21ST CENTURY HOLDING CO – 10-K – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Edgar Online, Inc.

OVERVIEW

  We are an insurance holding company that controls substantially all steps in the insurance underwriting, distribution and claims processes through our subsidiaries and our contractual relationships with our independent agents and general agents.  We are authorized to underwrite, and/or place through our wholly owned subsidiaries, homeowners' multi-peril ("homeowners"), commercial general liability, personal and commercial automobile, personal umbrella, fire, allied lines, workers' compensation and commercial inland marine insurance in Florida and various other states.  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.  ·      Our primary insurance subsidiary is Federated National Insurance Company ("Federated National"). Federated National is licensed as an admitted carrier in Florida. 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. Through contractual relationships with a network of approximately 3,000 independent agents, of which approximately 600 actively sell and service our products, Federated National is authorized to underwrite  homeowners', fire, allied lines and personal and commercial automobile insurance in Florida.  Federated National is also licensed as an admitted carrier in Alabama, Louisiana, Georgia and Texas, and underwrites commercial general liability insurance in those states.  Federated National operated as a non-admitted carrier in Arkansas, California, Kentucky, Maryland, Missouri, Nevada, Oklahoma, South Carolina, Tennessee and Virginia, and could underwrite commercial general liability insurance in all of these states. A non-admitted carrier 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.  In January 2011, we merged Federated National and our other wholly owned insurance subsidiary, American Vehicle Insurance Company ("American Vehicle"), with Federated National continuing the operations of both entities. In connection with this merger, the Company, Federated National and American Vehicle entered into a Consent Order with the Florida Office of Insurance Regulation ("Florida OIR")  pursuant to which we agreed to certain restrictions on our a business operations. See "Regulation - Consent Order".  ·      We internally process claims made by our insureds through our wholly owned claims adjusting company, Superior Adjusting, Inc. ("Superior"). Until June 2011, we offered premium financing to our own and third-party insureds through our wholly owned subsidiary, Federated Premium Finance, Inc. ("Federated Premium").  ·      Assurance Managing General Agents, Inc. ("Assurance MGA"),  a wholly owned subsidiary of the Company, acts as Federated National's exclusive managing general agent in Florida and is also licensed as a managing general agent in the States of Alabama, Georgia, Illinois, Louisiana, North Carolina, Mississippi, Missouri, New York, Nevada, South Carolina, Texas and Virginia. Assurance MGA has contracted with several unaffiliated insurance companies to sell commercial general liability, workers compensation, personal umbrella and inland marine insurance through Assurance MGA's existing network of agents.  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 earns a $25 per policy fee, and traditionally a 6% commission fee from its affiliates Federated National and American Vehicle. During the fourth quarter of 2010, Assurance MGA, pursuant to the Consent Order as discussed in "Regulation - Consent Order" reduced its fee, to earn amounts varying between 2% and 4%, which we anticipate will return to 6% at an unknown future date with approval from the Florida OIR. A formal agreement reflecting this fee modification was executed during January 2011.  Although we are authorized to underwrite the various lines described above, our business is primarily underwriting homeowners' policies. During 2011, 81.8%, 10.3%, 4.6% and 3.3% of the premiums we underwrote were for homeowners', commercial general liability, federal flood, and personal automobile insurance, respectively. During 2010, 79.7%, 12.3%, 4.1% and 3.9% of the premiums we underwrote were for homeowners', commercial general liability, federal flood, and personal automobile insurance, respectively.                                        - 36 -

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21st Century Holding Company

Management's Discussion and Analysis of Financial Condition and Results of

                                   Operations  During the years ended December 31, 2011, 2010 or 2009, we did not experience any weather-related catastrophic events such as the hurricanes that occurred in Florida during 2005 and 2004. We are not able to predict how hurricanes or other insurable events will affect our future results of operations and liquidity. Loss and loss adjustment expenses ("LAE") are affected by a number of factors, many of which are partially or entirely beyond our control, including the following.                         · the nature and severity of the loss;                               · weather-related patterns;                    · the availability, cost and terms of reinsurance;            · underlying settlement costs, including medical and legal costs;     · legal and political factors such as legislative initiatives and public     opinion;                                 · macroeconomic issues.    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 us. When our estimated liabilities for unpaid losses and LAE are less than the actuarially determined amounts, we increase the expense in the current period. Conversely, when our estimated liabilities for unpaid losses and LAE are greater than the actuarially determined amounts, we decrease the expense in the current period.  Our goal in our reinsurance strategy is to equalize the liquidity requirements imposed by most severe insurable events and by all other insurable events we manage in the normal course of business. Please see "Reinsurance Agreements" under "Item 1. Business" for a more detailed description of our reinsurance agreements and strategy.  

CRITICAL ACCOUNTING POLICIES

  The preparation of financial statements in conformity with Generally Accepted Accounting Principles ("GAAP") requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.  The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with management's evaluation of the determination of (i) liability for unpaid losses and LAE, (ii) the amount and recoverability of amortization of Deferred Policy Acquisition Costs ("DPAC"), and (iii) estimates for our reserves with respect to finance contracts, premiums receivable and deferred income taxes. Various assumptions and other factors underlie the determination of these significant estimates, which are described in greater detail in Footnote 2 in this Form 10-K.  Except as described below, we believe that in 2011 there were no significant changes in those critical accounting policies and estimates. Senior management has reviewed the development and selection of our critical accounting policies and estimates and their disclosure in this Form 10-K with the Audit Committee of our Board of Directors.  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.                                        - 37 -

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21st Century Holding Company

Management's Discussion and Analysis of Financial Condition and Results of

                                   Operations  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".  

Overview of Management's Loss Reserving Process

  The Company's loss reserves can generally be categorized into two distinct groups. One group is short-tail classes of business consisting principally of property risks in connection with homes and automobiles. The other group is long-tail casualty classes of business which include primarily commercial general liability and to a much lesser extent, homeowner and automobile liability. For operations writing short-tail coverages our loss reserves were generally geared toward determining an expected loss ratio for current business rather than maintaining a reserve for the outstanding exposure. Estimations of ultimate net loss reserves for long-tail casualty classes of business is a more complex process and depends on a number of factors including class and volume of business involved. Experience in the more recent accident years of long-tail casualty classes of business shows limited statistical credibility in reported net losses because a relatively low proportion of net losses would be reported claims and expenses and even smaller percentage would be net losses paid. Therefore, incurred but not yet reported ("IBNR") would constitute a relatively high proportion of net losses.  Additionally, the different methodologies are utilized the same, regardless of the line of business. However, the final selection of ultimate loss and LAE is certain to vary by both line of business and by accident period maturity. There is no prescribed combination of line of business, accident year maturity, and methodologies; consistency in results of the different methodologies and reasonableness of the result are the primary factors that drive the final selection of ultimate loss and LAE.  

Methods Used to Estimate Loss and LAE Reserves

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

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

                     · Paid  and Incurred Loss Development Method                  · Paid and Incurred Bornhuetter-Ferguson Incurred Method                               · Frequency / Severity Method   

Description of Ultimate Loss Estimation Methods

  The estimated Ultimate Loss and Defense and Cost Containment Expense ("DCCE") is based on an analysis by line of business, coverage and by accident quarter performed using data as of December 31, 2011. The analysis relies primarily on four actuarial methods: Incurred Loss and DCCE Development Method, Paid Loss and DCCE Development Method, Bornhuetter-Ferguson Incurred Method, and Bornhuetter-Ferguson Paid Method. Each method relies on company experience, and, where relevant, the analysis includes comparisons to industry experience. The following is a description of each of these methods:                                        - 38 -

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21st Century Holding Company

