UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 
WASHINGTON, D.C.  20549
FORM 10-K

x  Annual Report under Section 13 or 15(d) of the Securities Act of 1934
For the fiscal year ended December 31, 2008
or
¨ Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period of _____________to_______________
Commission file number:  0-2500111
21st Century Holding Company
(Exact name of registrant as specified in its Charter)

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

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

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

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

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

Securities registered pursuant to Section 12(g) of the Exchange Act:
None

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

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yesx No o

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See the 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 Act). YesoNo x

The aggregate market value of the Registrant’s common stock held by non-affiliates was $57,775,675 on June 30, 2008, computed on the basis of the closing sale price of the Registrant’s common stock on that date.

 As of March 16, 2009, the total number of common shares outstanding of Registrant's common stock was 8,013,894.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 2009 Annual Meeting of the Shareholders are incorporated by reference into Part III, of this Form 10K.
 
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21st Century Holding Company
 
Table of Contents

PART I
 
3
     
ITEM 1
BUSINESS
3
     
ITEM 1A
RISK FACTORS
24
     
ITEM 1B
UNRESOLVED STAFF COMMENTS
34
     
ITEM 2
PROPERTIES
34
     
ITEM 3
LEGAL PROCEEDINGS
35
     
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
35
     
PART II
 
35
     
ITEM 5
MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
35
     
ITEM 6
SELECTED FINANCIAL DATA
38
     
ITEM 7
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
40
     
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
66
     
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
68
     
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
110
     
ITEM 9A
CONTROLS AND PROCEDURES
110
     
ITEM 9B
OTHER INFORMATION
111
     
PART III
 
111
     
ITEM 10
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
111
     
ITEM 11
EXECUTIVE COMPENSATION
111
     
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
111
     
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
111
     
ITEM 14
PRINCIPAL ACCOUNTING FEES AND SERVICES
111
     
PART IV
 
112
     
ITEM 15
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K
112
     
SIGNATURES
 
115
 
 
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21st Century Holding Company

PART I

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

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

ITEM 1             BUSINESS

GENERAL

21st Century Holding Company (“21st Century”, “Company”, “we”, “us”) is an insurance holding company, which, through our subsidiaries and our contractual relationships with our independent agents and general agents, controls substantially all aspects of the insurance underwriting, distribution and claims processes. We are authorized to underwrite fire, allied lines, homeowners’ property and casualty insurance, commercial general liability insurance, commercial multi peril, inland marine, personal automobile insurance and commercial automobile insurance in various states with various lines of authority through our wholly owned subsidiaries, Federated National Insurance Company (“Federated National”) and American Vehicle Insurance Company (“American Vehicle”). We market and distribute our own and third-party insurers’ products and our other services primarily in Florida, through contractual relationships with a network of approximately 1,500 independent agents and a select number of general agents.

The insurable events during 2008, 2007 and 2006 did not include any weather related catastrophic events such as the well publicized series of hurricanes that occurred in Florida during 2005 and 2004. During 2008, 2007 and 2006 we processed property and liability claims stemming from our homeowners’, commercial general liability and private passenger automobile lines of business. Our automobile claims generally will exceed commercial general liability and homeowners’ claims with respect to frequency of claimant activity; however the per-claim severity in connection with our commercial general liability and homeowner lines would be expected to exceed the automobile line. Our reinsurance strategy serves to smooth the liquidity requirements imposed by the most severe insurable events and for all other insurable events we manage, at a micro and macro perspective, in the normal course of business.

Federated National is authorized to underwrite fire, allied lines, personal automobile, and homeowners’ property and casualty insurance in Florida as an admitted carrier. American Vehicle is authorized to underwrite commercial multi peril, inland marine and personal and commercial automobile insurance in Florida as an admitted carrier. In addition, American Vehicle is authorized to underwrite commercial general liability insurance in fifteen states, of which eleven states had ongoing operations in 2008, as either an admitted or non-admitted carrier. American Vehicle will continue its expansion of commercial general liability insurance into new states.

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

A non-admitted carrier is not licensed by the state, but is allowed to do business in that state and is strictly regulated to protect policyholders from a variety of illegal and unethical practices, including fraud. Sometimes, non-admitted carriers are referred to as “excess and surplus” lines carriers.  Non-admitted carriers are subject to considerably less regulation with respect to policy rates and forms.
 
 
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21st Century Holding Company

The table below denotes American Vehicle’s authority by state.
 
States
 
Admitted
carrier
 
Non-
Admitted
Carrier
Alabama
 
ü
   
Arkansas
     
ü
California
     
ü
Florida
 
ü
   
Georgia
     
ü
Kentucky
     
ü
Louisiana
 
ü
   
Maryland
     
ü
Missouri
     
ü
Nevada
     
ü
Oklahoma
     
ü
South Carolina
     
ü
Tennessee
     
ü
Texas
 
ü
   
Virginia
     
ü

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

During 2008 Federated National applied for and was granted, by the State of Florida, a license to underwrite fire and allied lines insurance as an admitted carrier. Operations under Federated National’s newly granted allied lines began in 2008 as a cedant for the insurance policies it underwrites for federal flood program. Operations under Federated National’s newly granted fire line of business is pending approval by the Florida Office of Insurance Regulation (“OIR”) and we expect to begin operations in 2009.

