SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
OR

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

FOR THE TRANSITION PERIOD FROM ___________________TO _______________________.
 
Commission file number 0-2500111
 
21st Century Holding Company
(Exact name of registrant as specified in its charter)
 
 Florida
 65-0248866
 (State or Other Jurisdiction of
Incorporation or Organization)
(IRS Employer
Identification No.)
 
3661 West Oakland Park Boulevard, Suite 300, Lauderdale Lakes, Florida 33311
(Address of principal executive offices) (Zip Code)
 
954-581-9993
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x Noo

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

 Large accelerated filer o
 Accelerated filer x
 Non-accelerated filer o
                 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

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

Common Stock, $.01 par value - 7,692,074 outstanding as of August 11, 2006
 


21ST CENTURY HOLDING COMPANY

INDEX

PART I: FINANCIAL INFORMATION
PAGE
     
ITEM 1
Financial Statements and Supplementary Data
3
     
ITEM 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
21
     
ITEM 3
Quantitative and Qualitative Disclosures about Market Risk
39
     
ITEM 4
Controls and Procedures
40
     
PART II: OTHER INFORMATION
 
     
ITEM 1
Legal Proceedings
41
     
ITEM 1A
Risk Factors
41
     
ITEM 2
Unregistered Sales of Equity Securities and Use of Proceeds
41
     
ITEM 3
Defaults Upon Senior Securities
42
     
ITEM 4
Submission of Matters to a Vote of Security Holders
43
     
ITEM 5
Other Information
43
     
ITEM 6
Exhibits
43
     
Signatures 
 
45
 
-2-


PART I: FINANCIAL INFORMATION
Item 1
 
21ST CENTURY HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS

   
June 30, 2006
 
December 31, 2005
 
ASSETS
         
Investments
         
Fixed maturities, available for sale, at fair value 
 
$
99,377,423
 
$
69,787,809
 
Fixed maturities, held to maturity, at amoritized cost 
   
19,679,749
   
19,691,937
 
Equity securities, available for sale, at fair value 
   
14,699,165
   
10,606,663
 
               
 Total investments
   
133,756,337
   
100,086,409
 
               
Cash and cash equivalents
   
9,958,979
   
6,071,460
 
Receivable for investments sold
   
17,022,140
       
Finance contracts, net of allowance for credit losses of $221,066 in 2006 and $419,445 in 2005, and net of unearned finance charges of $170,594 in 2006 and $379,212 in 2005
   
3,723,486
   
7,312,736
 
Prepaid reinsurance premiums
   
2,869,073
   
12,133,734
 
Premiums receivable, net of allowance for credit losses of $192,596 and $158,151, respectively
   
10,231,312
   
7,505,631
 
Reinsurance recoverable, net
   
16,167,555
   
136,675,703
 
Deferred policy acquisition costs
   
11,944,450
   
9,183,654
 
Deferred income taxes, net
   
4,995,491
   
2,703,978
 
Property, plant and equipment, net
   
1,421,273
   
3,901,385
 
Other assets
   
5,371,150
   
4,580,063
 
               
 Total assets
 
$
217,461,246
 
$
290,154,753
 
               
LIABILITIES AND SHAREHOLDERS' EQUITY
             
Unpaid losses and LAE
 
$
31,344,127
 
$
154,038,543
 
Unearned premiums
   
85,016,274
   
61,839,051
 
Premiums deposits
   
3,402,861
   
2,144,863
 
Revolving credit outstanding
   
-
   
196,943
 
Bank overdraft
   
10,291,955
   
12,237,735
 
Funds held under reinsurance treaties
   
1,568,871
   
1,544,544
 
Income taxes payable
   
7,718,037
   
3,019,696
 
Subordinated debt
   
6,875,000
   
10,208,333
 
Deferred gain from sale of property
   
2,680,940
   
-
 
Accounts payable and accrued expenses
   
5,644,948
   
4,157,675
 
               
 Total liabilities
   
154,543,013
   
249,387,383
 
               
               
Shareholders' equity:
             
Common stock, $0.01 par value. Authorized 37,500,000 shares; issued 8,102,298 and 
             
7,468,713 shares, respectively; Outstanding 7,405,449 and 6,771,864, respectively 
   
81,022
   
74,688
 
Additional paid-in capital 
   
40,517,377
   
31,825,053
 
Accumulated other comprehensive (deficit) 
   
(1,757,766
)
 
(1,537,243
)
Retained earnings 
   
24,077,600
   
10,404,872
 
 Total shareholders' equity
   
62,918,233
   
40,767,370
 
 Total liabilities and shareholders' equity
 
$
217,461,246
 
$
290,154,753
 
 
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

-3-

 
21ST CENTURY HOLDING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
   
Three Months Ended
 
Six Months Ended
 
   
June 30, 2006
 
June 30, 2005
 
June 30, 2006
 
June 30, 2005
 
Revenue:
                 
Gross premiums written 
 
$
50,752,672
 
$
31,362,908
 
$
86,361,745
 
$
61,459,952
 
Gross premiums ceded 
   
(3,371,781
)
 
(2,053,152
)
 
(3,371,781
)
 
(4,954,443
)
                           
 Net premiums written
   
47,380,891
   
29,309,756
   
82,989,964
   
56,505,509
 
                           
Decrease in prepaid reinsurance premiums 
   
(593,089
)
 
(2,835,083
)
 
(9,264,661
)
 
(5,510,378
)
(Increase) in unearned premiums 
   
(18,047,162
)
 
(4,585,523
)
 
(23,177,223
)
 
(10,271,083
)
                           
 Net change in prepaid reinsurance premiums and unearned premiums
   
(18,640,251
)
 
(7,420,606
)
 
(32,441,884
)
 
(15,781,461
)
                           
 Net premiums earned
   
28,740,640
   
21,889,150
   
50,548,080
   
40,724,048
 
Finance revenue 
   
496,117
   
937,681
   
1,132,143
   
2,042,211
 
Managing general agent fees 
   
723,020
   
620,378
   
1,380,988
   
1,252,693
 
Net investment income 
   
1,612,014
   
910,925
   
2,808,279
   
1,803,796
 
Net realized investment gains 
   
283,341
   
125,510
   
479,552
   
285,033
 
Other income 
   
486,962
   
161,913
   
1,107,761
   
404,381
 
                           
 Total revenue
   
32,342,094
   
24,645,557
   
57,456,803
   
46,512,162
 
                           
Expenses:
                         
Loss and loss adjustment expense 
   
9,343,158
   
12,308,775
   
16,912,001
   
19,218,772
 
Operating and underwriting expenses 
   
2,308,331
   
2,206,281
   
4,612,576
   
3,788,812
 
Salaries and wages 
   
1,772,511
   
1,580,120
   
3,610,472
   
3,158,701
 
Interest expense 
   
181,403
   
379,787
   
410,287
   
809,931
 
Policy acquisition costs, net of amortization 
   
4,126,985
   
3,222,441
   
8,045,037
   
7,048,042
 
                           
 Total expenses
   
17,732,388
   
19,697,404
   
33,590,373
   
34,024,258
 
                           
Income from continuing operations before provision for income tax expense
   
14,609,706
   
4,948,153
   
23,866,430
   
12,487,904
 
Provision for income tax expense
   
5,705,147
   
1,924,612
   
8,948,559
   
4,678,687
 
                           
 Net income from continuing operations
   
8,904,559
   
3,023,541
   
14,917,871
   
7,809,217
 
                           
Discontinued operations:
                         
Income from discontinued operations (including gain on disposal of $0 and $1,630,000, respectively) 
   
-
   
-
   
-
   
1,630,000
 
Provision for income tax expense 
   
-
   
-
   
-
   
595,396
 
                           
 Income from discontinued operations
   
-
   
-
   
-
   
1,034,604
 
                           
 Net income
 
$
8,904,559
 
$
3,023,541
 
$
14,917,871
 
$
8,843,821
 
                           
                           
Basic net income per share from continuing operations
 
$
1.20
 
$
0.48
 
$
2.02
 
$
1.27
 
                           
Basic net income per share from discontinued operations
 
$
-
 
$
-
 
$
-
 
$
0.16
 
                           
Basic net income per share
 
$
1.20
 
$
0.48
 
$
2.02
 
$
1.43
 
                           
Fully diluted net income per share from continuing operations
 
$
1.19
 
$
0.46
 
$
1.89
 
$
1.19
 
                           
Fully diluted net income per share from discontinued operations
 
$
-
 
$
-
 
$
-
 
$
0.16
 
                           
Fully diluted net income per share
 
$
1.19
 
$
0.46
 
$
1.89
 
$
1.35
 
                           
Weighted average number of common shares outstanding
   
7,427,765
   
6,349,182
   
7,370,592
   
6,171,134
 
                           
Weighted average number of common shares outstanding (assuming dilution)
   
7,465,896
   
6,620,510
   
7,880,251
   
6,550,789
 
                           
Dividends declared per share
 
$
0.12
 
$
0.08
 
$
0.24
 
$
0.16
 
 
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
-4-

 
21ST CENTURY HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

   
Six months ended June 30 
 
   
2006
 
 2005
 
Cash flow from operating activities:
     
 Restated - See note 10
 
Net income 
 
$
14,917,871
 
$
7,809,217
 
Adjustments to reconcile net income to net cash provided by operating activities: 
             
 Amortization of investment discount, net
   
(142,788
)
 
(56,786
)
 Depreciation and amortization of property plant and equipment, net
   
170,013
   
240,073
 
 Net realized investment gains
   
479,552
   
179,744
 
 Common Stock issued for interest on Notes
   
128,125
   
315,625
 
 Provision for credit losses, net
   
95,375
   
495,881
 
 (Recovery) for uncollectible premiums receivable
   
(60
)
 
(370,887
)
 Non-cash compensation
   
280,000
   
-
 
Changes in operating assets and liabilities: 
             
 Premiums receivable
   
(2,725,621
)
 
(663,746
)
 Prepaid reinsurance premiums
   
9,264,661
   
5,510,379
 
 Due from reinsurers, net
   
120,508,148
   
3,285,572
 
 Income taxes recoverable
   
-
   
6,151,767
 
 Deferred income tax expense
   
(2,291,513
)
 
740,252
 
 Policy acquisition costs, net of amortization
   
(2,760,796
)
 
(1,681,114
)
 Finance contracts receivable
   
3,493,875
   
(885,049
)
 Other assets
   
1,889,853
   
664,143
 
 Unpaid losses and loss adjustment expenses
   
(122,694,416
)
 
(20,544,863
)
 Unearned premiums
   
23,177,223
   
10,271,082
 
 Premium deposits
   
1,257,998
   
1,237,826
 
 Funds held under reinsurance treaties
   
24,327
       
 Income taxes payable
   
4,698,341
   
-
 
 Bank overdraft
   
(1,945,780
)
 