Management's Discussion and Analysis of Financial Condition and Results of

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

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

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

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

  We select an estimate of ultimate loss & DCCE for each accident quarter after considering the results of each projection method for the quarter and the relative maturity of the quarter (the time elapsed between the start of the quarter and December 31, 2011). Reserves for unpaid losses & DCCE for each quarter are the differences between these ultimate estimates and the amount already paid. The reserves for each quarter and each coverage are summed, and the result is the overall estimate of unpaid losses & DCCE liability for the company.  We also produce an estimate of unpaid Adjusting and Other Expense ("A&O"), as a reserve is required under Statutory Accounting Principles ("SAP") even if this expense has been pre-paid or with an unconsolidated affiliate. Although we do not prepay for A&O, the majority of the A&O incurred is with an affiliated company and eliminated under the accounting principles for consolidation. The unpaid A&O is added to unpaid losses & DCCE, resulting in total unpaid losses and LAE.  The validity of the results from using a loss development approach can be affected by many conditions, such as internal claim department processing changes, a shift between single and multiple claim payments, legal changes, or variations in a company's mix of business from year to year. Also, since the percentage of losses paid for immature years is often low, development factors can be volatile. A small variation in the number of claims paid can have a leveraging effect that could lead to significant changes in estimated ultimate values. Accordingly, our reserves are estimates because there are uncertainties inherent in the determination of ultimate losses. Court decisions, regulatory changes and economic conditions can affect the ultimate cost of claims that occurred in the past as well as create uncertainties regarding future loss cost trends. We compute our estimated ultimate liability using the most appropriate principles and procedures applicable to the lines of business written. However, because the establishment of loss reserves is an inherently uncertain process, we cannot be certain that ultimate losses will not exceed the established loss reserves and have a material adverse effect on our results of operations and financial condition.  Frequency / Severity Method - This method separately estimates the two components of ultimate losses (the frequency, or number of claims and the severity, or cost per claim) and then combines the resulting estimates in a multiplicative fashion to estimate ultimate losses. The approach is valuable because sometimes there is more inherent stability in the frequency and severity data when viewed separately than in the total losses.  We developed reported claim counts to ultimate levels using the development approach. The mechanics of this approach are the same as we described previously for paid and incurred losses. The validity of the results of this method depends on the stability of claim reporting and settlement rates. Then we developed accident year incurred severities (incurred losses divided by reported claim counts) to ultimate levels using the development approach.                                        - 39 -

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21st Century Holding Company

Management's Discussion and Analysis of Financial Condition and Results of

                                   Operations  We trended these severities to accident year 2011 levels. Trend rates were selected based on a review of historical severities. Selected severity was chosen based on judgment considering the developed severities and the trended severities, considering industry benchmarks for each segment. The loss & ALAE, claim count and severity triangles are evaluated as of 12 months, 24 months, 36 months etc. We selected loss development factors based on the loss development history, to the extent credible, and supplemented with industry data where appropriate.  A key assumption underlying the estimation of the reserve for loss and LAE is that past experience serves as the most reliable estimator of future events. This assumption may materially affect the estimates when the insurance market, the regulatory environment, the legal environment, the economic environment, the book of business, the claims handling department, or other factors (known or unknown) have varied over time during the experience period and / or will vary (expectedly or unexpectedly) in the future. Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the operating results of the period during which such adjustments are made. Therefore, the ultimate liability for unpaid losses and LAE will likely differ from the amount recorded at December 31, 2011.  

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

  Annually - Our policy is to select a single point estimate that best reflects our in-house actuarial determination for unpaid losses and LAE. Our independent actuarial firm, examining the exact same data set, will independently select a point estimate which determines a high point and low point range. Both processes rely on objective and subjective determinations. If our point estimate falls within the range determined from the point estimate of our actuary, then the Company's policy has been that no adjustments by management would be required. In consideration thereof, the company does not have a policy for adjusting the liability for unpaid losses and LAE to an amount that is different than an amount set forth within the range determined by our independent actuary, although the reserve level ultimately determined by us may not be the mid-point of our independent actuary's range. Further, there can be no assurances that our actual losses will be within our actuary's range. Our independent actuary's report expressly states that the report is based on assumptions developed from its own analysis and based on information provided by management and that notwithstanding its analysis, there is a significant risk of material adverse deviation from its range.  

Interim - During 2011 our interim approach was very similar to the annual process noted above.

A number of other actuarial assumptions are generally made in the review of reserves for each class of business.

· For each class of business, expected ultimate loss ratios for each accident

year are estimated based on loss reserve development patterns. The expected

loss ratio generally reflects the projected loss ratio from prior accident

years, adjusted for the loss trend and the effect of rate changes and other

quantifiable factors on the loss ratio.

    In practice there are factors that change over time; however, many (such as inflation) are intrinsically reflected in the historical development patterns, and others typically do not materially affect the estimate of the reserve for unpaid losses and LAE. Therefore, no specific adjustments have been incorporated for such contingencies projecting future development of losses and LAE. There are no key assumptions as of December 31, 2011 premised on future emergence inconsistent with historical loss reserve development patterns.                                        - 40 -

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21st Century Holding Company

Management's Discussion and Analysis of Financial Condition and Results of

                                   Operations  The table below distinguishes total loss reserves between IBNR, as discussed above, and case estimates for specific claims as established by routine claims management.  Reserves for unpaid                                                                          Reinsurance loss and LAE net of                                                                          Recoverable reinsurance                                                                                   on Unpaid recoverable as           Case Loss       Case LAE       Total Case       IBNR Reserves      Loss and Loss of December 31, 2011     Reserves        Reserves        Reserves       (Including LAE)       Expenses         Net Reserves                                                                (Dollars in Thousands)  Homeowners'             $     6,719     $     1,571     $     8,290     $        12,328     $         480     $       20,138 Commercial General Liability                     2,369           1,606           3,975              28,089              (190 )           32,254 Automobile                    3,428             113           3,541               3,511             1,798              5,254 Fire                              8               2              10                 238                 -                248 Inland Marine                     -               -               -                   1                 -                  1  Total                   $    12,524     $     3,292     $    15,816     $        44,167     $       2,088     $       57,895    Reserves for unpaid                                                                          Reinsurance loss and LAE net of                                                                          Recoverable reinsurance                                                                                   on Unpaid recoverable as           Case Loss       Case LAE       Total Case       IBNR Reserves      Loss and Loss of December 31, 2010     Reserves        Reserves        Reserves       (Including LAE)       Expenses         Net Reserves                                                                (Dollars in Thousands)  Homeowners'             $     4,829     $       975     $     5,804     $        16,695     $       5,508     $       16,991 Commercial General Liability                     5,620           2,610           8,230              27,817                 -             36,047 Automobile                    3,353             112           3,465               4,366             1,302              6,529 Fire                              -               3               3                 148                 -                151 Inland Marine                     -               -               -                   1                 -                  1  Total                   $    13,802     $     3,700     $    17,502     $        49,027     $       6,810     $       59,719                                          - 41 -

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21st Century Holding Company

Management's Discussion and Analysis of Financial Condition and Results of

                                   Operations

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

                                            Years Ended December 31,                                  2011

2010

   Change in       Adjusted loss                          Adjusted loss loss and LAE         and LAE                                and LAE 

reserves, net reserves, net Percentage reserves, net

Percentage

     of                of           change in equity          of          

change in equity

  reinsurance       reinsurance            (1)             reinsurance            (1)                                  (Dollars in Thousands)         -10.0 %          52,106                 -7.5 %          53,747                -20.8 %          -7.5 %          53,553                 -5.6 %          55,240                -15.6 %          -5.0 %          55,000                 -3.7 %          56,733                -10.4 %          -2.5 %          56,448                 -1.9 %          58,226                 -5.2 %          Base            57,895                    -            59,719                    -           2.5 %          59,343                  1.9 %          61,212                  5.2 %           5.0 %          60,790                  3.7 %          62,705                 10.4 %           7.5 %          62,237                  5.6 %          64,198                 15.6 %          10.0 %          63,685                  7.5 %          65,691                 20.8 %    (1) Net of tax  For the year ended December 31, 2011, our actuarial firm determined range of statutory loss and LAE reserves on a net basis range from a low of $51.5 million to a high of $65.2 million, with a best estimate of $55.4 million. The Company's net loss and LAE reserves are carried on a statutory basis at $55.6 million, and on a GAAP consolidated basis at $60.0 million which when netted with our $2.1 million reinsurance recoverable totals $57.9 million. The Company's point estimate for its reserves as of December 31, 2011 is 0.3% above our actuary's best estimate, which reflects management's current analysis of the status and expected timing of our anticipated claims, our analysis of expected weather patterns in the regions in which we sell policies, our re-focus of our business growth efforts to areas outside of South Florida, and other factors.  We are required to review the contractual terms of all our reinsurance purchases to ensure compliance with FASB issued guidance. The guidance establishes the conditions required for a contract with a reinsurer to be accounted for as reinsurance and prescribes accounting and reporting standards for those contracts. Contracts that do not result in the reasonable possibility that the reinsurer may realize a significant loss from the insurance risk assumed generally do not meet the conditions for reinsurance accounting and must be accounted for as deposits. The guidance also requires us to disclose the nature, purpose and effect of reinsurance transactions, including the premium amounts associated with reinsurance assumed and ceded. It also requires disclosure of concentrations of credit risk associated with reinsurance receivables and prepaid reinsurance premiums.  

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

RECENT ACCOUNTING PRONOUNCEMENTS

  See Note 2(n), "Summary of Significant Accounting Policies - Recent Accounting Pronouncements" in the Notes to the Condensed Consolidated Financial Statements for a discussion of recent accounting pronouncements and their effect, if any, on the Company.                                        - 42 -

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21st Century Holding Company

Management's Discussion and Analysis of Financial Condition and Results of

                                   Operations  ANALYSIS OF FINANCIAL CONDITION As of December 31, 2011 Compared with December 31, 2010

Total Investments

Total investments increased $7.0 million, or 5.7%, to $129.5 million as of December 31, 2011, compared with $122.5 million as of December 31, 2010.

