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Executives

Michael Braun – CEO

Peter Prygelski - CFO

Analysts

Ray Dirks - Dirks Associates

Casey Alexander – Gilford Securities

Robert Sterling – Shareholder

Charles Burger – Shareholder

21st Century Holding Company (TCHC) Q2 2009 Earnings Call August 10, 2009 4:30 PM ET

Operator

Good day and welcome to the 21st Century Holding Company, second quarter financial results conference call. Today’s conference is being recorded.

Statements in this conference call or in documents incorporated by reference that are not historical fact are forward-looking statements. Forward-looking statements are subject to certain risks and uncertainties that could cause actual events and results to differ materially from those discussed herein.

Without limiting the generality of the foregoing words such as may, will, expect, believe, anticipate, intend, could, would, estimate or continue, or the negative other variations thereof or comparable terminology are intended to identify forward-looking statements.

The risks and uncertainties included, but are not limited to the risks and uncertainties described in this conference call or from time-to-time in our filings with the SEC.

Furthermore, the unaudited consolidated financial statements of 21st Century Holding Company for the quarter ended June 30, 2009 have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Rule 10-1 of Regulation S [through] X.

These financial statements do not include all information and notes required by GAAP for a complete financial statement and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the company’s Annual Report on Form 10-K for the year ended December 31, 2008.

(Operator Instructions) Participating in today’s conference is Mr. Michael Braun, Chief Executive Officer, and Mr. Peter Prygelski, Chief Financial Officer. Mr. Braun, you may go ahead with your prepared remarks.

Michael Braun

Thank you very much, what I’ll do is I’m just going to start by reading some of the highlights in the press release that went out earlier today. For the three months ending June 30, 2009, the company reported a net income of about $785,000 or $0.10 a share compared to a net loss of about $2.5 million last year or $0.31 per share in the same three month period.

For the six months ending June 30, 2009 the company reported a net income of about $1.1 million or $0.14 per share, versus net income of about $1.8 million or $0.23 per share the same six month period last year.

Net premium earned decreased $1.2 million or 7.7% to $14.3 million for the three months ending June 30, 2009 compared to $15.5 million for the same three month period last year. Net premiums earned decreased $5.9 million or 17.3% to $28.2 million for the six months ending June 30, 2009 compared to $34.1 million for the same six month period last year.

Total revenues increased $1.7 million or 11% to $17.1 million for the three months ending June 30, 2009 compared to $15.4 million for the same three month period last year. Total revenues decreased $2.7 million or 7.7% to $32.8 million for the six months ending June 30, 2009 compared to $35.5 million for the same six month period last year.

Those are just some highlights from the press release and with that we’ll be glad to go ahead and open up for some questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Michael Braun

While we’re waiting for if there’s any questions, just to elaborate a little bit more you can see that our book of business has grown a bit, the homeowners’ book of business and that’s a result of some of the assumptions that we’ve done, policies from Citizens Property Insurance Corporation earlier in the year. But also we’re seeing further reduction in premium from the mitigation credits that have been mandated by the state of Florida.

Also with American Vehicle, we’ve got the two insurance companies, we have some growth initiatives that we’re working on to grow the [artist] and general liability book of business that we have, some [inaudible] marine product, also some products where we’re supplementing our existing book of business where we really aren’t taking risk but acting more as a general agent with Workers’ Compensation.

Operator

Your first question comes from the line of Ray Dirks - Dirks Associates

Ray Dirks - Dirks Associates

I was wondering if you could elaborate, comment on the outlook for the hurricane season which has been commented upon by the so-called experts out in Colorado which now say I believe that many fewer hurricanes are likely this year and of course we haven’t had any yet, so even started, now maybe there’s one going to start soon, but could you give us a little color on that please.

Michael Braun

Sure we purchased approximately $345 million of reinsurance in the event that there is a hurricane, anything that impacts us, and we spent approximately $53 million for that cover. In the event of a hurricane we have a retention of $5 million so the first $5 million we’d be responsible for 100% and for the next $345 million we have coverage on.

In terms of the activities of the upcoming with the weather, what may or may not happen obviously we can’t be, we don’t know specifically but we think with our reinsurance program that we’re adequately protecting the company in the event it happens.

