for the incurred loss & DCCE and incurred patterns.

We select an estimate of ultimate loss & DCCE for each accident quarter after considering the results of each projection method for the quarter and the relative maturity of the quarter (the time elapsed between the start of the quarter and December 31, 2009). Reserves for unpaid losses & DCCE for each quarter are the differences between these ultimate estimates and the amount already paid. The reserves for each quarter and each coverage are summed, and the result is the overall estimate of unpaid losses & DCCE liability for the company.

We also produce an estimate of unpaid Adjusting and Other Expense (“A&O”), as a reserve is required under statutory accounting principles even if this expense has been pre-paid or with an unconsolidated affiliate. Although we do not prepay for A&O, the majority of the A&O incurred is with an affiliated company and eliminated under the accounting principles for consolidation. The unpaid A&O is added to unpaid losses & DCCE, resulting in total unpaid losses and LAE.

The validity of the results from using a loss development approach can be affected by many conditions, such as internal claim department processing changes, a shift between single and multiple claim payments, legal changes, or variations in a company’s mix of business from year to year. Also, since the percentage of losses paid for immature years is often low, development factors can be volatile. A small variation in the number of claims paid can have a leveraging effect that could lead to significant changes in estimated ultimate values. Accordingly, our reserves are estimates because there are uncertainties inherent in the determination of ultimate losses. Court decisions, regulatory changes and economic conditions can affect the ultimate cost of claims that occurred in the past as well as create uncertainties regarding future loss cost trends. We compute our estimated ultimate liability using the most appropriate principles and procedures applicable to the lines of business written. However, because the establishment of loss reserves is an inherently uncertain process, we cannot be certain that ultimate losses will not exceed the established loss reserves and have a material adverse effect on our results of operations and financial condition.

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21st Century Holding Company

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

A key assumption underlying the estimation of the reserve for loss and LAE is that past experience serves as the most reliable estimator of future events. This assumption may materially affect the estimates when the insurance market, the regulatory environment, the legal environment, the economic environment, the book of business, the claims handling department, or other factors (known or unknown) have varied over time during the experience period and / or will vary (expectedly or unexpectedly) in the future. Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the operating results of the period during which such adjustments are made. Therefore, the ultimate liability for unpaid losses and LAE will likely differ from the amount recorded at December 31, 2009.

The following describes the extent of our procedures for determining the reserve for loss and LAE on both an annual and interim reporting basis:

Annually - Our policy is to select a single point estimate that best reflects our in-house actuarial determination for unpaid losses and LAE. Our independent actuaries, examining the exact same data set, will independently select a point estimate which determines a high point and low point range. Both processes rely on objective and subjective determinations. If our point estimate falls within the range determined from the point estimate of our actuaries, then no adjustments by management would be required. In consideration thereof, management does not have a policy for adjusting the liability for unpaid losses and LAE to an amount that is different than an amount set forth within the range determined by the independent actuaries.

Interim – During 2009 our interim approach was very similar to the annual process noted above.

A number of other actuarial assumptions are generally made in the review of reserves for each class of business. For the long-tail classes of business, other actuarial assumptions generally are made with respect to the following:

Loss trend factors which are used to establish expected loss ratios for subsequent accident years based on the projected loss ratio for prior accident years.

Expected loss ratios for the latest accident year and, in some cases for accident years prior to the latest accident year. The expected loss ratio generally reflects the projected loss ratio from prior accident years, adjusted for the loss trend and the effect of rate changes and other quantifiable factors on the loss ratio.

In practice there are factors that change over time; however, many (such as inflation) are intrinsically reflected in the historical development patterns, and others typically do not materially affect the estimate of the reserve for unpaid losses and LAE. Therefore, no specific adjustments have been incorporated for such contingencies projecting future development of losses and LAE. There are no key assumptions as of December 31, 2009 premised on future emergence inconsistent with historical loss reserve development patterns.

The table below distinguishes total loss reserves between IBNR, as discussed above, and case estimates for specific claims as established by routine claims management.

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21st Century Holding Company

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

Reserves for unpaid loss and LAE net of reinsurance recoverable as of December 31, 2009	Case Loss Reserves		Case LAE Reserves		Total Case Reserves		IBNR Reserves (Including LAE)		Reinsurance Recoverable on Unpaid Loss and Loss Expenses		Net Reserves
	(Dollars in Thousands)

Homeowners'	$	7,489	$	1,348	$	8,837	$	21,093	$	11,666	$	18,264
Commercial General Liability		6,312		1,573		7,885		29,578		-		37,463
Automobile		286		188		474		2,888		84		3,278
Fire		-		-		-		11		-		11
Inland Marine		-		-		-		-		-		-

Total	$	14,087	$	3,109	$	17,196	$	53,570	$	11,750	$	59,016

Reserves for unpaid loss and LAE net of reinsurance recoverable as of December 31, 2008	Case Loss Reserves		Case LAE Reserves		Total Case Reserves		IBNR Reserves (Including LAE)		Reinsurance Recoverable on Unpaid Loss and Loss Expenses		Net Reserves
	(Dollars in Thousands)

Homeowners'	$	7,132	$	899	$	8,031	$	19,669	$	12,613	$	15,087
Commercial General Liability		6,166		1,364		7,530		27,323		-		34,853
Automobile		412		255		667		1,555		100		2,122

Total	$	13,710	$	2,518	$	16,228	$	48,547	$	12,713	$	52,062

Our reported results, financial position and liquidity would be affected by likely changes in key assumptions that determine our net loss reserves. The table below illustrates the change to equity that would occur as a result of a change in loss and LAE reserves, net of reinsurance.

		Years Ended December 31,
		2009					2008
Change in loss and LAE reserves, net of reinsurance		Adjusted loss and LAE reserves, net of reinsurance		Percentage change in equity (1)			Adjusted loss and LAE reserves, net of reinsurance		Percentage change in equity (1)
		(Dollars in Thousands)
-10.0	%		53,115		-15.2	%		46,856		-12.8	%
-7.5	%		54,590		-11.4	%		48,158		-9.6	%
-5.0	%		56,066		-7.6	%		49,459		-6.4	%
-2.5	%		57,541		-3.8	%		50,761		-3.2	%
Base			59,016		-			52,062		-
2.5	%		60,492		3.8	%		53,364		3.2	%
5.0	%		61,967		7.6	%		54,665		6.4	%
7.5	%		63,443		11.4	%		55,967		9.6	%
10.0	%		64,918		15.2	%		57,268		12.8	%

(1) Net of tax

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21st Century Holding Company

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

For the year ended December 31, 2009 our actuarial firm determined range of loss and LAE reserves on a net basis range from a low of $53.8 million to a high of $70.6 million, with a best estimate of $61.2 million. The Company’s net loss and LAE reserves are carried at $58.7 million. Management’s point estimate of reserves is 4.0% below our actuary’s best estimate in recognition of the inherent uncertainty in assessing the potential ultimate liabilities given legal developments as well as evolution in its operations.

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

Please see Footnote 2 of the Notes to Consolidated Financial Statements for additional discussions regarding critical accounting policies.

RECENT ACCOUNTING PRONOUNCEMENTS

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

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

In January 2010, the FASB issued accounting guidance related to fair value measurements and disclosures. The amendments add some new disclosures regarding fair value measurements, including information regarding transfers into and out of Level 1 and Level 2, and information about purchases, sales, issuances and settlements in Level 3 measurements. The amendments also clarify certain existing disclosure requirements. Level 3 amendments are effective for fiscal years beginning after December 15, 2010 and interim periods within those fiscal years; with all other amendments effective for both interim and annual reporting periods beginning after December 15, 2009. The adoption of the guidance will not have a material effect on our financial statements.

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21st Century Holding Company

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

See Note 2(n), “Summary of Significant Accounting Policies – Recent Accounting Pronouncements” in the Notes to the Condensed Consolidated Financial Statements for a discussion of other recent accounting pronouncements and their effect, if any, on the Company.

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21st Century Holding Company

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

ANALYSIS OF FINANCIAL CONDITION

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

Total Investments

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

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

Total Investments increased $88.1 million, or 338.2%, to $114.2 million as of December 31, 2009, compared with $26.1 million as of December 31, 2008. Our debt portfolio contained callable features exercised in 2008. The proceeds from our called securities were in cash and short-term investments as of December 31, 2008. During 2008, the Company engaged an outside investment advisor and during 2009 the funds were invested in long and short term investments with yields that best match our liquidity needs.

The debt and equity securities that are available for sale and carried at fair value represent 98% of total investments as of December 31, 2009, compared with 48% as of December 31, 2008.

We did not hold any trading investment securities during 2009.

Below is a summary of net unrealized gains and losses at December 31, 2009 and December 31, 2008 by category. The $0.1 million unrealized losses for debt securities is related to United States Treasury obligations. The unrealized losses on the Company’s investments in United States Treasury obligations were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporary impaired at December 31, 2009.

	Unrealized Gains and (Losses)
	December 31, 2009			December 31, 2008
	(Dollars in Thousands)
Debt securities:
United States government obligations	$	(120	)	$	-
Obligations of states and political subdivisions		500			(148	)
Corporate		1,742			(936	)
		2,122			(1,084	)

Equity securities:
Common stocks		1,128			(819	)

Total debt and equity securities	$	3,250		$	(1,903	)

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

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21st Century Holding Company

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

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

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

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

prospects for the issuer’s industry segment;

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

historical volatility of the fair value of the security.

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

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

As of December 31, 2009, all of our securities are in good standing and not impaired as defined by FASB issued guidance, except for our holdings in Blackrock Pfd, Inc., which continues to be impaired by $0.4 million as of December 31, 2009, compared to the total $2.1 million as of December 31, 2008.

During 2008 we charged to operations a net realized investment loss that totaled approximately $9.9 million, net of an estimated provisional tax effect of approximately $3.7 million. Most of these investments were subsequently sold during the third and fourth quarter of the year, and, we recognized an additional $0.2 million loss, net of an estimated tax benefit of approximately $0.1 million.