  We account for our investment securities consistent with FASB-issued guidance that requires our securities to 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 where the Company's intent and ability are to hold the investment until maturity and are carried 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 and are carried 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 and are carried at fair value with unrealized holding gains and losses excluded from earnings and reported as a separate component of shareholders' equity, namely "Other Comprehensive Income."  The debt and equity securities that are available for sale and carried at fair value represent 94% of total investments as of December 31, 2011, compared with 95% as of December 31, 2010.  

We did not hold any trading investment securities during 2011.

  As of December 31, 2011 and 2010, our investments consisted primarily of corporate bonds held in various industries, municipal bonds and United States government bonds. As of December 31, 2011, 61% of our debt portfolio was in diverse industries and 39% is in United States government bonds.  As of December 31, 2011, approximately 83% of our equity holdings were in equities related to diverse industries and 17% were in mutual funds. As of December 31, 2010, 72% of our debt portfolio was in diverse industries and 28% was in United States government bonds.  As of December 31, 2010, approximately 77% of our equity holdings were in equities related to diverse industries and 23% were in mutual funds.  

Below is a summary of net unrealized gains and losses at December 31, 2011 and December 31, 2010 by category.

                                                                  Unrealized Gains and (Losses)                                                                December 31,         December 31,                                                                    2011                 2010                                                                      (Dollars in Thousands) Debt securities: United States government obligations and authorities           $        659         $        (192 ) Obligations of states and political subdivisions                        138                    43 Corporate                                                             1,543                   268 International                                                             5                    24                                                                       2,345                   143  Equity securities: Common stocks                                                          (939 )                 692  Total debt and equity securities                               $      1,406 

$ 835

    The net unrealized gain of $1.4 million is inclusive of $2.4 million of unrealized losses. The $2.4 million of unrealized losses is inclusive of $2.0 million unrealized losses from equity securities and $0.4 million unrealized losses from debt securities.  

The $2.0 million of unrealized losses from equity securities is from common stocks and mutual funds held in diverse industries as of December 31, 2011.

The

 Company evaluated the near-term prospects in relation to the severity and duration of the impairment.  Based on this evaluation and the Company's ability and intent to hold these investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2011.                                        - 43 -

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21st Century Holding Company

Management's Discussion and Analysis of Financial Condition and Results of

                                   Operations  The $0.4 million of unrealized losses from debt securities is related to both corporate and US government bonds.  The Company does not expect to settle at prices less than the amortized cost basis. The Company does not consider these investments to be other-than-temporarily impaired at December 31, 2011 because we neither currently intend to sell these investments nor consider it likely that we will be required to sell these investments before recovery of the amortized cost basis; additionally, at least 74% of these bonds had at least an "A" rating.  FASB has also issued guidance regarding when an investment is considered impaired, whether that impairment is other-than temporary, and the measurement of an impairment loss. 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 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 also 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 2011, in connection with the process, we have charged to operations $0.8 million of investment losses. During 2010, in connection with this process, we have not charged any net realized investment loss to operations.  

As of December 31, 2011 and December 31, 2010, all of our securities are in good standing and not impaired, except as noted above.

  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".  The following table summarizes, by type, our investments as of December 31, 2011 and 2010.                                                December 31, 2011            December 31, 2010                                            Carrying       Percent       Carrying       Percent                                             Amount        of Total       Amount        of Total                                                           (Dollars in Thousands) Debt securities, at market: United States government obligations and authorities                                $  37,217          28.75 %   $  28,196          23.02 % Obligations of states and political subdivisions                                   2,303           1.77 %       2,963           2.42 % Corporate                                     63,268          48.87 %      65,808          53.73 % International                                  1,523           1.18 %       1,383           1.13 %                                              104,311          80.57 %      98,350          80.30 % Debt securities, at amortized cost: Corporate                                        962           0.74 %         818           0.67 % United States government obligations and authorities                                    6,166           4.76 %       5,380           4.39 %                                                7,128           5.50 %       6,198           5.06 % Total debt securities                        111,439          86.07 %     104,548          85.36 %  Equity securities, at market:                 18,028          13.93 %      17,937          14.64 % Total investments                          $ 129,467         100.00 %   $ 122,485         100.00 %                                          - 44 -

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21st Century Holding Company

Management's Discussion and Analysis of Financial Condition and Results of

                                   Operations  Debt securities are carried on the balance sheet at market. At December 31, 2011 and 2010, debt securities had the following quality ratings by S&P and for securities not assigned a rating by S&P, Moody's or Fitch ratings were used.                   December 31, 2011           December 31, 2010               Carrying       Percent      Carrying       Percent                Amount       of Total       Amount       of Total                             (Dollars in Thousands)  AAA           $  48,686         43.69 %   $  43,533         41.64 % AA                6,712          6.02 %       8,995          8.60 % A                31,960         28.68 %      39,079         37.38 % BBB              22,193         19.92 %      11,125         10.64 % Not rated         1,888          1.69 %       1,816          1.74 %               $ 111,439        100.00 %   $ 104,548        100.00 %    The following table summarizes, by maturity, the debt securities as of December 31, 2011 and 2010.                              December 31, 2011           December 31, 2010                          Carrying       Percent      Carrying       Percent                           Amount       of Total       Amount       of Total                                        (Dollars in Thousands) Matures In: One year or less         $   8,328          7.47 %   $  13,267         12.69 % One year to five years      48,176         43.24 %      50,149         47.96 % Five years to 10 years      37,380         33.54 %      29,979         28.68 % More than 10 years          17,555         15.75 %      11,153         10.67 % Total debt securities    $ 111,439        100.00 %   $ 104,548        100.00 %   

At December 31, 2011, the weighted average maturity of the debt portfolio was approximately 7.5 years.

  As of December 31, 2011 and December 31, 2010, we have classified $7.1 million and $6.2 million, respectively, of our bond portfolio as held-to-maturity. We only classify bonds as held-to-maturity to support securitization of credit requirements.  

During 2011, we did not re-classify any of our bond portfolio between available-for-sale and held-to-maturity.

During 2010, we re-classified $3.1 million of amortized cost to held-to-maturity from available-for-sale to fund trust agreements.

  As of December 31, 2011 and December 31, 2010, Federated National maintained fully funded trust agreements that totaled $4.6 million in favor of two of its reinsurers.  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. During 2010, the letter of credit in favor of Republic was replaced by a fully funded trust agreement. As of December 31, 2011 and 2010 respectively, the amount held in trust was $1.0 million.  

Cash and Short-Term Investments

  Cash and short-term investments, which include cash, certificates of deposits, and money market accounts, decreased $1.0 million, or 6.2%, to $15.2 million as of December 31, 2011, compared with $16.2 million as of December 31, 2010. The decrease in cash and short-term investments resulted from portfolio reallocation based on improving risk profiles; wherein we decided to increase our exposure to corporate bonds.  We evaluate our asset class allocation on an ongoing basis continually adjust based on economic and business risk.                                        - 45 -

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21st Century Holding Company

Management's Discussion and Analysis of Financial Condition and Results of

                                   Operations

Prepaid Reinsurance Premiums

  Prepaid reinsurance premiums decreased $2.1 million, or 19.9%, to $8.3 million as of December 31, 2011, compared with $10.4 million as of December 31, 2010. The change is due to $0.6 million of ceded premiums, net of payments to reinsurers, reduced by $2.7 million amortization of prepaid reinsurance premiums associated with our reinsurance programs. We believe concentrations of credit risk associated with our prepaid reinsurance premiums are not significant.  

Premiums Receivable, Net of Allowance for Credit Losses

  Premiums receivable, net of allowance for credit losses, remained unchanged at $5.6 million as of December 31, 2011, compared with $5.6 million as of December 31, 2010.  

Our homeowners' insurance premiums receivable increased $0.2 million, or 6.6%, to $3.7 million as of December 31, 2011, compared with $3.5 million as of December 31, 2010.

  Our commercial general liability insurance premiums receivable decreased $0.2 million, or 15.2%, to $1.2 million as of December 31, 2011, compared with $1.4 million as of December 31, 2010.  Premiums receivable in connection with our automobile line of business remained unchanged at $0.8 million as of December 31, 2011, compared with $0.8 million as of December 31, 2010.  

Our allowance for credit losses remained unchanged at $0.1 million as of December 31, 2011, compared with $0.1 million as of December 31, 2010.