Ray Dirks - Dirks Associates

And if there, let’s say if you do have, well let’s say you get hit for $5 million and that’s all for the whole year, how would your earnings likely develop in the third quarter particularly but also through the fourth quarter.

Michael Braun

Obviously that would be an immediate impact to earnings. So in other words if that occurred during the third quarter that would be an immediate impact of up to $5 million. In terms of the expense of the reinsurance program, that’s allocated over the entire 12 months, third quarter, fourth quarter, first and second.

But any type of retention that we have on an event would hit us immediately in that particular quarter.

Ray Dirks - Dirks Associates

And compared to last year, how would that appear let’s say in the third quarter, how is your experience on that.

Michael Braun

Well last year we had the retention on it was $3 million if we had any events, [unfortunately] nothing happened last year, but the cost of reinsurance has gone up this year. And the other side of that is also is the mitigation credits has reduced our premium in that program so its definitely impacted, we have the two insurance companies, its definitely Federated National having those mitigation credits as mandated by the state.

Ray Dirks - Dirks Associates

So the impact is negative, but its going to put you out of the red or anything like that is it, it looks like in terms of the, just the Florida situation, I thought you were working things out on a favorable way.

Michael Braun

The mitigation credits have been a big challenge for us. While we don’t give specific guidance on a go forward our increased reinsurance costs will impact us in the third quarter. We’re reacting to the mitigation credits by, we’ve modified our underwriting, we’re modified our distribution, our book of business, a lot of the characteristics.

Our intention is to ensure that we have a profitable book of business for the homeowners, but its absolutely impacted us and in the third quarter its going to be a big impact on Federated National in the third quarter for the third and really the fourth quarter but as we move forward, we’re taking actions like I said with our underwriting, our distribution, our policy selection, assumption of policies, things like that as well as rate action to correct that book of business, the problems that have occurred because of these mitigation credits.

Ray Dirks - Dirks Associates

And how about the impact, if you don’t have any hurricanes let’s say this year, what would that mean for earnings over the next six months of this year.

Michael Braun

Well once again we’re not giving any projections of earnings out there, but the increased reinsurance costs and the mitigation credits will impact the company in a significant manner in the third and fourth quarter, more in the third than in the fourth and as we move into the first and second as the book continues to realign and everything we do takes time in terms of policies.

In the state of Florida, it’s a non renewal policy, in some cases it’s a 100 days and some cases its 180 days. So as we modify it, in terms of like I say the rate increase we’ve asked the state for approximately a 15% rate increase. We’re hopeful that that will kick in later on this year. That will help us obviously offset the cost of reinsurance and also some of these mitigation credits and we’re also looking at further [inaudible] of policies from the state of Florida citizens as well as a new program for condominium.

But its, that’s the intention with the program.

Ray Dirks - Dirks Associates

And where do you stand on book value per share.

Peter Prygelski

We’re $9.68, its up $0.17 from first quarter.

Ray Dirks - Dirks Associates

And what is your expectation longer-term on trying to, a rate of return that should be earned on something, on book value.

Michael Braun

Obviously we’ve been impacted in the last year in 2008. We have had impact, we’ve had some write-downs in our investments and then in the latter part of 2008 we also were hit with some mitigation credits, that really have turned in to bigger credits. So as we correct these, I think that will really flow through.

We’re talking primarily about Federated National in this case, that will, we anticipate that being, returning to a positive for Federated in 2010, 2009 is a challenge for Federated based on these mandated credits which have resulted in big discounts of premium.

Ray Dirks - Dirks Associates

Do you think you will have a chance to increase your dividend perhaps next year if you, if that comes to pass there.

Michael Braun

That’s something the Board evaluates every quarter, at this point, the current dividend that we have in place was the $0.06 and when the Board meets again in the beginning of September, the Board will discuss that. I would anticipate that as the company improves, the finances improve, that the probability of an increase in dividend may be there.

But that’s a decision that won’t be made until that Board meeting and like I say as the finances improve each quarter and like I say in 2010 Federated should be stronger, we’ll reevaluate it at that point. But that’s evaluated on a quarter by quarter basis by the Board of Directors.

Well at this point if there’s no further questions we can give it a moment here, but just really in closing I think we’ve gone over the major items which is Federated National has had some struggles with mitigation credits and we’re taking corrective action, a lot of that just takes time for it to work its way through.

American Vehicle we have a lot of growth initiatives there as well in terms of having other lines so if there’s any other questions out there.