The investments held as of December 31, 2009, were comprised mainly of corporate bonds held in various industries and municipal and United States government bonds. The investments held as of December 31, 2008, were comprised mainly of United States government and agency bonds, as well as municipal bonds and corporate bonds held in the financial and conglomerate industries. As of December 31, 2009, 89% of the debt portfolio is in diverse industries and 11% is in United States government bonds. As of December 31, 2009, approximately 89% of the equity holdings are in equities related to diverse industries and 11% are in mutual funds.

As of December 31, 2009, 36.9% of the investment portfolio is in corporate bonds, 34.4% is in obligations of states and political subdivisions, and 11.2% is in United States government bonds.

The following table summarizes, by type, our investments as of December 31, 2009 and 2008.

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21st Century Holding Company

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

	December 31, 2009					December 31, 2008
	Carrying		Percent			Carrying		Percent
	Amount		of Total			Amount		of Total
	(Dollars in Thousands)
Debt securities, at market:
United States government agencies and authorities	$	12,802		11.21	%	$	4,544		17.43	%
Obligations of states and political subdivisions		39,269		34.38	%		5,331		20.45	%
Corporate		42,092		36.85	%		13,050		50.07	%
Other		-		0.00	%		-		0.00	%
Total fixed maturities		94,163		82.44	%		22,925		87.95	%
Equity securities, at market		20,056		17.56	%		3,140		12.05	%
Total investments	$	114,219		100.00	%	$	26,065		100.00	%

As of December 31, 2009 and 2008 we have classified $2.7 million and $13.5 million, respectively, of our bond portfolio as held-to-maturity. We only classify bonds as held to maturity to support collateralized letters of credit. Outstanding irrevocable letters of credit, used for such purposes, total $2.8 million and $3.0 million for the period ended December 31, 2009 and December 31, 2008, respectively.

During 2009, we reclassified $5.0 million of amortized cost to available-for-sale from held-to-maturity because a collaterized requirement was reduced.

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

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

Cash and Short Term Investments

Cash and short-term investments, which include cash, certificates of deposits, and money market accounts, decreased $96.4 million, or 77.4%, to $28.2 million as of December 31, 2009, compared with $124.6 million as of December 31, 2008.

Our debt portfolio contained callable features exercised in 2008. The proceeds from our called securities were in cash and short-term investments as of December 31, 2008. During 2008, the Company engaged an outside investment advisor and during 2009 the funds were invested in long and short term investments with yields that best match our liquidity needs.

Prepaid Reinsurance Premiums

Prepaid reinsurance premiums increased $4.8 million, or 86.4%, to $10.3 million as of December 31, 2009, compared with $5.5 million as of December 31, 2008. The change is due to our payments and amortization of prepaid reinsurance premiums associated with our homeowners’ book of business. We believe concentrations of credit risk associated with our prepaid reinsurance premiums are not significant.

Premiums Receivable, Net of Allowance for Credit Losses

Premiums receivable, net of allowance for credit losses, increased $6.9 million, or 207.5%, to $10.3 million as of December 31, 2009, compared with $3.4 million as of December 31, 2008.

Our homeowners’ insurance premiums receivable increased $7.3 million, to $9.0 million as of December 31, 2009, compared with $1.7 million as of December 31, 2008. The increased homeowners’ insurance premiums receivable includes $5.4 million assumed premiums receivable in connection with our citizens take-out. Our commercial general liability insurance premiums receivable decreased $0.8 million, or 47.7%, to $0.9 million as of December 31, 2009, compared with $1.7 million as of December 31, 2008. Premiums receivable in connection with our automobile line of business increased $0.4 million, or 308.3%, to $0.5 million as of December 31, 2009, compared with $0.1 million as of December 31, 2008. Our allowance for credit losses decreased $0.1 million, or 79.9%, to less than $0.1 million as of December 31, 2009, compared with more than $0.1 million as of December 31, 2008.

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21st Century Holding Company

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

The activity in the allowance for credit losses for premiums receivable was as follows.

	Years Ended December 31,
	2009			2008
	(Dollars in Thousands)

Allowance for credit losses at beginning of year	$	122		$	289
Additions charged to bad debt expense		92			(300	)
Write-downs charged against the allowance		(190	)		133
Allowance for credit losses at end of year	$	24		$	122

Reinsurance Recoverable, Net of Allowance for Credit Losses

Reinsurance recoverable, net, decreased $1.6 million, or 9.39%, to $15.3 million as of December 31, 2009, compared with $16.9 million as of December 31, 2008. The change is due to payment patterns by our reinsurers. All amounts are current and deemed collectable. We believe concentrations of credit risk associated with our reinsurance recoverables, net are not significant.

DPAC

DPAC increased $1.7 million, or 26.1%, to $8.3 million as of December 31, 2009, compared with $6.6 million as of December 31, 2008. The change is due to increased homeowner’s written and unearned premium, net of decreased commercial general liability premium.

An analysis of deferred acquisition costs follows.

	Years Ended December 31,
	2009			2008
	(Dollars in Thousands)

Balance, beginning of year	$	6,558		$	8,958
Acquisition costs deferred		15,456			12,360
Amortization expense during year		(13,747	)		(14,760	)
Balance, end of year	$	8,267		$	6,558

Deferred Income Taxes, net

Deferred income taxes, net, decreased $3.8 million, or 45.2%, to $4.7 million as of December 31, 2009, compared with $8.5 million as of December 31, 2008. Deferred income taxes, net is comprised of approximately $9.1 million and $11.0 million of deferred tax assets, net of approximately $4.4 million and $2.5 million of deferred tax liabilities as of December 31, 2009 and December 31, 2008, respectively.

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21st Century Holding Company

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

	Years Ended December 31,
	2009			2008
	(Dollars in Thousands)
Deferred tax assets
Unpaid losses and LAE	$	2,315		$	2,187
Unearned premiums		1,785			1,771
Unrealized loss on investment securities		-			716
Allowance for credit losses		-			141
Allowance for impairments		164			1,410
Regulatory assessments		260			1,312
Unearned agent commissions		8			-
Depreciation & amortization		367			155
Reserve for claims settlements		809			-
Capital loss carryover		2,112			2,657
State net operating loss carryforward		663			-
Deferred gain on sale and leaseback		288			453
Stock option expense per FASB 123R		305			237
Total deferred tax assets		9,076			11,039

Deferred tax liabilities
Deferred acquisition costs, net		(3,111	)		(2,468	)
Allowance for credit losses		(60	)		-
Discount on advance premiums		(7	)		(41	)
Unrealized gain on investment securities		(1,223	)		-
Total deferred tax liabilities		(4,401	)		(2,509	)
Net deferred tax asset	$	4,675		$	8,530

Income Taxes Receivable

Income taxes receivable increased $4.8 million, or 210.8%, to $7.1 million as of December 31, 2009, compared with $2.3 million as of December 31, 2008. The change is due to tax payment patterns in connection with our tax liabilities.

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

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

Property, Plant and Equipment, net

Property, plant and equipment, net, remained unchanged at $0.9 million as of December 31, 2009 and December 31, 2008.

Other Assets

Other assets increased $1.2 million, or 48.5%, to $3.7 million as of December 31, 2009, compared with $2.5 million as of December 31, 2008. Major components of other assets are shown in the following table; the accrued interest income receivable is primarily investment related.

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21st Century Holding Company

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

	As of December 31,
	2009		2008
	(Dollars in Thousands)

Accrued interest income receivable	$	1,162	$	243
Notes receivable		599		703
Deposits		334		71
Prepaid expenses		644		748
Revenue sharing due from reinsurer		-		282
Receivable for investments sold		567		-
Other		365		425
Total	$	3,671	$	2,472

Unpaid Losses and LAE

Unpaid losses and LAE increased $5.8 million, or 9.0%, to $70.6 million as of December 31, 2009, compared with $64.8 million as of December 31, 2008. The composition of unpaid losses and LAE by product line is as follows.

	December 31, 2009						December 31, 2008
	Case		Bulk		Total		Case		Bulk		Total
	(Dollars in Thousands)						(Dollars in Thousands)

Homeowners'	$	8,705	$	21,102	$	29,807	$	8,048	$	19,678	$	27,726
Commercial General Liability		7,885		29,346		37,231		7,531		26,998		34,529
Automobile		2,612		960		3,572		657		1,863		2,520
Total	$	19,202	$	51,408	$	70,610	$	16,236	$	48,539	$	64,775

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

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

The incurred loss development method relies on the assumption that, at any given state of maturity, ultimate losses can be predicted by multiplying cumulative reported losses (paid losses plus case reserves) by a cumulative development factor. The validity of the results of this method depends on the stability of claim reporting and settlement rates, as well as the consistency of case reserve levels. Case reserves do not have to be adequately stated for this method to be effective; they only need to have a fairly consistent level of adequacy at all stages of maturity. Historical “age-to-age” loss development factors were calculated to measure the relative development of an accident year from one maturity point to the next. We then selected appropriate age-to-age loss development factors based on these historical factors and use the selected factors to project the ultimate losses.

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21st Century Holding Company

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

Unearned Premium

Unearned premiums increased $10.4 million, or 25.5%, to $50.9 million as of December 31, 2009, compared with $40.5 million as of December 31, 2008. The change was due to a $13.6 million increase in unearned homeowners’ insurance premiums of which $7.4 million is associated with our assumption of policies from Citizens, a $3.8 million decrease in unearned commercial general liability premiums, a $0.2 million increase in unearned flood insurance premiums, and a $0.4 million increase in unearned automobile premiums. Generally, as is in this case, an increase in unearned premium directly relates to an increase in written premium on a rolling twelve-month basis. Competition could negatively affect our unearned premium.

Premium Deposits and Customer Credit Balances

Premium deposits and customer credit balances increased $0.4 million, or 25.3%, to $2.1 million as of December 31, 2009, compared with $1.7 million as of December 31, 2008. Premium deposits are monies received on policies not yet in-force as of December 31, 2009.