                                                      Years Ended December 31,                                                        2011               2010                                                       (Dollars in Thousands) 

Allowance for credit losses at beginning of year $ 68 $

24

 Additions charged to bad debt expense                        115            

135

 Write-downs charged against the allowance                   (110 )           (91 ) Allowance for credit losses at end of year         $          73         $  

68

Reinsurance Recoverable, Net

  Reinsurance recoverable, net, decreased $5.9 million, or 74.0%, to $2.1 million as of December 31, 2011, compared with $8.0 million as of December 31, 2010. The change is due to the payment patterns by our reinsurers, as influenced by the diminishing catastrophe related claims. All amounts are current and deemed collectable. We believe concentrations of credit risk associated with our reinsurance recoverables, net, are not significant.  

Deferred Policy Acquisition Costs

DPAC decreased $0.2 million, or 2.0%, to $7.7 million as of December 31, 2011, compared with $7.9 million as of December 31, 2010. The change is due to the deferral of the actual policy acquisition costs, including commissions, payroll and premium taxes, less commissions earned on reinsurance ceded and policy fees earned. An analysis of deferred acquisition costs follows.                                       Years Ended December 31,                                        2011              2010                                       (Dollars in Thousands)  Balance, beginning of year         $       7,879       $   8,267 Acquisition costs deferred                12,186          12,637 Amortization expense during year         (12,347 )       (13,025 ) Balance, end of year               $       7,718       $   7,879                                          - 46 -

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21st Century Holding Company

Management's Discussion and Analysis of Financial Condition and Results of

                                    Operations  Deferred Income Taxes, Net  Deferred income taxes, net, increased $0.7 million, or 8.8%, to $8.6 million as of December 31, 2011, compared with $7.9 million as of December 31, 2010. Deferred income taxes, net, is comprised of approximately $12.1 million and $11.2 million of deferred tax assets, net of approximately $3.5 million and $3.3 million of deferred tax liabilities as of December 31, 2011 as of December 31, 2010. The change in the net deferred tax asset is primarily due to the increase in the deferred tax assets related to discounted unearned premiums, discount on advanced premiums and net operating losses carry forward.                                                  Years Ended December 31,                                                  2011               2010 Deferred tax assets: Unpaid losses and loss adjustment expenses   $      2,385       $      2,243 Unearned premiums                                   1,950              1,663 Discount on advance premiums                          195                  - Allowance for credit losses                            34                  - Allowance for impairments                             317                  - Regulatory assessments                                  -                (69 ) Unearned agent commissions (SNSIC)                      -                  8 Depreciation & amortization                           317                

393

 Reserve for claims settlements                        809                

809

  NOL Carryforward                                   5,696              

5,702

 Deferred gain on sale and leaseback                     -                

100

 Stock option expense per ASC 718                      410                379 Total deferred tax assets                          12,113             11,228 Deferred tax liabilities:  Deferred acquisition costs, net                    (2,905 )           (2,965 ) Allowance for credit losses                             -                (44 ) Discount on advance premiums                            -                 

11

 Regulatory assessments                                (67 )                - Unrealized Gain on investment securities             (529 )             (314 ) Total deferred tax liabilities                     (3,501 )           (3,312 ) Net deferred tax asset                       $      8,612       $      7,916    Income Taxes Receivable 

Income taxes receivable decreased $2.4 million, or 100.0%, to nothing as of December 31, 2011, compared with $2.4 million as of December 31, 2010. The change is due to the receipt of our prior year refund, net of our loss as discussed within "Results of Operations- Year Ended December 31, 2011 Compared with Year Ended December 31, 2010".

  The Company's consolidated federal and state income tax returns for 2005-2010 are open for review by the Internal Revenue Service ("IRS") and various state taxing authorities. 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 2005 and 2006 income tax returns and net operating loss carry-back from tax year 2009 have been reviewed by the Joint Committee on Taxation. The Joint Committee on Taxation completed its consideration in September 2011 and took no exception to the conclusions reached by the IRS regarding the net operating loss carry-back from tax year 2009.                                        - 47 -

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21st Century Holding Company

Management's Discussion and Analysis of Financial Condition and Results of

                                    Operations  Other Assets  Other assets decreased $0.2 million, or 9.4%, to $2.1 million as of December 31, 2011, compared with $2.3 million as of December 31, 2010. Major components of other assets are shown in the following table; the accrued interest income receivable is primarily investment related.                                           As of December 31,                                          2011             2010                                        (Dollars in Thousands)  Accrued interest income receivable   $       1,130       $ 1,089 Notes receivable                                 -           365 Deposits                                       185           133 Prepaid expenses                               432           376 Other                                          347           347 Total                                $       2,094       $ 2,310    Unpaid Losses and LAE 

Unpaid losses and LAE decreased $6.5 million, or 9.8%, to $60.0 million as of December 31, 2011, compared with $66.5 million as of December 31, 2010. The composition of unpaid losses and LAE by product line is as follows.

                                   December 31, 2011                         December 31, 2010                           Case          Bulk          Total         Case          Bulk          Total                                (Dollars in Thousands)                   

(Dollars in Thousands)

 Homeowners'             $   8,795     $  10,652     $  19,447     $   5,825     $  16,847     $  22,672 Commercial General Liability                   4,225        27,717        31,942         8,230        27,819        36,049 Automobile                  3,533         5,061         8,594         3,447         4,361         7,808 Total                   $  16,553     $  43,430     $  59,983     $  17,502     $  49,027     $  66,529   

Please see "Liability for Unpaid Losses and LAE" under "Item 1. Business" for a discussion of the factors that affect unpaid losses and LAE.

Unearned Premium

  Unearned premiums increased $0.8 million, or 1.7%, to $47.9 million as of December 31, 2011, compared with $47.1 million as of December 31, 2010. The change was due to a $1.5 million increase in unearned homeowners' insurance premiums, a $0.3 million increase in unearned flood insurance premiums, a $0.6 million decrease in unearned commercial general liability premiums, and a $0.4 million decrease in unearned automobile insurance premiums. Generally, as is in this case, a increase in unearned premium directly relates to a increase in written premium on a rolling twelve-month basis. Competition could negatively affect our unearned premium.  

Premium Deposits and Customer Credit Balances

Premium deposits and customer credit balances increased $0.4 million, or 18.6%, to $2.8 million as of December 31, 2011, compared with $2.4 million as of December 31, 2010. Premium deposits are monies received on policies not yet in-force as of December 31, 2011.

Bank Overdraft

  Bank overdraft increased $0.5 million, or 6.7%, to $7.9 million as of December 31, 2011, compared with $7.4 million as of December 31, 2010. The bank overdraft relates primarily to losses and LAE disbursements paid but not presented for payment by the policyholder or vendor. The change relates to the timing of presentation of claims checks to the issuing bank.                                        - 48 -

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21st Century Holding Company

Management's Discussion and Analysis of Financial Condition and Results of

                                   Operations

Accounts Payable and Accrued Expenses

  Accounts payable and accrued expenses increased $0.9 million, or 44.4%, to $3.1 million as of December 31, 2011, compared with $2.2 million as of December 31, 2010. The change from prior year includes increases of $0.2 million for premium taxes payable and $0.1 million for homeowners' commission payable, as well as the impact of the timing of payments with our trade vendors.  Results of Operations Year Ended December 31, 2011 Compared with Year Ended December 31, 2010

Effective January 26, 2011, Federated National merged with and into American Vehicle, and the resulting entity changed its name to "Federated National Insurance Company".

Gross Premiums Written

  Gross premiums written increased $1.9 million, or 1.9%, to $98.3 million for 2011, compared with $96.4 million for 2010. The following table denotes gross premiums written by major product line. This increase reflected primarily an increase in the sale of homeowners' policies.                                                 Years Ended December 31,                                          2011                            2010                                               (Dollars in Thousands)                                 Amount       Percentage         Amount       Percentage  Homeowners'                    $ 80,402            81.82 %     $ 76,844            79.70 % Commercial General Liability     10,125            10.30 %       11,894            12.34 % Federal Flood                     4,468             4.55 %        3,951             4.10 % Automobile                        3,274             3.33 %        3,721             3.86 % Gross written premiums         $ 98,269           100.00 %     $ 96,410           100.00 %    The increase in the sale of homeowners' policies by $3.6 million, or 4.6%, to $80.4 million in 2011, compared with $76.8 million in 2010, is gross of reinsurance costs and net of Florida's mandated homeowners' wind mitigation discounts.  We offer premium discounts for wind mitigation efforts by policyholders, as required by Florida law. As of December 31, 2011, 63.5% of our in-force homeowners' policyholders were receiving wind mitigation credits totaling approximately $31.5 million (a 28.6% reduction of in-force premium), while 60.1% of our in-force homeowners' policyholders were receiving wind mitigation credits totaling approximately $27.3 million, (a 26.0 % reduction of in-force premium), as of December 31, 2010.  

During 2011 and 2010, the change to the cumulative wind mitigation credits afforded our policyholders totaled $4.2 million and ($0.3) million, respectively.