Operator

Your next question comes from the line of Casey Alexander – Gilford Securities

Casey Alexander – Gilford Securities

Where do these mitigation credits show up in the statement of operations, because I see this large increase in gross premiums that [seeded] is that, are you just reinsuring much more of your book or is that where these mitigation credits are showing up in the deduction of net premiums written. Where do they show up, I’m not sure I know where to find these things.

Michael Braun

Its in the gross written, has been reduced by these credits. In other words a policy may be $1,500 and after credits on that policy, it might come down to $1,000. So the premium, the gross written in that case would be the $1,000. So you really don’t see that in the Q that we have, it is broken out there and—

Casey Alexander – Gilford Securities

Well in this quarter you have $33 million in gross premiums written and how much was that reduced by mitigation credits.

Michael Braun

Mitigation credits currently in force is approximately $23 million. So our book on an annualized basis are in force booked without the mitigation credits would have been approximately $23 million higher.

Casey Alexander – Gilford Securities

For the quarter or for the year.

Michael Braun

Well for the year.

Casey Alexander – Gilford Securities

So its maybe $6 million a quarter that its impacting the gross premiums written.

Michael Braun

Approximately, yes.

Casey Alexander – Gilford Securities

And the other one that I had, the regulatory assessments recovered, this is becoming a pretty significant figure although it kind of feels sort of one-timish, is there a run off to that ands just the very title of it makes it feel like that that’s sort of a one-time line and at some point in time that’s going to run off. Is that true or does that just continue on.

Michael Braun

There’s two different types that we have. Back from the storms of 2004 and 2005 we were basically given an invoice from the state, whether it was through FIGA or Citizens or the FHCF and where we would basically go ahead and front that money and then recover that we would go ahead and file that to recover that in our rates and recover it in the rates.

With our book contracting it has taken longer when it has contracted in 2007 and 2008 it has taken a lot longer to recover those assessments. So those assessments will come to an end at some point, absolutely.

There’s another type of assessment which is basically a pass through where we would add basically 1% let’s just say as an example, if its $100.00 policy, there’d now be $101.00, we collect that $1.00 and pass it along to the state and I believe the one on the FHCF goes for approximately 10 years. That’s subject to change obviously but there’s two types of assessments.

Casey Alexander – Gilford Securities

But it does have some sort of a run off aspect to it then, eventually.

Michael Braun

Yes absolutely, it should be ending, the ones that we’re recouping, recovering that we have fronted should end in the next six to 12 months correct.

Casey Alexander – Gilford Securities

Lastly the MGA fees, the more policies you write the more MGA fees there are so, and the gross premium written is going up so why aren’t the MGA fees following the gross premium written going up unless the one reason that you [wouldn’t] is if you were writing policies for an outside company but the commissions are way down, so that wouldn’t be the answer to that also. Why are the MGA fees not trailing up with the premiums written.

Michael Braun

I think you will see that trend up. Once again the book in the second quarter was smaller than the year prior. Now the book is starting to increase because of the [de pots] that we’ve taken. Our book was as high as about $135 million, the homeowners’ book, in the first and second quarter I believe it was with the mitigation credits, everything brings that premium down, I would say that it was about $60, $70 million of in force premium, dramatically different.

So as the book grows due to rate increases as well as more policies then you’ll the see the MGA fees increase.

Casey Alexander – Gilford Securities

Somehow I’m just not seeing that. The homeowners premium break out is $28 million in the quarter versus $19 million last year, but the MGA fees are lower than last year.

Michael Braun

The quantity of policies that we have is less, the total number of policies that we have is less, and the premium in force is less. So once again, I do anticipate that that would increase.

Casey Alexander – Gilford Securities

So it’s the premium per policy that’s been going up.

Michael Braun

The premium per policy has been coming down dramatically. Once again back to 2006 our average premium was close to $3,000. Our average premium now is about $1,700. So the average policy, average premium per policy has come down considerably.

Casey Alexander – Gilford Securities

Well maybe I’ll call you on the outside, because clearly I’m going to need to be better educated on this one because I’m not going to get it off of this call.

Operator

Your next question comes from the line of Robert Sterling – Shareholder

Robert Sterling – Shareholder

I’d like to go back to this wind mitigation credit, from what I heard and correct me if I’m wrong, these things would drop right to the bottom line.