3,844,824
 
 Accounts payable and accrued expenses
   
1,487,273
   
(1,255,321
)
Net cash provided by operating activities - continuing operations
   
49,311,661
   
15,288,619
 
Net cash (used for) operating activities - discontinued operations
   
-
   
(1,380,265
)
Net cash provided by operating activities
   
49,311,661
   
13,908,354
 
Cash flow (used in) investing activities:
             
Proceeds from sale of investment securities available for sale 
   
192,229,141
   
31,747,952
 
Purchases of investment securities available for sale 
   
(226,456,356
)
 
(31,624,260
)
Receivable for investments sold 
   
(17,022,140
)
     
Purchases of property and equipment 
   
(352,831
)
 
(138,196
)
Proceeds from sale of assets 
   
2,662,930
   
-
 
Net cash (used in) investing activities - continuing operations
   
(48,939,256
)
 
(14,504
)
Net cash provided by investing activities - discontinued operations
   
-
   
1,689,129
 
Net cash (used in) provided by investing activities
   
(48,939,256
)
 
1,674,625
 
Cash flow provided by financing activities:
             
Subordinated debt repaid 
   
(1,666,667
)
 
(1,894,792
)
Acquisition of common stock 
   
(2,000,862
)
     
Exercised stock options 
   
1,417,095
   
1,387,719
 
Dividends paid 
   
(1,856,057
)
 
(1,015,214
)
Exercised warrants, net 
   
6,060,797
   
-
 
Tax benefit related to non-cash compensation 
   
1,757,751
   
-
 
Revolving credit outstanding 
   
(196,943
)
 
(1,562,570
)
Net cash provided by (used in) financing activities - continuing operations
   
3,515,114
   
(3,084,857
)
Net increase in cash and cash equivalents
   
3,887,519
   
12,498,122
 
Cash and cash equivalents at beginning of period
   
6,071,460
   
6,127,706
 
Cash and cash equivalents at end of period
 
$
9,958,979
 
$
18,625,828
 
 
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
-5-

 
21ST CENTURY HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

        
 Six months ended June 30, 
 
(continued)
      
2006
 
 2005
 
Supplemental disclosure of cash flow information:
               
Cash paid during the period for: 
 
 
          
 Interest
       
$
160,215
 
$
292,338
 
Non-cash investing and finance activities: 
                   
 Accrued dividends payable
       
$
972,276
 
$
446,579
 
 Retirement of subordinated debt by Common Stock issuance
       
$
1,666,667
 
$
1,666,667
 
 Stock issued to pay interest on subordinated debt
       
$
128,125
 
$
315,625
 
 
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-6-

 
21st Century Holding Company
Notes to Consolidated Financial Statements
 
(1)  Organization and Business

The accompanying unaudited consolidated financial statements of 21st Century Holding Company have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. These financial statements do not include all information and notes required by GAAP for complete financial statements, and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2005. The December 31, 2005 year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. The financial information furnished reflects all adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. The results of operations are not necessarily indicative of the results of operations that may be achieved in the future. 

21st Century Holding Company (“21st Century,” “the 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 process. We are authorized to underwrite homeowners’ property and casualty insurance, commercial general liability insurance, and personal automobile insurance in various states with various lines of authority through our wholly owned subsidiaries, Federated National Insurance Company (“Federated National”) and American Vehicle Insurance Company (“American Vehicle”).

Federated National is authorized to underwrite personal automobile insurance, homeowners’ property and casualty insurance and mobile home property and casualty insurance in Florida as an admitted carrier. American Vehicle is authorized to underwrite personal and commercial automobile insurance and commercial general liability insurance in Florida as an admitted carrier. In addition, American Vehicle is authorized to underwrite commercial general liability insurance in Georgia, Kentucky, South Carolina and Virginia as a surplus lines carrier and in Texas, Louisiana and Alabama as an admitted carrier. American Vehicle operations in Florida, Georgia, Louisiana, Texas, South Carolina and Virginia are on-going. American Vehicle operations in Alabama and Kentucky are expected to begin this year. American Vehicle has pending applications, in various stages of approval, to be authorized as a surplus lines carrier in the states of Missouri, California and Arkansas.

During the six months ended June 30, 2006, 75.2%, 19.1% and 5.7% of the premiums we underwrote were for homeowners’ property and casualty insurance, commercial general liability insurance and personal automobile insurance, respectively. During the six months ended June 30, 2005, 60.3%, 18.8% and 20.9% of the premiums we underwrote were for homeowners’ property and casualty insurance, commercial general liability insurance and personal automobile insurance, respectively. We internally process claims made by our own and third-party insureds through our wholly owned claims adjusting company, Superior Adjusting, Inc. (“Superior”). We also offer premium financing to our own and third-party insureds through our wholly owned subsidiary, Federated Premium Finance, Inc. (Federated Premium”).

We market and distribute our own and third-party insurers’ products and our other services primarily in Central and South Florida, through contractual relationships with a network of approximately 1,500 independent agents and a select number of general agents.

Assurance Managing General Agents, Inc. (“Assurance MGA”), a wholly owned subsidiary, acts as Federated National’s and American Vehicle’s exclusive managing general agent in the state of Florida. As American Vehicle continues its expansion into other states we expect to contract with other managing general agents to market our commercial general liability insurance product beyond the state of Florida. Assurance MGA currently provides all underwriting policy administration, marketing, accounting and financial services to Federated National and American Vehicle, and participates in the negotiation of reinsurance contracts. Assurance MGA generates revenue through a 6% commission fee from the insurance companies net written premium, policy fee income of $25 per policy and other administrative fees from the marketing of companies’ products through the Company’s distribution network. The 6% commission fee from Federated National and American Vehicle was made effective January 1, 2005. Assurance MGA plans to establish relationships with additional carriers and add additional insurance products in the future.
 
-7-

 
21st Century Holding Company
Notes to Consolidated Financial Statements
 
(2) Summary of Significant Accounting Policies and Practices

(A) Critical Accounting Policies

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

The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with management’s evaluation of the determination of liability for unpaid loss and loss adjustment expense (“LAE’), the amount and recoverability of amortization of deferred policy acquisition costs. In addition, significant estimates form the bases 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. 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 loss 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 up to 6 different 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 loss adjustment expenses, salvage and other recoveries received, reported claim counts, open claim counts and counts for claims closed with and without payment of loss.

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

(B) Impact of New Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) revised SFAS No. 123, Share-Based Payments (“SFAS No. 123R”). This statement eliminates the option to apply the intrinsic value measurement provisions of the Accounting Principles Board (“APB”) No. 25 to stock compensation awards issued to employees. Rather, SFAS No. 123R requires companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. That cost will be recognized over the period during which an employee is required to provide services in exchange for the award the requisite service period (usually the vesting period). SFAS No. 123R will also require companies to measure the cost of employee services received in exchange for employee stock purchase plan awards. SFAS No. 123R was effective for 21st Century’s fiscal year beginning January 1, 2006 as subsequently extended by the SEC pursuant to its April 13, 2005 announcement. We have determined that the pretax charge to earnings for the year ending 2006 will total approximately $0.6 million, of which approximately $0.3 million was charged to income from continuing operations before provision for income taxes for the six months ended June 30, 2006. The effect on earnings per share for the six months ended June 30, 2006 for both undiluted and fully diluted was approximately $0.04 per share. The effect on earnings per share for the three months ended June 30, 2006 for both undiluted and fully diluted was approximately $0.02 per share. For a more detailed discussion, please see Footnote 8, titled Stock Compensation Plans.
 
-8-

 
21st Century Holding Company
Notes to Consolidated Financial Statements
 
(C) Stock Options

At June 30, 2006, the Company has three stock-based employee compensation plans, which are described later in footnote 8, Stock Compensation Plans. Prior to January 1, 2006, we accounted for those plans under the recognition and measurement provisions of stock-based compensation using the intrinsic value method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation. Under these provisions, no stock-based employee compensation cost was recognized in the Statement of Operations for the year ended December 31, 2005 as all options granted under those plans had an exercise price equal to or less than the market value of the underlying common stock on the date of grant. Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123R using the modified-prospective-transition method. Under that transition method, compensation cost recognized in the first quarter of 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of Statement 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair-value estimated in accordance with the provisions of SFAS No. 123R. Results for prior periods have not been restated. On May 16, 2006, 41,000 non-qualified and 7,500 qualified stock options were issued with an option price of $17.00 per share and a market share price of $16.00 per share. Like all other outstanding stock options, these stock options contain service conditions and do not contain any performance conditions. For a further discussion regarding the provisions of SFAS No. 123R and its effect on our operations, please refer to footnote 8, Stock Compensation Plans.

(D) Earnings Per Share

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

(E) Reclassifications

Certain amounts in 2005 financial statements have been reclassified to conform to the 2006 presentation.

(3) Revolving Credit Outstanding

Federated Premium’s operations are funded by a revolving loan agreement (“Revolving Agreement”) with FlatIron Funding Company. LLC (“FlatIron”). The Revolving Agreement is structured as a sale of contracts receivable under a sale and assignment agreement with Westchester Premium Acceptance Corporation (“WPAC”), a wholly-owned subsidiary of FlatIron, which gives WPAC the right to sell or assign these contracts receivable. Federated Premium, which services these contracts, has recorded transactions under the Revolving Agreement as secured borrowings.

The amounts of WPAC’s advances are subject to availability under a borrowing base calculation, with maximum advances outstanding not to exceed the maximum credit commitment. The annual interest rate on advances under the Revolving Agreement equals the prime rate plus additional interest varying from 1.25% to 3.25% based on the prior month’s ratio of contracts receivable related to insurance companies with an A. M. Best rating of B or lower, to total contracts receivable. The effective interest rate on this line of credit, based on our average outstanding borrowings under the Revolving Agreement, was 14.4% and 9.39% for the six months ended June 30, 2006 and 2005, respectively.

There were no outstanding borrowings under the Revolving Agreement as of June 30, 2006. Outstanding borrowings as of December 31, 2005 were approximately $197,000. Interest expense on this revolving credit line for the six months ended June 30, 2006 and 2005 totaled approximately $3,400 and $28,000, respectively.

-9-

 
21st Century Holding Company
Notes to Consolidated Financial Statements
 
(4) Commitments and Contingencies
 
We are involved in other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, results of operations, or liquidity.

As a direct premium writer in the State of Florida, we are required to participate in certain insurer solvency association under Florida Statutes 631.57(3) (a). Participation in these pools is based on our written premium by line of business to total premiums written statewide by all insurers. Our participation has resulted in an assessment due to the insolvency of other property and casualty insurance carriers in the State of Florida. The assessment was approximately 2% of our 2005 net written premium in Florida and totaled $1.9 million. The assessment was payable in July. There was no charge to operations for this assessment. We have been approved by Florida’s Office of Insurance Regulation (“OIR”) to recoup the assessment through a 0.9% add-on fee to all Federated National and American Vehicle policies issued in Florida with effective dates of August 15, 2006 for new business and October 15, 2006 for renewal business.