  These premium discounts have had a significant effect on both written and earned premium. Wind mitigation credits are 28.6% of the pre-credit premium, or $31.5 million, as of December 31, 2011, as compared with 26.0% of the pre-credit premium, or $27.3 million, as of December 31, 2010.  

Our in-force homeowners' policies increased by approximately 700, or approximately 2.0%, to approximately 43,800 as of December 31, 2011, as compared with approximately 43,100 as of December 31, 2010.

  We received approval from the Florida OIR in 2009 and 2010 for a premium rate increases for our voluntary homeowners' program within the State of Florida. These premium rate increases averaged approximately 19% in 2009 and 20.2% in 2010 and were implemented for policies with effective dates as soon as permitted following approval. In addition, in 2010 we received approval from the Florida OIR for a premium rate increase of approximately 15% for homeowners policies assumed from Citizens Property Insurance Corporation ("Citizens") in Florida beginning July 2010. In February 2012, we received approval from the Florida OIR of a 14.1% rate increase. That rate increase, together with our 2011 rate increases for our voluntary property book of homeowners' business, averaging 20.2% statewide, and our assumed property book of homeowners' business, averaging 13.9% statewide, are expected to gain momentum and accrete throughout 2012.                                        - 49 -

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21st Century Holding Company

Management's Discussion and Analysis of Financial Condition and Results of

                                   Operations  Our earnings can also be impacted by our ratings, such as the rating of Federated National by Demotech, Inc. ("Demotech"). Federated National's rating as of December 31, 2011 was "A" ("Exceptional"). For more information regarding our rating and the impact of a change or withdrawal of our rating, please see "Business-Regulation-Industry Rating Services."  The Company's sale of commercial general liability policies decreased by $1.8 million to $10.1 million for 2011, compared with $11.9 million for 2010. The primary factor for this decrease has been improvements to our underwriting standards and our decision to restrict underwriting authority within specific commercial general liability classes and geographic areas.  The following table sets forth the amounts and percentages of our gross premiums written in connection with our commercial general liability program by state.                                  Years Ended December 31,                            2011                          2010                   Amount       Percentage       Amount       Percentage                                  (Dollars in Thousands) State Alabama          $     57             0.56 %   $     46             0.39 % Arkansas                -             0.00 %          1             0.01 % California              8             0.08 %         34             0.29 % Florida             8,606            84.99 %      9,972            83.85 % Georgia                 -             0.00 %         68             0.57 % Kentucky                -             0.00 %          -             0.00 % Louisiana             916             9.05 %      1,094             9.19 % Maryland                -             0.00 %          9             0.07 % Oklahoma                2             0.02 %          -             0.00 % South Carolina          2             0.02 %          1             0.01 % Texas                 534             5.28 %        665             5.59 % Virginia                -             0.00 %          4             0.03 % Total            $ 10,125           100.00 %   $ 11,894           100.00 %   

We are required to report write-your-own flood premiums on a direct and 100% ceded basis.

The Company's sale of auto insurance policies decreased to $3.3 million for 2011, compared with $3.7 million 2010. The Company's sale of auto insurance included only renewal policies in 2011 , and new and renewal policies in 2010.

Gross Premiums Ceded

  Gross premiums ceded decreased to $46.3 million for 2011, compared with $53.0 million for 2010. Gross premiums ceded relating to our homeowners', write-your-own flood and automobile programs totaled $40.3 million, $4.5 million and $1.5 million for 2011. Gross premiums ceded relating to our homeowners', commercial general liability, write-your-own flood and automobile programs totaled $46.9 million, $0.2 million, $4.0 million and $1.9 million for 2010.  

The decrease to gross premiums ceded relating to our homeowners' program is primarily due to the reduced cost of reinsurance purchased from the Florida Hurricane Catastrophe Fund ("FHCF"). The ceded relating to our automobile program is associated with our arrangement to write nonstandard private passenger automobile insurance through a reputable managing general agent familiar with the Georgia market. A quota share treaty cedes 100% of the risk and fully collateralizes for unearned premium and unpaid loss and LAE.

Decrease in Prepaid Reinsurance Premiums

  The decrease in prepaid reinsurance premiums was $2.7 million in 2011, compared with a $2.1 million decrease in 2010. The increased charge to written premium is associated with the timing of our reinsurance payments measured against the term of the underlying reinsurance policies.                                        - 50 -

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21st Century Holding Company

Management's Discussion and Analysis of Financial Condition and Results of

                                   Operations

(Increase) Decrease in Unearned Premiums

  The increase in unearned premiums was $0.8 million for 2011, compared with a $3.7 million decrease for 2010. The 2011 charge to written premium was due to a $1.5 million increase in unearned homeowners' insurance premiums, a $0.3 million increase in unearned flood premiums, a $0.4 million decrease in unearned automobile premiums and a $0.6 million decrease in unearned commercial general liability premiums during 2011. These changes are a result of differences in written premium volume during this period as compared with the same period last year. See "Gross Premiums Written" above.  

Net Premiums Earned

  Net premiums earned increased $3.4 million, or 7.7%, to $48.5 million for 2011, compared with $45.1 million for 2010. The following table denotes net premiums earned by product line.                                                 Years Ended December 31,                                           2011                           2010                                 Amount        Percentage        Amount       Percentage                                               (Dollars in Thousands)  Homeowners'                    $ 35,785              73.75 %   $ 30,040            66.67 % Commercial General Liability     10,632              21.91 %     13,302            29.52 % Automobile                        2,106               4.34 %      1,718             3.81 % Net premiums earned            $ 48,523             100.00 %   $ 45,060           100.00 %    The $5.7 million increase in homeowners' net premiums earned is due to a $3.6 million increase in gross written premium as discussed, a $6.5 million decrease in gross premiums ceded and a $4.4 million decrease in the net change to prepaid reinsurance premiums and unearned premium.  The $2.7 million decrease in commercial general liability net premiums earned is a result of a $1.8 million decrease in gross written premium, reflecting the impact our decision to restrict underwriting authority within specific commercial general liability classes and geographic areas. The change is also a result of a $0.2 million decrease in gross premiums ceded and a $1.1 million decrease in the net change to unearned premium.  The $0.4 million increase in automobile net premiums earned is a result of a $0.4 million decrease in gross written premium as discussed, a $0.3 million decrease in gross premiums ceded and a $0.5 million increase in the net change to prepaid reinsurance premiums and unearned premium.  

Commission Income

  Commission income decreased $0.4 million, or 28.4%, to $1.0 million for 2011, compared with $1.4 million for 2010. The primary sources of our commission income are our managing general agent services, write-your-own flood premiums and our independent insurance agency, Insure-Link, Inc. ("Insure-Link").  

Net Investment Income

  Net investment income increased $0.4 million, or 9.5%, to $4.1 million for 2011, compared with $3.7 million for 2010.  Our investment yield, net and gross of investment expenses, excluding equities and including cash, were 2.9% and 3.1%, respectively, for 2011. Our investment yield, net and gross of investment expenses, excluding equities and including cash, were 2.5% and 2.7%, respectively, for 2010.  Our investment yield, net and gross of investment expenses measured against debt securities, excluding equities and cash, were 3.1% and 3.4%, respectively, for 2011.  The primary reason for our lower investment yield in 2011 was the Company harvested gains that were a result of the Federal Reserve's activity in the bond market, which pushed up bond prices and lowered yields.  Hence the proceeds from recognizing the gains were reinvested at yields that were lower than what was sold. Our investment yield, net and gross of investment expenses measured against debt securities, excluding equities and cash, were 3.4% and 3.7%, respectively, for 2010.  

See also "Analysis of Financial Condition As of December 31, 2011 Compared with December 31, 2010 - Investments" for a further discussion on our investment portfolio.