Michael Braun

They drop right to the bottom line.

Robert Sterling – Shareholder

So they’re taking $6 million a quarter out of your bottom line.

Michael Braun

Its significant, yes. These are mandated by the state and its become a bit of a hotter issue because its taking profitability, its taking surplus away from the insurance companies in the state of Florida, those that write. Its made our business considerably harder.

Robert Sterling – Shareholder

Has this been litigated. Is it constitutional. They can go ahead and then after the fact they change the, they say we’ll rebate that money. Seems like you can do that on a department store also, someone buys a dress and they catch her outside and they so go back and have them give you another $100.00 back for it. I don’t understand.

Michael Braun

It’s a significant challenge for us. And this is, the legislators of the state of Florida passed it and the OIR forced the implementation of it that they’re evaluating it because its, the state is starting to understand the significance of these mitigation credits. We’re not seeing the corresponding relief in our reinsurance costs with the reduction in our premium for our policy holder.

Robert Sterling – Shareholder

So why don’t you just wind down your business and liquidate it.

Michael Braun

With the homeowners’ book, we have done it for 10 years and we feel that we can make money at it when we take these sharp turns as the state imposes new guidelines, it takes some time to react but long-term we think it’s a profitable business to be in.

Robert Sterling – Shareholder

But how can that be if they can turn around and change the rules on you at any time.

Michael Braun

We’re a regulated entity and the state of Florida has the, the Department of Insurance has that authority. It’s a risk of our business.

Robert Sterling – Shareholder

And they do it after you have already written a premium, they can say go ahead and rebate so much, a third of it back.

Michael Braun

No, I think you’re saying that’s it mid-term, its our existing book of business as it comes up for renewal, we have to apply these mitigation credits and we also any new business that comes in we have to apply these mitigation credits. So its not, the state’s not mandating it from a mid-term perspective, however its based on a policy effective date.

So we think that the—

Robert Sterling – Shareholder

Its an arbitrary number, they come in and they say, do this much back or does it, if you haven’t had a hurricane for a year or two, then they say well we’re lucky so go ahead and rebate this much. I don’t understand.

Michael Braun

These are credits that the state, they did a study back in I believe it 2001 and then basically they’re saying that if you [inaudible] a house, and I think in general the theory may be good, I think the credits are high. The theory is if you reinforce your roof, if you put a new roof on, if you use straps, if you put shutters on the house, those are all things that should reduce the exposure of that house to a storm, how much damage it should have and that theory, I think is a legitimate theory.

What I think is the problem is that these credits are much larger than I think should be out there and therefore its taken a stable book of business with predictable earnings and has made it dramatically changed it in short order.

So therefore we are reacting by underwriting to make sure that we can get some profitable policies in but it takes time to switch out that book of business as these credits really impact us and our profitable policies. Some of our policies have gone from profitable to unprofitable. Some have gone from profitable and remain profitable.

So there’s, its impacted us.

Robert Sterling – Shareholder

So going forward what’s your strategy with these things.

Michael Braun

To write profitable business. We’re concentrating on only taking in the business that’s profitable and we’re also concentrating on not having risks in our book of business that is unprofitable. It just takes time though. There’s regulations on how we can off risks and there’s regulations of how we can take risk.

So we have to manage accordingly.

Robert Sterling – Shareholder

So what are you looking for people that don’t tie on their roofs or what, don’t put shutters on.

Michael Braun

Not a all, what we’re looking for is that the policy is profitable whether the wind blows or does not blow, we buy a significant amount of reinsurance. We want to ensure that based on our non cat loss, our projected non cat loss, our agents’ commissions, all our expenses and our reinsurance costs at the end of the day we want that policy to be profitable.

And that’s what we model it on.

Robert Sterling – Shareholder

And if you were just to wind down your business and liquidate, how long would that take.

Michael Braun

Well you’d have to apply to the state, that’s something that State Farm has been trying to do with the state for I believe a year or so. But that’s not our business plan. We think that this book can be profitable and we’re making all the steps, we’re taking the appropriate steps and working with the credits.

We’ve had to modify our business plan.

Robert Sterling – Shareholder

And going forward, what’s, this used to be a very profitable company, are you going to get back there.