Federated National and American Vehicle are also required to participate in an insurance apportionment plan under Florida Statutes Section 627.351, which is referred to as a Joint Underwriting Plan (“JUA Plan”). The JUA Plan provides for the equitable apportionment of any profits realized, or losses and expenses incurred, among participating motor vehicle insurers. In the event of an underwriting deficit incurred by the JUA Plan, which is not recovered through the policyholders in the JUA Plan, such deficit shall be recovered from the companies participating in the JUA Plan in the proportion that the net direct written premiums of each such member during the preceding calendar year bear to the aggregate net direct premiums written in this state by all members of the JUA Plan. During the six months ended June 30, 2006, Federated National and American Vehicle were assessed approximately $93,000 and $2,000, respectively by the JUA Plan based on their respective Cash Activity Reports. These assessments are charged to operations as paid. Future assessments by this association are undeterminable at this time.

During its regularly scheduled meeting on August 17, 2005, the Board of Governors of Citizens Property Insurance Corporation (“Citizens”) determined a 2004 plan year deficit existed in their High Risk Account. Citizen’s Board decided that a $515 million Regular Assessment is in the best interest of Citizens and consistent with Florida Statutes. On this basis, Citizen’s Board certified for a Regular Assessment. Federated National’s participation in this assessment totaled $2.0 million. Provisions contained in our excess of loss reinsurance policies provide for their participation totaling $1.5 million. Pursuant to Section 627.3512, Florida Statutes, insurers are permitted to recoup the assessment by adding a surcharge to policies in an amount not to exceed the amount paid by the insurer to Citizens. Federated National is currently underwriting the recoupment in connection with this assessment which began in March 2006. As noted above, Federated National is entitled to recoup this assessment, and will subrogate $1.5 million to our reinsurers. Through June 30, 2006 Federated National has recouped approximately $1.1 million in connection with this assessment. Future assessments by Citizens for a 2005 plan year deficit are assured, however no determination as to when or by how much are available at this time.

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

-10-

 
21st Century Holding Company
Notes to Consolidated Financial Statements

Effective on or about March 1, 2006, 21st Century sold its interest in the Lauderdale Lakes property to an unrelated party. As part of this transaction, 21st Century has agreed to lease the same facilities for a six year term. Our lease for this office space expires in December 2011.

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

Fiscal Year
 
Lease payments
 
2006
 
$
278,792
 
2007
   
557,583
 
2008
   
557,583
 
2009
   
557,583
 
2010
   
557,583
 
Thereafter
   
557,583
 
Total
 
$
3,066,707
 
 
(5) Comprehensive Income

For the three and six months ended June 30, 2006 and 2005, comprehensive income consisted of the following:

   
Three months ended June 30,
 
Six months ended June 30,
 
   
2006
 
2005
 
2006
 
2005
 
Net income
 
$
8,904,559
 
$
3,023,541
 
$
14,917,871
 
$
8,843,821
 
Change in net unrealized gains on investments available for sale
   
(535,832
)
 
458,828
   
(353,572
)
 
(278,738
)
Comprehensive income, before tax
   
8,368,727
   
3,482,369
   
14,564,299
   
8,565,083
 
Income tax (expense) benefit related to items of other comprehensive income
   
201,634
   
(172,835
)
 
133,049
   
104,889
 
Comprehensive income
 
$
8,570,361
 
$
3,309,534
 
$
14,697,348
 
$
8,669,972
 

(6) Segment Information

FASB Statement No. 131, Disclosures About Segments of an Enterprise and Related Information, requires that the amount reported for each segment item be based on what is used by the chief operating decision maker in formulating a determination as to how many resources to assign to a segment and how to appraise the performance of that segment. The term chief operating decision maker may apply to the chief executive officer or chief operating officer or to a group of executives. Note: The term of chief operating decision maker may apply to a function and not necessarily to a specific person. This is a management approach rather than an industry approach in identifying segments. The segments are based on the Company’s organizational structure, revenue sources, nature of activities, existence of responsible managers, and information presented to the Board of Directors.

If any one of the following exists, a segment must be reported on:

·  
Revenue, including unaffiliated and inter-segment sales or transfers, is 10% or more of total revenue of all operating segments.
·  
Operating profit or loss is 10% or more of the greater, in absolute amount, of the combined operating profit (or loss) of all industry segments with operating profits (or losses).
·  
Identifiable assets are 10% or more of total assets of all operating segments.

Operating segments that are not reportable should be combined and disclosed in the ‘‘all other’’ category. Disclosure should be made of the sources of revenue for these segments.

-11-

 
21st Century Holding Company
Notes to Consolidated Financial Statements
 
Accordingly, we have discontinued our segment disclosures due to the finance segment not exceeding the 10% threshold for revenues, earnings or assets.

(7) Reinsurance Agreements

We follow industry practice of reinsuring a portion of our risks and paying for that protection based primarily upon total insured values of all policies in effect and subject to such reinsurance. Reinsurance involves an insurance company transferring or "ceding" all or a portion of its exposure on insurance underwritten by it to another insurer, known as a "reinsurer.” The ceding of insurance does not legally discharge the insurer from its primary liability for the full amount of the policies. If the reinsurer fails to meet its obligations under the reinsurance agreement, the ceding company is still required to pay for the insured the loss.

For the 2006 - 2007 hurricane season, we have assembled a range of reinsurance products designed to insure the Company for an aggregate of approximately $414.5 million for a minimum of two catastrophic events. The reinsurance treaties contain several complex features and through a series of fluid retentions, attachment points and limitations, additional coverage may be afforded Federated National for events beyond the first two catastrophic events. Our retention will vary depending on the severity and frequency of each catastrophic event. The reinsurance companies and their respective participation in this season's program are noted in the table as follows:

       
First Event Participation
 
  Reinstated Premium Protection

Current AM
Best Rating
 
Reinsurer
 
$20m in
excess of
$15m
 
$40m in excess of
$35m
 
$72m in excess of
$75m and FHCF
participation
 
$20m in
excess of
$15m
 
$40m in excess of
$35m
A+
 
Ace Tempest Reinsurance Ltd
     
7.5%
 
7.50%
       
A
 
Amlin 2001 Syndicate
 
5.0%
 
5.0%
 
5.00%
 
5.0%
   
A-
 
Amlin Bermuda Ltd
 
2.5%
 
4.0%
 
4.00%
 
2.5%
   
A
 
American Reinsurance Company
         
3.53%
       
A
 
Ascot 1414 Syndicate
         
6.50%
       
A++
 
National Liability and Fire Company
     
33.8%
 
6.57%
     
77.6%
B++
 
Converium AG
     
5.0%
           
A+
 
Everest Reinsurance Company
     
22.0%
 
4.25%
     
12.0%
NR
 
Wentworth Insurance Company Ltd
 
5.0%
     
.
 
5.0%
   
A-
 
Flagstone Reinsurance Ltd
     
4.3%
 
4.00%
       
A
 
MAP 2791 Syndicate
 
2.5%
 
2.5%
 
2.50%
 
2.5%
   
A-
 
New Castle Reinsurance Company Ltd
 
2.0%
 
2.0%
 
2.00%
 
2.0%
   
A
 
QBE Reinsurance Corporation
     
1.5%
 
1.00%
       
A
 
Renaissance Reinsurance, Ltd
     
12.5%
 
12.50%
       
A+
 
XL Re Limited
         
2.50%
       
A
 
Odyssey
         
3.47%
       
A
 
Catlin Insurance Company Ltd
 
25.0%
         
25.0%
   
NR
 
Allianz Risk Transfer (Bermuda) Ltd
 
33.0%
         
33.0%
   
A
 
Liberty Mutual Insurance Company
         
34.72%
       
   
American Vehicle Insurance Company
                   
NR4
 
(Affiliated)
 
25.0%
         
25.0%
   

In the discussion that follows it should be noted that all amounts of reinsurance are based on management’s current analysis of Federated National’s exposure levels to catastrophic risk. Our data will be subjected to exposure level data analysis at various dates through December 31, 2006. This analysis of our exposure level in relation to the total exposures to the FHCF may produce changes in retentions, limits and reinsurance premiums as a result of increases or decreases in our exposure level.

Our overall reinsurance structure may be divided into four major layers of financial impact in connection with any single catastrophic event. The bottom layer is considered to be the first $15 million of losses. The next layer is considered to be greater than $15 million and less than $35 million. The next layer is considered to be greater than $35 million and less than $233.3 million. The fourth layer is considered to be losses greater than $233.3 million and less than 305.3 million.

-12-

 
21st Century Holding Company
Notes to Consolidated Financial Statements
 
For first and second catastrophic events equal to or less than $15 million, the bottom layer, Federated National will retain 100% of the first $4.3 million and the last $0.7 million of this bottom layer. The FHCF will participate 100% for the $10, million in excess of Federated National’s first $4.3 million.

For the first and second catastrophic events with aggregate losses in excess of the first $15.0 million discussed above and less than $35 million, Federated National has acquired 100% reinsurance protection with a single automatic premium reinstatement protection provision. The $20 million of coverage afforded in this layer is by way of 42% traditional, single season, excess of loss (“Traditional”) treaties and 58% structured, multi-year, excess of loss (“Structured”) treaties. As noted in the chart above, American Vehicle will reinsure Federated National via a traditional treaty for 25% of this $20 million layer. Relative to the structured excess of loss reinsurance treaties, terms contained in these treaties afford capacity in this layer beyond the 2006 - 2007 season for two additional hurricane seasons. The structured treaties offer respective coverage for a single event in each of the three hurricane seasons and one additional respective coverage that may be applied as needed in any one of the three hurricane seasons. One of the structured treaties, representing 25% of this layer, contains a no coverage provision if any single event results in damages that exceed $20 billion in the Unites States and its territories.

For the first and second catastrophic events where aggregate losses exceed $35 million, but are less than $233.3 million, Federated National has acquired 100% reinsurance protection through a combination of private market reinsurers and the FHCF program. The private market reinsurers have afforded coverage to insure us for $40 million against covered losses in excess of $35 million. The FHCF has afforded coverage to insure us for 90% of loss greater than $55.6 million and less than $231.5 million. The private treaties “wrap around” the FHCF treaty and afford coverage, in aggregate, for losses in excess of $35 million and less than $233.3 million. The FHCF treaty is an aggregate “for the entire season” treaty while the private market treaties afford respective per event coverage. As to reinstatement of coverage for the private market treaties, Federated National has purchased a single automatic premium reinstatement protection provision that would provide for an automatic reinstatement for 89% of the $40 million coverage. Federated National would be responsible for the remaining premium reinstatement protection and the cost in connection with that reinstatement is estimated to be approximately $2.1 million. Federated National would also be responsible for seasonal losses beyond what is afforded through this part of the FHCF coverage.