Bank Overdraft

Bank overdraft decreased $0.4 million, or 5.1%, to $8.3 million as of December 31, 2009, compared with $8.7 million as of December 31, 2008. The bank overdraft relates primarily to losses and LAE disbursements paid but not presented for payment by the policyholder or vendor. The change relates to our payment patterns in relationship to the rate at which those cash disbursements are presented to the bank for payment.

Deferred Gain from Sale of Property

Deferred gain from sale of property decreased $0.5 million, or 32.7%, to $1.0 million as of December 31, 2009, compared with $1.5 million as of December 31, 2008. In accordance with the provisions of FASB issued guidance, we are amortizing the deferred gain over the term of the leaseback, which is scheduled to end in December 2011.

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses decreased $1.1 million, or 29.9%, to $2.6 million as of December 31, 2009, compared with $3.7 million as of December 31, 2008. This change is due to the timing of payments with our trade vendors.

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21st Century Holding Company

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

Results of Operations

Year Ended December 31, 2009 Compared with Year Ended December 31, 2008

Gross Premiums Written

Gross premiums written increased $16.2 million, or 18.3%, to $104.4 million for the year ended December 31, 2009 (“2009”), compared with $88.2 million for the year ended December 31, 2008 (“2008”). The following table denotes gross premiums written by major product line.

	Years Ended December 31,
	2009					2008
			(Dollars in Thousands)
	Amount		Percentage			Amount		Percentage

Homeowners'	$	84,705		81.15	%	$	60,708		68.79	%
Commercial General Liability		15,279		14.64	%		23,790		26.96	%
Federal Flood		3,559		3.41	%		3,263		3.70	%
Automobile		836		0.80	%		487		0.55	%
Gross written premiums	$	104,379		100.00	%	$	88,248		100.00	%

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

We continue to afford premium discounts in response to wind mitigation efforts by policyholders. Such discounts, which were required by the Florida Legislature and became effective on December 15, 2007 for new business and renewal business, have also had a significant effect on both written and earned premium. During 2009 and 2008 wind mitigation credits totaling $9.8 million and $15.3 million were afforded our policyholders, respectively. As of December 31, 2009, 56.8% of our in-force homeowners’ policyholders were receiving wind mitigation credits totaling approximately $27.6 million, (a 24.2% reduction of in-force premium), while 52.1% of our in-force homeowners’ policyholders were receiving wind mitigation credits totaling approximately $17.8 million, (a 22.2% reduction of in-force premium), as of December 31, 2008.

Despite the effects of Florida’s mandated homeowners’ rate reductions and wind mitigation discounts the Company’s sale of homeowners’ policies increased $24.0 million, or 39.5%, to $84.7 million in 2009, compared with $60.7 million in 2008. Included in our sale of homeowners’ policies during 2009, is $17.9 million from policies we assumed from Citizens.

We are required to report write-your-own flood premiums on a direct and 100% ceded basis for the twelve months ended December 31, 2008 and subsequent periods. Prior to 2008, we reported only the commissions income associated with this program. Commissions in connection with this program totaled $0.1 million, $0.2 million and $0.3 million in 2009, 2008 and 2007.

Federated National and American Vehicle are currently rated by Demotech as "A" ("Exceptional"), which is the third of seven ratings, and defined as “Regardless of the severity of a general economic downturn or deterioration in the insurance cycle, insurers earning a Financial Stability Rating (“FSR”) of “A” possess “Exceptional” financial stability related to maintaining surplus as regards to policyholders”. Demotech’s ratings are based upon factors of concern to agents, reinsurers and policyholders and are not primarily directed toward the protection of investors. However, our Demotech rating could be jeopardized by such other factors including adverse development and various surplus related ratio exceptions. On June 11, 2009, Demotech reaffirmed Federated National’s FSR of “A” (“Exceptional”).

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21st Century Holding Company

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

The Company’s sale of commercial general liability policies decreased by $8.5 million to $15.3 million in 2009, compared with $23.8 million in 2008. The primary factor for the decrease is a slowdown in the economy which has a dramatic impact on the artisan contractor portfolio written by American Vehicle. An additional factor is our decision to restrict underwriting authority within specific commercial general liability classes and geographic areas. The following table sets forth the amounts and percentages of our gross premiums written in connection with our commercial general liability program by state.

	Years Ended December 31,
	2009					2008
	Amount		Percentage			Amount		Percentage
	(Dollars in Thousands)
State
Alabama	$	76		0.50	%	$	117		0.49	%
Arkansas		4		0.03	%		12		0.05	%
California		49		0.32	%		269		1.13	%
Florida		12,341		80.77	%		16,011		67.30	%
Georgia		291		1.91	%		568		2.39	%
Kentucky		1		0.00	%		1		0.00	%
Louisiana		1,736		11.36	%		4,481		18.84	%
Maryland		-		0.00	%		2		0.01	%
South Carolina		2		0.01	%		70		0.29	%
Texas		778		5.09	%		2,252		9.47	%
Virginia		1		0.01	%		7		0.03	%
Total	$	15,279		100.00	%	$	23,790		100.00	%

The Company’s sale of auto insurance policies increased by $0.3 million to $0.8 million in 2009, compared with $0.5 million in 2008.

Gross Premiums Ceded

Gross premiums ceded increased to $56.2 million in 2009, compared with $34.6 million in 2008. Gross premiums ceded under our catastrophe reinsurance program totaled $52.5 million and gross premiums ceded to the write-your-own flood program totaled $3.6 million in 2009.

Increase in Prepaid Reinsurance Premiums

The change in prepaid reinsurance premiums was a $10.2 million increase in 2009, compared with a $4.5 million decrease in 2008. This change is primarily associated with the timing of our reinsurance payments measured against the term of the underlying reinsurance policies.

Increase in Unearned Premiums

The change in unearned premiums was a $10.3 million increase in 2009, compared with a $15.9 million decrease in 2008. The change was due to a $13.5 million increase in unearned homeowners’ insurance premiums of which $7.4 million is associated with our assumption of policies from Citizens, a $3.8 million decrease in unearned commercial general liability premiums, a $0.4 million increase in unearned automobile premiums, net of a $0.2 million increase in unearned flood premiums in 2009. These changes are a result of differences in written premium volume during this period as compared with the same period last year. See Gross Premiums Written.

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21st Century Holding Company

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

Net Premiums Earned

Net premiums earned decreased $17.1 million, or 26.3%, to $48.0 million in 2009, compared with $65.1 million in 2008. The following table denotes net premiums earned by product line.

	Years Ended December 31,
	2009					2008
	Amount		Percentage			Amount		Percentage
	(Dollars in Thousands)

Homeowners'	$	28,474		59.35	%	$	36,415		55.91	%
Commercial General Liability		19,076		39.76	%		27,784		42.66	%
Automobile		426		0.89	%		931		1.43	%
Net premiums earned	$	47,976		100.00	%	$	65,130		100.00	%

The change in homeowners’ net premiums earned is partially due to a $13.5 million increase in unearned premiums, of which $7.4 million is associated with our assumption of policies from Citizens in December 2009, and a $24.0 million increase in premium volume. Please see above Gross Premiums Ceded discussion.

The change in commercial general liability net premiums earned is a result of decreased premium volume. The primary factor for the decrease in premium volume is a slowdown in the economy which has a dramatic impact on the artisan contractor portfolio written by American Vehicle. An additional factor is our decision to restrict underwriting authority within specific commercial general liability classes and geographic areas.

Commission Income

Commission income decreased $0.2 million, or 15.5%, to $1.4 million in 2009, compared with $1.6 million in 2008. The primary sources of our commission income are in connection with our managing general agent services and our independent insurance agency, Insure-Link, Inc. (“Insure-Link”).

Finance Revenue

Finance revenue decreased $0.1 million, or 16.1%, to $0.3 million in 2009, compared with $0.4 million in 2008. This is primarily due to the Company’s decreased emphasis on automobile insurance and the finance revenue derived from these policies.

Managing General Agent Fees

Managing general agent fees decreased $0.1million, or 7.2%, to $1.6 million in 2009, compared with $1.7 million in 2008.

Net Investment Income

Net investment income decreased $3.1 million to $3.4 million for 2009, compared with $6.5 million for 2008. Our investment yield net and gross of investment expenses were 2.1% and 2.3% respectively for 2009, compared with 4.1% net of investment expenses for 2008. Our investment yield net and gross of investment expenses measured against debt securities, excluding cash were 3.5% and 3.7% respectively for 2009. Our net investment income and yield were adversely affected by having an average cash balance of $55.0 million in the prime money market account that provided less than a 1% yield during 2009.

Net investment income on corporate bonds, which generally provide a higher yield than United States government bonds, decreased $1.5 million to $1.6 million for 2009, compared with $3.1 million for 2008. The decrease in corporate bond income was due to our selection of higher quality bonds that reduce overall portfolio risk though offer a lower yield. Municipal bond income increased $0.7 million to $1.4 million for 2009 compared to $0.7 million in 2008. The increase in Municipal bond income was due to the increase in the municipal bond portfolio to $40.0 million in 2009, from approximately $5.0 million in 2008.

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21st Century Holding Company

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

Dividend income decreased $0.3 million to $0.5 million for 2009, compared with $0.8 million for 2008. Short-term income decreased $0.9 million to $0.2 million for 2009, compared with $1.1 million for 2008.

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

Net Realized Investment Gains

Net realized investment gains were $1.1 million in 2009, compared with net realized investment losses of $10.6 million in 2008.

During 2009, we did not mark any equity investments to market value pursuant to guidelines prescribed in FASB issued guidance. In reaching a conclusion that a security is either other than temporary or permanently impaired we consider such factors as the timeliness and completeness of expected dividends, principal and interest payments, ratings from nationally recognized statistical rating organizations such as Standard and Poor’s and Moody’s, as well as information released via the general media channels. During 2008 the pretax charge to operations was approximately $9.9 million in connection with our estimates of the net realizable value of these investments.

The table below depicts the net realized investment gains (losses) by investment category in 2009 as compared with 2008.

