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

FOR THE QUARTERLY PERIOD ENDED March 31, 2010
OR

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

FOR THE TRANSITION PERIOD FROM ___________________TO _______________________
 
Commission File number 0-2500111
 
21st Century Holding Company
(Exact name of registrant as specified in its charter)

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

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

954-581-9993
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

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

Yes ¨ No ¨

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

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

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

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

Common Stock, $.01 par value –7,946,374 outstanding as of May 17, 2010

 

 
 
21ST CENTURY HOLDING COMPANY

INDEX

   
PAGE
PART I: FINANCIAL INFORMATION
 
     
ITEM 1
Financial Statements
3
     
ITEM 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
31
     
ITEM 3
Quantitative and Qualitative Disclosures about Market Risk
47
     
ITEM 4
Controls and Procedures
49
     
PART II: OTHER INFORMATION
 
     
ITEM 1
Legal Proceedings
50
     
ITEM 1A
Risk Factors
50
     
ITEM 2
Unregistered Sales of Equity Securities and Use of Proceeds
50
     
ITEM 3
Defaults upon Senior Securities
50
     
ITEM 4
(Removed and Reserved)
50
     
ITEM 5
Other Information
50
     
ITEM 6
Exhibits
51
     
SIGNATURES
52

 
2

 

PART I: FINANCIAL INFORMATION
Item 1 Financial Statements

21st CENTURY HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

   
Period Ending
 
   
March 31, 2010
   
December 31, 2009
 
   
(Dollars in Thousands)
 
ASSETS
           
Investments
           
Debt maturities, available for sale, at fair value
  $ 91,201     $ 91,513  
Debt maturities, held to maturity, at amortized cost
    5,790       2,650  
Equity securities, available for sale, at fair value
    13,945       20,056  
                 
Total investments
    110,936       114,219  
                 
Cash and short term investments
    53,004       28,197  
Prepaid reinsurance premiums
    6,136       10,319  
Premiums receivable, net of allowance for credit losses of $70 and $24, respectively
    6,313       10,311  
Reinsurance recoverable, net
    13,065       15,302  
Deferred policy acquisition costs
    8,564       8,267  
Deferred income taxes, net
    5,011       4,675  
Income taxes receivable
    7,684       7,069  
Property, plant and equipment, net
    1,007       859  
Other assets
    2,851       3,671  
                 
Total assets
  $ 214,571     $ 202,889  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Unpaid losses and LAE
  $ 68,248     $ 70,611  
Unearned premiums
    52,883       50,857  
Premiums deposits and customer credit balances
    3,219       2,129  
Bank overdraft
    18,087       8,251  
Deferred gain from sale of property
    883       1,006  
Accounts payable and accrued expenses
    5,640       2,593  
                 
Total liabilities
    148,960       135,447  
                 
Shareholders' equity:
               
Common stock, $0.01 par value. Authorized 25,000,000 shares; issued and outstanding 7,946,374 and 7,953,384, respectively.
    79       80  
Preferred stock, $0.01 par value. Authorized 1,000,000 shares; none issued or outstanding
    -       -  
Additional paid-in capital
    50,301       50,185  
Accumulated other comprehensive income
    1,485       2,026  
Retained earnings
    13,746       15,151  
Total shareholders' equity
    65,611       67,442  
Total liabilities and shareholders' equity
  $ 214,571     $ 202,889  

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
3

 

21ST CENTURY HOLDING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

   
Three Months Ended March31,
 
   
2010
   
2009
 
   
(Dollars in Thousands except EPS and share and dividend data)
 
Revenue:
           
Gross premiums written
  $ 27,021     $ 28,431  
Gross premiums ceded
    (918 )     (328 )
                 
Net premiums written
    26,103       28,103  
                 
Decrease in prepaid reinsurance premiums
    (13,061 )     (8,069 )
Increase in unearned premiums
    (2,026 )     (6,129 )
                 
Net change in prepaid reinsurance premiums and unearned premiums
    (15,087 )     (14,198 )
                 
Net premiums earned
    11,016       13,905  
Commission income
    386       238  
Finance revenue
    72       83  
Managing general agent fees
    494       431  
Net investment income
    935       681  
Net realized investment gains (losses)
    2,225       (537 )
Regulatory assessments recovered
    515       548  
Other income
    137       312  
                 
Total revenue
    15,780       15,661  
                 
Expenses:
               
Losses and LAE
    9,063       8,874  
Operating and underwriting expenses
    2,717       1,953  
Salaries and wages
    2,072       1,909  
Policy acquisition costs, net of amortization
    3,460       2,744  
                 
Total expenses
    17,312       15,480  
                 
 (Loss) Income before provision for income tax benefit
    (1,532 )     181  
Provision for income tax benefit
    (605 )     (122 )
                 
Net (loss) income
  $ (927 )   $ 303  
                 
Net (loss) income  per share - basic
  $ (0.12 )   $ 0.04  
                 
Net  (loss) income per share - diluted
  $ (0.12 )   $ 0.04  
                 
Weighted average number of common shares outstanding - basic
    7,946,374       8,013,894  
                 
Weighted average number of common shares outstanding - diluted
    7,946,374       8,013,894  
                 
Dividends paid per share
  $ 0.06     $ 0.18  

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
4

 

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

   
Three Months Ended March 31,
 
   
2010
   
2009
 
   
(Dollars in Thousands)
 
Cash flow from operating activities:
           
Net (loss) income
  $ (927 )   $ 303  
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
               
Amortization of investment premium (discount), net
    212       (38 )
                 
Depreciation and amortization of property plant and equipment, net
    51       47  
Net realized investment (gains) losses
    (2,225 )     537  
(Recovery) Provision for credit losses, net
    (5 )     12  
Recovery for uncollectible premiums receivable
    (45 )     (24 )
Non-cash compensation
    79       119  
Changes in operating assets and liabilities:
               
Premiums receivable
    4,043       (730 )
Prepaid reinsurance premiums
    4,182       (4,124 )
Reinsurance recoverable, net
    2,237       (808 )
Income taxes recoverable
    (615 )     336  
Deferred income taxes, net of other comprehensive income
    (9 )     (544 )
Policy acquisition costs, net of amortization
    (297 )     (1,537 )
Other assets
    702       (487 )
Unpaid losses and LAE
    (2,362 )     1,316  
Unearned premiums
    2,026       6,131  
Premium deposits and customer credit balances
    1,089       273  
Bank overdraft
    9,836       642  
Accounts payable and accrued expenses
    3,047       (662 )
Net cash provided by operating activities
    21,019       762  
Cash flow provided (used)  by investing activities:
               