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21st Century Holding Company

Management's Discussion and Analysis of Financial Condition and Results of

                                   Operations

Net Realized Investment Gains

  Net realized investment gains were $2.7 million for 2011, compared with net realized investment gains of $6.8 million for 2010.  Specifically, net realized losses for equity securities were $0.3 million for 2011, compared with $1.7 million net realized gains for 2010. For debt securities, net realized gains were nearly $3.0 million for 2011, compared with net realized gains of $4.0 million for 2010. During 2011, the Company, because of the actions taken by the Federal Reserve to maintain a low interest rate environment, realized significant gains in the fixed income portfolio. During 2010, the Company had an overweight in corporate bonds that performed well and sold these bonds to lock in gains and bolster the surplus of our insurance companies.  FASB has issued guidance regarding when an investment is considered impaired, whether that impairment is other-than temporary, and the measurement of an impairment loss. 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. During 2011, pursuant to guidelines prescribed in FASB issued guidance, we have charged to operations, realized investment losses of $0.8 million. The charges relate to common stock held in diverse industries; during 2010, we did not mark any investments to market value pursuant to guidelines prescribed in FASB issued guidance. 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, as well as information released via the general media channels.  The table below depicts the net realized investment gains by investment category during 2011 and 2010.                                         Years Ended December 31,                                         2011               2010                                         (Dollars in Thousands) Realized gains: Debt securities                     $      3,569       $      4,484 Equity securities                          1,240              4,228 Total realized gains                       4,809              8,712  Realized losses: Debt securities                             (595 )             (209 ) Equity securities                         (1,489 )           (1,726 ) Total realized losses                     (2,084 )           (1,935 )

Net realized gains on investments $ 2,725 $ 6,777

Other Income

  Other income increased $0.8 million, or 100.0%, to $1.6 million for 2011, compared with $0.8 million for 2010. The major components of other income for 2011 include $1.1 million from the reconciliation of outstanding checks in connection with our accounting for unclaimed property and $0.5 million in partial recognition of our gain on the sale of our Lauderdale Lakes property. The major components of other income for 2010 included approximately $0.5 million in partial recognition of our gain on the sale of our Lauderdale Lakes property and $0.3 million in recognition of our gain on the sale of a vacant retail property.  Losses and LAE  Losses and LAE, our most significant expense, represent actual payments made and changes in estimated future payments to be made to or on behalf of our policyholders, including expenses required to settle claims and losses. We revise our estimates based on the results of analysis of estimated future payments to be made. This process assumes that experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events.  Losses and LAE decreased by $9.2 million, or 22.9%, to $30.9 million for 2011, compared with $40.1 million for 2010. The overall change includes a $7.0 million decrease in our homeowners' program due to favorable experience based in part on enhanced underwriting and claim processing techniques. The overall change also includes a $2.8 million decrease in our commercial general liability program and a $0.6 million increase in connection with our automobile program.                                        - 52 -

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21st Century Holding Company

Management's Discussion and Analysis of Financial Condition and Results of

                                   Operations

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

December 31, 2011

December 31, 2010

                           Case          Bulk          Total         Case    

Bulk Total

                                (Dollars in Thousands)                    

(Dollars in Thousands)

 Homeowners'             $   8,795     $  10,652     $  19,447     $   5,825     $  16,847     $  22,672 Commercial General Liability                   4,225        27,717        31,942         8,230        27,819        36,049 Automobile                  3,533         5,061         8,594         3,447         4,361         7,808 Total                   $  16,553     $  43,430     $  59,983     $  17,502     $  49,027     $  66,529   

Please see "Liability for Unpaid Losses and LAE" under "Item 1 Business" for a discussion of the factors that affect unpaid losses and LAE.

  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. Because of our process, reserves were decreased by approximately $6.5 million during 2011. This overall change includes a $3.2 million decrease in reserves for our homeowners' program, a $4.1 million decrease in reserves for our commercial general liability program and a $0.8 million increase in reserves for our automobile program. The decreases are due to favorable experience based in part on enhanced underwriting and claim processing techniques.  Our loss ratio is computed as losses and LAE divided by net premiums earned. A lower loss ratio generally results in higher operating income. Our loss ratio for 2011 was 63.7% compared with 89.0% for the same period in 2010. The favorable decrease to our loss ratio is due to the $9.2 million decrease in losses and LAE measured against the $3.5 million increase in net premium earned during 2011 as compared with the same period in 2010.  

The table below reflects the loss ratios by product line.

                                   Years Ended December 31,                                    2011               2010 Homeowners'                           57.79 %            92.06 % Commercial General Liability          60.11 %            69.39 % Automobile                           181.63 %           186.30 % All lines                             63.67 %            88.96 %   

Operating and Underwriting Expenses

  Operating and underwriting expenses decreased $0.9 million, or 8.5%, to $9.9 million for 2011, compared with $10.8 million for 2010. The decreases include $0.4 million in surveys and underwriting reports, $0.3 million in actuarial fees and $0.2 million in insurance expense.  

Salaries and Wages

  Salaries and wages decreased $0.6 million, or 7.1%, to $8.0 million for 2011, compared with $8.6 million for 2010. The charge to operations for stock-based compensation, in accordance with FASB guidance, was approximately $0.2 million during 2011, compared with approximately $0.4 million for 2010.  

Policy Acquisition Costs - Amortization

Policy acquisition costs - amortization, decreased $0.7 million, or 5.2%, to $12.3 million for 2011, compared with $13.0 million for 2010.

Policy acquisition costs - amortization, consists of the actual policy acquisition costs, including commissions, payroll and premium taxes, less commissions earned on reinsurance ceded and policy fees earned.

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21st Century Holding Company

Management's Discussion and Analysis of Financial Condition and Results of

                                   Operations

Provision for Income Tax Benefit

  The provision for income tax benefit was $0.6 million for 2011, compared with a $4.0 million for 2010. The effective rate for income taxes was 57.0% for 2011, compared with 33.1% for 2010. The 57.0% effective rate reflects the true-up of the 2010 tax return permanent differences.  

Net Loss

As a result of the foregoing, the Company's net loss for 2011was $0.4 million, compared with $8.0 million for 2010.

  Results of Operations Year Ended December 31, 2010 Compared with Year Ended December 31, 2009

Effective January 26, 2011, Federated National merged with and into American Vehicle, and the resulting entity changed its name to "Federated National Insurance Company".

Gross Premiums Written

  Gross premiums written decreased $8.0 million, or 7.6%, to $96.4 million for 2010, compared with $104.4 million for 2009. The following table denotes gross premiums written by major product line. This decrease reflected primarily a decrease in the sale of homeowners' and commercial general liability policies.                                                 Years Ended December 31,                                          2010                            2009                                               (Dollars in Thousands)                                 Amount      Percentage         Amount        Percentage  Homeowners'                    $ 76,844           79.70 %     $  84,705            81.15 % Commercial General Liability     11,894           12.34 %        15,279            14.64 % Federal Flood                     3,951            4.10 %         3,559             3.41 % Automobile                        3,721            3.86 %           836             0.80 % Gross written premiums         $ 96,410          100.00 %     $ 104,379           100.00 %    The decrease in the sale of homeowners' policies by $7.9 million, or 9.3%, to $76.8 million in 2010, compared with $84.7 million in 2009, is gross of reinsurance costs and net of Florida's mandated homeowners' wind mitigation discounts.  We offer premium discounts for wind mitigation efforts by policyholders, as required by Florida law. As of December 31, 2010, 60.1% of our in-force homeowners' policyholders were receiving wind mitigation credits totaling approximately $27.3 million (a 26.0% reduction of in-force premium), while 56.8% of our in-force homeowners' policyholders were receiving wind mitigation credits totaling approximately $27.6 million, (a 24.2 % reduction of in-force premium), as of December 31, 2009.  

During 2010 and 2009, the change to the cumulative wind mitigation credits afforded our policyholders totaled ($0.3) million and $9.8 million, respectively.

  These premium discounts have had a significant effect on both written and earned premium. Wind mitigation credits are 26.0% of the pre-credit premium, or $27.3 million, as of December 31, 2010, as compared with 24.2% of the pre-credit premium, or $27.6 million, as of December 31, 2009.  

As a result of our expanded underwriting criteria, our in-force homeowners' policies decreased by approximately 9,500, or approximately 18.0%, to approximately 43,100 as of December 31, 2010, as compared with approximately 52,600 as of December 31, 2009.

  We received approval from the Florida OIR in 2009 and 2010 for a premium rate increases for our voluntary homeowners' program within the State of Florida. These premium rate increases averaged approximately 19% in 2009 and 20.2% in 2010 and were implemented for policies with effective dates as soon as permitted following approval.                                        - 54 -

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Management's Discussion and Analysis of Financial Condition and Results of

                                   Operations  The Company's sale of commercial general liability policies decreased by $3.4 million to $11.9 million in 2010, compared with $15.3 million in 2009. The primary factor for this decrease has been the slowdown in the economy, which had a dramatic impact on the artisan contractor portfolio written by American Vehicle. An additional factor is our decision to restrict underwriting authority within specific commercial general liability classes and geographic areas.  The following table sets forth the amounts and percentages of our gross premiums written in connection with our commercial general liability program by state.                                  Years Ended December 31,                            2010                          2009                   Amount       Percentage       Amount       Percentage                                  (Dollars in Thousands) State Alabama          $     46             0.39 %   $     76             0.50 % Arkansas                1             0.01 %          4             0.03 % California             34             0.29 %         49             0.32 % Florida             9,972            83.85 %     12,341            80.77 % Georgia                68             0.57 %        291             1.91 % Kentucky                -             0.00 %          1             0.00 % Louisiana           1,094             9.19 %      1,736            11.36 % Maryland                9             0.07 %          -             0.00 % South Carolina          1             0.01 %          2             0.01 % Texas                 665             5.59 %        778             5.09 % Virginia                4             0.03 %          1             0.01 % Total            $ 11,894           100.00 %   $ 15,279           100.00 %   

We are required to report write-your-own flood premiums on a direct and 100% ceded basis.