During the year ended December 31, 2008, 68.8%, 27.0%, 3.7% and 0.6% of the premiums we underwrote were for homeowners’ property and casualty insurance, commercial general liability insurance, federal flood, and personal automobile insurance, respectively. During the year ended December 31, 2007, 74.5%, 24.1% and 1.4% of the premiums we underwrote were for homeowners’ property and casualty insurance, commercial general liability insurance and personal automobile insurance, respectively.

Our business, results of operations and financial condition are subject to fluctuations due to a variety of factors. Abnormally high severity or frequency of claims in any period could have a material adverse effect on our business, results of operations and financial condition. In addition, if our estimated liabilities for unpaid losses and loss adjustment expenses (“LAE”) are less than actual losses and LAE, we will be required to increase reserves with a corresponding reduction in our net income in the period in which the deficiency is identified. We internally process claims made by our insureds through our wholly owned claims adjusting company, Superior Adjusting, Inc. (“Superior”).
 
Our executive offices are located at 3661 West Oakland Park Boulevard, Suite 300, Lauderdale Lakes, Florida and our telephone number is (954) 581-9993.
 
Our web site is located at www.21centuryholding.com. Information on our website is not incorporated by reference into this Form 10-K and should not be considered part of this Annual Report on Form 10-K or any other filing that we make with the SEC. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to such reports are available, free of charge, through our website as soon as reasonably practicable after we electronically file or furnish such material to the Securities and Exchange Commission (“SEC”). Further, a copy of this annual report on Form 10-K is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov.

 
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21st Century Holding Company

RECENT DEVELOPMENTS
 
Proposed Florida Legislation

Throughout 2008 industry leaders and lawmakers have met to discuss legislative options including a significant reduction of capacity in the Florida Hurricane Catastrophe Fund (“FHCF”), substantially increasing members’ co-insurance participation and the reorganization of the FHCF under the Florida Cabinet. Efforts by the Governor and Commissioner of Insurance at the Federal level to secure post catastrophic event liquidity commitments remain ongoing.

Additionally, the Board of Directors of the Florida Insurance Guaranty Association (“FIGA”) held separate meetings to discuss their continued financial challenges in connection with the insolvency of a particular insurance company that was assumed subsequent to the 2005 – 2006 hurricane season. At this time, we do not know if any new laws or regulations will be adopted in Florida which will impact our property and casualty insurance business in fiscal 2009 or any subsequent years.

BUSINESS STRATEGY

We expect that in 2009 we will capitalize on our operational efficiencies and business practices by:

 
·
expanding our lines of business, such as our recent approval to write allied line insurance and last year’s approval for commercial multi-peril and inland marine insurance in the State of Florida. While new lines of operations are in various stages of deployment, we expect to introduce many of these new insurance products during 2009;

 
·
continued expansion of our commercial general liability insurance product into additional states. In addition to our ongoing operations in eleven states, we expect to commence operations in four states where we obtained licenses to underwrite and sell commercial general liability insurance in 2008;

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

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

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

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

 
·
assumption of existing risks from other carriers;

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

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

Additionally, State of Florida legislative initiatives, increased competition, softening general market conditions, an unfolding economic downturn and additional loss development from catastrophic events over two years old suggest that continued financial challenges exist in 2009.

INSURANCE OPERATIONS AND RELATED SERVICES

General

We are authorized to underwrite fire, allied lines, homeowners’ property and casualty insurance, commercial general liability insurance, commercial multi peril, inland marine, personal automobile insurance and commercial automobile insurance in various states with various lines of authority through our wholly owned subsidiaries, Federated National and American Vehicle.

Federated National is authorized to underwrite fire, allied lines, personal automobile, and homeowners’ property and casualty insurance in Florida as an admitted carrier.

 
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21st Century Holding Company
 
American Vehicle is authorized to underwrite commercial multi peril, inland marine and personal and commercial automobile insurance in Florida as an admitted carrier. In addition, American Vehicle is authorized to underwrite commercial general liability insurance in fifteen states, of which eleven states had ongoing operations in 2008, as either an admitted or non-admitted carrier. American Vehicle will continue its expansion of commercial general liability insurance into new states.

In January 2008, the Florida OIR granted American Vehicle licenses to underwrite commercial multiple peril and inland marine lines of business as an admitted carrier.

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

   
Years Ended December 31,
 
   
2008
   
2007
   
2006
 
   
Premium
   
Percent
   
Premium
   
Percent
   
Premium
   
Percent
 
   
(Dollars in Thousands)
 
Gross written premiums:
                               
Automobile
  $ 487       0.6 %   $ 1,867       1.4 %   $ 6,064       4.0 %
Federal Flood
    3,263       3.7 %     -       0.0 %     -       0.0 %
Homeowners'
    60,709       68.7 %     99,502       74.5 %     114,388       74.9 %
Commercial General Liability
    23,790       27.0 %     32,222       24.1 %     32,213       21.1 %
Total gross written premiums
  $ 88,248       100.0 %   $ 133,591       100.0 %   $ 152,665       100.0 %
                                                 
Ceded premiums:
                                               