For an event where aggregate losses exceed $233.3 million, but are less than $305.3 million, Federated National has acquired traditional reinsurance treaties representing 65.3% of this layer without a provision for premium reinstatement protection. Premium reinstatement coverage would be prorated as to amount and if the first event exhausted this coverage Federated National would be responsible for approximately $10.4 million for reinstatement protection. Additional coverage is afforded to Federated National via Industry Loss Warrants (“ILW”). The ILW policies provide for payments to Federated National based solely on industry wide losses to private and commercial property only in the State of Florida, not-withstanding losses incurred directly by Federated National. A payment to Federated National would only be considered, under the terms of these contracts, if wind damages incurred in the State of Florida exceeded amounts varying between $25 billion and $20 billion excluding public property and certain other named exclusions.

The Company is responsible for single catastrophic events with incurred losses in excess of approximately $305 million subject to the terms of the ILW’s above.

The estimated cost to the Company in connection with this reinsurance structure is approximately $65 million and for the most part payable in quarterly installments beginning July 1, 2006 and will be amortized through earned premium in accordance with the provisions and terms contained in the respective treaties.

For the 2005-2006 hurricane season, the excess of loss treaties insured us for approximately $64.0 million, with the Company retaining the first $3.0 million of loss and LAE. The treaties had one full reinstatement provision for each excess layer with 100% additional premium as to time and pro rata as to amount. In addition, we purchased, from the private sector, Reinstatement Premium Protection which would reimburse the Company 100% of the cost of reinstatement for the second event. Unused coverage from the first two events carried forward to events beyond the second, in conjunction with a lowered attachment point (as explained below) afforded by the FHCF.

-13-

 
21st Century Holding Company
Notes to Consolidated Financial Statements
 
In addition to the excess of loss reinsurance policies (described above), we participated in the FHCF to protect our interest in the insurable risks associated with our homeowner and mobile home owner insurance products. For the first two events, FHCF coverage began after the Company’s retention of $3.0 million and its excess of loss reinsures retention of approximately $40.3 million.

Maximum coverage afforded from the combined policies of our FHCF and excess of loss policies in effect for varying dates from June 1, 2005 to June 30, 2006 total approximately $194.8 million. FHCF retained approximately $131.0 million, our excess of loss reinsurance policies retained $64.0 million, and the Company retained the first $3 million of insurable losses for two events. For events beyond the second largest catastrophic event during the policy term, FHCF coverage attached after the Company and its excess of loss reinsures collective retention of approximately $15.0 million. Additionally, unused coverage from our excess of loss reinsurance treaties could have been carried forward and totaled $20.0 million. However, loss and LAE incurred up to approximately $15.0 million for each hurricane subsequent to Hurricane Wilma in October 2005 and through June 30, 2006 and deemed to be a catastrophic event would have been the responsibility of the Company. There were no such catastrophic events through June 30, 2005.

As a result of the loss and LAE incurred in connection with the hurricane activity that occurred in 2004 and 2005, the Company has reflected in its operations the effects of each storm as follows:

   
Claim
 
Gross
     
Reinsurance
 
Net
 
2004 Hurricanes
 
Count
 
Losses
     
Recoveries
 
Losses
 
   
 (Dollars in millions)
 
Charley (August 13)
   
2,570
 
$
60.8
       
$
50.8
 
$
10.0
 
Frances (September 3)
   
3,808
   
50.7
         
40.7
   
10.0
 
Ivan (September 14)
   
1,061
   
22.0
         
-
   
22.0
 
Jeanne (September 25)
   
1,560
   
13.2
         
-
   
13.2
 
                                 
Total Loss Estimate
   
8,999
 
$
146.7
       
$
91.5
 
$
55.2
 
 
 
 
Claim
 
Gross
       
Reinsurance
 
Net
 
2005 Hurricanes
 
Count
 
Losses
       
Recoveries
 
Losses
 
 
   
(Dollars in millions) 
 
Dennis (July 10)
   
322
 
$
2.8
       
$
-
 
$
2.8
 
Katrina (August 25)
   
2,096
   
12.3
         
9.3
   
3.0
 
Rita (September 20)
   
19
   
0.1
         
-
   
0.1
 
Wilma (October 24)
   
11,290
   
146.1
         
143.1
   
3.0
 
                                 
Total Loss Estimate
   
13,727
 
$
161.3
       
$
152.4
 
$
8.9
 

We are selective in choosing a reinsurer 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.

During 2005 American Vehicle did not reinsure any of its insurance products.

(8) Stock Compensation Plans

We implemented a stock option plan in November 1998 that provides for the granting of stock options to officers, directors, employees and consultants. The objectives of this plan include attracting and retaining the best personnel, providing for additional performance incentives, and promoting our success by providing employees the opportunity to acquire common stock. Options outstanding under this plan have been granted at prices which are either equal to or above the market value of the stock on the date of grant, vest over a four-year period, and expire ten years after the grant date. Under this plan, we are authorized to grant options to purchase up to 900,000 common shares, and, as of June 30, 2006 and December 31, 2005, we had outstanding exercisable options to purchase 46,250 and 97,650 shares, respectively.

-14-

 
21st Century Holding Company
Notes to Consolidated Financial Statements
 
In 2001, we implemented a franchise stock option plan that provides for the granting of stock options to individuals purchasing Company owned agencies which were then converted to franchised agencies. The purpose of the plan was to advance our interests by providing an additional incentive to encourage managers of Company owned agencies to purchase the agencies and convert them to franchises. Options outstanding under the plan have been granted at prices which are above the market value of the stock on the date of grant and expire ten years after the grant date. Under this plan, we are authorized to grant options to purchase up to 988,500 common shares, though in connection with our sale of our franchise operations, we do not anticipate additional options to be granted under this plan. As of June 30, 2006 and December 31, 2005, we had outstanding exercisable options to purchase -0- and 15,000 shares, respectively.

In 2002, we implemented the 2002 Option Plan. The purpose of this Plan is to advance our interests by providing an additional incentive to attract, retain and motivate highly qualified and competent persons who are key to the Company, including employees, consultants, independent contractors, officers and directors, upon whose efforts and judgment our success is largely dependent, by authorizing the grant of options to purchase Common Stock to persons who are eligible to participate hereunder, thereby encouraging stock ownership by such persons, all upon and subject to the terms and conditions of the Plan. Options outstanding under the plan have been granted at prices which are above the market value of the stock on the date of grant, vest over a five-year period, and expire six years after the grant date. Under this plan, the Company is authorized to grant options to purchase up to 1,800,000 common shares, and, as of June 30, 2006 and December 31, 2005, we had outstanding exercisable options to purchase 736,408 and 818,608 shares, respectively.

Activity in the Company’s stock option plans for the period from January 1, 2005 to June 30, 2006, is summarized below: 
 
   
1998 Plan
 
2001 Franchisee Plan
 
2002 Plan
 
   
 Number of Shares 
 
Weighted
Average
Option
Exercise
 Price
 
 Number of Shares
 
 Weighted Average Option
Exercise
Price
 
 Number of Shares
 
Weighted Average Option
Exercise
Price
 
Outstanding at January 1, 2005
   
198,275
 
$
6.67
   
15,000
 
$
9.17
   
906,300
 
$
10.80
 
Granted
   
-
         
-
         
451,500
 
$
14.39
 
Exercised
   
(96,875
)
$
6.67
   
-
 
$
-
   
(271,542
)
$
8.96
 
Cancelled
   
(3,750
)
$
6.67
   
-
         
(262,650
)
$
14.00
 
Outstanding at January 1, 2006
   
97,650
 
$
6.67
   
15,000
 
$
9.17
   
823,608
 
$
12.35
 
Granted
   
-
 
$
-
   
-
 
$
-
   
48,500
 
$
17.00
 
Exercised
   
(51,400
)
$
6.67
   
(15,000
)
$
9.17
   
(115,200
)
$
9.22
 
Cancelled
   
-
 
$
6.67
   
-
         
(20,500
)
$
13.50
 
Outstanding at June 30, 2006
   
46,250
 
$
6.67
   
-
 
$
-
   
736,408
 
$
13.13
 
 
Options outstanding as of June 30, 2006 are exercisable as follows:

-15-

 
21st Century Holding Company
Notes to Consolidated Financial Statements

   
1998 Plan
 
2001 Franchisee Plan
 
2002 Plan
 
Options Exercisable at:
 
Number of Shares
 
Weighted Average Option Exercise Price
 
Number of Shares
 
Weighted Average Option Exercise Price
 
Number of Shares
 
Weighted Average Option Exercise Price
 
June 30, 2006
   
46,250
 
$
6.67
   
-
 
$
-
   
306,958
 
$
9.21
 
December 31, 2006
   
-
         
-
         
55,350
 
$
9.21
 
December 31, 2007
   
-
         
-
         
129,200
 
$
9.21
 
December 31, 2008
   
-
         
-
         
95,900
 
$
9.21
 
December 31, 2009
   
-
         
-
         
83,900
 
$
9.21
 
December 31, 2010
   
-
         
-
         
57,400
 
$
9.21
 
Thereafter
   
-
         
-
         
7,700
       
Total options exercisible
   
46,250
         
-
         
736,408
       
 
At June 30, 2006, the Company has three stock-based employee compensation plans, which are described above. Prior to January 1, 2006, we accounted for those plans under the recognition and measurement provisions of stock-based compensation using the intrinsic value method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation. Under these provisions, no stock-based employee compensation cost was recognized in the Statement of Operations for the years ended December 31, 2005 or 2004 as all options granted under those plans had an exercise price equal to or less than the market value of the underlying common stock on the date of grant. Effective January 1, 2006, the Company adopted the fair value recognitions provisions of FASB Statement No. 123 (R) using the modified-prospective-transition method. Under that transition method, compensation cost recognized in the first quarter of 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of Statement 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair-value estimated in accordance with the provisions of SFAS No. 123R. Results for prior periods have not been restated.

As a result of adopting SFAS No. 123R on January 1, 2006, the Company’s income from continuing operations before provision for income taxes and net income for the six months ended June 30, 2006, are lower by approximately $280,000 and $175,000, respectively, than if it had continued to account for share-base compensation under ABP Opinion No. 25. For the three months ended June 30, 2006, income from continuing operations before provision for income taxes and net income are lower by approximately $123,000 and $75,000, respectively, than if it had continued to account for share-base compensation under ABP Opinion No. 25.

Basic and diluted earnings per share for the six month period ended June 30, 2006 for both basic and diluted would have been $2.00 and $1.87, respectively, if the Company had not adopted SFAS No. 123R, compared to reported basic and diluted earnings per share of $2.02 and $1.89, respectively.

Basic and diluted earnings per share for the three month period ended June 30, 2006 for basic and diluted would have been $1.19 and $1.18, respectively, if the Company had not adopted SFAS No. 123R, compared to reported basic and diluted earnings per share of $1.20 and $1.19, respectively.

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

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement 123 to options granted under our stock option plans in the period presented. For purposes of this provision disclosure and comparability, the value of the options were estimated using the Black-Scholes option-pricing model and amortized to expense over the options vesting periods.