Michael Braun

I think that, yes, I think that we’ll be profitable with that line of business, absolutely. However due to the challenges its significantly impacted us short-term. Its not a market that we want to abandon, its impacting the industry in the state of Florida.

We still think there’s a way to make profit in this book of business with this business however, its become obviously more difficult but with most lines of business in insurance, there’s cycles to it and right now we’re in a hard part with, the hard part of the cycle but we will get there.

Robert Sterling – Shareholder

Well is there any part of your business that is nice and profitable you can point to.

Michael Braun

Well we’ve got the two insurance companies, obviously we just went over with Federated National and American Vehicle has the liability line of business and basically you’ve seen a decrease in that business based on the slowing of the economy, really the construction business has really decreased significantly, almost come to a halt but we’re working on new lines of business, we’re working on the condo program, we’re working on assumption of new policies, voluntary as well as some of the assumptions in the state of Florida.

Yes we are taking those actions to bring the profitability into the program.

Robert Sterling – Shareholder

And are you going to assume more policies from Citizens, you did last year at the end of the year if I remember right.

Michael Braun

Yes, anticipate taking more policies in late 2009 here.

Robert Sterling – Shareholder

The same amount, what did you take last year.

Michael Braun

Took about 15,000 policies, I would say we would take up to that amount, could be, its hard to say because we model the policies to ensure profitability with our existing book of business so there’s a million policies in there but there’s not, I’m not saying there’s a million profitable policies. So and then whatever policies we target there’s other carriers that can go ahead and try to assume those policies as well.

So I would anticipate in the latter part of this year somewhere between five, 10 as high as 15,000 policies we’ll assume from Citizens. But like I say we’ve got to go through the process first as we analyze it and compete with other carriers.

Robert Sterling – Shareholder

I know you don’t give guidance but what I sort of heard through the thing is you don’t expect to be profitable in the third and the fourth quarters.

Michael Braun

Federated National will be significantly impacted by these mitigation credits and reinsurance costs in the third quarter and less so in the fourth quarter. Federated National, that’s Federated business. Its had a huge impact on it. I think both will be in much better shape as we’re in 2010 in the first quarter.

Operator

Your next question comes from the line of Charles Burger – Shareholder

Charles Burger – Shareholder

Some of my questions regarding the de pop have already been answered but can you give me any idea or explain a little further about the attrition rates you were referring to about other companies taking some of the de pop away from you or—

Michael Braun

Well basically what happens is we start with let’s say there’s a million policies approximately in the Citizens and we model those million policies and through a variety of reasons they get sorted out pretty quick. And we can come down to at any given point I would say there could be five, 10, 15, 20, 25, 30,000 policies based on what we’re looking for.

So we model it from an underwriting perspective and a profitability perspective and we identify those policies and we assume those policies from the state, and we once again we compete with other carriers for those policies. We also, the insured can say that they don’t want us to assume the policy and I’m sorry the agent can also say that.

So that’s where I’m coming up with later this year, the plan is that we should be able to assume, I know I’m give a big range, five, 10, 15,000 policies, it’s a big range because there’s so much uncertainty about how many policies we’ll get.

Charles Burger – Shareholder

What’s been the attrition rate from the last three de pops that you’ve gone through.

Michael Braun

Well we’ve taken, we did January, March, May and June, those all totaled about 15,000 policies total and I would say that we identified about real rough number, maybe a three to one, maybe about 45, 50,000 policies that we were interested in at that time and once again through the insured agent and other carriers, we wound up with about 15,000.

Charles Burger – Shareholder

So that’s after the attrition then.

Michael Braun

Yes, it’s the actual policies that we get out.

Charles Burger – Shareholder

Right and you expect to renew those policies or is there a further attrition rate when they come up for renewal.

Michael Braun

Well at any point they’re not obligated to stay with us. But we anticipate that they’ll stay with us. When we assume a policy we’re committed to them for at least three years but sure they can go elsewhere, that’s possible, but we anticipate that the vast majority of them will renew with us.

Charles Burger – Shareholder

And what percentage of your book is this 15,000.

Michael Braun

Well we have approximately I would say 48,000 policies in force and about 15,000 of them are Citizens policies that we’ve assumed in the last year.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Michael Braun

Thank you very much everyone for their questions and I think we covered a lot of ground here and we appreciate everyone dialing in and listening so if there’s any further questions they could always reach us here at the company. Thank you.

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