Automobile
  $ -       0.0 %   $ -       0.0 %   $ -       0.0 %
Federal Flood
    3,263       9.4 %     -       0.0 %     -       0.0 %
Homeowners'
    31,291       90.6 %     44,551       100.0 %     67,520       100.0 %
Commercial General Liability
    -       0.0 %     -       0.0 %     -       0.0 %
Total ceded premiums
  $ 34,553       100.0 %   $ 44,551       100.0 %   $ 67,520       100.0 %
                                                 
Net written premiums
                                               
Automobile
  $ 487       0.9 %   $ 1,867       2.1 %   $ 6,064       7.2 %
Federal Flood
    -       0.0 %     -       0.0 %     -       0.0 %
Homeowners'
    29,418       54.8 %     54,952       61.7 %     46,868       55.0 %
Commercial General Liability
    23,790       44.3 %     32,222       36.2 %     32,213       37.8 %
Total net written premiums
  $ 53,695       100.0 %   $ 89,041       100.0 %   $ 85,145       100.0 %
 
We marketed our insurance products through our network of independent agents and general agents during fiscal years 2008, 2007 and 2006.

Homeowners’ Property and Casualty Insurance

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

   
As of the years ended December 31
 
   
In-force policy count
 
   
2008
   
2007
   
2006
 
County
 
Amount
   
Percentage
 
Amount
   
Percentage
 
Amount
   
Percentage
 
                                     
Dade
    2,981       9.7 %     4,587       12.7 %     9,151       21.6 %
Broward
    3,629       11.8 %     4,446       12.3 %     6,629       15.6 %
West Palm Beach
    14,152       45.7 %     14,969       41.3 %     13,539       31.9 %
All others
    10,122       32.8 %     12,239       33.7 %     13,099       30.9 %
Total
    30,884       100.0 %     36,241       100.0 %     42,418       100.0 %
 
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21st Century Holding Company
 
Our homeowner insurance products typically provide maximum coverage in the amount of $750,000, with the aggregate maximum policy limit being approximately $1,350,000. We continually subject these limits to review though there were no changes during 2008. The approximate average premium on the policies currently in-force is $2,016, as compared with $2,769 for 2007, and the typical deductible is either $2,500 or $1,000 for non-hurricane-related claims and generally 2% of the coverage amount for the structure for hurricane-related claims.

Premium rates charged to our homeowner insurance policyholders are continually evaluated to assure that they meet the expectation, are actuarially sound and produce a reasonable level of profit (neither excessive nor inadequate). In Florida, premium rates are also regulated by the Florida OIR, and rate increases must be approved by the Florida OIR.

Our May 2008 “file and use” rate filing reflects an average rate decrease of 11.3%. The June 2007 rate filing resulted in an average rate reduction of 15.2%.

Commercial General Liability

We underwrite commercial general liability insurance for approximately 250 classes of artisan and mercantile trades (excluding home-builders and developers), habitational exposures and certain special events.  The limits of liability range from $100,000 per occurrence with a $200,000 policy aggregate to $1.0 million per occurrence with a $2.0 million policy aggregate. We continually subject these limits to review, though there were no changes during 2008. We market the commercial general liability insurance products through independent agents and a limited number of general agencies unaffiliated with the Company. The average annual premium on policies, with deductibles of $250 to $500 per claim, and currently in-force is approximately $798, as compared with $989 in 2008 and 2007, respectively.

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

   
Years Ended December 31,
 
   
2008
   
2007
   
2006
 
   
Amount
   
Percentage
   
Amount
   
Percentage
   
Amount
   
Percentage
 
   
(Dollars in Thousands)
 
State
                                               
Alabama
  $ 117       0.49 %   $ 26       0.08 %   $ -       0.00 %
Arkansas
    12       0.05 %     -       0.00 %     -       0.00 %
California
    269       1.13 %     23       0.07 %     -       0.00 %
Florida
    16,011       67.30 %     21,192       65.77 %     22,965       71.29 %
Georgia
    568       2.39 %     1,023       3.17 %     1,805       5.60 %
Kentucky
    1       0.00 %     8       0.03 %     9       0.03 %
Louisiana
    4,481       18.84 %     5,595       17.36 %     5,743       17.83 %
Maryland
    2       0.01 %     -       0.00 %     -       0.00 %
South Carolina
    70       0.29 %     182       0.57 %     77       0.24 %
Texas
    2,252       9.47 %     4,127       12.81 %     1,604       4.98 %
Virginia
    7       0.03 %     46       0.14 %     10       0.03 %
Total
  $ 23,790       100.00 %   $ 32,222       100.00 %   $ 32,213       100.00 %

In order to expand our commercial general liability business, we entered into a 100% quota-share reinsurance treaty with Republic Underwriters Insurance Company (“Republic”) on March 28, 2006. This agreement was in place for approximately one year until March 31, 2007, when it was cancelled at the request of Republic. Republic is domiciled in the State of Texas and licensed both directly and on a surplus lines basis in approximately 32 states. This arrangement would have facilitated the policyholder who requires their commercial general liability insurance policy to come from an insurance company with a satisfactory A.M. Best Company (“A.M. Best”) rating.

Our arrangement with Republic allowed for a 4.75% commission on net written premium and reimbursement for all other costs in connection with the treaty such as premium taxes and assessments. We also remitted a 1% commission to the intermediary broker on the same net written premium. Under this agreement, the Company assumed approximately $325,000 and $23,000 in premiums in connection with its operations in the State of Texas in 2007 and 2006, respectively. Our operations in Texas began in December 2006. During the three months ended March 31, 2007, this 100% quota-sharing reinsurance treaty with Republic was cancelled, on a run-off basis, at their request, effective June 30, 2007. All premiums in connection with this program have been fully earned, and $0.2 million of Loss and LAE remain unpaid.
 