Proceeds from sale of investment securities
    31,135       12,256  
Purchases of investment securities available for sale
    (26,708 )     (58,351 )
Purchases of property and equipment
    (199 )     (9 )
Net cash provided (used) by investing activities
    4,228       (46,104 )
Cash flow used by financing activities:
               
Dividends paid
    (477 )     (481 )
Tax benefit provision related to non-cash compensation
    36       27  
Net cash used by financing activities
    (441 )     (454 )
Net increase (decrease) in cash and short term investments
    24,806       (45,796 )
Cash and short term investments at beginning of period
    28,197       124,577  
Cash and short term investments at end of period
  $ 53,003     $ 78,781  

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
5

 

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

   
Three Months Ended March 31,
 
(continued)
 
2010
   
2009
 
   
(Dollars in Thousands)
 
Supplemental disclosure of cash flow information:
           
Cash paid during the period for:
           
Income taxes
  $ 2     $ 75  
Non-cash investing and finance activities:
               
Accrued dividends payable
  $ 477     $ 481  

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
6

 

21st Century Holding Company
Notes to Condensed Consolidated Financial Statements

 (1) Organization and Business

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

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

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

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

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

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

During the three months ended March 31, 2010, 78.0%, 13.0%, 3.0% and 6.0% of the premiums we underwrote were for homeowners’ property and casualty, commercial general liability, federal flood, and personal automobile insurance, respectively. During the three months ended March 31, 2009, 81.0%, 15.9%, 2.6% and 0.5% of the premiums we underwrote were for homeowners’ property and casualty, commercial general liability, federal flood, 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. When our estimated liabilities for unpaid losses and loss adjustment expenses (“LAE”) are less than actual losses and LAE, we increase reserves with a corresponding reduction in our net income in the period in which the deficiency is identified. Conversely, when our estimated liabilities for unpaid losses and LAE are greater than actual losses and LAE, we decrease reserves with a corresponding increase in our net income in the period in which the deficiency is identified.

 
- 7 -

 

21st Century Holding Company
Notes to Condensed Consolidated Financial Statements

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

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.

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

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

Insure-Link, Inc. (“Insure-Link”) was formed in March 2008 to serve as an independent insurance agency. The insurance agency markets direct to the public to provide a variety of insurance products and services to individual clients as well as business clients by offering a full line of insurance products including, but not limited to,  homeowners’, personal and commercial automobile, commercial general liability and workers compensation insurance through their agency appointments with over fifty different carriers.  Insure-Link will expand its’ business through marketing and by acquiring other insurance agencies.

(2) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements for the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America referred to as Generally Accepted Accounting Principles (“GAAP”) for interim financial information, and the Securities and Exchange Commission (“SEC”) rules for interim financial reporting. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, in the opinion of management, the accompanying financial statements reflect all normal recurring adjustments necessary to present fairly the Company’s financial position as of March 31, 2010 and the results of operations and cash flows for the periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results of operations to be expected for any subsequent interim period or for the fiscal year ending December 31, 2010. The accompanying unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2009 included in the Company’s Form 10-K, which was filed with the SEC on March 26, 2010.

In preparing the interim unaudited condensed consolidated financial statements, management was required to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the financial reporting date and throughout the periods being reported upon. Certain of the estimates result from judgments that can be subjective and complex and consequently actual results may differ from these estimates.


 
- 8 -

 

21st Century Holding Company
Notes to Condensed Consolidated Financial Statements

Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of loss and LAE, ceded reinsurance balances payable, the recoverability of Deferred Policy Acquisition Costs (“DPAC”), the determination of federal income taxes, and the net realizable value of reinsurance recoverables. Although considerable variability is inherent in these estimates, management believes that the amounts provided are reasonable. These estimates are continually reviewed and adjusted as necessary. Such adjustments are reflected in current operations.

All significant intercompany balances and transactions have been eliminated. Certain reclassifications have been made to the prior-period balances to conform to the current-period presentation.

(3) Summary of Significant Accounting Policies and Practices

(A) Critical Accounting Policies

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

The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with management’s evaluation of the determination of (i) liability for unpaid losses and LAE, (ii) the amount and recoverability of amortization of DPAC, and (iii) estimates for our reserves with respect to finance contracts, premiums receivable and deferred income taxes. Various assumptions and other factors underlie the determination of these significant estimates, which are described in greater detail in Footnote 2 of the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2009, which we included in the Company’s Annual Report on Form 10-K which was filed with the SEC on March 26, 2010.

We believe that there were no significant changes in those critical accounting policies and estimates during the first three months of fiscal 2010. Senior management has reviewed the development and selection of our critical accounting policies and estimates and their disclosure in this Form 10-Q with the Audit Committee of our Board of Directors.

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

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

 
- 9 -

 

21st Century Holding Company
Notes to Condensed Consolidated Financial Statements

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

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

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

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

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

The fair value of our investments is estimated based on prices published by financial services or quotations received from securities dealers and is reflective of the interest rate environment that existed as of the close of business on March 31, 2010 and December 31, 2009. Changes in interest rates subsequent to March 31, 2010 and December 31, 2009 may affect the fair value of our investments.

The carrying amounts for the following financial instrument categories approximate their fair values at March 31, 2010 and December 31, 2009 because of their short-term nature: cash and short term investments, premiums receivable, finance contracts, due from reinsurers, revolving credit outstanding, bank overdraft, accounts payable and accrued expenses.

 
- 10 -

 

21st Century Holding Company
Notes to Condensed Consolidated Financial Statements
 