	Years Ended December 31,
	2009			2008
	(Dollars in Thousands)
Realized gains:
Debt securities	$	485		$	770
Equity securities		2,159			544
Total realized gains		2,644			1,314

Realized losses:
Debt securities		(825	)		(854	)
Equity securities		(702	)		(11,053	)
Total realized losses		(1,527	)		(11,907	)
Net realized gains (losses) on investments	$	1,117		$	(10,593	)

Regulatory Assessments Recovered

Regulatory assessments recovered increased $0.2 million, or 10.9%, to $2.3 million in 2009, compared with $2.1 million in 2008.

Other Income

Other income increased $0.1 million, or 15.4%, to $0.8 million in 2009, compared with $0.7 million in 2008.

Major components of other income in 2009 and 2008 included approximately $0.5 million in partial recognition of our gain on the sale of our Lauderdale Lakes property.

Losses and LAE

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

Losses and LAE increased by $1.8 million, or 4.4%, to $43.7 million for 2009, compared with $41.9 million for 2008. The overall change includes a $4.5 million increase in our homeowners’ program, a $6.0 million decrease in our commercial general liability program and a $3.3 million increase in connection with our automobile program.

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21st Century Holding Company

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

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

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

	December 31, 2009						December 31, 2008
	Case		Bulk		Total		Case		Bulk		Total
	(Dollars in Thousands)						(Dollars in Thousands)

Homeowners'	$	8,705	$	21,102	$	29,807	$	8,048	$	19,678	$	27,726
Commercial General Liability		7,885		29,346		37,231		7,531		26,998		34,529
Automobile		2,612		960		3,572		657		1,863		2,520
Total	$	19,202	$	51,408	$	70,610	$	16,236	$	48,539	$	64,775

In accordance with GAAP, our loss ratio is computed as losses and LAE divided by net premiums earned. A lower loss ratio generally results in higher operating income. Our loss ratio for 2009 was 86.9% compared with 64.3% for 2008. The table below reflects the loss ratios by product line.

	Years Ended December 31,
	2009			2008
Homeowners'		92.0	%		56.2	%
Commercial General Liability		81.5	%		77.0	%
Fire		18.7	%		0.0	%
Inland Marine		57.5	%		0.0	%
Automobile		-1.1	%		1.8	%
All lines		86.9	%		64.3	%

For further discussion, see Footnote 7 to the Consolidated Financial Statements included under Part II, Item 8, of this Report.

Operating and Underwriting Expenses

Operating and underwriting expenses increased $2.5 million, or 34.3%, to $9.7 million for 2009, compared with $7.2 million for 2008.

The change is partially due to the addition of Insure-Link, created to serve as an independent insurance agency, for which operating and underwriting expenses increased to $1.1 million for the twelve months ended December 31, 2009, compared with $0.1 million for the twelve months ended December 31, 2008. Additionally, assessments paid, investment fees and bad debt expense increased a net total $1.5 million for the twelve months ended December 31, 2009, compared with the twelve months ended December 31, 2008.

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21st Century Holding Company

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

Salaries and Wages

Salaries and wages increased $0.5 million, or 6.8%, to $7.9 million for 2009, compared with $7.4 million for 2008.

The charge to operations for stock based compensation, in accordance with the provisions of FASB issued guidance, was approximately $0.4 million during 2009 compared with approximately $0.5 million for 2008.

Policy Acquisition Costs, Net of Amortization

Policy acquisition costs, net of amortization decreased $1.1 million, or 6.9%, to $13.7 million for 2009, compared with $14.8 million for 2008. Policy acquisition costs, net of amortization, consists of the actual policy acquisition costs, including commissions, payroll and premium taxes, less commissions earned on reinsurance ceded and policy fees earned. The change is due to increased homeowner’s written premium and the less than 20% related commissions, net of decreased commercial general liability premium and the approximately 25% related commissions.

Provision for Income Tax Benefit

The provision for income tax benefit was $5.9 million for 2009, compared with $1.3 million for 2008.

The effective rate for income taxes was 36.5% for 2009, compared with 34.8% for 2008.

Net Loss

As a result of the foregoing, the Company’s net loss for 2009 was $10.3 million, compared with $2.5 million for 2008.

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21st Century Holding Company

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

RESULTS OF OPERATIONS

Year Ended December 31, 2008 Compared with Year Ended December 31, 2007

Gross Premiums Written

Gross premiums written decreased $45.4 million, or 33.9%, to $88.2 million for the year ended December 31, 2008 (“2008”), compared with $133.6 million for year ended December 31, 2007 (“2007”). The following table denotes gross premiums written by major product line.

	Years Ended December 31,
	2008					2007
	(Dollars in Thousands)
	Amount		Percentage			Amount		Percentage

Homeowners'	$	60,708		68.79	%	$	99,502		74.48	%
Commercial General Liability		23,790		26.96	%		32,222		24.12	%
Federal Flood		3,263		3.70	%		-		0.00	%
Automobile		487		0.55	%		1,867		1.40	%
Gross written premiums	$	88,248		100.00	%	$	133,591		100.00	%

The Company’s sale of homeowners’ policies decreased $38.8 million, or 39.0%, to $60.7 million in 2008, compared with $99.5 million in 2007. The significant erosion was primarily due to the soft market conditions prevailing in the state of Florida. The soft market conditions are lead by Citizens, the state run insurance company. We believe that these marketplace conditions have forced some carriers to pursue market share based on “best case” pricing models that may ultimately prove unprofitable from an underwriting perspective. We did not compete with others solely based on pricing. We continued to market our property insurance product in territories in Florida where our rates are competitive.

The Company experienced a decrease in homeowners’ gross premiums written in 2008 primarily because of the effects of state mandated homeowner’s rate reductions and wind mitigation discounts.

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

In addition, we implemented higher premium discounts in response to wind mitigation efforts by policyholders. Such discounts, which were required by the Florida Legislature and became effective on December 15, 2007 for new business and renewal business, have also had a significant effect on premium. As of December 31, 2007, 30.0% of our homeowners’ policyholders were receiving wind mitigation credits totaling $2.0 million, (a 2.0% reduction of in-force premium), while 50.0% of our homeowners’ policyholders were receiving wind mitigation credits totaling $17.0 million, (a 27.6% reduction of in-force premium), at December 31, 2008.

Pursuant to the Florida OIR regulations, we are required to report write-your-own-flood premiums on a direct and ceded basis for 2008 and subsequent years. Prior to 2008, we reported only the commissions income associated with this program.

Federated National and American Vehicle are currently rated by Demotech as "A" ("Exceptional"), which is the third of seven ratings, and defined as “Regardless of the severity of a general economic downturn or deterioration in the insurance cycle, insurers earning a FSR of “A” possess “Exceptional” financial stability related to maintaining surplus as regards to policyholders”. Demotech’s ratings are based upon factors of concern to agents, reinsurers and policyholders and are not primarily directed toward the protection of investors. See “Industry Rating Services”. However, our Demotech rating could be jeopardized by such other factors including the letter we received from Demotech on March 22, 2010, adverse development and various surplus related ratio exceptions.

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21st Century Holding Company

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

The Company’s sale of commercial general liability policies decreased by $8.4 million to $23.8 million in 2008, compared with $32.2 million in 2007. This decrease is due to increased competition in the commercial general liability market. The following table sets forth the amounts and percentages of our gross premiums written in connection with our commercial general liability program by state.

	Years Ended December 31,
	2008					2007
	Amount		Percentage			Amount		Percentage
	(Dollars in Thousands)
State
Alabama	$	117		0.49	%	$	26		0.08	%
Arkansas		12		0.05	%		-		0.00	%
California		269		1.13	%		23		0.07	%
Florida		16,011		67.30	%		21,192		65.77	%
Georgia		568		2.39	%		1,023		3.17	%
Kentucky		1		0.00	%		8		0.03	%
Louisiana		4,481		18.84	%		5,595		17.36	%
Maryland		2		0.01	%		-		0.00	%
South Carolina		70		0.29	%		182		0.57	%
Texas		2,252		9.47	%		4,127		12.81	%
Virginia		7		0.03	%		46		0.14	%
Total	$	23,790		100.00	%	$	32,222		100.00	%

The Company’s sale of auto insurance policies decreased by $1.4 million, or 73.9%, to $0.5 million in 2008, compared with $1.9 million in 2007. American Vehicle markets automobile insurance in Florida only to its existing policyholders by offering to renew the existing policy. Federated National markets its automobile insurance in Florida to both existing and new policyholders.

Gross Premiums Ceded

Gross premiums ceded decreased $10.0 million, or 22.4%, to $34.6 million in 2008, compared with $44.6 million in 2007.

Decrease in Prepaid Reinsurance Premiums

The decrease in prepaid reinsurance premiums was $4.5 million in 2008, compared with $11.3 million in 2007. The change in this account was primarily associated with the timing of our reinsurance payments measured against the term of the underling reinsurance policies.

Decrease in Unearned Premiums

The decrease in unearned premiums was $15.9 million in 2008, compared with $21.4 million in 2007. The change was due to a $13.2 million decrease in unearned homeowners’ insurance premiums, a $4.0 million decrease in unearned commercial general liability premiums, a $1.7 million increase in federal flood unearned premiums and a $0.4 million decrease in unearned automobile premiums. These changes are a result of our decreased premium volume during this period. See Gross Premiums Written.

Net Premiums Earned

Net premiums earned decreased $34.1 million, or 34.4%, to $65.1 million in 2008, compared with $99.2 million in 2007. The following table denotes net premiums earned by major product line.

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21st Century Holding Company

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

	Years Ended December 31,
	2008					2007
	Amount		Percentage			Amount		Percentage
	(Dollars in Thousands)

Homeowners'	$	36,415		55.91	%	$	63,121		63.62	%
Commercial General Liability		27,784		42.66	%		32,738		32.99	%
Automobile		931		1.43	%		3,365		3.39	%
Net premiums earned	$	65,130		100.00	%	$	99,224		100.00	%

Commission Income

Commission income decreased $5.6 million, to $1.6 million in 2008, compared with $7.2 million in 2007. The 2008 commission income was primarily in connection with our reinsurance treaties.