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21st Century Holding Company
 
We are currently in the process of replacing the Republic quota-share reinsurance treaty with another “A” rated A.M. Best carrier. This agreement is currently pending Florida OIR approval.

Personal Automobile

Personal automobile insurance markets can be divided into two categories, standard automobile and nonstandard automobile. Standard personal automobile insurance is principally provided to insureds who present an average risk profile in terms of driving record, vehicle type and other factors. Nonstandard personal automobile insurance is principally provided to insureds that are unable to obtain standard insurance coverage because of their driving record, age, vehicle type or other factors, including market conditions. The average annual premium on policies currently in force is approximately $1,292, as compared with $1,075 for 2007, and the nonstandard personal automobile insurance lines represents 100% and more than 99.5% of our written premiums for personal automobile insurance in 2008 and 2007, respectively.

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

Both of our insurance subsidiaries currently underwrite nonstandard personal automobile insurance in Florida, where the maximum exposures are predominantly $10,000 per individual, $20,000 per accident for bodily injury, $10,000 per accident for property damage, and predominantly $50,000 for comprehensive and collision. American Vehicle’s commercial automobile program in Florida is expected to experience managed growth in 2009.  The maximum exposure is predominantly $25,000 on a combined single limit basis.

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

American Vehicle underwrites only renewal policies for this coverage on primarily an annual basis and to a much lesser extent, on a semi-annual basis.

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

Federated National underwrites standard personal automobile insurance policies providing coverage no higher than $100,000 per individual, $300,000 per accident for bodily injury, $50,000 per accident for property damage and comprehensive and collision up to $50,000 per accident, with deductibles ranging from $200 to $1,000. The average premium on the policies in-force was $1,346 for 2007, and represented approximately 0.5% of our written premiums for personal automobile insurance in 2007. They were no standard personal automobile insurance policies offered during 2008.

Flood

Federated National writes flood insurance through the National Flood Insurance Program (“NFIP”). We write the policy for the NFIP, which assumes 100% of the flood risk while we retain a commission for our service. The average flood policy premium is approximately $400 with limits up to $250,000. Commissions in connection with this program totaled $0.2 million, $0.3 million and $0.3 million in 2008, 2007 and 2006, respectively. Pursuant to the Florida OIR regulations, we are required to report write-your-own-flood premiums on a direct and ceded basis for 2008 and subsequent years. Prior to 2008, we reported only the commissions income associated with this program.

Assurance Managing General Agents, Inc. (“Assurance MGA”)

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 intend to retain other general agents to market our commercial general liability insurance products. During the year ended December 31, 2008, Assurance MGA became licensed in the states of Alabama, Arkansas, Georgia, Illinois, Mississippi, Missouri, Nevada, North Carolina, Texas and Virginia.
 
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21st Century Holding Company
 
Assurance MGA currently provides underwriting policy administration, marketing, accounting and financial services to Federated National and American Vehicle, and participates in the negotiation of reinsurance contracts. For the above-mentioned services, Assurance MGA generates revenue through a 6% commission fee from the insurance companies’ gross written premium, policy fee income of $25 per policy and other administrative fees. 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.

Superior

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

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

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

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

The following table sets forth the amount and percentages of premiums financed for Federated National, American Vehicle and other insurers for the periods indicated:

   
Years Ended December 31,
 
   
2008
   
2007
   
2006
 
   
Premium
   
Percent
   
Premium
   
Percent
   
Premium
   
Percent
 
   
(Dollars in Thousands)
 
                                     
Federated National
  $ 311       41.3 %   $ 2,547       62.7 %   $ 6,279       56.2 %
American Vehicle
    175       23.3 %     169       4.2 %     1,981       17.7 %
Other insurers
    267       35.4 %     1,346       33.1 %     2,917       26.1 %
Total
  $ 753       100.00 %   $ 4,062       100.00 %   $ 11,177       100.00 %
 
Federated Premium’s operations were funded by a revolving loan agreement (“Revolving Agreement”) with FlatIron Funding Company LLC (“Flatiron”). The Revolving Agreement was 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 gave WPAC the right to sell or assign these contracts receivable. Federated Premium, which serviced these contracts, recorded transactions under the Revolving Agreement as secured borrowings. There were no outstanding borrowings under the Revolving Agreement as of December 31, 2008 and 2007. Outstanding borrowings under the Revolving Agreement as of December 31, 2006 were approximately $0.01 million. This credit facility terminated, at our request, during 2007.

Finance contracts receivable decreased $0.2 million, or 52.3%, to $02 million as of December 31, 2008, compared with $0.4 million as of December 31, 2007. We anticipate a continued decline in the short-term in connection with premium financed contracts. The Company anticipates continued use of the direct bill feature associated with Federated National and American Vehicle lines of business.
 