(B) Impact of New Accounting Pronouncements
 
In April 2009, the FASB issued FASB Staff Position (“FSP”) FAS 115-2 and FSP FAS 124-2, “Recognition and Presentation of Other-Than Temporary Impairments” (“FSP FAS 115-2 and FSP FAS 124-2”) related to the recognition and presentation of other-than temporary impairments.  In April 2009, the SEC also adopted similar guidance with Staff Accounting Bulletin (“SAB”) No. 111 (“SAB 111”) on Other-Than Temporary Impairment. FSP FAS 115-2 and FSP FAS 124-2 establishes a new method of recognizing and reporting other-than temporary impairments of debt securities and contains additional disclosure requirements related to debt and equity securities. For debt securities, the “ability and intent to hold” provision is eliminated, and impairment is considered to be other-than temporary if an entity (i) intends to sell the security, (ii) more likely than not will be required to sell the security before recovering its cost, or (iii) does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell).  This new framework does not apply to equity securities (i.e., impaired equity securities will continue to be evaluated under previously existing guidance).  The “probability” standard relating to the collectability of cash flows is eliminated, and impairment is now considered to be other-than temporary if the present value of cash flows expected to be collected from the debt security is less than the amortized cost basis of the security.  FSP FAS 115-2 and FSP FAS 124-2 provides that for debt securities which (i) an entity does not intend to sell and (ii) it is not more likely than not that the entity will be required to sell before the anticipated recovery of its remaining amortized cost basis, the impairment is separated into the amount related to estimated credit losses and the amount related to all other factors. The amount of the total impairment related to all other factors is recorded in other comprehensive loss and the amount related to estimated credit loss is recognized as a charge against current period earnings.  FSP FAS 115-2 and FSP FAS 124-2 expands disclosure requirements for both debt and equity securities and requires a more detailed, risk-oriented breakdown of security types and related information, and requires that the annual disclosures be made in interim periods.  FSP FAS 115-2 and FSP FAS 124-2 is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted.  At the time of adoption, the Company did not have any Other-Than Temporary Impairments for debt securities, and, the adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transaction That Are Not Orderly” (“FSP FAS 157-4“).  FSP FAS 157-4 is related to determining fair value when the volume and level of activity for an asset or liability have significantly decreased and identifying transactions that are not orderly.  The guidance indicates that if an entity determines that either the volume and/or level of activity for an asset or liability has significantly decreased (from normal conditions for that asset or liability) or price quotations or observable inputs are not associated with orderly transactions, increased analysis and management judgment will be required to estimate fair value. The guidance is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted and must be applied prospectively. The adoption of FSP FAS 157-4 did not have a material impact on the Company’s financial statements or condition.

In May 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 165, “Subsequent Events” (“SFAS No. 165”), which is now part of Accounting Standard Update (“ASU”) ASU Topic 855, Subsequent Events.  In SFAS No. 165, the FASB establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued.  Our adoption of SFAS No. 165 on April 1, 2009 did not have a material impact on the Company’s consolidated financial statements.

In January 2010, the FASB issued Accounting Standard Update (“ASU”) ASU No. 2010-06: Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.  The amendments in ASU 2010-06  requires additional disclosures about fair value measurements, including transfers in and out of Levels 1 and 2 and activity in Level 3 on a gross basis, and clarifies certain other existing disclosure requirements including level of disaggregation and disclosures around inputs and valuation techniques. The provisions of the new standards are effective for interim or annual reporting periods beginning after December 15, 2009, except for the additional Level 3 disclosures which will become effective for fiscal years beginnings after December 15, 2010. These standards are disclosure only in nature and do not change accounting requirements. Accordingly, adoption of the new standard had no impact on the Company’s consolidated financial position, results of operations or cash flows.

In February 2010, the FASB issued ASU No. 2010-09:  Amendments to Certain Recognition and Disclosure Requirements, an amendment to Topic 855 Subsequent Events, to address potentially conflicting interactions of the requirements in this Topic with the SEC’s reporting requirements. This update amends Topic 855 as follows: i) an entity that either is a SEC filer or a conduit bond obligor is required to evaluate subsequent events through the date that the financial statements are issued, if the entity does not meet either of these criteria then it should evaluate subsequent events through the date the financial statements are available to be issued; and ii) an SEC filer is not required to disclose the date through which subsequent events have been evaluated. All amendments in this ASU are effective upon issuance of this ASU, except for the use of the issued date for conduit debt obligors which effective date is for interim and annual periods ending after June 15, 2010. The Company’s subsequent events disclosure will reflect the new guidance.

 
- 11 -

 

21st Century Holding Company
Notes to Condensed Consolidated Financial Statements
               
Other recent accounting pronouncements issued by the FASB, the American Institute of Certified Public Accountants (“AICPA”), and the SEC did not or are not believed by management to have a material impact on the Company’s present or future financial statements.

(C) Stock Options

Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB issued guidance using the modified-prospective-transition method. Under that transition method, compensation cost recognized during the three months ended March 31, 2010 includes compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the guidance.

(D) Earnings per Share

Basic earnings per share (“Basic EPS”) is computed by dividing net income by the weighted average number of common shares outstanding during the period presented.  Diluted earnings per share (“Diluted EPS”) is computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding during the period presented; outstanding warrants and stock options are considered common stock equivalents and are included in the calculation using the treasury stock method.

(E) Reclassifications

No reclassification of the 2009 financial statements was necessary to conform to the 2010 presentation.

 (4) Commitments and Contingencies

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

(A) Insured Claim Activity

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

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

 The Company also faces, in the ordinary course of business, lawsuits that seek damages beyond policy limits, commonly known as bad faith claims. The Company continually evaluates potential liabilities and reserves for litigation of these types using the criteria established by FASB issued guidance. Under this guidance, reserves for a loss are recorded if the likelihood of occurrence is probable and the amount can be reasonably estimated. If a loss, while not probable, is judged to be reasonably possible, management will make an estimate of a possible range of loss or state that an estimate cannot be made. Management considers each legal action using this guidance and records reserves for losses as warranted.

 
- 12 -

 

21st Century Holding Company
Notes to Condensed Consolidated Financial Statements

(B) Assessment Related Activity

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

As a direct premium writer in the state of Florida, we are required to participate in certain insurer solvency associations under Florida Statutes Section 631.57(3) (a), administered by FIGA. Participation in these pools is based on our written premium by line of business to total premiums written statewide by all insurers. Participation has resulted in assessments against us, as it had in 2006 and 2007, and again on October 30, 2009. There were no assessments made during the three months ended March 31, 2010 or for the year ended December 31, 2008. Through 2007, we have been assessed $6.6 million and in 2009 we were assessed an additional $0.6 million in connection with the insolvencies of domestic insurance companies. For statutory accounting these assessments are not charged to operations, in contrast, GAAP treatment is to charge current operations for the assessments. Through policyholder surcharges, as approved by the Florida Office of Insurance Regulation (“Florida OIR”), we have since recouped $6.7 million in connection with these assessments. 

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

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

During a subsequent regularly scheduled meeting on or about December 18, 2006, Citizens Board determined an additional 2004 plan year deficit existed in the High Risk Account. Citizens decided that a $515 million Regular Assessment was in the best interest of Citizens and consistent with Florida Statutes. On this basis, Citizens certified for a Regular Assessment. Federated National’s participation in this assessment totaled $0.3 million. Provisions contained in our excess of loss reinsurance policies provided for participation of our reinsurers totaling $1.8 million of the $2.3 million in assessments. There was no assessment made for 2010, 2009 or 2008.

Pursuant to Florida Statutes Section 627.3512, insurers are permitted to recoup the assessment by adding a surcharge to policies in an amount not to exceed the amount paid by the insurer to Citizens. Federated National is currently underwriting the recoupment in connection with the Citizens assessments and has since recouped approximately $2.3 million. Federated National subrogated approximately $1.8 million to the reinsurers.