The recurring components of our 2007 commission income totaled $1.4 million. Non-reoccurring components of our 2007 commission income totaled $5.8 million stemming from two separate events. First and pursuant to provisions contained in the three-year reinsurance treaties, we were afforded the right to cancel the remaining two years and be entitled to receive a no loss experience commission. In connection with this treaty, we reported approximately $2.8 million in 2007. The second non-reoccurring operating event was in connection with commission income totaling approximately $3.0 million in connection with our participation in a Citizens take out program which we began in 2004, wherein the commission was earned by us upon the successful retention of the policyholder for thirty-six months.

Finance Revenue

Finance revenue decreased $0.1 million, or 35.7%, to $0.4 million in 2008, compared with $0.5 million in 2007. The change was primarily due to the Company’s decreased emphasis on automobile insurance and the finance revenue derived there-from.

Managing General Agent Fees

Managing general agent fees decreased $0.3 million, or 14.2%, to $1.7 million in 2008, compared with $2.0 million in 2007.

Net Investment Income

Net investment income decreased $1.5 million, or 19.6%, to $6.5 million in 2008, compared with $8.0 million in 2007. Net investment income on corporate bonds, which generally provide a higher yield than United States government bonds, increased $2.4 million, to $3.1 million in 2008, compared with $0.7 million in 2007. Net investment income on United States government bonds decreased $3.6 million, to $0.9 million in 2008, compared with $4.5 million in 2007.

Affecting our net investment income was a decrease in funds available for investment and a decrease in the overall yield to 4.11% in 2008 compared with a yield of 5.28% in 2007.

Net Realized Investment Losses

Net realized investment losses were $10.6 million in 2008, compared with $0.1 million in 2007. The table below depicts the net realized investment losses by investment category in 2008 as compared with the same period during 2007.

In 2008 we marked certain equity investments to market value pursuant to guidelines prescribed in FASB issued guidance. In reaching a conclusion that a security is either other than temporary or permanently impaired we consider such factors as the timeliness and completeness of expected dividends, principal and interest payments, ratings from nationally recognized statistical rating organizations such as Standard and Poor’s and Moody’s, as well as information released via the general media channels. The pretax charge to operations was approximately $9.9 million in connection with our estimates of the net realizable value of these investments. A significant number of these investments were subsequently sold in 2008, and we recognized an additional pretax charge to operations of $0.2 million.

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21st Century Holding Company

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

	Years Ended December 31,
	2008			2007
	(Dollars in Thousands)
Realized gains:
Debt securities	$	770		$	18
Equity securities		544			2,115
Total realized gains		1,314			2,133

Realized losses:
Debt securities		(854	)		(0	)
Equity securities		(11,053	)		(2,278	)
Total realized losses		(11,907	)		(2,278	)
Net realized losses on investments	$	(10,593	)	$	(145	)

Regulatory Assessments Recovered

Regulatory assessments recovered increased $0.4 million, or 27.2%, to $2.1 million in 2008, compared with $1.7 million in 2007.

Other Income

Other income increased less than $0.1 million, or 2.1%, to $0.7 million in 2008, compared with $0.6 million in 2007. Major components of other income in 2008 included approximately $0.5 million in partial recognition of our gain on the sale of our Lauderdale Lakes property and $0.2 million of rental income, interest income and miscellaneous income.

Losses and LAE

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

Losses and LAE decreased by $5.7 million, or 12.1%, to $41.9 million in 2008, compared with $47.6 million in 2007. The overall change includes a $1.0 million decrease in our homeowners’ program, a $2.3 million increase in our commercial general liability program and a $7.0 million decrease in connection with our automobile program.

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

	December 31, 2008						December 31, 2007
	Case		Bulk		Total		Case		Bulk		Total
	(Dollars in Thousands)						(Dollars in Thousands)

Homeowners'	$	8,048	$	19,678	$	27,726	$	7,776	$	24,599	$	32,375
Commercial General Liability		7,531		26,998		34,529		5,415		17,870		23,285
Automobile		657		1,863		2,520		530		3,495		4,025
Total	$	16,236	$	48,539	$	64,775	$	13,721	$	45,964	$	59,685

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21st Century Holding Company

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

Management revises its estimates based on the results of its analysis. This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for estimating the ultimate settlement of all claims. There is no precise method for subsequently evaluating the impact of any specific factor on the adequacy of the reserves, because the eventual redundancy or deficiency is affected by multiple factors. Because of our process, reserves were increased by approximately $5.1 million in 2008.

In accordance with GAAP, our loss ratio is computed as losses and LAE divided by net premiums earned. A lower loss ratio generally results in higher operating income. Our loss ratio in 2008 was 64.3% compared with 48.0% for the same period in 2007. The table below reflects the loss ratios by product line.

	Years Ended December 31,
	2008			2007
Homeowners'		56.2	%		37.4	%
Commercial General Liability		77.0	%		58.9	%
Fire		34.0	%		0.0	%
Automobile		1.8	%		140.0	%
All lines		64.3	%		48.0	%

For further discussion, see Footnote 7 to the Consolidated Financial Statements included under Part II, Item 8, of this Report.

Operating and Underwriting Expenses

Operating and underwriting expenses decreased $5.6 million, or 43.5%, to $7.2 million in 2008, compared with $12.8 million in 2007. The change was primarily due to a $2.9 million decrease in fees paid to boards, bureaus and associations, a $1.8 million decrease in premium taxes and a $1.2 million decrease in bad debts.

Salaries and Wages

Salaries and wages increased $0.7 million, or 10.3%, to $7.4 million in 2008, compared with $6.7 million in 2007. In 2008, we had a $0.3 million severance payment. The charge to operations for stock based compensation, in accordance with the provisions of FASB issued guidance, was approximately $0.5 million in 2008 compared with approximately $0.6 million in 2007.

Interest Expense

Interest expense decreased $0.2 million to nothing in 2008, compared with $0.2 million in 2007. The decrease results from the repayment of our subordinated debt on September 30, 2007.

Policy Acquisition Costs, Net of Amortization

Policy acquisition costs, net of amortization, decreased $4.7 million, or 24.0%, to $14.8 million in 2008, compared with $19.4 million in 2007. Policy acquisition costs, net of amortization, consisted of the actual policy acquisition costs, including commissions, payroll and premium taxes, less commissions earned on reinsurance ceded and policy fees earned. The decreased production volume for both the homeowners’ and commercial general liability product lines was the reason for the decrease in this asset.

Provision for Income Tax (Benefit) Expense

The provision for income tax benefit was $1.3 million in 2008, compared with an income tax expense of $11.2 million in 2007. The effective rate for income taxes was 34.8% in 2008, compared with 34.5% in 2007.

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21st Century Holding Company

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

Net (Loss) Income

As a result of the foregoing, the Company’s net loss in 2008 was $2.5 million compared with net income of $21.3 million in 2007.

CONTRACTUAL OBLIGATIONS

A summary of long-term contractual obligations as of December 31, 2009 follows. The amounts represent estimates of gross undiscounted amounts payable over time.

	(Dollars in Thousands)
Contractual Obligations	Total		2010		2011		2012		2013		Thereafter
Unpaid Losses and LAE	$	70,610	$	41,914	$	16,883	$	7,767	$	2,711	$	1,335
Operating leases		1,288		638		650		-		-		-
Total	$	71,898	$	42,552	$	17,533	$	7,767	$	2,711	$	1,335

LIQUIDITY AND CAPITAL RESOURCES

In 2009, our primary sources of capital included proceeds from the sale of investment securities, increased unearned premiums, increased unpaid losses and LAE, increased deferred income tax expense, net realized investment gains, increased premium deposits and customer credit balances, non-cash compensation, and depreciation and amortization. Also contributing to our liquidity were a tax benefit related to non-cash compensation, a provision for uncollectible premiums receivable, and a provision for credit losses, net. Because we are a holding company, we are largely dependent upon fees and commissions from our subsidiaries for cash flow.

In 2009 and 2008, operations used net operating cash flow of $11.6 million and $1.5 million, respectively, and provided net operating cash flow of $33.6 million in 2007.

In 2009, operations generated $21.4 million of gross cash flow, due to a $10.4 million increase in unearned premiums, a $5.8 million increase in unpaid losses and LAE, a $1.9 million increase in deferred income tax expense, a $0.4 million increase in premium deposits and customer credit balances, $0.3 million of non-cash compensation, $0.2 million of depreciation and amortization, a $0.1 million increase in the provision for uncollectible premiums receivable, a $1.6 million decrease in reinsurance recoverable, net and $0.7 million of amortization of investment discount.

In 2009, operations used $33.0 million of gross cash flow primarily due to a $4.8 million increase in income taxes recoverable, a $4.8 million increase in prepaid reinsurance premiums, a $1.7 million increase in other assets, a $1.7 million increase in policy acquisition costs, net of amortization, a $7.1 million increase in premiums receivable, a $1.1 million decrease in accounts payable and accrued expenses, a $0.4 million decrease in bank overdraft, and $1.1 million of net realized investment gains, all in conjunction with a net loss of $10.3 million.

In 2009, net cash used in investing activities was $82.7 million, compared with net cash provided by investment activities of $107.9 million in 2008 and net cash used in investing activities of $19.7 million in 2007. Our available for sale investment portfolio is highly liquid as it consists entirely of readily marketable securities. In 2009, investing activities generated $59.2 million and used $141.9 million. Our debt portfolio contained callable features exercised in 2008. The proceeds from our called securities were in cash and short-term investments as of December 31, 2008. During 2008, the Company engaged an outside investment advisor and during 2009 the funds were invested in long and short term investments with yields that best match our liquidity needs.

In 2009, net financing activities used $2.0 million, as compared with $4.3 million and $9.2 million in 2008 and 2007, respectively. In 2009, the sources of cash in connection with financing activities included a $0.2 million tax benefit related to non-cash compensation. The uses of cash in connection with financing activities included $1.9 million in dividends paid and $0.3 million for the purchase of treasury stock.