- 9 -

 
21st Century Holding Company
 
The direct billing opportunity is very similar to the premium finance arrangement with respect to down payments and scheduled monthly payments. Direct billing is when the insurance company accepts from the insured, as a receivable, a promise to pay the premium, as opposed to requiring payment of the full amount of the policy, either directly from the insured or from a premium finance company. We believe that the direct billing program does not increase our risk because the insurance policy, which serves as collateral, is managed by our computer system. Underwriting criteria are designed with down payment requirements and monthly payments that create policyholder equity in the insurance policy. The equity in the policy is collateral for the extension of credit to the insured. Through our monitoring systems, we track delinquent payments and, in accordance with the terms of the extension of credit, cancel if payment is not made. If any excess premium remains after cancellation of the policy and deduction of applicable penalties, this excess is refunded to the policyholder. Similarly, we believe that the premium financing that we offer to our own insureds involves limited credit risk. By primarily financing policies underwritten by our own insurance carriers, our credit risks are reduced because we can more securely rely on the underwriting processes of our own insurance carriers. Furthermore, the direct bill program enables us to closely manage our risk while providing credit to our insureds.

Insure-Link, Inc. (“Insure-Link”)

Insure-Link was formed in March 2008. Insure-Link was created to serve as an independent insurance agency. The insurance agency markets to the general public to serve all of their insurance needs. Insure-Link will acquire new business through marketing and acquisition.

MARKETING AND DISTRIBUTION

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

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

During 2008, the Company formed a wholly owned Florida insurance agency named Insure-Link and operations began during the second quarter of 2008. Insure-Link has binding authority for Federated National and American Vehicle as well as many national and local insurance carriers. There were no other agency relationships with affiliated captive or franchised agents in 2008, 2007 and 2006.

During periods under emergency order as defined by the Florida OIR, there typically exists a moratorium on cancellations and non-renewals of various types of insurance coverage. The homeowner policy provides Assurance MGA the right to cancel any policy within a period of 90 days from the policy's inception with 25 days’ notice, or after 90 days from policy inception with 95 days’ notice, even if the risk falls within our underwriting criteria.

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

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

REINSURANCE

As is common practice within the insurance industry, we transfer a portion of the risks insured under our policies to other companies through the purchase of reinsurance. This reinsurance is maintained to protect our insurance subsidiary against the severity of losses on individual claims, unusually serious occurrences in which a number of claims produce an aggregate extraordinary loss and catastrophic events. Although reinsurance does not discharge our insurance subsidiary from its primary obligation to pay for losses insured under the policies it issues, reinsurance does make the assuming reinsurer liable to the insurance subsidiary for the reinsured portion of the risk. A credit exposure exists with respect to ceded losses to the extent that any reinsurer is unable or unwilling to meet the obligations assumed under the reinsurance contracts. The collectibility of reinsurance is subject to the solvency of the reinsurers, interpretation of contract language and other factors.   A reinsurer's insolvency or inability to make payments under the terms of a reinsurance contract could have a material adverse effect on our results of operations and financial condition.
 
- 10 -

 
21st Century Holding Company
 
The availability and costs associated with the acquisition of reinsurance will vary year to year. These fluctuations, which can be significant, are not subject to our control and may limit our ability to purchase adequate coverage. The recovery of increased reinsurance costs through rate action is not immediate and can not be presumed, as it is subject to Florida OIR approval.

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

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

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

 
·
The total liability of the FHCF could be up to $28.0 billion for a single season storm
 
·
The FHCF has approximately $10.3 billion in liquidity, which includes the $4.0 billion “put” option. The “putt” option is the guarantee arrangement with Berkshire Hathaway approved by the State Board of Administration this summer
 
·
The FHCF has “potential obligations that it can not pay of approximately $14.5 billion in the event of a major storm”

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

The Senate Committee on Banking and Insurance released a report in early December 2008 that was meant to enlighten lawmakers before the legislative session begin in March 2009. The Senate Committee reported that the FHCF has a possible $19.0 billion deficit in 2009.  Even though Florida remained largely unscathed in 2008, the insurance industry as a whole was battered by various natural catastrophes and a global financial crisis that undercut its profits more than at any time in the past 20 years.  Experts say that the FHCF’s ability to come up with money after a storm would be dependent on its ability to market and sell bonds, an option that is severely limited by the global credit crunch that intensified this past fall.
 
- 11 -

 
21st Century Holding Company
 
The 2008-2009 private reinsurance companies and their respective A. M. Best rating are listed in the table as follows:
 
Reinsurer
 
A.M. Best Rating
       
UNITED STATES
           
Everest Reinsurance Company
 
  A+
       
GMAC Re/Motors Insurance Corporation
 
  A-
       
Munich Reinsurance America, Inc.
 
  A+
       
QBE Reinsurance Corporation
 
  A
 
*
   
             
BERMUDA
           
Actua Re Limited
 
  NR
 
*
 
(1)
Ariel Reinsurance Company Limited
 
  A-
 
*
   
DaVinci Reinsurance Limited
 
  A
 
*
   
Flagstone Reinsurance Limited
 
  A-
       
Hiscox Insurance Company Limited
 
  A-
       
Max Bermuda Limited
 
  A-
       
New Castle Reinsurance Company Limited
 
  A-
 
*
   
Renaissance Reinsurance Limited
 
  A+
 
*
   
Amlin Bermuda Limited
 
  A
       
             
EUROPE
           
Lansforsakringar Sak Forsakringsaktiebolag
 
  NR
     
(2) 
SCOR Switzerland AG
 
  A-
       
 
* 2008 Reinstatement Premium Protection Program Participants

(1) Participant has funded a trust agreement for their unearned premium with approximately $1.3 million of cash and U.S. Government obligations of American institutions at fair market value.