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

 
- 13 -

 

21st Century Holding Company
Notes to Condensed Consolidated Financial Statements

Florida OIR issued an Order April 29, 2010, levying an emergency assessment of 1.30%, which was previously 1.0%, of direct written premium on all property and casualty lines of business written in the state of Florida for the benefit of the FHCF. The assessment was approved by the Florida SBA to fund FHCF losses stemming from the 2005 hurricane season. This order requires insurers to begin collecting the emergency assessment for policies issued or renewed on or after January 1, 2011. The FHCF emergency assessment will be remitted to the administrator of the assessment as collected and therefore accounted for in a manner such that amounts collected or receivable are not recorded as revenues and amounts due or paid are not expensed. Previously and still in effect, the Florida OIR issued a similar order dated January 11, 2007, levying an emergency assessment of 1.40% of direct written premium on all property and casualty lines of business written in the state of Florida for the benefit of Citizens’ High Risk Account. This order requires insurers to collect the emergency assessment for policies issued or renewed on or after July 1, 2007. Similar to the FHCF assessment discussed above, the Citizens emergency assessment is remitted to the administrator of the assessment as collected and therefore accounted for in a manner such that amounts collected or receivable are not recorded as revenues and amounts due or paid are not expensed.

Federated National and American Vehicle are also required to participate in an insurance apportionment plan under Florida Statutes Section 627.351, which is referred to as a JUA Plan. The JUA Plan provides for the equitable apportionment of any profits realized, or losses and expenses incurred, among participating automobile insurers. In the event of an underwriting deficit incurred by the JUA Plan which is not recovered through the policyholders in the JUA Plan, such deficit shall be recovered from the companies participating in the JUA Plan in the proportion that the net direct written premiums of each such member during the preceding calendar year bear to the aggregate net direct premiums written in this state by all members of the JUA Plan. Neither Federated National nor American Vehicle was assessed by the JUA Plan during 2010, 2009 or 2008.  Future assessments by this association are undeterminable at this time.

(C) Operational Matters

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

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

The Company has recorded a net deferred tax asset of $5.0 million as of March 31, 2010.  Realization of net deferred tax asset is dependent on generating sufficient taxable income in future periods. Management believes that it is more likely than not that the deferred tax assets will be realized and as such no valuation allowance has been recorded against the net deferred tax asset. When assessing the need for valuation allowances, the Company considers future taxable income and ongoing prudent and feasible tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, the Company would record valuation allowances as deemed appropriate in the period that the change in circumstances occurs, along with a corresponding increase or charge to net income. The resolution of tax reserves and changes in valuation allowances could be material to the Company’s results of operations for any period, but is not expected to be material to the Company’s financial position.

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

 
- 14 -

 

21st Century Holding Company
Notes to Condensed Consolidated Financial Statements

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

Fiscal Year
 
Lease payments
 
   
(Dollars in Thousands)
 
2010
    480  
2011
    650  
Total
  $ 1,130  

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

From July 27, 2007 to August 7, 2007, several securities class action lawsuits were filed against the Company and certain of its executive officers in the United States District Court for the Southern District of Florida (“District Court”) on behalf of all persons and entities (the “plaintiffs”) who purchased the Company's securities during the various class periods specified in the complaints.  A consolidated amended complaint (“Class Litigation”) was filed on behalf of the class on January 22, 2008, Case No. 07-61057.  The complaint alleged that the defendants made false and misleading statements and failed to accurately project the Company's business and financial performance during the putative class period. The plaintiffs sought an unspecified amount of damages and claim violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5.  On March 18, 2008, a verified shareholder derivative complaint Case No. 08-cv-60374 (“Derivative Litigation”) was filed against certain current or former officers and directors of the Company in the District Court.

 On November 7, 2008, the District Court granted in part and denied in part the Company's motion to dismiss the consolidated class litigation with leave to amend by December 8, 2009 or the allegations dismissed would be deemed dismissed with prejudice without further order of the District Court.  Lead plaintiffs did not seek to amend the consolidated complaint and the defendants answered.  On July 29, 2008, the District Court granted the defendant’s motion to dismiss the plaintiff’s shareholder derivative complaint without prejudice.  On August 27, 2009, the derivative plaintiff filed an amended shareholder derivative complaint.  On March 30, 2009, following various motions by the parties, the District Court entered an order granting defendant’s renewed motion to stay the shareholder derivative action pending resolution of the class action.

           On September 4, 2009, a  stipulation   of  settlement  ("Stipulation of Settlement")  was submitted to the Court by  lead  plaintiffs, the  derivative  plaintiff and the defendants, setting forth the terms of  a settlement of the Class Litigation and Derivative Litigation  ("Settlement Agreement") which proposed that a payment of $2.4 million be made to the lead plaintiffs and the derivative plaintiff.  The Stipulation of Settlement contains no admission of liability or wrongdoing by the Company or its officers and directors. The Company's insurance carriers agreed to fund the $2.4 million settlement payment. The Stipulation of Settlement was preliminarily approved by the Court on October 19, 2009. 

 At a settlement hearing held on January 29, 2010, the District Court approved the terms of the Stipulation of Settlement.  On March 15, 2010, counsel for Plaintiffs acknowledged receipt of $2.4 million in settlement funds paid under the Company’s directors' and officers’ insurance policy.

(5) Investments

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

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

 
- 15 -

 

21st Century Holding Company
Notes to Condensed Consolidated Financial Statements

Total investments decreased $3.3 million, or 2.9%, to $110.9 million as of March 31, 2010, compared with $114.2 million as of December 31, 2009.

The debt and equity securities that are available for sale and carried at fair value represent 95% of total investments as of March 31, 2010, compared with 98% as of December 31, 2009.

We did not hold any trading investment securities during the three months ended March 31, 2010.

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

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

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

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

 
·
prospects for the issuer’s industry segment;

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

 
·
historical volatility of the fair value of the security.

Pursuant to FASB issued guidance, the Company records the unrealized losses, net of estimated income taxes that are associated with that part of our portfolio classified as available for sale through the shareholders' equity account titled “Other Comprehensive Income”. Management periodically reviews the individual investments that comprise our portfolio in order to determine whether a decline in fair value below our cost either is other-than temporarily 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 temporarily or permanently impaired we consider such factors as the timeliness and completeness of expected dividends, principal and interest payments, ratings from nationally recognized statistical rating organizations such as Standard and Poor’s and Moody’s Investors Service, Inc. (“Moody’s”), as well as information released via the general media channels. During the three months ended March 31, 2010, in connection with this process, we have not charged any net realized investment loss to operations.

As of March 31, 2010, all of our securities are in good standing and not impaired as defined by FASB issued guidance, except for our holdings in Blackrock Pfd, Inc., which continues to be impaired by $0.1 million as of March 31, 2010, compared to the total $0.4 million as of December 31, 2009.