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

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21st Century Holding Company

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

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

Federated National’s and American Vehicle’s statutory capital surplus levels as of December 31, 2009 were approximately $21.0 million and $25.8 million, respectively, and their statutory net losses in 2009 were $12.2 million and $1.1 million, respectively.

As of December 31, 2009, 2008, and 2007, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as “structured finance” or “special purpose” entities, which were established for the purpose of facilitating off-balance-sheet arrangements or other contractually narrow or limited purposes. As such, management believes that we currently are not exposed to any financing, liquidity, market or credit risks that could arise if we had engaged in transactions of that type requiring disclosure herein.

IMPACT OF INFLATION AND CHANGING PRICES

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

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

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21st Century Holding Company

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

SELECTED QUARTERLY FINANCIAL DATA (Unaudited)

	Year Ended December 31, 2009
	(Dollars in Thousands except EPS)
	First			Second		Third			Fourth
	Quarter			Quarter		Quarter			Quarter
Revenue:
Net premiums earned	$	13,905		$	14,264	$	9,511		$	10,296
Other revenue		1,719			2,864		3,368			2,927
Total revenue		15,624			17,128		12,879			13,223

Expenses:
Losses and LAE		8,873			8,974		11,119			14,740
Other expenses		6,570			7,119		8,158			9,511
Total expenses		15,443			16,093		19,277			24,251

Income (loss) before provision for income tax (benefit) expense		181			1,035		(6,398	)		(11,028	)
Provision for income tax (benefit) expense		(122	)		250		(2,403	)		(3,646	)

Net income (loss)	$	303		$	785	$	(3,995	)	$	(7,382	)

Basic net income (loss) per share	$	0.04		$	0.10	$	(0.50	)	$	(0.93	)

Fully diluted net income (loss) per share	$	0.04		$	0.10	$	(0.50	)	$	(0.93	)

Weighted average number of common shares outstanding		8,014			8,014		8,014			7,968

Weighted average number of common shares outstanding (assuming dilution)		8,014			8,014		8,014			7,968

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21st Century Holding Company

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

	Year Ended December 31, 2008
	(Dollars in Thousands except EPS)
	First		Second			Third			Fourth
	Quarter		Quarter			Quarter			Quarter
Revenue:
Net premiums earned	$	18,606	$	15,459		$	16,249		$	14,816
Other revenue		1,436		(32	)		(283	)		1,213
Total revenue		20,042		15,427			15,966			16,029

Expenses:
Losses and LAE		7,874		12,493			9,888			11,614
Other expenses		7,150		7,024			7,927			7,296
Total expenses		15,024		19,517			17,815			18,910

Income (loss) before provision for income tax expense (benefit)		5,018		(4,090	)		(1,849	)		(2,881	)

Provision for income tax expense (benefit)		709		(1,590	)		(336	)		(107	)

Net income (loss)	$	4,309	$	(2,500	)	$	(1,513	)	$	(2,774	)

Basic net income (loss) per share	$	0.54	$	(0.31	)	$	(0.19	)	$	(0.35	)

Fully diluted net income (loss) per share	$	0.54	$	(0.31	)	$	(0.19	)	$	(0.35	)

Weighted average number of common shares outstanding		7,913		7,974			8,014			8,014

Weighted average number of common shares outstanding (assuming dilution)		7,960		7,974			8,014			8,014

OFF BALANCE SHEET TRANSACTIONS

For the years ended December 31, 2009 and 2008, there were no off balance sheet transactions.

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21st Century Holding Company

ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

Our investment policy is established by the Board of Directors Investment Committee and is reviewed on a regular basis. Pursuant to this investment policy, as of December 31, 2009, approximately 86% of investments were in debt securities and cash and cash equivalents, which are considered to be either held until maturity or available for sale, based upon our estimates of required liquidity. Approximately 97% of the debt securities are considered available for sale and are marked to market. We may in the future consider additional debt securities to be held to maturity and carried at amortized cost. We do not use any swaps, options, futures or forward contracts to hedge or enhance our investment portfolio.

The table below sets forth investment results for the periods indicated.

	Years Ended December 31,
	2009		2008			2007
	(Dollars in Thousands)

Interest on debt securities	$	2,718	$	4,619		$	6,782
Dividends on equity securities		466		770			565
Interest on cash and cash equivalents		213		1,072			691
Total investment income	$	3,397	$	6,461		$	8,038

Net realized gains (losses)	$	1,117	$	(10,593	)	$	(145	)

The following table summarizes, by type, our investments as of December 31, 2009 and 2008.

	December 31, 2009					December 31, 2008
	Carrying		Percent			Carrying		Percent
	Amount		of Total			Amount		of Total
	(Dollars in Thousands)
Debt securities, at market:
United States government agencies and authorities	$	12,802		11.21	%	$	4,544		17.43	%
Obligations of states and political subdivisions		39,269		34.38	%		5,331		20.45	%
Corporate		42,092		36.85	%		13,050		50.07	%
Other		-		0.00	%		-		0.00	%
Total fixed maturities		94,163		82.44	%		22,925		87.95	%
Equity securities, at market		20,056		17.56	%		3,140		12.05	%
Total investments	$	114,219		100.00	%	$	26,065		100.00	%

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21st Century Holding Company

Debt securities are carried on the balance sheet at market. At December 31, 2009 and 2008, debt securities had the following quality ratings by Moody's and for securities not assigned a rating by Moody's, Standard and Poor's Company or Fitch ratings were used.

	December 31, 2009					December 31, 2008
	Carrying		Percent			Carrying		Percent
	Amount		of Total			Amount		of Total
	(Dollars in Thousands)

AAA	$	40,390		42.90	%	$	15,180		66.22	%
AA		18,619		19.77	%		5,732		25.00	%
A		24,286		25.79	%		151		0.66	%
BBB		9,954		10.57	%		1,862		8.12	%
BB++		-		0.00	%		-		0.00	%
Not rated		914		0.97	%		-		0.00	%
	$	94,163		100.00	%	$	22,925		100.00	%

The following table summarizes, by maturity, the debt securities as of December 31, 2009 and 2008.

	December 31, 2009					December 31, 2008
	Carrying		Percent			Carrying		Percent
	Amount		of Total			Amount		of Total
	(Dollars in Thousands)
Matures In:
One year or less	$	1,615		1.72	%	$	2,388		10.42	%
One year to five years		50,781		53.93	%		9,850		42.97	%
Five years to 10 years		27,178		28.86	%		1,037		4.52	%
More than 10 years		14,589		15.49	%		9,650		42.09	%
Total debt securities	$	94,163		100.00	%	$	22,925		100.00	%

At December 31, 2009, the weighted average maturity of the debt portfolio was approximately 6.4 years.

The following table provides information about the financial instruments as of December 31, 2009 that are sensitive to changes in interest rates. The table presents principal cash flows and the related weighted average interest rate by expected maturity date based upon par values.

																						Carrying
	2010			2011			2012			2013			2014			Thereafter			Total			Amount
	(Dollars in Thousands)
Principal amount by expected maturity:
U.S. government agencies and authorities	$	-		$	4,325		$	3,350		$	2,500		$	500		$	2,190		$	12,865		$	12,802
Obligations of states and political subdivisions		1,225			3,605			6,670			5,005			4,161			15,440			36,106			39,269
Corporate securities		350			4,100			8,140			1,280			4,529			15,878			34,277			42,092
Collateralized mortgage obligations		-			-			-			-			-			5,154			5,154			-
Equity securities, at market		-			-			-			-			-			-			-			20,056
Mortgage notes receivable		-			-			-			-			-			-			-			-
All investments	$	1,575		$	12,030		$	18,160		$	8,785		$	9,190		$	38,662		$	88,402		$	114,219

Weighted average interest rate by expected maturity:
U.S. government agencies and authorities		0.00	%		1.18	%		3.17	%		3.66	%		1.75	%		3.24	%		2.55	%
Obligations of states and political subdivisions		4.96	%		3.68	%		5.22	%		5.25	%		5.00	%		5.27	%		5.06	%
Corporate securities		6.07	%		4.23	%		2.84	%		5.32	%		5.50	%		6.45	%		5.16	%
Collateralized mortgage obligations		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		5.50	%		5.50	%
Equity securities, at market		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%
Mortgage notes receivable		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%
All investments		5.21	%		2.97	%		3.78	%		4.81	%		5.07	%		5.67	%		4.76	%

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21st Century Holding Company

ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		PAGE

Report of Independent Registered Accounting Firm		73
Consolidated Balance Sheets as of December 31, 2009 and 2008		74
Consolidated Statements of Operations For the years ended December 31, 2009, 2008 and 2007		75
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income (Loss) For the years ended December 31, 2009, 2008 and 2007		76
Consolidated Statements of Cash Flows For the years ended December 31, 2009, 2008 and 2007		77
Notes to Consolidated Financial Statements		79

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21st Century Holding Company and Subsidiaries

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

Stockholders of 21st Century Holding Company

We have audited the accompanying balance sheets of 21st Century Holding Company as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2009. We also have audited 21st Century Holding Company’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). 21st Century Holding Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Certification Report included in the Company’s 2009 Form 10-K. Our responsibility is to express an opinion on these financial statements and an opinion on the company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of 21st Century Holding Company as of December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, 21st Century Holding Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

De Meo Young McGrath

Boca Raton, FL

March 26, 2010

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21st Century Holding Company and Subsidiaries

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2009 AND 2008

	Period Ending
	December 31, 2009		December 31, 2008
	(Dollars in Thousands)
ASSETS
Investments
Debt maturities, available for sale, at fair value	$	91,513	$	9,429
Debt maturities, held to maturity, at amortized cost		2,650		13,496
Equity securities, available for sale, at fair value		20,056		3,140

Total investments		114,219		26,065

Cash and short term investments		28,197		124,577
Prepaid reinsurance premiums		10,319		5,537
Premiums receivable, net of allowance for credit losses of $24 and $122, respectively		10,311		3,353
Reinsurance recoverable, net of allowance for credit losses of $0 and $226, respectively		15,302		16,880
Deferred policy acquisition costs		8,267		6,558
Deferred income taxes, net		4,675		8,530
Income taxes receivable		7,069		2,275
Property, plant and equipment, net		859		855
Other assets		3,671		2,472

Total assets	$	202,889	$	197,102

LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and LAE	$	70,611	$	64,775
Unearned premiums		50,857		40,508
Premiums deposits and customer credit balances		2,129		1,700
Bank overdraft		8,251		8,694
Deferred gain from sale of property		1,006		1,495
Accounts payable and accrued expenses		2,593		3,699

Total liabilities		135,447		120,871

Shareholders' equity:
Common stock, $0.01 par value. Authorized 25,000,000 shares; issued and outstanding 7,953,384 and 8,013,894, respectively.		80		80
Preferred stock, $0.01 par value. Authorized 1,000,000 shares; none issued or outstanding		-		-
Additional paid-in capital		50,185		49,979
Accumulated other comprehensive income (deficit)		2,026		(1,187	)
Retained earnings		15,151		27,359
Total shareholders' equity		67,442		76,231
Total liabilities and shareholders' equity	$	202,889	$	197,102

See accompanying notes to consolidated financial statements.