-16-

 
21st Century Holding Company
Notes to Consolidated Financial Statements

       
Three months
ended June 30,
     
Six months
ended June 30,
 
       
2005
     
2005
 
                         
Net Income as reported
       
$
3,023,541
     
$
8,843,821
 
Compensation, net of tax effect
         
145,768
       
799,699
 
Pro forma net income
       
$
2,877,773
     
$
8,044,122
 
Net income per share
                       
As reported - Basic
       
$
0.48
     
$
1.43
 
As reported - Diluted
       
$
0.46
     
$
1.35
 
Pro forma - Basic
       
$
0.45
     
$
1.30
 
Pro forma - Diluted
       
$
0.43
     
$
1.23
 

The weighted average fair value for the 48,500 new options granted during the three months ended June 30, 2006, estimated on the date of grant using the Black-Scholes option-pricing model was $4.67. There were no new options granted during the quarter ending March 31, 2006.

The weighted average fair value for new options granted during the six months ended June 30, 2005, estimated on the date of grant using the Black-Scholes option-pricing model was $20.00. In connection with the sale of Express Tax Service, Inc. and EXPRESSTAX Franchise Corporation on January 1, 2005, 105,000 Incentive Stock Options under the 2002 Stock Option plan were cancelled and reissued as Non-Qualified Stock Options.

The weighted average fair value of options granted during 2005 as estimated on the date of grant using the Black-Scholes option-pricing model was $2.81 to $10.75 in 2005. The fair value of options granted is estimated on the date of grant using the following assumptions:
 
   
June 30, 2006
 
June 30, 2005
Dividend yield
 
2.80% to 3.70%
 
2.33% to 2.43%
Expected volatility
 
43.97% to 44.30%
 
61.76% to 96.76%
Risk-free interest rate
 
5.18%
 
3.34% to 3.86%
Expected life (in years)
 
2.04 to 2.86
 
2.59 to 2.63

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

Summary information about the Company’s stock options outstanding at June 30, 2006:
 
   
Range of
Exercise Price
 
Outstanding at
June 30, 2006
 
Weighted Average
Contractual
Periods in Years
 
Weighted
Average
Exercise Price
 
Exercisable at
June 30, 2006
 
1998 Plan
 
$
6.67
   
46,250
   
2.53
 
$
6.67
   
46,250
 
2001 Franchise Plan
   
-
   
-
   
-
   
-
   
-
 
2002 Plan
 
$
8.33 - $17.00
   
736,408
   
2.86
 
$
13.13
   
306,958
 
 
(9) Subordinated Debt

On July 31, 2003, we completed a private placement of our 6% Senior Subordinated Notes (the “July 2003 Notes”), which were offered and sold to accredited investors as units consisting of one July 2003 Note with a principal amount of $1,000 and warrants (the “2003 Warrants”) to purchase shares of our Common Stock. We sold an aggregate of $7.5 million of July 2003 Notes in this placement, which resulted in proceeds to us (net of placement agent fees of $450,724 and offering expenses of $110,778) of $6,938,498.

-17-

 
21st Century Holding Company
Notes to Consolidated Financial Statements
 
The July 2003 Notes pay interest at the annual rate of 6%, are subordinated to senior debt of the Company, and mature on July 31, 2006. Quarterly payments of principal and interest due on the July 2003 Notes may be made in cash or, at our option, in shares of our Common Stock. If paid in shares of Common Stock, the number of shares to be issued shall be determined by dividing the payment due by 95% of the weighted-average volume price for the Common Stock on Nasdaq as reported by Bloomberg for the 20 consecutive trading days preceding the payment date.
 
The 2003 Warrants issued in this placement to the purchasers of the July 2003 Notes and to the placement agent in the offering, J. Giordano Securities Group (“J. Giordano”), each entitle the holder to purchase ¾ of one share of our Common Stock at an exercise price of $12.744 per whole share (as adjusted for the Company’s three-for-two stock split) until July 31, 2006. The total number of shares issuable upon exercise of 2003 Warrants issued to the purchasers of the July 2003 Notes and to J. Giordano totaled 612,074. GAAP requires that detachable warrants be valued separately from debt and included in paid-in capital.  Based on the terms of the purchase agreement with the investors in the private placement, management determined that the July 2003 Warrants had zero value at the date of issuance.

On or about July 31, 2006, the July 2003 notes and the warrants were retired. Of the 612,074 shares that could have been issued in connection with the July 2003 notes, 301,430 were exercised and issued, 225,000 were reacquired in the open market by us and 85,644 were unexercised.

On September 30, 2004, we completed a private placement of 6% Senior Subordinated Notes due September 30, 2007 (the “September 2004 Notes”). These notes were offered and sold to accredited investors as units consisting of one September 2004 Note with a principal amount of $1,000 and warrants to purchase shares of our Common Stock (the “2004 Warrants”), the terms of which are similar to our July 2003 Notes and 2003 Warrants, except as described below. We sold an aggregate of $12.5 million of units in this placement, which resulted in proceeds (net of placement agent fees of $700,000 and offering expenses of $32,500) to us of $11,767,500.

The September 2004 Notes pay interest at the annual rate of 6%, mature on September 30, 2007, and rank pari passu in terms of payment and priority to the July 2003 Notes. Quarterly payments of principal and interest due on the September 2004 Notes, like the July 2003 Notes, may be made in cash or, at our option, in shares of our Common Stock. If paid in shares of Common Stock, the number of shares to be issued shall be determined by dividing the payment due by 95% of the weighted-average volume price for the Common Stock on Nasdaq as reported by Bloomberg for the 20 consecutive trading days preceding the payment date.

The 2004 Warrants issued to the purchasers of the September 2004 Notes and to the placement agent in the offering, J. Giordano, each entitle the holder to purchase one share of our Common Stock at an exercise price of $12.75 per share and will be exercisable until September 30, 2007. The number of shares issuable upon exercise of the 2004 Warrants issued to purchasers equaled $12.5 million divided by the exercise price of the warrants, and totaled 980,392. The number of shares issuable upon exercise of the 2004 Warrants issued to J. Giordano equaled $500,000 divided by the exercise price of the warrants, and totaled 39,216. GAAP requires that detachable warrants be valued separately from debt and included in paid-in capital. Based on the terms of the purchase agreement with the investors in the private placement, management determined that the September 2004 Warrants had zero value at the date of issuance. Of the 1,019,000 warrants issued in connection with the September 2004 notes, 539,868 have been exercised to date.

The terms of the 2004 and 2003 Warrants provide for adjustment of the exercise price and the number of shares issuable thereunder upon the occurrence of certain events typical for private offerings of this type.

As indicated on the table below, we paid, pursuant to the terms of the July 2003 Notes and in accordance with the contractual computations, the quarterly payments of principal and interest due in shares of our Common Stock.

-18-

 
21st Century Holding Company
Notes to Consolidated Financial Statements

Quarterly payment due date
 
2006
 
2005
 
January 31,
   
-
   
55,537
 
April 30,
   
38,420
   
-
 
July 31,
   
-
   
-
 
October 31,
   
-
   
-
 
Total common stock issued
   
38,420
   
55,537
 

As indicated on the table below, we paid, pursuant to the terms of the September 2004 Notes and in accordance with the contractual computations, the quarterly payments of principal and interest due in shares of our Common Stock.
 
Quarterly payment due date
 
2006
 
2005
 
January 31,
   
-
   
103,870
 
April 30,
   
68,696
   
-
 
July 31,
   
-
   
-
 
October 31,
   
-
   
-
 
Total common stock issued
   
68,696
   
103,870
 

The Company retains the privilege of repaying these notes in cash or by the issuance of common stock. Through the quarter ended March 31, 2005, we made our quarterly installment payments by issuing common stock. Our regularly scheduled payment of principal and interest in connection with the July 2003 and September 2004 Notes were due on April 30, 2006 and were paid by issuance of 38,420 shares and 68,696 shares of our Common Stock, respectively.

For the July 2003 Notes, the quarterly principal and interest payments totaling approximately $0.6 million per payment are due quarterly with the last installment paid in cash on July 31, 2006.

For the September 2004 Notes, the quarterly principal and interest payments, totaling approximately $1.2 million per payment, are due quarterly for two more years with the last installment due on September 30, 2007. The scheduled loan payments for the next two years are as follows:


For the period
     
Year ending December 31, 2006
 
$
2,083,334
 
Year ending December 31, 2007
   
4,166,666
 
Total
 
$
6,250,000
 

(10) Discontinued Operations

In 2005 the Company has separately disclosed the operating, investing and financing portions of the cash flows attributable to its discontinued operations, which in prior periods were reported on a combined basis with its continuing operations.

The Company completed the transaction contemplated by the Stock Purchase and Redemption Agreement dated January 3, 2005 with Express Tax Service, Inc. (“Express Tax”), Robert J. Kluba and Robert H. Taylor. The Company was the beneficial and record owner of 80% of the issued and outstanding stock of Express Tax, which in turn owned 100% of the issued and outstanding stock of EXPRESSTAX Franchise Corporation (“EXPRESSTAX”). Mr. Kluba was the President and a director of Express Tax and EXPRESSTAX, and the owner of the remaining 20% of the issued and outstanding stock of Express Tax. The sale of the assets closed on January 13, 2005 with an effective date of January 1, 2005.

The Company received at closing a cash payment of $311,351, which reflected the purchase price of $660,000 for all of the Company’s common stock in Express Tax, less $348,649 representing intercompany receivables owed to Express Tax by the Company. The Company also received a payment of $1,200,000 in exchange for the Company’s agreement not to compete with the current business of Express Tax and EXPRESSTAX for five years following the closing. The Company’s investment in its subsidiary totaled $230,000.

-19-

 
21st Century Holding Company
Notes to Consolidated Financial Statements
 
In connection with the transaction, the Company has extended the expiration dates for the 75,000 outstanding stock options previously granted to Mr. Kluba and the 30,000 outstanding stock options previously granted to Mr. Kluba’s wife, such that 80% of such stock options shall expire, if not exercised, on the first anniversary date of the closing and the remaining 20% of such stock options shall expire on the second anniversary date of the closing; none of these options were exercisable for the six-month period following the closing.
 
-20-

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

Item 2

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

Forward-Looking Statements

Statements in this report or in documents that are incorporated by reference that are not historical fact are forward-looking statements that are subject to certain risks and uncertainties that could cause actual events and results to differ materially from those discussed herein. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” or “continue” or the negative other variations thereof or comparable terminology are intended to identify forward-looking statements. The risks and uncertainties include, without limitation, uncertainties related to estimates, assumptions and projections relating to losses from the nine hurricanes that occurred in fiscal years 2005 and 2004 and other estimates, assumptions and projections contained in this 10-Q; inflation and other changes in economic conditions (including changes in interest rates and financial markets); pricing competition and other initiatives by competitors; ability to obtain regulatory approval for requested rate changes and the timing thereof; legislative and regulatory developments; the outcome of litigation pending against us, including the terms of any settlements; risks related to the nature of our business; dependence on investment income and the composition of our investment portfolio; the adequacy of our liability for loss and loss adjustment expense; insurance agents; claims experience; ratings by industry services; catastrophe losses; reliance on key personnel; weather conditions (including the severity and frequency of storms, hurricanes, tornadoes and hail); changes in driving patterns and loss trends; acts of war and terrorist activities; court decisions and trends in litigation and health care and auto repair costs; and other matters described from time to time by us in this report, and our other filings with the SEC.
 