During the three months ended March 31, 2010, in connection with the other-than temporarily or permanently impaired process, we did not charge any net realized investment loss to operations.

 
- 16 -

 

21st Century Holding Company
Notes to Condensed Consolidated Financial Statements

The investments held as of March 31, 2010 and December 31, 2009, were comprised mainly of corporate bonds held in various industries and municipal and United States government bonds. As of March 31, 2010, 87% of the debt portfolio is in diverse industries and 13% is in United States government bonds.  As of March 31, 2010, approximately 85% of the equity holdings are in equities related to diverse industries and 15% are in mutual funds.

As of March 31, 2010, 56.3% of the investment portfolio is in corporate bonds, 30.0% is in obligations of states and political subdivisions, and 11.2% is in United States government bonds. Approximately 16.0% of the common stock holdings are related to foreign entities.

During the three months ended March 31, 2010, we re-classified $3.1 million of our bond portfolio from available for sale to held-to-maturity.

As of March 31, 2010 and December 31, 2009, we have classified $5.8 million and $2.7 million, respectively, of our bond portfolio as held-to-maturity. We only classify bonds as held-to-maturity to support securitization of credit requirements. Fully funded trust agreements or outstanding irrevocable letters of credit, used for such purposes, total $3.1 million for the period ended March 31, 2010 and December 31, 2009, respectively.

During April 2006, American Vehicle finalized a $15.0 million irrevocable letter of credit in conjunction with the 100% Quota Share Reinsurance Agreement with Republic Underwriters Insurance Company (“Republic”) which was terminated in April 2007. As of December 31, 2007, the letter of credit in favor of Republic totaled $10.0 million. As of December 31, 2008, the letter of credit in favor of Republic totaled $3.0 million. As of December 31, 2009, the letter of credit in favor of Republic totaled $1.0 million. As of March 31, 2010, the letter of credit in favor of Republic totaled zero, and was replaced by a fully funded trust agreement that totaled $1.0 million.

(A) Debt and Equity Securities

The following table summarizes, by type, our investments as of March 31, 2010 and December 31, 2009.

   
March 31, 2010
   
December 31, 2009
 
   
Carrying
   
Percent
   
Carrying
   
Percent
 
   
Amount
   
of Total
   
Amount
   
of Total
 
   
(Dollars in Thousands)
 
Debt securities, at market:
                       
United States government obligations and authorities
  $ 6,369       5.74 %   $ 10,152       8.89 %
Obligations of states and political subdivisions
    28,780       25.94 %     39,269       34.38 %
Corporate
    55,351       49.90 %     42,092       36.85 %
International
    701       0.63 %     -       0.00 %
      91,201       82.21 %     91,513       80.12 %
Debt securities, at amortized cost:
                               
United States government obligations and authorities
  5,790       5.22 %     2,650       2.32 %
Total debt securities
    96,991       5.22 %     94,163       2.32 %
                                 
Equity securities, at market
    13,945       12.57 %     20,056       17.56 %
Total investments
  $ 110,936       100.00 %   $ 114,219       100.00 %

 
- 17 -

 

21st Century Holding Company
Notes to Condensed Consolidated Financial Statements

The following table shows the realized gains (losses) for debt and equity securities for the three months ended March 31, 2010 and 2009.

   
Three Months Ended March 31,
 
   
2010
   
2009
 
   
Gains
   
Fair Value
   
Gains
   
Fair Value
 
   
(Losses)
   
at Sale
   
(Losses)
   
at Sale
 
   
(Dollars in Thousands)
 
                         
Debt securities
  $ 348     $ 14,584     $ 90     $ 7,846  
Equity securities
    2,093       13,349       10       151  
Total realized gains
    2,441       27,933       100       7,997  
                                 
Debt securities
    (25 )     1,481       (340 )     3,382  
Equity securities
    (191 )     1,439       (297 )     781  
Total realized losses
    (216 )     2,920       (637 )     4,163  
                                 
Net realized gains (losses) on investments
  $ 2,225     $ 30,853     $ (537 )   $ 12,160  

 
- 18 -

 

21st Century Holding Company
Notes to Condensed Consolidated Financial Statements

A summary of the amortized cost, estimated fair value, gross unrealized gains and losses of debt and equity securities at March 31, 2010 and December 31, 2009 is as follows.

         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Estimated
 
   
Cost
   
Gains
   
Losses
   
Fair Value
 
   
(Dollars in Thousands)
 
March 31, 2010
                       
Debt Securities  - Available For Sale:
                       
United States government obligations and authorities
  $ 6,404     $ 63     $ 97     $ 6,370  
Obligations of states and political subdivisions
    28,333       516       69       28,780  
Corporate
    53,167       2,245       62       55,350  
International
    698       4       1       701  
    $ 88,602     $ 2,828     $ 229     $ 91,201  
                                 
Debt Securities  - Held To Maturity:
                               
United States government obligations and authorities
  $ 5,790     $ 204     $ 136     $ 5,858  
Corporate
    -       -       -       -  
    $ 5,790     $ 204     $ 136     $ 5,858  
                                 
Equity securities - common stocks
  $ 14,161     $ 725     $ 941     $ 13,945  
                                 
December 31, 2009
                               
Debt Securities  - Available For Sale:
                               
Obligations of states and political subdivisions
  $ 49,041     $ 695     $ 315     $ 49,421  
Corporate
    40,350       1,798       56       42,092  
    $ 89,391     $ 2,493     $ 371     $ 91,513  
                                 
Debt Securities  - Held To Maturity:
                               
United States government obligations and authorities
  $ 2,650     $ 148     $ 5     $ 2,793  
Corporate
    -       -       -       -  
    $ 2,650     $ 148     $ 5     $ 2,793  
                                 
Equity securities - common stocks
  $ 18,927     $ 1,840     $ 711     $ 20,056  

 
- 19 -

 

21st Century Holding Company
Notes to Condensed Consolidated Financial Statements

The table below reflects our unrealized investment losses by investment class, aged for length of time in a continuous unrealized loss position as of March 31, 2010.

   
Unrealized Losses
   
Less than 12
months
   
12 months or
longer
 
   
(Dollars in Thousands)
 
Debt securities:
                 
United States government obligations and authorities
  $ (35 )   $ (5 )   $ (30 )
Obligations of states and political subdivisions
    -       -       -  
Corporate
    -       -       -  
      (35 )     (5 )     (30 )
Equity securities:
                       
Common stocks
    (340 )     -       (340 )
                         
Total debt and equity securities
  $ (375 )   $ (5 )   $ (370 )

The table below reflects our unrealized investment losses by investment class, aged for length of time in a continuous unrealized loss position as of December 31, 2009.