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21st Century Holding Company and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

	Twelve Months Ended December 31,
	2009			2008			2007
	(Dollars in Thousands except EPS and dividend data)
Revenue:
Gross premiums written	$	104,379		$	88,248		$	133,591
Gross premiums ceded		(56,217	)		(34,553	)		(44,550	)

Net premiums written		48,162			53,695			89,041

Increase (Decrease) in prepaid reinsurance premiums		10,163			(4,451	)		(11,251	)
(Increase) Decrease in unearned premiums		(10,349	)		15,886			21,435

Net change in prepaid reinsurance premiums and unearned premiums		(186	)		11,435			10,184

Net premiums earned		47,976			65,130			99,224
Commission income		1,362			1,612			7,214
Finance revenue		294			350			545
Managing general agent fees		1,620			1,745			2,035
Net investment income		3,397			6,461			8,038
Net realized investment gains (losses)		1,117			(10,593	)		(145	)
Regulatory assessments recovered		2,333			2,104			1,655
Other income		755			655			642

Total revenue		58,854			67,464			119,208

Expenses:
Losses and LAE		43,706			41,869			47,619
Operating and underwriting expenses		9,681			7,209			12,758
Salaries and wages		7,930			7,428			6,732
Interest expense		-			-			173
Policy acquisition costs, net of amortization		13,747			14,760			19,420

Total expenses		75,064			71,266			86,702

(Loss) Income before provision for income tax (benefit) expense		(16,210	)		(3,802	)		32,506
Provision for income tax (benefit) expense		(5,921	)		(1,324	)		11,226

Net (loss) income	$	(10,289	)	$	(2,478	)	$	21,280

Basic net (loss) income per share	$	(1.29	)	$	(0.31	)	$	2.69

Fully diluted net (loss) income per share	$	(1.29	)	$	(0.31	)	$	2.65

Weighted average number of common shares outstanding		8,002,365			7,979,436			7,922,542

Weighted average number of common shares outstanding (assuming dilution)		8,002,365			7,979,436			8,030,205

Dividends paid per share	$	0.36		$	0.72		$	0.72

See accompanying notes to consolidated financial statements.

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21st Century Holding Company and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)

YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

										Accumulated
							Additional			Other						Total
	Comprehensive			Common			Paid-in			Comprehensive			Retained			Shareholder's
	Income			Stock			Capital			Deficit			Earnings			Equity
	(Dollars in Thousands)

Balance as of December 31, 2006				$	79		$	47,070		$	(967	)	$	20,011		$	66,193

Net Income	$	21,280												21,280			21,280
Cash Dividends														(5,757	)		(5,757	)
Stock issued in lieu of cash payment for principal and interest associated with our notes					1			2,192									2,193
Treasury stock acquired					(3	)		(3,819	)								(3,823	)
Stock options exercised								176									176
Warrants exercised					2			2,033									2,035
Shares based compensation								589									589
Net unrealized change in investments, net of tax effect of $927		(1,629	)								(1,629	)					(1,629	)
Comprehensive income	$	19,651

Balance as of December 31, 2007				$	79		$	48,240		$	(2,596	)	$	35,534		$	81,256

Net (Loss)	$	(2,478	)											(2,478	)		(2,478	)
Cash Dividends														(5,697	)		(5,697	)
Treasury stock acquired								(144	)								(144	)
Stock options exercised					1			1,335									1,337
Shares based compensation								547									547
Net unrealized change in investments, net of tax effect of $794		1,409									1,409						1,409
Comprehensive income	$	(1,069	)

Balance as of December 31, 2008				$	80		$	49,979		$	(1,187	)	$	27,359		$	76,231

Net (Loss)	$	(10,289	)											(10,289	)		(10,289	)
Cash Dividends														(1,920	)		(1,920	)
Treasury stock acquired					(1	)		(288	)								(288	)
Shares based compensation								493									493
Net unrealized change in investments, net of tax effect of $1,939		3,214									3,214						3,214
Comprehensive income	$	(7,075	)

Balance as of December 31, 2009				$	80		$	50,185		$	2,026		$	15,151		$	67,442

See accompanying notes to consolidated financial statements.

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21st Century Holding Company and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

	For the Years Ended December 31,
	2009			2008			2007
	(Dollars in Thousands)
Cash flow from operating activities:
Net (loss) income	$	(10,289	)	$	(2,478	)	$	21,280
Adjustments to reconcile net (loss) income to net cash (used) provided by operating activities:
Amortization of investment discount, net		642			223			360
Depreciation and amortization of property plant and equipment, net		188			290			317
Net realized investment (gains) losses		(1,117	)		10,593			188
Common Stock issues for interest on Notes		-			-			109
Provision (Recovery) for credit losses, net		30			(2	)		(31	)
Provision for uncollectible premiums receivable		97			157			222
Non-cash compensation		333			365			405
Changes in operating assets and liabilities:		-			-			-
Premiums receivable		(7,055	)		287			3,203
Prepaid reinsurance premiums		(4,783	)		2,934			5,990
Reinsurance recoverable, net		1,578			6,055			(2,712	)
Income taxes recoverable		(4,794	)		(2,275	)		787
Deferred income taxes, net of other comprehensive income		1,916			(3,685	)		(2,400	)
Policy acquisition costs, net of amortization		(1,709	)		2,400			2,195
Premium finance contracts receivable		-			222			1,442
Other assets		(1,710	)		144			1,169
Unpaid losses and LAE		5,835			5,098			20,068
Unearned premiums		10,343			(15,886	)		(21,435	)
Premium deposits and customer credit balances		429			(1,061	)		(1,032	)
Income taxes payable		-			(4,226	)		4,226
Bank overdraft		(442	)		(1	)		588
Accounts payable and accrued expenses		(1,106	)		(646	)		(1,379	)
Net cash (used) provided by operating activities		(11,614	)		(1,494	)		33,560
Cash flow (used) provided by investing activities:
Proceeds from sale of investment securities		59,227			156,674			202,233
Purchases of investment securities available for sale		(141,753	)		(48,707	)		(221,879	)
Purchases of property and equipment		(193	)		(99	)		(67	)
Net cash (used) provided by investing activities		(82,719	)		107,869			(19,713	)
Cash flow used by financing activities:
Subordinated debt		-			-			(2,083	)
Exercised stock options		-			1,337			177
Dividends paid		(1,920	)		(5,697	)		(5,759	)
Exercised warrants, net		-			-			2,035
Acquisition of Common Stock		(288	)		(144	)		(3,823	)
Tax benefit provision related to non-cash compensation		160			182			214
Net cash used by financing activities		(2,048	)		(4,322	)		(9,239	)
Net (decrease) increase in cash and short term investments		(96,380	)		102,053			4,607
Cash and short term investments at beginning of period		124,577			22,524			17,917
Cash and short term investments at end of period	$	28,197		$	124,577		$	22,524

See accompanying notes to consolidated financial statements.

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21st Century Holding Company and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

	For the Years Ended December 31,
(continued)	2009		2008		2007
	(Dollars in Thousands)
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	-	$	-	$	44
Income taxes	$	178	$	8,800	$	7,300
Non-cash investing and finance activities:
Accrued dividends payable	$	477	$	1,443	$	1,475
Retirement of subordinated debt by Common Stock issuance	$	-	$	-	$	2,193
Stock issued to pay interest on subordinated debt	$	-	$	-	$	109

See accompanying notes to consolidated financial statements.

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21st Century Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2009

(1) ORGANIZATION AND BUSINESS

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

21st Century is an insurance holding company, which, through our subsidiaries and our contractual relationships with our independent agents and general agents, controls substantially all aspects of the insurance underwriting, distribution and claims processes. We are authorized to underwrite homeowners’ multi-peril, commercial general liability, personal and commercial automobile, fire, allied lines, surety, commercial multi-peril and inland marine in various states on behalf of our wholly owned subsidiaries, Federated National and American Vehicle and other insurance carriers. We market and distribute our own and third-party insurers’ products and our other services through contractual relationships with a network of approximately 4,200 independent agents, of which approximately 300 actively sell and service our products. We also utilize a select number of general agents for the same purpose.

The insurable events during 2009, 2008 and 2007 did not include any weather related catastrophic events such as the well publicized series of hurricanes that occurred in Florida during 2005 and 2004. During 2009, 2008 and 2007 we processed property and liability claims stemming from our homeowners’, commercial general liability and private passenger automobile lines of business. Our reinsurance strategy serves to smooth the liquidity requirements imposed by the most severe insurable events and for all other insurable events we manage, at a micro and macro perspective, in the normal course of business.