You are cautioned not to place reliance on these forward-looking statements, which are valid only as of the date they were made. The Company undertakes no obligation to update or revise any forward-looking statements to reflect new information or the occurrence of unanticipated events or otherwise. In addition, readers should be aware that GAAP prescribes when a company may reserve for particular risks, including litigation exposures. Accordingly, results for a given reporting period could be significantly affected if and when a reserve is established for a major contingency. Reported results may therefore appear to be volatile in certain accounting periods.

Overview

The insurance industry uses terminology that is unfamiliar to many people. The Company has denoted certain terms in the footnotes to its consolidated financial statements beginning on page seven. It may be helpful for you to refer to these definitions as you read this Quarterly Report on Form 10-Q.

We are an insurance holding company, which, through our subsidiaries and our contractual relationships with our independent agents and general agents, control substantially all aspects of the insurance underwriting, distribution and claims process. We are authorized to underwrite homeowners’ property and casualty insurance, commercial general liability insurance, and personal automobile insurance, in various states with various lines of authority through our wholly owned subsidiaries, Federated National and American Vehicle. We internally process claims made by our own and third party insureds through our wholly owned claims adjusting company, Superior.

Federated National is authorized to underwrite personal automobile insurance, homeowners’ property and casualty insurance and mobile home property and casualty insurance in Florida as an admitted carrier. American Vehicle is authorized to underwrite personal and commercial automobile insurance and commercial general liability insurance in Florida as an admitted carrier. In addition, American Vehicle is authorized to underwrite commercial general liability insurance in Georgia, Kentucky, South Carolina and Virginia as a surplus lines carrier and in Texas, Louisiana and Alabama as an admitted carrier. American Vehicle operations in Florida, Georgia, Louisiana, Texas, South Carolina and Virginia are on-going. American Vehicle operations in Alabama and Kentucky are expected to begin this year. American Vehicle has pending applications, in various stages of approval, to be authorized as a surplus lines carrier in the states of Missouri, California and Arkansas.

-21-

 
21st Century Holding Company
 
During the six months ended June 30, 2006, 75.2%, 19.1% and 5.7% of the premiums we underwrote were for homeowners’ property and casualty insurance, commercial general liability insurance and personal automobile insurance, respectively. During the six months ended June 30, 2005, 60.3%, 18.8% and 20.9% of the premiums we underwrote were for homeowners’ property and casualty insurance, commercial general liability insurance and personal automobile insurance, respectively. We internally process claims made by our own and third-party insureds through our wholly owned claims adjusting company, Superior. We also offer premium financing to our own and third-party insureds through our wholly owned subsidiary, Federated Premium.
 
We market and distribute our own and third-party insurers’ products and our other services primarily in Central and South Florida, through contractual relationships with a network of approximately 1,500 independent agents and a select number of general agents.

Assurance MGA, a wholly owned subsidiary, acts as Federated National’s and American Vehicle’s exclusive managing general agent. Assurance MGA currently provides all underwriting policy administration, marketing, accounting and financial services to Federated National and American Vehicle, and participates in the negotiation of reinsurance contracts. Assurance MGA generates revenue through a 6% commission fee from the insurance companies' net written premium, policy fee income of $25 per policy and other administrative fees from the marketing of companies’ products through the Company’s distribution network. The 6% commission fee from Federated National and American Vehicle was made effective January 1, 2005. Assurance MGA plans to establish relationships with additional carriers and add additional insurance products in the future.

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. Also, 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 operate in highly competitive markets and face competition from both national and regional insurance companies, many of whom are larger and have greater financial and other resources, have better A.M. Best ratings and offer more diversified insurance coverage. Our competitors include companies which market their products through agents, as well as companies which 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. We may also face competition from new or temporary entrants in our niche markets. In some cases, such entrants may, because of inexperience, desire for new business or other reasons, price their insurance below ours. 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. Comparable companies which compete with us in the homeowners’ market include Allstate Insurance Company, State Farm Insurance Company, First Floridian Insurance Company, and Vanguard Insurance Company. During the quarter ended June 30, 2006 the Florida OIR announced the take over of three of our major competitors due to the poor financial condition stemming from the effects of last year’s catastrophic hurricanes. We are currently experiencing an increase in policy volume relative to our homeowners’ insurance products due to the narrowed competition.

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

With respect to automobile insurance in Florida, we compete with more than 100 companies, which underwrite personal automobile insurance. Comparable companies which compete with us in the personal automobile insurance market include Affirmative Insurance Holdings, Inc., which acquired our non-standard automobile agency business in Florida in December 2004, U.S. Security Insurance Company, United Automobile Insurance Company, Direct General Insurance Company and Security National Insurance Company, as well as major insurers such as Progressive Casualty Insurance Company.

Competition could have a material adverse effect on our business, results of operations and financial condition.

-22-

 
21st Century Holding Company
 
Our executive offices are located at 3661 West Oakland Park Boulevard, Suite 300, Lauderdale Lakes, Florida and our telephone number is (954) 581-9993.
 
Critical Accounting Policies
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us 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 our evaluation of the determination of liability for unpaid losses and LAE. In addition, significant estimates form the basis for our reserves with respect to finance contracts, premiums receivable, deferred income taxes, deferred acquisition costs and loss contingencies. Various assumptions and other factors underlie the determination of these significant estimates. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, as well as current and expected economic conditions. We periodically re-evaluate these significant factors and make adjustments where facts and circumstances dictate.
 
Using the various complex actuarial methods and different underlying assumptions, our actuaries produce a number of point estimates for each class of business. After reviewing the appropriateness of the underlying assumptions, management selects the carried reserve for each class of business. We do not calculate a range of loss reserve estimates. Ranges are not a true reflection of the potential volatility between carried loss reserves and the ultimate settlement amount of losses incurred prior to the balance sheet date. This is due to the fact that ranges are developed based on known events as of the valuation date whereas the ultimate disposition of losses is subject to the outcome of events and circumstances that were unknown as of the valuation date.
 
Among the numerous factors that contribute to the inherent uncertainty in the process of establishing loss reserves are the following:
 
·  
Changes in the market and inflation rate for goods and services related to covered damages such as medical care and home repair costs,
 
·  
Changes in the judicial environment regarding the interpretation of policy provisions relating to the determination of coverage,
 
·  
Changes in the general attitude of juries in the determination of liability and damages,
 
·  
Legislative actions,
 
·  
Changes in our estimates of the number and/or severity of claims that have been incurred but not reported as of the date of the financial statements,
 
·  
Changes in our underwriting standards, and
 
·  
Any changes in our claim handling procedures.
 
We establish and evaluate unpaid loss reserves using recognized standard statistical loss development methods and techniques. Each component of loss reserves is affected by the expected frequency and average severity of claims. Such amounts are analyzed using statistical techniques on historical claims data and adjusted when appropriate to reflect perceived changes in loss patterns. Data is analyzed by policy coverage, jurisdiction of loss, reporting date and occurrence date, among other factors.
 
Average reserve amounts are established for automobile claims prior to the development of an individual case reserve. Average reserve amounts are driven by the estimated average severity per claim and the number of new claims opened.
 
For other than automobile lines, claims adjusters generally establish individual claim case loss and LAE reserve estimates as soon as the specific facts and merits of each claim can be evaluated. Case reserves represent the amounts, that in the judgment of the adjusters, are reasonably expected to be paid in the future to completely settle the claim, including expenses. Individual case reserves are revised as more information becomes known.
 
-23-

 
21st Century Holding Company
 
For unreported claims, incurred but not reported (“IBNR”) reserve estimates are calculated by first projecting the ultimate number of claims expected (reported and unreported) for each significant coverage by using historical quarterly and monthly claim counts, to develop age-to-age projections of the ultimate counts by accident quarter. Reported claims are subtracted from the ultimate claim projections to produce an estimate of the number of unreported claims. The number of unreported claims is multiplied by an estimate of the average cost per unreported claim to produce the IBNR reserve amount. Actuarial techniques are difficult to apply reliably in certain situations, such as to new legal precedents, class action suits, long-term claimants from personal injury protection coverage or recent catastrophes. Consequently, supplemental IBNR reserves for these types of events may be established.
 
New Accounting Pronouncements 
 
The material set forth in Item 1, Part I, “Financial Statements - Note 2 - Summary of Significant Accounting Policies and Practices” of this Form 10-Q is incorporated herein by reference.

At June 30, 2006, the Company has three stock-based employee compensation plans, which are described in Item 1, Part I, “Financial Statements - Note 8 - Stock Compensation Plans” of this Form 10-Q. Prior to January 1, 2006, we accounted for those plans under the recognition and measurement provisions of stock-based compensation using the intrinsic value method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation. Under these provisions, no stock-based employee compensation cost was recognized in the Statement of Operations for the years ended December 31, 2005 or 2004 as all options granted under those plans had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. Effective January 1, 2006, the Company adopted the fair value recognitions provisions of FASB Statement No. 123 (R) using the modified-prospective-transition method. Under that transition method, compensation cost recognized for the six months and three months ending June 30, 2006 include: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of Statement 123, totaling approximately $117,000 and $157,000, respectively and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair-value estimated in accordance with the provisions of SFAS No. 123R; and totaling approximately nothing and $6,000, respectively. Results for prior periods have not been restated and there were no cumulative adjustments recorded in the March 31, 2006 Statement of Operations as a result of the adoption of FASB Statement 123 (R).

As a result of adopting SFAS No. 123R on January 1, 2006, the Company’s income from continuing operations before provision for income taxes and net income for the six months ended June 30, 2006, are lower by approximately $280,000 and $175,000, respectively, than if it had continued to account for share-base compensation under ABP Opinion No. 25. For the three months ended June 30, 2006, income from continuing operations before provision for income taxes and net income are lower by approximately $123,000 and $75,000, respectively, than if it had continued to account for share-base compensation under ABP Opinion No. 25.

Basic and diluted earnings per share for the six month period ended June 30, 2006 for basic and diluted would have been $2.00 and $1.87, respectively, if the Company had not adopted SFAS No. 123R, compared to reported basic and diluted earnings per share of $2.02 and $1.89, respectively.

Basic and diluted earnings per share for the three month period ended June 30, 2006 for basic and diluted would have been $1.19 and $1.18, respectively, if the Company had not adopted SFAS No. 123R, compared to reported basic and diluted earnings per share of $1.20 and $1.19, respectively.

Our estimate for compensation cost related to non-vested awards not yet recognized as of January 1, 2006 total approximately $1.7 million and the weighted average period over which it is expected to be recognized ranges between 2.6 and 2.82 years.