   
Unrealized Losses
   
Less than 12
months
   
12 months or
longer
 
   
(Dollars in Thousands)
 
Debt securities:
                 
United States government obligations and authorities
  $ (120 )   $ (120 )   $ -  
Obligations of states and political subdivisions
    (4 )     -       (4 )
Corporate
    -       -       -  
      (124 )     (120 )     (4 )
Equity securities:
                       
Common stocks
    (237 )     -       (237 )
                         
Total debt and equity securities
  $ (361 )   $ (120 )   $ (241 )

Below is a summary of debt securities at March 31, 2010 and December 31, 2009, by contractual or expected maturity periods. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

   
March 31, 2010
   
December 31, 2009
 
   
Amortized
   
Estimated
   
Amortized
   
Estimated
 
   
Cost
   
Fair Value
   
Cost
   
Fair Value
 
   
(Dollars in Thousands)
 
                         
Due in one year or less
  $ 5,707     $ 5,741     $ 1,602     $ 1,615  
Due after one through five years
    51,319       52,628       49,821       50,885  
Due after five through ten years
    29,320       30,473       26,177       27,217  
Due after ten years
    8,046       8,217       14,441       14,589  
                                 
Total
  $ 94,392     $ 97,059     $ 92,041     $ 94,306  

 
- 20 -

 

21st Century Holding Company
Notes to Condensed Consolidated Financial Statements

United States Treasury notes with a book value of $1,038,000 and $1,044,000, both maturing in 2012, were on deposit with the Florida OIR as of March 31, 2010, as required by law for American Vehicle and Federated National respectively, and are included with other investments held until maturity.

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

   
Three Months Ended March 31,
 
   
2010
   
2009
 
   
(Dollars in Thousands)
 
             
Interest on debt securities
  $ 845     $ 426  
Dividends on equity securities
    87       101  
Interest on cash and cash equivalents
    3       154  
                 
Total investment income
  $ 935     $ 681  
                 
Net realized gains (losses)
  $ 2,225     $ (537 )

Proceeds from sales of debt and equity securities during the three months ended March 31, 2010 and 2009, were approximately $31.1 million and $14.7 million, respectively.

A summary of realized investment gains (losses) and net unrealized gains follows.

   
Three Months Ended March 31,
   
2010
   
2009
 
   
(Dollars in Thousands)
Net realized gains (losses)
           
Debt securities
  $ 323     $ (257 )
Equity securities
    1,902       (280 )
                 
Total
  $ 2,225     $ (537 )

   
As of March 31, 2010
   
As of December 31, 2009
 
   
(Dollars in Thousands)
 
Net unrealized gains (losses)
           
Debt securities
  $ 2,599     $ 2,122  
Equity securities
    (217 )     1,128  
                 
Total
  $ 2,382     $ 3,250  

(6) Fair Value Disclosure

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

 
- 21 -

 

21st Century Holding Company
Notes to Condensed Consolidated Financial Statements

In October 2008, the FASB issued accounting guidance to clarify the application of GAAP in determining fair value of financial instruments in a market that is not active.  The guidance was effective upon issuance, including prior periods for which financial statements had not been issued.  Our adoption of this guidance does not have a material effect on our financial position, results of operations, cash flows or disclosures.

In September 2006, FASB issued accounting guidance that defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants on the measurement date.  This guidance also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The guidance also categorizes assets and liabilities at fair value into one of three different levels depending on the observation of the inputs employed in the measurement, as follows:

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

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

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

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

Assets measured at fair value on a recurring basis as of March 31, 2010, which are presented in accordance with this guidance are as follows.

   
As of March 31, 2010
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
   
(Dollars in Thousands)
 
Debt securities:
                       
United States government obligations and authorities
  $ -     $ 6,370     $ -     $ 6,370  
Obligations of states and political subdivisions
    -       28,780       -       28,780  
Corporate
    55,350       -       -       55,350  
International
    -       701       -       701  
      55,350       35,851       -       91,201  
                                 
Equity securities:
                               
Common stocks
    13,945       -       -       13,945  
      13,945       -       -       13,945  
                                 
Total debt and equity securities
  $ 69,295     $ 35,851     $ -     $ 105,146  

 
- 22 -

 

21st Century Holding Company
Notes to Condensed Consolidated Financial Statements

Assets measured at fair value on a recurring basis as of December 31, 2009, which are presented in accordance with this guidance are as follows.

   
As of December 31, 2009
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
   
(Dollars in Thousands)
 
Debt securities:
                       
United States government obligations and authorities
  $ -     $ 10,152     $ -     $ 10,152  
Obligations of states and political subdivisions
    -       39,269       -       39,269  
Corporate
    42,092       -       -       42,092  
      42,092       49,421       -       91,513  
                                 
Equity securities:
                               
Common stocks
    20,056       -       -       20,056  
      20,056       -       -       20,056  
                                 
Total debt and equity securities
  $ 62,148     $ 49,421     $ -     $ 111,569  

(7)  Comprehensive Income

For the three months ended March 31, 2010 and 2009, comprehensive income consisted of the following.

   
Three Months Ended March 31,
 
   
2010
   
2009
 
   
(Dollars in Thousands)
 
             
Net (loss) income
  $ (927 )   $ 303  
                 
Change in net unrealized (losses) gains on investments available for sale
    (869 )     45  
Comprehensive (loss) income, before tax
    (1,796 )     348  
                 
Income tax benefit (expense) related to items of other comprehensive income
    327       (16 )
Comprehensive (loss) income
  $ (1,469 )   $ 332  

(8) Reinsurance Agreements

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

 
- 23 -

 

21st Century Holding Company
Notes to Condensed Consolidated Financial Statements

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

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

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

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

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

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

 
- 24 -

 

21st Century Holding Company
Notes to Condensed Consolidated Financial Statements

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

Reinsurer
 
A.M. Best Rating
       
             
UNITED STATES
           
Everest Reinsurance Company
 
A+
     
**
Munich Reinsurance America, Inc.
 
A+
     
**
QBE Reinsurance Corporation
 
A
     
**
             
BERMUDA
           
ACE Tempest Reinsurance Limited
 
A+
 
*
   
Amlin Bermuda Limited
 
A
       
Ariel Reinsurance Company Limited
 
A-
 
*
   
DaVinci Reinsurance Limited
 
A
 
*
   
Flagstone Reinsurance Limited
 
A-
       
Hiscox Insurance Company Limited
 
A
 
*
   
Montpelier Reinsurance Limited
 
A-
       
Platinum Underwriters Bermuda Limited
 
A
 
*
   
Renaissance Reinsurance Limited
 
A+
 
*
   
Torus Insurance (Bermuda) Limited
 
A-
 
*
   
             
LONDON & EUROPE
           
Amlin Syndicate No. 2001 (AML)
 
A+
     
**
Antares Syndicate No. 1274 (AUL)
 
A
     
**
Arrow Syndicate No. 1910 (ARW)
 
A
 
*
 
**
Broadgate Syndicate No. 1301 (BGT)
 
A
     
**
Liberty Syndicates Services Limited, Paris for and on behalf of Lloyd's Syndicate No. 4472 (LIB)
 
A
     
**
Novae Syndicate No. 2007 (NVA)
 
A
     
**
SCOR Switzerland AG
 
A-
       
             
HEDGE FUNDS / COLLATERALIZED
           
Actua Re Limited
 
NR
 
*
 
(1)
Allianz Risk Transfer AG (Bermuda Branch)
  
NR-5
 
*
 
(2)
 
* 2009 Reinstatement Premium Protection Program Participants
 
** Admitted in Florida as a reinsurer, whether through licensing, accreditation or other means.
 
(Blank) Non admitted reinsurer in Florida.
 