We are not certain how hurricanes and other insurable events will affect our future results of operations and liquidity. Loss and LAE are affected by a number of factors including:

the quality of the insurable risks underwritten;

the nature and severity of the loss;

weather-related patterns;

the availability, cost and terms of reinsurance;

underlying settlement costs, including medical and legal costs;

legal and political factors such as legislative initiatives and public opinion;

macroeconomic issues.

We continue to manage the foregoing to the extent within our control. Many of the foregoing are partially, or entirely, outside our control.

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21st Century Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2009

During 2007 American Vehicle applied for and was granted, by the Florida OIR in 2008, a license to underwrite commercial multi-peril and inland marine lines of business as an admitted carrier. We believe these new lines of authority will bode well with American Vehicle’s existing customers. Operations under American Vehicle’s newly granted lines of authority began in 2009.

During 2008 Federated National applied for and was granted, by the Florida OIR, a license to underwrite fire and allied lines insurance as an admitted carrier. Operations under Federated National’s newly granted allied lines began in 2008 as a cedant for the insurance policies it underwrites to the federal flood program. Operations under Federated National’s granted fire line of business began in 2009.

During 2009, 81.2%, 14.6%, 3.4% and 0.8% of the premiums we underwrote were for homeowners’ property and casualty insurance, commercial general liability insurance, federal flood, and personal automobile insurance, respectively. During the year ended December 31, 2008, 68.8%, 27.0%, 3.7% and 0.6% of the premiums we underwrote were for homeowners’ property and casualty insurance, commercial general liability insurance, federal flood, and personal automobile insurance, respectively.

Despite the effects of Florida’s mandated homeowners’ rates reduction and wind mitigation discounts the Company’s sale of homeowners’ policies increased $24.0 million, or 39.5%, to $84.7 million in 2009, compared with $60.7 million in 2008. Included in our sale of homeowners’ policies during 2009, is $17.9 million from policies we assumed from Citizens. The primary factor for the decrease in commercial general liability production is a slowdown in the economy, which has a dramatic impact on the artisan contractor portfolio written by American Vehicle.

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

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

(a) CASH AND SHORT TERM INVESTMENTS

We consider all short-term highly liquid investments with original maturities of less than three months to be short term investments.

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21st Century Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2009

(b) INVESTMENTS

Our investment securities have been classified as either available-for-sale or held to maturity in response to our liquidity needs, changes in market interest rates and asset-liability management strategies, among other reasons. Investments available-for-sale are stated at fair value on the balance sheet. Investments designated as held to maturity are stated at amortized cost on the balance sheet. Unrealized gains and losses are excluded from earnings and are reported as a component of other comprehensive income within shareholders' equity, net of related deferred income taxes.

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

Premium revenue on all lines is earned on a pro-rata basis over the life of the policies. Unearned premiums represent the portion of the premium related to the unexpired policy term.

(d) DEFERRED ACQUISITION COSTS

Deferred acquisition costs primarily represent commissions paid to outside agents at the time of policy issuance (to the extent they are recoverable from future premium income) net of ceded premium commission earned from reinsurers, salaries and premium taxes net of policy fees, and are amortized over the life of the related policy in relation to the amount of premiums earned. The method followed in computing deferred acquisition costs limits the amount of such deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related investment income, unpaid losses and LAE and certain other costs expected to be incurred as the premium is earned. There is no indication that these costs will not be fully recoverable in the near term.

(e) PREMIUM DEPOSITS

Premium deposits represent premiums received primarily in connection with homeowner policies that are not yet effective. We take approximately 30 working days to issue the policy from the date the cash and policy application are received.

(f) UNPAID LOSSES AND LAE

Unpaid losses and LAE are determined by establishing liabilities in amounts estimated to cover incurred losses and LAE. Such liabilities are determined based upon our assessment of claims pending and the development of prior years' loss liability. These amounts include liabilities based upon individual case estimates for reported losses and LAE and estimates of such amounts that are IBNR. Changes in the estimated liability are charged or credited to operations as the losses and LAE are settled.

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21st Century Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2009

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

We do not discount unpaid losses and LAE for financial statement purposes.

(g) FINANCE REVENUE

Interest and service income, resulting from the financing of insurance premiums, is recognized using a method that approximates the effective interest method. Late charges are recognized as income when chargeable.

(h) CREDIT LOSSES

Provisions for credit losses are provided in amounts sufficient to maintain the allowance for credit losses at a level considered adequate to cover anticipated losses. Generally, accounts that are over 90 days old are written off to the allowance for credit losses. We have been increasing our reliance on direct billing of our policyholders for their insurance premiums. Direct billing is when the insurance company accepts from the insured, as a receivable, a promise to pay the premium, as opposed to requiring payment of the full amount of the policy, either directly from the insured or from a premium finance company. We manage the credit risk associated with our direct billing program through our integrated computer system which allows us to monitor the equity in the unearned premium to the underlying policy. Underwriting criteria are designed with down payment requirements and monthly payments that create policyholder equity, also called unearned premium, in the insurance policy. The equity in the policy is collateral for the extension of credit to the insured.

(i) MANAGING GENERAL AGENT FEES

If all the costs substantially associated with the MGA contracts, which do not involve affiliated insurers, are incurred during the underwriting process, then the MGA fees and the related acquisition costs are recognized at the time the policy is underwritten, net of estimated cancellations. If the MGA contract requires significant involvement subsequent to the completion of the underwriting process, then the MGA fees and related acquisition costs are deferred and recognized over the life of the policy. Included in Managing General Agent Fees are policy fees charged by the insurance companies and passed through to Assurance MGA. Policy fees are discussed below.

(j) POLICY FEES

Policy fees represent a $25 non-refundable application fee for insurance coverage, which are intended to reimburse us for the costs incurred to underwrite the policy. The fees and related costs are recognized when the policy is underwritten. These fees are netted against underwriting costs and are included as a component of deferred acquisition costs.

(k) REINSURANCE

We recognize the income and expense on reinsurance contracts principally on a pro-rata basis over the term of the reinsurance contracts or until the reinsurers maximum liability is exhausted, whichever comes first. We are reinsured under separate reinsurance agreements for the different lines of business underwritten. Reinsurance contracts do not relieve us from our obligations to policyholders. We continually monitor our reinsurers to minimize our exposure to significant losses from reinsurer insolvencies. We only cede risks to reinsurers whom we believe to be financially sound. At December 31, 2009, all reinsurance recoverables are considered current and deemed collectable.

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21st Century Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2009

(l) INCOME TAXES

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss, capital loss and tax-credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income or expense in the period that includes the enactment date.

(m) CONCENTRATION OF CREDIT RISK

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

(n) RECENT ACCOUNTING PRONOUNCEMENTS

In June 2009, the FASB issued new accounting guidance related to accounting standards codification and the hierarchy of GAAP. This guidance provides for the FASB Accounting Standards Codification (the “Codification”) to become the single official source of authoritative, nongovernmental United States GAAP. The Codification did not change GAAP but reorganized the literature. The guidance is effective for interim and annual periods ending after September 15, 2009.

In May 2009, FASB issued guidance related to subsequent events. The objective of the guidance is to establish general standards of accounting for disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. In particular, the guidance sets forth:

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

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

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

In accordance with this guidance, an entity should apply the requirements to interim or annual financial periods ending after June 15, 2009. The adoption of this guidance did not have a material impact on the Company’s financial statements or condition.

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

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21st Century Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2009

In September 2006, FASB issued new accounting guidance that enhances existing guidance for measuring assets and liabilities using fair value and requires additional disclosure about the use of fair value for measurement. The adoption of this guidance did not have a material impact on the Company’s financial statements or condition.

In October 2008, the FASB issued new accounting guidance related to determining the fair value of a financial asset when the market for that asset is not active. The purpose of the guidance was to clarify the application of previous accounting guidance. The guidance allows for the use of management’s internal assumptions about future cash flows with appropriately risk-adjusted discount rates when relevant observable market data does not exist. The guidance was effective upon issuance, including prior periods for which financial statements had not been issued. The adoption of this guidance did not have a material impact on the Company’s financial statements or condition.

In March 2008, the FASB issued new accounting guidance related to disclosures about derivative instruments and hedging activities. This guidance requires companies with derivative instruments to disclose information that should enable financial-statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedged items affect a company’s financial position, financial performance and cash flows. This guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company does not utilize derivative instruments, and, accordingly the adoption of this guidance did not have an impact on the Company’s consolidated financial statements.

In February 2007, FASB issued new accounting guidance related to the fair value option for financial assets and financial liabilities. This guidance permits an entity to measure many financial assets and financial liabilities at fair value that are not currently required to be measured at fair value. Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option may be elected on an instrument-by-instrument basis, with a few exceptions. This guidance amends previous guidance to extend the use of the fair value option to available-for-sale and held-to-maturity securities. The guidance also establishes presentation and disclosure requirements to help financial statement users understand the effect of the election. We adopted this guidance on its effective date, January 1, 2008. The Company did not elect to measure any financial assets and liabilities, and accordingly, to date, there is no impact on our consolidated financial statements.

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

(o) USE OF ESTIMATES

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

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21st Century Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2009

Similar to other property and casualty insurers, our liability for unpaid losses and LAE, although supported by actuarial projections and other data, is ultimately based on management's reasoned expectations of future events. Although considerable variability is inherent in these estimates, we believe that this liability is adequate. Estimates are reviewed regularly and adjusted as necessary. Such adjustments are reflected in current operations. In addition, the realization of our deferred income tax assets is dependent on generating sufficient future taxable income. It is reasonably possible that the expectations associated with these accounts could change in the near term and that the effect of such changes could be material to the Consolidated Financial Statements.

(p) OPERATIONAL RISKS

Risks Related to Our Business

Our financial condition could be adversely affected by the occurrence of natural and man-made disasters.

We face a risk of non-collectibility of reinsurance, which could materially and adversely affect our business, results of operations and/or financial condition.

We may experience financial exposure from climate change.

Our loss reserves may be inadequate to cover our actual liability for losses, causing our results of operations to be adversely affected.

Our revenues and operating performance may fluctuate due to statutorily approved assessments that support property and casualty insurance pools and associations.