The weighted average fair value for the 48,500 new options granted during the three months ended June 30, 2006, estimated on the date of grant using the Black-Scholes option-pricing model was $4.67. There were no new options granted during the quarter ended March 31, 2006. The weighted average fair value for new options granted during the six months ended June 30, 2005, estimated on the date of grant using the Black-Scholes option-pricing model was $20.00. The fair value of options granted is estimated on the date of grant using the following assumptions:

-24-

 
21st Century Holding Company

   
June 30, 2006
 
June 30, 2005
Dividend yield
 
2.80% to 3.70%
 
2.33% to 2.43%
Expected volatility
 
43.97% to 44.30%
 
61.76% to 96.76%
Risk-free interest rate
 
5.18%
 
3.34% to 3.86%
Expected life (in years)
 
2.04 to 2.86
 
2.59 to 2.63

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

There were no changes in the quantity or type of instruments used in the share-based payment programs, such as a shift from share options to restricted shares. Additionally, there were no changes in the terms of the share-based payment arrangements, such as the addition of performance conditions.

On December 5, 2005, our Board of Directors granted a modification to the outstanding share-based stock options prior to the adoption of SAFS 123 (R). The modification provided that the grant price for 92,000 outstanding share-based stock options under the 2002 Stock Option Plan (both vested and unvested) be repriced from $20.00 per share as originally issued to a new grant price of $16.00 per share. All other features of the stock options were unchanged. At the close of business on the date of the modification the company’s common stock traded at $14.35 per share. The effect of the modification to these stock options was reflected in the pro forma disclosure for the period ended December 31, 2005. The reason for the reprice was to reinstate the desired motivational effect and provide a refreshed incentive to the holders of those stock options.

Analysis of Financial Condition
As of June 30, 2006 as Compared to December 31, 2005

Total Investments

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

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

Total Investments increased $33.7 million, or 33.6%, to $133.8 million as of June 30, 2006, as compared to $100.1 million as of December 31, 2005. The increase is primarily a result of our investment of the proceeds from an increase in written insurance premiums.

The fixed maturities and the equity securities that are available for sale and carried at fair value represent 85.3% of total investments as of June 30, 2006, as compared to 80.3% as of December 31, 2005.

We did not hold any non-traded investment securities during 2006 or 2005.

Below is a summary of net unrealized gains and (losses) at June 30, 2006 and December 31, 2005 by category.

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21st Century Holding Company

   
Unrealized Gains and (Losses)
 
   
June 30, 2006
 
December 31, 2005
 
Fixed maturities:
         
U.S. government obligations and agency obligations
 
$
(1,310,967
)
$
(618,703
)
Obligations of states and political subdivisions
   
(328,185
)
 
(135,305
)
     
(1,639,152
)
 
(754,008
)
               
Corporate securities:
             
Communications
   
3,401
   
14,735
 
Financial
   
(81,665
)
 
(225,768
)
Other
   
(20,893
)
 
(19,681
)
     
(99,157
)
 
(230,714
)
               
               
Equity securities:
             
Common stocks
   
(1,079,979
)
 
(1,479,994
)
               
Total unrealized gains and (losses), net
 
$
(2,818,288
)
$
(2,464,716
)

During December 2005, we classified $19.7 million of our bond portfolio as held-to-maturity. The decision to classify this layer of our bond portfolio as held-to-maturity was predicated on our intention to establish an irrevocable letter of credit in order to facilitate business opportunities in connection with our commercial general liability program. During April 2006, American Vehicle finalized the irrevocable letter of credit in conjunction with the 100% Quota Share Reinsurance Agreement with Republic Underwriters Insurance Company.

Pursuant to FASB 115, the Company records the unrealized losses, net of estimated income taxes that are associated with that part of our portfolio classified as available for sale through the Shareholders' equity account titled Other Comprehensive Income. Management periodically reviews the individual investments that comprise our portfolio in order to determine whether a decline in fair value below our cost is either 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, principle 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 investments held at June 30, 2006 and December 31, 2005 were comprised mainly of United States government and agency bonds as well as municipal bonds which are viewed by the Company as conservative and less risky holdings however, sensitive to interest rate changes. There is a smaller concentration of corporate bonds predominantly held in the financial and conglomerate industries. Approximately two-thirds of the equity holdings are in income funds while the other third is invested in equities related to the mortgage investment industry and business service industry.

All of our securities are in good standing and are not impaired as defined by FASB 115. We have determined that none of our securities qualify for other than temporary impairment or permanent impairment status. Our rational for this determination includes, but is not limited to Standard and Poor’s rating of no less than BB++, no delinquent interest and dividend payments, near term maturity dates and our ability and intent to hold these securities for a period sufficient to allow for an anticipated recovery in market value.
 
-26-

 
21st Century Holding Company

Cash and Cash Equivalents
 
Cash and cash equivalents, which include cash, certificates of deposits, and money market accounts increased $3.9 million, or 64.0%, to $10.0 million as of June 30, 2006, as compared to $6.1 million as of December 31, 2005. These balances are held primarily in money market accounts and are available for the settlement of hurricanes related claims.

Receivable for Investments Sold

Receivable for investments sold increased to $17.0 million as of June 30, 2006, as compared to nothing as of December 31, 2005. The increase is a result of investment trading activity that occurred in late June 2006 and did not settle until early July 2006.

Finance Contracts Receivable, Net of Allowance for Credit Losses

Finance contracts receivable, net of allowance for credit losses, decreased $3.6 million, or 49.1%, to $3.7 million as of June 30, 2006, as compared to $7.3 million as of December 31, 2005. The decrease is primarily due to our sale in December 2004 of our assets related to our non-standard automobile insurance agency business in Florida and the associated financed contracts. We anticipate a continued decline in the financed contracts receivable, net over the future short term and its related conversion to cash, cash equivalents and investments.

Prepaid Reinsurance Premiums

Prepaid reinsurance premiums decreased $9.3 million, or 76.4%, to $2.9 million as of June 30, 2006, as compared to $12.1 million as of December 31, 2005. The decrease is due to the amortization of prepaid reinsurance premiums associated with our homeowners’ book of business.

Premiums Receivable, Net of Allowance for Credit Losses

Premiums receivable, net of allowance for credit losses, increased $2.7 million, or 36.3%, to $10.2 million as of June 30, 2006, as compared to $7.5 million as of December 31, 2005.

The largest component of the increase relates to our expanding homeowners’ insurance business for which premiums receivable increased $2.9 million, or 152.6%, to $4.9 million as of June 30, 2006, as compared to $1.9 million as of December 31, 2005. The increase in the homeowner’s receivable is due to the Company’s success in expanding homeowner’s written premium to new customers and the implementation of overall rate increases.

Additional components of the premium receivable include amounts in connection with our commercial general liability insurance business which increased $0.9 million, or 38.7%, to $3.1 million as of June 30, 2006, as compared to $2.3 million as of December 31, 2005.

Premiums receivable in connection with our automobile line of business decreased $1.1 million, or 25.2%, to $3.1 million as of June 30, 2006, as compared to $4.2 million as of December 31, 2005. The decrease in automobile related premiums receivable is associated with the sale of our distribution channels in connection with the sale of our agencies, effective December 31, 2004.

Reinsurance Recoverable

Reinsurance recoverable decreased $120.5 million, or 88.2%, to $16.2 million as of June 30, 2006, as compared to $136.7 million as of December 31, 2005. The decrease is due to the timing of settlements with our reinsurers in connection with the adjustment of loss and LAE claims as they relate to costs recoverable under our reinsurance agreements. All amounts are considered current; the private reinsurance recoverable is collateralized by irrevocable letters of credit in favor of Federated National.

Deferred Policy Acquisition Costs

Deferred policy acquisition costs increased $2.8 million, or 30.1%, to $11.9 million as of June 30, 2006, as compared to $9.2 million as of December 31, 2005. The increased production volume for both the homeowners’ and commercial general liability product lines is the reason for the modest increase to this asset.

-27-

 
21st Century Holding Company

Deferred Income Taxes, net
 
Deferred income taxes, net, increased $2.3 million, or 84.8%, to $5.0 million as of June 30, 2006, as compared to $2.7 million as of December 31, 2005. The increase is comprised primarily of $2.4 million related to discounted unearned premiums and $0.9 million in connection with the sale of our property in Lauderdale Lakes, offset by $1.0 million associated with deferred policy acquisition costs.

Property, Plant and Equipment, net

Property, plant and equipment, net, decreased $2.5 million, or 63.6%, to $1.4 million as of June 30, 2006, as compared to $3.9 million as of December 31, 2005. Effective on or about March 1, 2006, 21st Century sold its interest in the Lauderdale Lakes property to an unrelated party for approximately $5.0 million cash and a $0.9 million six year 5% note, generating a gain on sale totaling approximately $2.9 million. 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 February 2011. The Company recognized a deferred gain in connection with the sale totaling approximately $2.8 million.
 
Other Assets

Other assets increased $0.8 million, or 17.3%, to $5.4 million as of June 30, 2006, as compared to $4.6 million as of December 31, 2005. Major components of other assets are as follows:

   
June 30, 2006
 
December 31, 2005
 
Accrued interest income
 
$
1,006,385
 
$
734,059
 
Notes receivable
   
889,583
   
-
 
Unamortized loan costs
   
155,552
   
310,832
 
Compensating cash balances
   
9,359
   
363,021
 
Due from sale of discontinued operations, net
   
-
   
410,000
 
Prepaid expenses
   
364,445
   
349,138
 
Recoupment of assessments
   
2,910,324
   
2,025,210
 
Other
   
35,502
   
387,803
 
Total
 
$
5,371,150
 
$
4,580,063
 
 
Unpaid Losses and LAE

Unpaid losses and LAE decreased $122.7 million, or 79.7%, to $31.3 million as of June 30, 2006, as compared to $154.0 million as of December 31, 2005. The decrease in unpaid losses and LAE relates to our payment patterns primarily relative to the settling of hurricane related claims. The composition of unpaid loss and LAE by product line is as follows:

   
June 30, 2006
 
December 31, 2005
 
Homeowners'
 
$
15,937,780
 
$
135,173,026
 
Commercial general liability
   
4,474,457
   
3,661,256
 
Automobile
   
10,931,890
   
15,204,261
 
   
$
31,344,127
 
$
154,038,543
 
 
Factors that affect unpaid losses and LAE include the estimates made on a claim-by-claim basis known as “case reserves” coupled with bulk estimates known as IBNR. Periodic estimates by management of the ultimate costs required to settle all claim files are based on the Company’s analysis of historical data and estimations of the impact of numerous factors such as (i) per claim information; (ii) company and industry historical loss experience; (iii) legislative enactments, judicial decisions, legal developments in the awarding of damages, and changes in political attitudes; and (iv) trends in general economic conditions, including the effects of inflation. Management revises its estimates based on the results of its analysis. This process assumes that 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.