(1) Participant has funded a trust agreement for their partcipation with approximately $6.4 million of cash and U.S. Government obligations of American institutions at fair market value.
 
(2) Standard & Poor's rated "AA" (Obligor's capacity to meet its financial commitment on the obligation is very strong)

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

 
- 25 -

 

21st Century Holding Company
Notes to Condensed Consolidated Financial Statements

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

Reinsurer
 
A.M. Best 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)

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

 
- 26 -

 

21st Century Holding Company
Notes to Condensed Consolidated Financial Statements

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

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

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

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

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

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

The quota-share retrocessionaire reinsurance agreements require American Vehicle to securitize credit, regulatory and business risk. As of March 31, 2010, irrevocable letters of credit fully collateralized by American Vehicle and further guaranteed by the parent company, 21st Century, were replaced by fully funded trust agreements. Fully funded trust agreements and outstanding irrevocable letters of credit totaled $3.1 million as of March 31, 2010 and December 31, 2009, respectively.

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.

 (9) Stock Compensation Plans

We implemented a stock option plan in September 1998, which expired in September 2008, and provided for the granting of stock options to officers, key employees and consultants.  The objectives of this plan included attracting and retaining the best personnel, providing for additional performance incentives, and promoting our success by providing employees the opportunity to acquire common stock. Options outstanding under this plan were granted at prices either equal to or above the market value of the stock on the date of grant, typically vest over a four-year or five-year period and expire six or ten years after the grant date. Under this plan, we were authorized to grant options to purchase up to 900,000 common shares, and, as of March 31, 2010 and December 31, 2009, we had outstanding exercisable options to purchase 121,599 and 124,599 shares, respectively.

 
- 27 -

 

21st Century Holding Company
Notes to Condensed Consolidated Financial Statements

In 2002, we implemented the 2002 Stock Option Plan.  The purpose of this plan is to advance our interests by providing an additional incentive to attract, retain and motivate highly qualified and competent persons who are key to the Company, including employees, consultants, independent contractors, officers and directors. Our success is largely dependent upon their efforts and judgment; therefore, by authorizing the grant of options to purchase common stock, we encourage stock ownership. Options outstanding under the plan were granted at prices either equal to or above the market value of the stock on the date of grant, typically vest over a five-year period, and expire six years after the grant date. Under this plan, we are authorized to grant options to purchase up to 1,800,000 common shares, and, as of March 31, 2010 and December 31, 2009, we had outstanding exercisable options to purchase 729,218 and 736,951 shares, respectively.

Activity in our stock option plans for the period from January 1, 2008 to March 31, 2010 is summarized below.

   
1998 Plan
   
2002 Plan
 
   
Number of
Shares
   
Weighted
Average
Option
Exercise Price
   
Number of
Shares
   
Weighted
Average
Option
Exercise Price
 
Outstanding at January 1, 2008
    152,599     $ 14.92       660,309     $ 13.78  
Granted
    4,500     $ 8.67       162,500     $ 8.92  
Exercised
    (13,500 )   $ 6.67       (141,458 )   $ 8.81  
Cancelled
    (13,500 )   $ 10.03       (23,200 )   $ 12.60  
Outstanding at January 1, 2009
    130,099     $ 16.07       658,151     $ 13.69  
Granted
    -     $ -       147,000     $ 4.37  
Exercised
    -     $ -       -     $ -  
Cancelled
    (5,500 )   $ 20.23       (68,200 )   $ 11.58  
Outstanding at January 1, 2010
    124,599     $ 15.88       736,951     $ 12.03  
Granted
    -     $ -       30,000     $ 4.36  
Exercised
    -     $ -       -     $ -  
Cancelled
    (3,000 )   $ 13.70       (37,733 )   $ 15.75  
Outstanding at March 31, 2010
    121,599     $ 15.94       729,218     $ 11.52  

 
- 28 -

 

21st Century Holding Company
Notes to Condensed Consolidated Financial Statements

Options outstanding as of March 31, 2010 are exercisable as follows.

   
1998 Plan
   
2002 Plan
 
Options Exercisable at:
 
Number of
Shares
   
Weighted
Average
Option
Exercise Price
   
Number of
Shares
   
Weighted
Average
Option
Exercise Price
 
                         
March 31, 2010
    64,889     $ 15.94       388,504     $ 11.52  
December 31, 2010
    18,670     $ 15.94       92,441     $ 11.52  
December 31, 2011
    18,670     $ 15.94       102,484     $ 11.52  
December 31, 2012
    18,670     $ 15.94       76,089     $ 11.52  
December 31, 2013
    700     $ 15.94       42,300     $ 11.52  
December 31, 2014
    -     $ 15.94       21,400     $ 11.52  
Thereafter
    -     $ 15.94       6,000     $ 11.52  
Total options exercisable
    121,599               729,218          

Prior to January 1, 2006, we accounted for the plans under the recognition and measurement provisions of stock-based compensation using the intrinsic value method prescribed by the Accounting Principles Board (“APB”) and related Interpretation , as permitted by FASB issued guidance. Under these provisions, no stock-based employee compensation cost was recognized in the Statement of Operations as all options granted under those plans had an exercise price equal to or less than the market value of the underlying common stock on the date of grant.

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

Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB issued guidance using the modified-prospective-transition method. Under that transition method, compensation costs recognized during 2010 and 2009 include:

 
·
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 FASB issued guidance, and

 
·
Compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair-value estimated in accordance with the provisions of FASB issued guidance. Results for prior periods have not been restated, as not required to be by the pronouncement.

As a result of adopting FASB issued guidance on January 1, 2006, the Company’s income from continuing operations before provision for income taxes and net income for the three months ended March 31, 2010 are lower by approximately $96,000 and $60,000, respectively, than if it had continued to account for share-based compensation under ABP guidance.