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

Subsequent to December 31, 2008 and pursuant to the provisions of our reinsurance treaties, we elected to cancel the contract with New Castle Reinsurance Company Limited (“New Castle”) and funds considered immaterial are in the process of settlement. New Castle’s participation in our reinsurance program represented approximately 1% of the aggregate catastrophic loss exposure. We are in the process of replacing this coverage however there can be no assurances that we can be successful, though our increased exposure is limited.

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

- 12 -

 
21st Century Holding Company

The 2007-2008 private reinsurance companies and their respective A. M. Best rating are listed in the table as follows:
 
Reinsurer
 
A.M. Best Rating
 
UNITED STATES
     
Everest Reinsurance Company
   
A+
 
Folksamerica Reinsurance Company
   
A-
 
GMAC Re/Motors Insurance Corporation
   
A-
 
Munich Reinsurance America, Inc.
   
A
 
Odyssey America Reinsurance Corporation
   
A
 
QBE Reinsurance Corporation
   
A
 
         
BERMUDA
       
ACE Tempest Reinsurance Limited, Bermuda
   
A+
 
Amlin Bermuda Limited
   
A-
 
Ariel Reinsurance Company Limited, Bermuda
   
A-
 
DaVinci Reinsurance Ltd, Bermuda
   
A
 
Flagstone Reinsurance Limited
   
A-
 
Max Bermuda Limited
   
A-
 
New Castle Reinsurance Company Limited
   
A-
 
Renaissance Reinsurance Ltd, Bermuda
   
A
 
         
UNITED KINGDOM
       
Amlin Syndicate No. 2001 (AML)
   
A
 
Ascot Underwriting Syndicate No. 1414 (RTH)
   
A
 
G.S. Christensen and Others Syndicate No. 958 (GSC)
   
A
 
MAP Underwriting Syndicate No. 2791 (MAP)
   
A
 
Talbot Underwriting Syndicate No. 1183 (TAL)
   
A
 
 
       
EUROPE
       
Converium Limited, Switzerland
   
B++
 
 
The cost to the Company for these reinsurance products for the 2008–2009 and 2007–2008 hurricane seasons, including the prepaid automatic premium reinstatement protection totals approximately $31.3 million and $44.6 million, respectively.

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

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

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

In order to expand our commercial general liability business, we entered into a 100% quota-share reinsurance treaty with Republic on March 28, 2006. This agreement was in place for approximately one year until March 31, 2007, when it was cancelled at the request of Republic. Republic is domiciled in the State of Texas and licensed both directly and on a surplus lines basis in approximately 32 states. This arrangement would have facilitated the policyholder who requires their commercial general liability insurance policy to come from an insurance company with a satisfactory A.M. Best rating. We are currently in the process of replacing the Republic quota-share reinsurance treaty with another “A” rated A.M. Best carrier. This agreement with the other carrier is currently pending Florida OIR approval.
 
- 13 -

 
21st Century Holding Company
 
Our arrangement with Republic allowed for a 4.75% commission on net written premium and reimbursement for all other costs in connection with the treaty such as premium taxes and assessments. We also remitted a 1% commission to the intermediary broker on the same net written premium. Under this agreement, the Company assumed approximately $325,000 and $23,000 in premiums in connection with its operations in the State of Texas in 2007 and 2006, respectively. Our operations in Texas began in December 2006. During the three months ended March 31, 2007, this 100% quota-sharing reinsurance treaty with Republic was cancelled, on a run-off basis, at their request, effective June 30, 2007. All premiums in connection with this program have been fully earned, and $0.2 million of Loss and LAE remain unpaid.

LIABILITY FOR UNPAID LOSSES AND LAE

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

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

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

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

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

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

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

 
- 14 -

 
 
21st Century Holding Company
 
The following table sets forth a reconciliation of beginning and ending liability for unpaid losses and LAE as shown in our consolidated financial statements for the periods indicated.

   
Years Ended December 31,
 
   
2008
   
2007
   
2006
 
                   
Balance at January 1:
  $ 59,684,790     $ 39,615,478     $ 154,038,543  
Less reinsurance recoverables
    (20,133,375 )     (12,382,028 )     (128,419,923 )
Net balance at January 1
  $ 39,551,415     $ 27,233,450     $ 25,618,620  
                         
Incurred related to:
                 
Current year
  $ 37,397,179     $ 38,452,431     $ 35,105,812  
Prior years
    4,471,081       9,166,491       9,294,096  
Total incurred
  $ 41,868,260     $ 47,618,922     $ 44,399,908  
                         
Paid related to:
                       
Current year
  $ 13,277,261     $ 15,628,017     $ 17,420,147  
Prior years
    16,072,908       19,672,941       25,364,930  
Total paid
  $ 29,350,169     $ 35,300,958     $ 42,785,077  
                         
Net balance at year-end
  $ 52,069,506     $ 39,551,415     $ 27,233,450  
Plus reinsurance recoverables
    12,712,980       20,133,375       12,382,028  
Balance at year-end
  $ 64,782,486     $ 59,684,790     $ 39,615,478  
 
As shown above, and as a result of our review of liability for losses and LAE, which includes a re-evaluation of the adequacy of reserve levels for prior year’s claims, we increased the liability for losses and LAE for claims occurring in prior years by $4.5 million, $9.2 million and $9.3 million for the years ended December 31, 2008, 2007 and 2006, respectively.