-28-

 
21st Century Holding Company

Unearned Premium
 
Unearned premiums increased $23.2 million, or 37.5%, to $85.0 million as of June 30, 2006, as compared to $61.8 million as of December 31, 2005. The increase was due to a $22.6 million increase in unearned homeowners’ insurance premiums, a $4.1 million increase in unearned commercial general liability premiums, and a $3.5 million decrease in unearned automobile premiums. These changes reflect our continued emphasis in 2006 on property and commercial general liability insurance products.
 
Premium Deposits

Premium deposits increased $1.3 million, or 58.7%, to $3.4 million as of June 30, 2006, as compared to $2.1 million as of December 31, 2005. Premium deposits are monies received on policies not yet in force as of June 30, 2006. The change is due to our policyholders purchasing patterns, the Company’s marketing efforts and our policies renewal patterns.

Revolving Credit Outstanding

Revolving credit outstanding decreased to nothing as of June 30, 2006, as compared to $0.2 million as of December 31, 2005. The decrease is due to our cash management efforts, requested credit reduction from the lender, and sale in December 2004 of our assets related to our non-standard automobile insurance agency business in Florida and the derived finance contracts receivable.

Bank Overdraft

Bank overdraft decreased $1.9 million, or 15.9%, to $10.3 million as of June 30, 2006, as compared to $12.2 million as of December 31, 2005. The bank overdraft relates to hurricane-related loss and LAE disbursements paid but not yet presented for payment by the policyholder or vendor. The decrease relates to our payment patterns in relationship to the rate at which those cash disbursements are presented to the bank for payment.

Funds Held Under Reinsurance Treaties

Funds held under reinsurance treaties remained relatively unchanged at $1.6 million as of June 30, 2006, as compared to $1.5 million as of December 31, 2005. During its regularly scheduled meeting on August 17, 2005, the Board of Governors of Citizens determined a 2004 plan year deficit existed in their High Risk Account. Citizen’s Board decided that a $515 million Regular Assessment was in the best interest of Citizens and consistent with Florida Statutes. On this basis, Citizen’s Board certified for a Regular Assessment. Federated National’s participation in this assessment totaled $2.0 million. Provisions contained in our excess of loss reinsurance policies provide for their participation totaling $1.5 million of our $2.0 million assessment. Pursuant to Section 627.3512, Florida Statutes, insurers are permitted to recoup the assessment by adding a surcharge to policies in an amount not to exceed the amount paid by the insurer to Citizens. Federated National is currently underwriting the recoupment in connection with this assessment which began during the later part of the first quarter of 2006. As noted above, Federated National is entitled to recoup this assessment, and will subrogate $1.5 million to our reinsurers.

Income Taxes Payable

Income taxes payable increased $4.7 million, or 155.6%, to $7.7 million as of June 30, 2006, as compared to $3.0 million as of December 31, 2005. The increase is due to the one time gain in connection with the sale of our property in Lauderdale Lakes and our continued profitable operations.

Subordinated Debt

Subordinated debt decreased $3.3 million, or 32.7%, to $6.9 million as of June 30, 2006, as compared to $10.2 million as of December 31, 2005. The decrease is in connection with the scheduled quarterly principle payments.

Deferred Gain from Sale of Property

-29-

 
21st Century Holding Company

Deferred gain from sale of property increased to $2.8 million as of June 30, 2006 as compared to nothing as of December 31, 2005. In accordance with the provisions of FASB No. 13, we will amortize the deferred gain over the term of the lease-back which is scheduled to end in December 2011.
 
Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses increased $1.5 million, or 35.8%, to $5.6 million as of June 30, 2006, as compared to $4.2 million as of December 31, 2005. The increase is due to our cash management efforts and timing of payments with our trade vendors.

Results of Operations
Three Months Ended June 30, 2006 as Compared to Three Months Ended June 30, 2005

Gross Premiums Written

Gross premiums written increased $19.4 million, or 61.8%, to $50.8 million for the three months ended June 30, 2006, as compared to $31.4 million for the three months ended June 30, 2005. The following table denotes gross premiums written by major product line.

   
Three months ended June 30,
 
   
2006
 
2005
 
   
Amount
 
Percentage
 
Amount
 
Percentage
 
                   
Automobile
 
$
660,317
   
1.30
%
$
3,829,250
   
12.21
%
Homeowners'
   
41,855,449
   
82.47
%
 
21,163,250
   
67.48
%
Commercial liability
   
8,236,906
   
16.23
%
 
6,370,408
   
20.31
%
                           
Gross written premiums
 
$
50,752,672
   
100.00
%
$
31,362,908
   
100.00
%
 
As noted above, the Company’s efforts to expand commercial general liability lines of insurance products are coming to fruition, as reflected by increased premiums written of $1.9 million, or 29.3 % to $8.2 million for the three months ended June 30, 2006, as compared to $6.4 million for the same three month period last year.

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

   
Three months ended June 30,
 
   
2006
 
2005
 
   
Amount
 
Percentage
 
Amount
 
Percentage
 
State
                 
Florida
 
$
6,174,391
   
75.1
%
$
5,475,418
   
85.9
%
Georgia
   
234,864
   
2.8
%
 
332,163
   
5.3
%
Lousiania
   
1,536,053
   
18.6
%
 
562,827
   
8.8
%
Texas
   
291,598
   
3.5
%
 
-
   
0.0
%
Total
 
$
8,236,906
   
100.0
%
$
6,370,408
   
100.0
%

The Company’s sale of homeowners’ policies increased $20.7 million, or 98.1% to $41.8 million for the three months ended June 30, 2006, as compared to $21.1 million in the same three months ended June 30, 2005. The increase in homeowners’ gross premiums written is primarily due to the Company’s rate increase and the addition of new customers.

The Company’s sale of auto insurance policies decreased by $3.2 million, or 82.8% to $0.7 million for the three months ended June 30, 2006, as compared to $3.8 million in the same three months ended June 30, 2005.

Gross Premiums Ceded

Gross premiums ceded increased to a debit balance of ($3.4) million for the three months ended June 30, 2006, as compared to a debit balance of ($2.1) million for the three months ended June 30, 2005. The increase is associated with the change in our prepaid reinsurance premiums.

-30-

 
21st Century Holding Company

Decrease in Prepaid Reinsurance Premiums  

The decrease in prepaid reinsurance premiums was $0.6 million for the three months ended June 30, 2006, as compared to $2.8 million for the three months ended June 30, 2005. The decreased charge against written premium is primarily associated with the timing of our reinsurance payments measured against the term of the underling reinsurance policies.
 
(Increase) in Unearned Premiums

The (increase) in unearned premiums was ($18.0) million for the three months ended June 30, 2006, as compared to ($4.6) million for the three months ended June 30, 2005. The change was due to a $19.5 million increase in unearned homeowners’ insurance premiums, a $1.7 million increase in unearned commercial general liability premiums, a $3.2 million decrease in unearned automobile premiums, and a $0.1 million decrease in unearned mobile home insurance premiums. These changes reflect our continued growth along our homeowners’ and commercial general liability lines of business. For further discussion, see “Unearned Premiums” above.

Finance Revenue

Finance revenue decreased $0.4 million, or 47.1%, to $0.5 million for the three months ended June 30, 2006, as compared to $0.9 million for the three months ended June 30, 2005. The decrease is primarily due to the sale in December 2004 of our assets related to our non-standard automobile insurance agency business in Florida and the finance revenue derived there-from.

Managing General Agent Fees

Managing general agent fees increased $0.1 million, or 16.6%, to $0.7 million for the three months ended June 30, 2006, as compared to $0.6 million for the three months ended June 30, 2005. The increase is associated with the number of policies issued during the respective periods.

Net Investment Income

Net investment income increased $0.7 million, or 77.0%, to $1.6 million for the three months ended June 30, 2006, as compared to $0.9 million for the three months ended June 30, 2005. The increase in investment income is primarily a result of the additional amounts of invested assets. Also affecting our net investment income was an increase in overall yield to 5.34% for the three months ended June 30, 2006 as compared to a yield of 4.44% for the three months ended June 30, 2005.

Net Realized Investment Gains 

Net realized investment gains increased $0.2 million, or 125.8% to $0.3 million for the three months ended June 30, 2006, as compared to $0.1 million for the three months ended June 30, 2005. The table below depicts the gains by investment category.
 
   
Net Realized Gains (Losses)
 
   
Three Months Ended June 30,
 
   
2006
 
2005
 
Fixed maturities:
             
U.S. government obligations and agencies
 
$
(32,516
)
$
-
 
Corporate securities:
             
Other
   
-
   
21,525
 
Equity securities:
             
Common stocks
   
315,857
   
103,985
 
               
Total net realized gains
 
$
283,341
 
$
125,510
 

-31-

 
 
21st Century Holding Company

Other Income

Other income increased $0.3 million, or 200.8%, to $0.5 million for the three months ended June 30, 2006, as compared to $0.2 million for the three months ended June 30, 2005. Major components of other income for the three months ended June 30, 2006 included approximately $153,000 in connection with our business interruption insurance proceeds stemming from Hurricane Wilma, $132,000 of commissions in connection with the national flood insurance program, $123,000 of commissions in connection with the acquisition of our current reinsurance program and $115,000 in connection with the recognition of our gain on the sale of our Lauderdale Lakes property

Loss and LAE

Loss 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

Loss and LAE decreased by $3.0 million, or 24.1%, to $9.3 million for the three months ended June 30, 2006, as compared to $12.3 million for the three months ended June 30, 2005. The decrease is attributable to the increase in loss and LAE incurred during the three months ended June 30, 2005 which was in connection with the adverse development associated with the 2004 hurricanes.

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. 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.

The table below reflects no effect to operations during the three months ended June 30, 2006 from the four hurricanes that occurred in July, August, September and October of 2005. As to Hurricane Wilma, despite the increase in claim count during the three months ended June 30, 2006, gross losses and reinsurance recoveries have increased by $8.3 million due primarily to an increase in average severity per claim.

2005 Hurricanes
 
Claim
Count
 
Gross
Losses
 
Reinsurance Recoveries
 
Net
Losses
 
       
(Dollars in millions)
 
Dennis (July 10)
   
2
 
$
-
 
$
-
 
$
-
 
Katrina (August 25)
   
2
   
-
   
-
   
-
 
Rita (September 20)
   
-
   
-
   
-
   
-
 
Wilma (October 24)
   
252
   
8.3
   
8.3
   
-
 
                           
Total Loss Estimate
   
256
 
$
8.3
 
$
8.3
 
$
-
 
 
The following table reflects the changes during the three months ended June 30, 2006 in connection with the four hurricanes that occurred in August and September of 2004. A charge of $1.1 million occurred during the three months ended June 30, 2006 in connection with these storms.

-32-

 
 
21st Century Holding Company
 
 
2004 Hurricanes
 
Claim
Count
 
Gross
Losses
 
Reinsurance
Recoveries
 
Net
Losses
 
       
(Dollars in millions)
 
Charley (August 13)
   
3