As a result of adopting FASB issued guidance on January 1, 2006, the Company’s income from continuing operations before provision for income taxes and net income for the three months ended March 31, 2009, were lower by approximately $146,000 and $119,000, respectively, than if it had continued to account for share-based compensation under ABP guidance.

Basic and diluted earnings per share for the three months ended March 31, 2010 would have been ($0.11), if the Company had not adopted FASB issued guidance, compared with reported basic and diluted earnings per share of ($0.12).

Basic and diluted earnings per share for the three months ended March 31, 2009 would have been $0.06 if the Company had not adopted FASB issued guidance, compared with reported basic and diluted earnings per share of $0.04.

 
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21st Century Holding Company
Notes to Condensed Consolidated Financial Statements

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. FASB issued guidance requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows.

The weighted average fair value of options granted during the three months ended March 31, 2010 was $1.81 and during the same period 2009 was $3.30 to $4.73, estimated on the date of grant using the Black-Scholes option-pricing model.

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

 
March 31, 2010
 
March 31, 2009
Dividend yield
5.80%
 
7.20% - 17.30%
Expected volatility
82.36%
 
57.54% - 70.68%
Risk-free interest rate
1.33%
 
1.22% - 1.50%
Expected life (in years)
3.06
 
3.53 - 4.16

Summary information about the Company’s stock options outstanding at March 31, 2010 follows.

               
Weighted Average
   
Weighted
       
   
Range of
   
Outstanding at
   
Contractual
   
Average
   
Exercisable at
 
   
Exercise Price
   
March 31, 2010
   
Periods in Years
   
Exercise Price
   
March 31, 2010
 
1998 Plan
  $ 6.67 - $27.79       121,599       3.04     $ 15.94       64,889  
2002 Plan
  $ 3.03 - $18.21       729,218       3.18     $ 11.52       388,504  

(10) Stockholders’ Equity

Capital Stock

The Company’s authorized capital consists of 1,000,000 shares of preferred stock, par value $0.01 per share, and 25,000,000 shares of common stock, par value $0.01 per share. As of March 31, 2010, there were no preferred shares issued or outstanding and there were 7,946,374 shares of common stock outstanding.

(11) Subsequent Events

None

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

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
You should read the following discussion in conjunction with our condensed consolidated financial statements and related notes and information included under this Item 2 and elsewhere in this Quarterly Report on Form 10-Q and in our Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 26, 2010. Unless the context requires otherwise, as used in this Form 10-Q, the terms “21st Century” “Company,” “we,” “us” and “our,” refers to 21st Century Holding Company and its subsidiaries, unless the context indicates otherwise.
 
Forward-Looking Statements

Statements in this Quarterly Report on Form 10-Q for the three months ended March 31, 2010 (“Form 10-Q”)  or in documents that are incorporated by reference that are not historical fact are forward-looking statements that are subject to certain risks and uncertainties that could cause actual events and results to differ materially from those discussed herein.  Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” or “continue” or the negative other variations thereof or comparable terminology are intended to identify forward-looking statements.  The risks and uncertainties include, without limitation, uncertainties related to estimates, assumptions and projections relating to unpaid losses and loss adjustment expenses and other accounting policies, losses from the nine hurricanes that occurred in fiscal years 2005 and 2004 and in other estimates, assumptions and projections contained in this Form 10-Q; inflation and other changes in economic conditions (including changes in interest rates and financial markets); the impact of new regulations adopted in Florida which affect the property and casualty insurance market; the costs of reinsurance, assessments charged by various governmental agencies; pricing competition and other initiatives by competitors; our ability to obtain regulatory approval for requested rate changes and the timing thereof; legislative and regulatory developments; the outcome of various litigation matters pending against us, including the terms of any settlements; risks related to the nature of our business; dependence on investment income and the composition of our investment portfolio; the adequacy of our liability for loss and loss adjustment expense; insurance agents; claims experience; ratings by industry services; catastrophe losses; reliance on key personnel; weather conditions (including the severity and frequency of storms, hurricanes, tornadoes and hail); changes in driving patterns and loss trends; acts of war and terrorist activities; court decisions and trends in litigation and health care and auto repair costs; and other matters described from time to time by us in this report, and our other  filings with the SEC, including the Company’s 2009 Form 10-K.

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 Generally Accepted Accounting Principles (“GAAP”) prescribes when a company may reserve for particular risks, including litigation exposures.  Accordingly, results for a given reporting period could be significantly affected when a reserve is established for a major contingency.  Reported results may therefore appear to be volatile in certain accounting periods.
 
 
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21st Century Holding Company
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Overview

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

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

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

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

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

During the three months ended March 31, 2010, 78.0%, 13.0%, 3.0% and 6.0% of the premiums we underwrote were for homeowners’ property and casualty, commercial general liability, federal flood, and personal automobile insurance, respectively. During the three months ended March 31, 2009, 81.0%, 15.9%, 2.6% and 0.5% of the premiums we underwrote were for homeowners’ property and casualty, commercial general liability, federal flood, 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. When our estimated liabilities for unpaid losses and loss adjustment expenses (“LAE”) are less than actual losses and LAE, we increase reserves with a corresponding reduction in our net income in the period in which the deficiency is identified. Conversely, when our estimated liabilities for unpaid losses and LAE are greater than actual losses and LAE, we decrease reserves with a corresponding increase in our net income in the period in which the deficiency is identified.

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

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.

 
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21st Century Holding Company
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Assurance Managing General Agents, Inc. (“Assurance MGA”), a wholly owned subsidiary of the Company, acts as Federated National’s and American Vehicle’s exclusive managing general agent in the state of Florida and is also licensed as a managing general agent in the states of Alabama, Arkansas, Georgia, Illinois, Louisiana, Mississippi, Missouri, New York, Nevada, South Carolina, Texas and Virginia. During 2009, Assurance MGA contracted with several unaffiliated insurance companies to sell commercial general liability, workers compensation and inland marine insurance through Assurance MGA’s existing network of distributors. This process will continue throughout 2010 as Assurance MGA benefits from the arrangement by receiving commission revenue from policies sold by its insurance partners, while minimizing its risks. As American Vehicle continues its expansion into other states, we intend to retain other general agents to market our commercial general liability insurance products.

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

Insure-Link, Inc. (“Insure-Link”) was formed in March 2008 to serve as an independent insurance agency. The insurance agency markets direct to the public to provide a variety of insurance products and services to individual clients as well as business clients by offering a full line of insurance products including, but not limited to,  homeowners’, personal and commercial automobile, commercial general liability and workers compensation insurance through their agency appointments with over fifty different carriers.  Insure-Link will expand its’ business through marketing and by acquiring o