  The Company's sale of auto insurance policies increased to $3.7 million in 2010, compared with $0.8 million in 2009. The Company's sale of auto insurance included new and renewal policies in 2010, but was limited to renewal policies in 2009.  Gross Premiums Ceded  Gross premiums ceded decreased to $53.0 million in 2010, compared with $56.2 million in 2009, due to our decreased cost of reinsurance. Gross premiums ceded under our catastrophe reinsurance program totaled $46.9 million, gross premiums ceded to the write-your-own flood program totaled $4.0 million, gross premiums ceded relating to our commercial automobile program totaled $1.9 million and gross premiums ceded relating to our commercial general liability program totaled $0.2 million in 2010.  

(Decrease) Increase in Prepaid Reinsurance Premiums

  The decrease in prepaid reinsurance premiums was $2.1 million in 2010, compared with a $10.2 million increase in 2009. The increased charge to written premium is associated with the timing of our reinsurance payments measured against the term of the underlying reinsurance policies.  

Decrease (Increase) in Unearned Premiums

  The decrease in unearned premiums was $3.7 million in 2010, compared with a $10.3 million increase in 2009. The change was due to a $3.1 million decrease in unearned homeowners' insurance premiums, a $1.6 million decrease in unearned commercial general liability premiums, a $0.8 million increase in unearned automobile premiums, net of a $0.2 million increase in unearned flood premiums in 2010. These changes are a result of differences in written premium volume during this period as compared with the same period last year. See "Gross Premiums Written" above.                                        - 55 -

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21st Century Holding Company

Management's Discussion and Analysis of Financial Condition and Results of

                                    Operations  Net Premiums Earned  

Net premiums earned decreased $2.9 million, or 6.1%, to $45.1 million for in 2010, compared with $48.0 million in 2009. The following table denotes net premiums earned by product line.

                                                Years Ended December 31,                                           2010                           2009                                 Amount        Percentage        Amount       Percentage                                               (Dollars in Thousands)  Homeowners'                    $ 30,040              66.67 %   $ 28,474            59.35 % Commercial General Liability     13,302              29.52 %     19,076            39.76 % Automobile                        1,718               3.81 %        426             0.89 % Net premiums earned            $ 45,060             100.00 %   $ 47,976           100.00 %    The change in homeowners' net premiums earned is due to an $8.0 million decrease in gross written premium as discussed, a $5.6 million decrease in gross premiums ceded and a $3.8 million increase in the net change to prepaid reinsurance premiums and unearned premium.  The change in commercial general liability net premiums earned is a result of a $3.4 million decrease in gross written premium, reflecting the impact of the economic slowdown on the artisan contractor portfolio written by American Vehicle and our decision to restrict underwriting authority within specific commercial general liability classes and geographic areas. The change is also a result of a $0.1 million increase in gross premiums ceded and a $2.3 million decrease in the net change to unearned premium.  

The change in automobile net premiums earned is a result of a $2.9 million increase in gross written premium as discussed, a $1.9 million increase in gross premiums ceded and a $0.3 million decrease in the change to unearned premium.

Commission Income

  Commission income remained unchanged at $1.4 million in 2010, compared with $1.4 million in 2009. The primary sources of our commission income are our managing general agent services, write-your-own flood premiums and our independent insurance agency, Insure-Link.  

Net Investment Income

  Net investment income increased $0.3 million, or 9.7%, to $3.7 million in 2010, compared with $3.4 million in 2009.  Our investment yield, net and gross of investment expenses, excluding equities and including cash, were 2.5% and 2.7%, respectively, in 2010. Our investment yield, net and gross of investment expenses, excluding equities and including cash, were 2.2% and 2.3%, respectively, in 2009.  Our investment yield, net and gross of investment expenses measured against debt securities, excluding equities and cash, were 3.4% and 3.7%, respectively, in 2010.  Our investment yield, net and gross of investment expenses measured against debt securities, excluding equities and cash, were 3.5% and 3.7%, respectively, in 2009.  

Net Realized Investment Gains

  Net realized investment gains were $6.8 million in 2010, compared with $1.1 million in 2009.  Specifically, net realized gains for equity marketable securities were $2.5 million in 2010 compared with $1.5 million in 2009; and for bonds, net realized gains were $4.3 million in 2010, compared with net realized loss of $0.4 million in 2009.  Realized investment gains recognized were higher in 2010 than in 2009 because of the Company's investment in marketable securities in diverse industries and an overweight in corporate bonds.  These securities performed well in 2010 and were sold to lock in gains and bolster surplus.  During 2010 and 2009, we did not mark any equity investments to market value pursuant to guidelines prescribed in FASB issued guidance. In reaching a conclusion that a security is either other than 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, as well as information released via the general media channels.                                        - 56 -

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Management's Discussion and Analysis of Financial Condition and Results of

                                   Operations  The table below depicts the net realized investment gains by investment category in 2010 and 2009.                                         Years Ended December 31,                                         2010               2009                                         (Dollars in Thousands) Realized gains: Debt securities                     $      4,484       $        485 Equity securities                          4,228              2,159 Total realized gains                       8,712              2,644  Realized losses: Debt securities                             (209 )             (825 ) Equity securities                         (1,726 )             (702 ) Total realized losses                     (1,935 )           (1,527 )

Net realized gains on investments $ 6,777 $ 1,117

Other Income

  Other income remained unchanged at $0.8 million in 2010, compared with $0.8 million in 2009. The major component of other income in 2010 and 2009 included approximately $0.5 million in partial recognition of our gain on the sale of our Lauderdale Lakes property.  Losses and LAE  Losses and LAE, our most significant expense, represent actual payments made and changes in estimated future payments to be made to or on behalf of our policyholders, including expenses required to settle claims and losses. We revise our estimates based on the results of analysis of estimated future payments to be made. This process assumes that experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events.  Losses and LAE decreased by $3.6 million, or 8.3%, to $40.1 million in 2010, compared with $43.7 million in 2009. The overall change includes a $1.5 million increase in our homeowners' program and a $6.3 million decrease in our commercial general liability program; these decreases are due to favorable experience in these markets based in part on enhanced underwriting and claim processing techniques. The overall increase also includes a $1.2 million increase in connection with our re-launched automobile program which has experienced adverse development in its initial phase.  

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

December 31, 2010

December 31, 2009

                           Case          Bulk          Total         Case    

Bulk Total

                                (Dollars in Thousands)                    

(Dollars in Thousands)

 Homeowners'             $   5,825     $  16,847     $  22,672     $   8,705     $  19,298     $  28,003 Commercial General Liability                   8,230        27,819        36,049         7,885        29,346        37,231 Automobile                  3,447         4,361         7,808         2,612         2,765         5,377 Total                   $  17,502     $  49,027     $  66,529     $  19,202     $  51,409     $  70,611   

Please see "Liability for Unpaid Losses and LAE" under "Item 1. Business" for a discussion of the factors that affect unpaid losses and LAE.

  Based on our review as discussed above, reserves were decreased by approximately $4.1 million in 2010. This overall change includes a $5.3 million decrease in our homeowners' program and a $1.2 million decrease in our commercial general liability program; these decreases are due to favorable experience in these markets based in part on enhanced underwriting and claim processing techniques. The overall decrease also includes a $2.4 million increase in connection with our re-launched automobile program which has experienced adverse development in its initial phase.                                        - 57 -

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21st Century Holding Company

Management's Discussion and Analysis of Financial Condition and Results of

                                   Operations

Our loss ratio, which is computed as losses and LAE divided by net premiums earned, in 2010 was 89.0% compared with 91.1% for the same period in 2009.

The table below reflects the loss ratios by product line.

                                   Years Ended December 31,                                    2010               2009 Homeowners'                           92.06 %            89.62 % Commercial General Liability          69.39 %            81.30 % Automobile                           186.30 %           629.37 % All lines                             88.96 %            91.10 %   

For further discussion, see Footnote 6 to the Consolidated Financial Statements included under Part II, Item 8, of this Report.

Operating and Underwriting Expenses

  Operating and underwriting expenses increased $1.1 million, or 11.9%, to $10.8 million in 2010, compared with $9.7 million in 2009. The change is primarily due to a $0.4 million increase in actuarial fees, a $0.2 million increase in consulting fees, a $0.2 million increase in licenses and fees, a less than $0.2 million increase in surveys and underwriting reports, and immaterial increases in other expenses.  Salaries and Wages 

Salaries and wages increased $0.7 million, or 8.6%, to $8.6 million in 2010, compared with $7.9 million in 2009. The increase is due to staffing for additional lines of business.