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

In 2007, we increased incurred losses and LAE for claims in connection with the hurricanes in 2005 and 2004 by approximately $1.2 million and increased the incurred loss and LAE in connection with our automobile and commercial general liability lines of business by $8.0 million.

There can be no assurance concerning future adjustments of reserves, positive or negative, for claims incurred through December 31, 2008.

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

 
- 15 -

 
 
21st Century Holding Company
 
The following table presents total unpaid loss and LAE, net, and total reinsurance recoverable, on a run-off basis, due from our automobile reinsurers as shown in our consolidated financial statements for the periods indicated.

   
As of December 31,
 
   
2008
   
2007
 
Transatlantic Reinsurance Company (A+ A.M. Best Rated):
           
Reinsurance recoverable on paid losses and LAE
  $ 4,521     $ 20,823  
Unpaid losses and LAE
    92,931       137,546  
    $ 97,452     $ 158,369  
                 
Amounts due from reinsurers consisted of amounts related to:
               
Unpaid losses and LAE
 
92,931
   
137,546
 
Reinsurance recoverable on paid losses and LAE
   
4,521
     
20,823
 
   
97,452
   
158,369 
 
 
In addition to reinsurance due from our automobile reinsurers, we also have reinsurance due from our catastrophic reinsurance companies. These reinsurance recoverables relate to Hurricane Katrina and Hurricane Wilma from 2005 and to the four hurricanes that occurred in August and September of 2004. The following table presents total unpaid loss and LAE, net, and total reinsurance recoverable due from our catastrophic reinsurers as shown in our consolidated financial statements.

   
As of December 31,
 
   
2008
   
2007
 
Catastrophe Excess of Loss (Various participants) and FHCF
           
Reinsurance recoverable on paid losses and LAE
  $ 4,262,572     $ 2,771,624  
Unpaid losses and LAE
    12,612,804       19,971,394  
    $ 16,875,376     $ 22,743,018  
                 
Amounts due from reinsurers consisted of amounts related to:
               
Unpaid losses and LAE
  $ 12,612,804     $ 19,971,394  
Reinsurance recoverable on paid LAE
    4,262,572       2,771,624  
Reinsurance payable
    (11,088,023 )     (12,605,238 )
    $ 5,787,353     $ 10,137,780  

The following table presents the liability for unpaid losses and LAE for the years ended December 31, 1999 through 2008 and does not distinguish between catastrophic and non-catastrophic events. The top line of the table shows the estimated net liabilities for unpaid losses and LAE at the balance sheet date for each of the periods indicated. These figures represent the estimated amount of unpaid losses and LAE for claims arising in all prior years that were unpaid at the balance sheet date, including losses that had been IBNR. The portion of the table labeled "Cumulative paid as of" shows the net cumulative payments for losses and LAE made in succeeding years for losses incurred prior to the balance sheet date. The lower portion of the table shows the re-estimated amount of the previously recorded liability based on experience as of the end of each succeeding year.

 
- 16 -

 
21st Century Holding Company
 
   
Years Ended December 31,
 
   
(Dollars in Thousands)
 
   
2008
   
2007
   
2006
   
2005
   
2004
   
2003
   
2002
   
2001
   
2000
   
1999
 
                                                             
Balance Sheet Liability
  $ 52,070     $ 39,551     $ 27,259     $ 25,733     $ 37,390     $ 15,314     $ 9,422     $ 6,207     $ 6,976     $ 4,428  
                                                                                 
Cumulative paid as of:
                                                                               
One year later
            7,666       19,331       25,465       35,114       10,466       8,101       5,283       8,160       4,224  
Two years later
                    26,997       34,073       48,285       12,499       9,857       7,215       9,487       5,666  
Three years later
                            39,012       53,621       14,220       10,417       7,711       10,094       6,182  
Four years later
                                    56,926       15,033       11,410       7,953       10,352       6,394  
Five years later
                                            15,261       11,725       8,171       10,476       6,542  
Six years later
                                                    11,763       8,296       10,641       6,563  
Seven years later
                                                            8,270       10,749       6,576  
Eight years later
                                                                    10,720       6,587  
Nine years later
                                                                            6,586  
                                                                              6,586  
                                                                                 
Re-estimated net liability as of:
                                                                         
End of year
  $ 52,070     $ 39,551     $ 27,259     $ 25,733     $ 37,390     $ 15,314     $ 9,422     $ 6,207     $ 6,976     $ 4,428  
One year later
            44,440       35,370       35,618       44,690       14,256       10,897       6,954       9,445       5,872  
Two years later
                    40,796       41,280       52,317       14,273       10,625       7,842       10,200       6,284  
Three years later
                            45,131       56,147       14,890       10,770       8,069       10,425       6,605  
Four years later
                                    59,583       15,854       11,650       8,312       10,616       6,561  
Five years later
                                            16,304       12,365       8,542       10,782       6,664  
Six years later
                                                    12,410       8,621       10,945       6,644  
Seven years later
                                                            8,458       11,241       6,743  
Eight years later
                                                                    10,644       7,228  
Nine years later
                                                                            5,967  
                                                                                 