The charge to operations for stock-based compensation, in accordance with FASB issued guidance, remained unchanged at approximately $0.4 million in 2010 compared with approximately $0.4 million in 2009.

Policy Acquisition Costs - Amortization

Policy acquisition costs - amortization, decreased $0.7 million, or 5.2%, to $13.0 million in 2010, compared with $13.7 million in 2009.

Policy acquisition costs - amortization, consists of the actual policy acquisition costs, including commissions, payroll and premium taxes, less commissions earned on reinsurance ceded and policy fees earned.

Provision for Income Tax Benefit

  The provision for income tax benefit was $4.0 million in 2010, compared with $5.9 million in 2009. The effective rate for income taxes was 33.1% in 2010 and 36.5% in 2009.  Net Loss 

As a result of the foregoing, the Company's net loss in 2010 was $8.0 million compared with $10.3 million in 2009.

CONTRACTUAL OBLIGATIONS

A summary of long-term contractual obligations as of December 31, 2011 follows. The amounts represent estimates of gross undiscounted amounts payable over time.

                                                      (Dollars in Thousands) 

Contractual Obligations Total 2012 2013 2014

   2015        Thereafter Unpaid Losses and LAE     $ 59,983     $ 35,606     $ 14,342     $ 6,598     $ 2,303     $      1,134 Operating leases             1,197          130          229         236         243              359 Total                     $ 61,180     $ 35,736     $ 14,571     $ 6,834     $ 2,546     $      1,493                                          - 58 -

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Management's Discussion and Analysis of Financial Condition and Results of

                                   Operations

LIQUIDITY AND CAPITAL RESOURCES

  In 2011, our primary sources of capital included proceeds from the sale of investment securities, decreased reinsurance recoverable, net, decreased income taxes recoverable, decreased prepaid reinsurance premiums, amortization of investment premium discount, net, increased accounts payable and accrued expenses, increased unearned premiums and increased bank overdraft. Also contributing to our liquidity was increased premium deposits and customer credit balances, non-cash compensation, depreciation and amortization, decreased policy acquisition costs, net of amortization and increased income taxes payable. Because we are a holding company, we are largely dependent upon fees and commissions from our subsidiaries for cash flow.  In 2011, net cash provided by operating activities was $4.2 million. In 2010 and 2009, net cash used by operating activities was $6.5 million and $11.6 million, respectively.  In 2011, operations generated $15.1 million of gross cash flow, due to a $6.0 million decrease in reinsurance recoverable, a $2.4 million decrease in income taxes recoverable, a $2.1 million decrease in prepaid reinsurance premiums, $1.3 million of amortization of investment discount, net, a $1.0 million increase in accounts payable and accrued expenses, a $0.8 million increase in unearned premiums, a $0.5 million increase in bank overdraft, a $0.4 million increase in premium deposits and customer credit balances, $0.3 million of non-cash compensation, $0.2 million of depreciation and amortization and a $0.1 million decrease in policy acquisition costs, net of amortization.  In 2011, operations used $10.9 million of gross cash flow primarily due to a $6.5 million decrease in unpaid losses and LAE, $2.7 million of net realized investment gains, a $0.9 million increase in deferred income tax expense, a $0.3 million increase in various other assets and a less than $0.1 million decrease in the provision for uncollectible premiums receivable, all in conjunction with a net loss of $0.4 million.  In 2011, 2010 and 2009, net cash used by investing activities was $5.2 million, $5.1 million and $82.7 million. Our available for sale investment portfolio is highly liquid as it consists entirely of readily marketable securities. In 2011, investing activities generated $108.3 million and used $113.5 million.  In 2011, net cash provided by financing activities was less than $0.1 million. In 2010 and 2009, net cash used by financing activities was $0.4 million and $2.0 million, respectively. In 2011, the source of cash in connection with financing activities was a tax benefit related to non-cash compensation.  We offer direct billing in connection with our homeowners', commercial general liability and automobile programs. Direct billing is an agreement in which the insurance company accepts from the insured, as a receivable, a promise to pay the premium, as opposed to requiring the full amount of the policy at policy inception, either directly from the insured or from a premium finance company. The advantage of direct billing a policyholder by the insurance company is that we are not reliant on a credit facility, but remain able to charge and collect interest from the policyholder.  We believe that our current capital resources will be sufficient to meet currently anticipated working capital requirements. There can be no assurances, however, that such will be the case. We continue to evaluate our liquidity and the possibility that we may require additional working capital.  

Federated National's statutory capital surplus as of December 31, 2011 was approximately $39.3 million and its statutory net income in 2011 was $0.8 million.

Federated National's and American Vehicle's statutory capital surplus as of December 31, 2010 were approximately $18.7 million and $22.0 million, respectively, and their statutory net losses in 2010 were $12.0 million and $1.6 million, respectively.

  As of December 31, 2011, 2010, and 2009, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as "structured finance" or "special purpose" entities, which were established for the purpose of facilitating off-balance-sheet arrangements or other contractually narrow or limited purposes. As such, management believes that we currently are not exposed to any financing, liquidity, market or credit risks that could arise if we had engaged in transactions of that type requiring disclosure herein.                                        - 59 -

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Management's Discussion and Analysis of Financial Condition and Results of

                                   Operations

IMPACT OF INFLATION AND CHANGING PRICES

    The consolidated financial statements and related data presented in this Annual Report have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Our primary assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the inflationary effect on the cost of paying losses and LAE.        Insurance premiums are established before we know the amount of losses and LAE and the extent to which inflation may affect such expenses. Consequently, we attempt to anticipate the future impact of inflation when establishing rate levels. While we attempt to charge adequate premiums, we may be limited in raising premium levels for competitive and regulatory reasons. Inflation may also affect the market value of our investment portfolio and the investment rate of return. Any future economic changes that result in prolonged and increasing levels of inflation could cause increases in the dollar amount of incurred losses and LAE and thereby materially adversely affect future liability requirements.  

SELECTED QUARTERLY FINANCIAL DATA (Unaudited)

                                                       Year Ended December 31, 2011                                                     (Dollars in Thousands except EPS)                                               First        Second         Third        Fourth                                             Quarter       Quarter       Quarter       Quarter Revenue: Net premiums earned                        $  11,144     $  11,660     $  12,892     $  12,827 Other revenue                                  1,982         2,516         3,302         3,840 Total revenue                                 13,126        14,176        16,194        16,667  Expenses: Losses and LAE                                 8,447         7,818         7,852         6,779 Other expenses                                 7,852         7,474         7,800         7,141 Total expenses                                16,299        15,292        15,652        13,920  (Loss) income before provision for income tax (benefit) expense                  (3,173 )      (1,116 )         542         2,747 Provision for income tax (benefit) expense                                       (1,166 )        (311 )         114           793  Net (loss) income                          $  (2,007 )   $    (805 )   $     428     $   1,954 

Basic net (loss) income per share $ (0.25 ) $ (0.10 ) $ 0.05$ 0.25

  Fully diluted net (loss) income per share                                      $   (0.25 )   $   (0.10 )   $    

0.05 $ 0.25

  Weighted average number of common shares outstanding                                    7,946         7,946         

7,946 7,946

  Weighted average number of common shares outstanding (assuming dilution)                7,946         7,946         7,946         7,946                                          - 60 -

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                          21st Century Holding Company    Management's Discussion and Analysis of Financial Condition and Results of                                    Operations                                                        Year Ended December 31, 2010                                                     (Dollars in Thousands except EPS)                                               First        Second         Third        Fourth                                             Quarter       Quarter       Quarter       Quarter Revenue: Net premiums earned                        $  11,016     $  10,892     $  11,621     $  11,531 Other revenue                                  4,764         4,142         3,858         2,780 Total revenue                                 15,780        15,034        15,479        14,311  Expenses: Losses and LAE                                 9,063        10,196         8,669        12,160 Other expenses                                 8,249         8,224         8,601         7,397 Total expenses                                17,312        18,420        17,270        19,557  Loss before provision for income tax benefit                                       (1,532 )      (3,386 )      (1,791 )      (5,246 ) Provision for income tax benefit                (605 )      (1,037 )        (523 )      (1,794 )  Net loss                                   $    (927 )   $  (2,349 )   $  (1,268 )   $  (3,452 )  Basic net loss per share                   $   (0.12 )   $   (0.30 )   $   (0.16 )   $   (0.43 )  Fully diluted net loss per share           $   (0.12 )   $   (0.30 )   $   

(0.16 ) $ (0.43 )

  Weighted average number of common shares outstanding                                    7,946         7,946         

7,946 7,946

  Weighted average number of common shares outstanding (assuming dilution)                7,946         7,946         

7,946 7,946

OFF BALANCE SHEET TRANSACTIONS

For the years ended December 31, 2011 and 2010, we had no off balance sheet transactions.

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