Cumulative redundancy (deficiency)
          $ (4,888 )   $ (13,537 )   $ (19,398 )   $ (22,193 )   $ (991 )   $ (2,988 )   $ (2,251 )   $ (3,668 )   $ (1,539 )
                                                                                 
Cumulative redundancy (-) deficiency as a % of reserves originally established
            -12.4 %     -49.7 %     -75.4 %     -59.4 %     -6.5 %     -31.7 %     -36.3 %     -52.6 %     -34.8 %

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

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

As noted last year, we had since experienced an $8.2 million cumulative deficiency in connection with the re-estimation of all loss that occurred in 2006 and a $15.7 million cumulative deficiency in connection with the re-estimation of all loss that occurred in 2005. Relative to the $8.2 million deficiency, our homeowner, commercial general liability and automobile losses totaled $2.2, $4.0 and $2.0, respectively. Relative to the $15.7 million deficiency, our homeowner and commercial general liability and automobile losses totaled $9.4 million, $3.4 million and $2.8 million, respectively.

 
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21st Century Holding Company
 
As noted in our Form 10-K for the fiscal year ended December 31, 2006, we experienced a $15.2 million cumulative deficiency recognized in 2006 and 2005 in connection with the re-estimation of all loss that occurred in 2004 and a $10.0 million cumulative deficiency recognized in 2006 in connection with the re-estimation of all loss that occurred in 2005. Relative to the $15.2 million deficiency, our homeowner and commercial general liability losses totaled $15.4 million and $0.6 million, respectively offset by automobile redundancies totaling $0.9 million. Relative to the $10.0 million deficiency, our homeowner and commercial general liability and automobile losses totaled $7.3 million, $1.7 million and $1.0 million, respectively.

The table below sets forth the differences between loss and LAE reserves as disclosed for Generally Accepted Accounting Principles (“GAAP”) basis compared with Statutory Accounting Principles (“SAP”) basis of presentation for the years ended 2008, 2007 and 2006.

   
Years Ended December 31,
 
   
2008
   
2007
   
2006
 
   
(Dollars in Thousands)
 
GAAP basis Loss and LAE reserves
  $ 64,782     $ 59,685     $ 39,615  
Less unpaid Losses and LAE ceded
    12,713       20,133       12,401  
Balance Sheet Liability
    52,070       39,552       27,214  
Add Insurance Apportionment Plan
    25       37       45  
SAP basis Loss and LAE reserves
  $ 52,094     $ 39,589     $ 27,259  

The table below sets forth the differences between loss and LAE incurred as disclosed for GAAP basis compared with SAP basis presentation for the years ended 2008, 2007 and 2006.

   
Years Ended December 31,
 
   
2008
   
2007
   
2006
 
   
(Dollars in Thousands)
 
GAAP basis Loss and LAE incurred
  $ 41,868     $ 47,619     $ 44,400  
Intercompany adjusting and other expenses
    4,313       7,361       6,465  
Insurance apportionment plan
    4       12       (294 )
SAP basis Loss and LAE incurred
  $ 46,185     $ 54,992     $ 50,571  

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

The following table sets forth Loss Ratios, Expense Ratios and Combined Ratios for the periods indicated for the insurance business of Federated National and American Vehicle for 2008, 2007 and 2006. The ratios, inclusive of Unallocated Loss Adjustment Expenses (“ULAE”), are shown in the table below, and are computed based upon SAP.

   
Years Ended December 31,
 
   
2008
   
2007
   
2006
 
Loss Ratio
    69.1 %     54.6 %     54.8 %
                         
Expense Ratio
    43.9 %     38.9 %     42.5 %
                         
Combined Ratio
    113.0 %     93.5 %     97.3 %

 
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21st Century Holding Company
 
COMPETITION

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

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

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

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

Finally, during 2007 and 2008, approximately two dozen new homeowner insurance companies have received authority by the Florida OIR to commence business as admitted carriers in the state of Florida.

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

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

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

Comparable companies which compete with us in the commercial general liability insurance market include Century Surety Insurance Company, Atlantic Casualty Insurance Company, Colony Insurance Company and Burlington/First Financial Insurance Companies. We also face new competition in Florida from such companies as Seminole Property and Casualty Insurance Company, Cypress Property and Casualty Company and U.S. Security Insurance Company.
.
With respect to automobile insurance in Florida, we intentionally market only to our existing policyholders by offering to renew the existing policy. Presently, we have chosen not to compete with more than 100 companies, which underwrite personal automobile insurance in Florida. Comparable companies in the personal automobile insurance market include 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.

 
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21st Century Holding Company

REGULATION

General

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

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

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

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

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

All insurance companies must file quarterly and annual statements with certain regulatory agencies and are subject to regular and special examinations by those agencies. The last regulatory examination conducted by the Florida OIR on Federated National covered the three-year period ended on December 31, 2004. The last regulatory examination conducted by the Florida OIR on American Vehicle covered the three-year period ended on December 31, 2005.

Federated National’s 2004 regularly scheduled statutory triennial examination for the three years ended December 31, 2004 was performed by the Florida OIR in 2005. American Vehicle's examination was for the three years ended