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Executives

Michael Braun – CEO and President

Pete Prygelski – CFO

Analysts

Douglas Ruth – Lennox Financial Services

William Meyers – Miller Asset Management

21st Century Holding Company (TCHC) Q1 2011 Earnings Call May 12, 2011 4:30 PM ET

Operator

Good afternoon and welcome to the 21st Century Holding Company first quarter 2011 financial results conference call. My name is Latoya and I’ll be your operator today. Please note that today's call is being recorded. At this time, all participants are in a listen-only mode. Later we will conduct a question-and –answer session. (Operator Instructions)

Statements in this conference call that are not historical facts are forward-looking statements without limiting the generality of the foregoing words such as May, will, expect, belief, anticipate, intend, could, would, estimate or continue or the negative other variations therefore comparable terminology are intended to identify forward-looking statements. The statements discussed on this call that are forward-looking statements are based on the current management expectations involving risks and uncertainties that may result in these expectations not being realized.

Actual results outcomes and results may differ materially from what is expressed or forecasted in forward-looking statements made on this call due to numerous risks and uncertainties including but not limited to the risks and uncertainties described in this conference call or press release issued today and other filings made by the company with the SEC from time-to-time.

Forward-looking statements made during this presentation speak only as of the date on which they are made and 21st Century Holding Company specifically disclaims any obligation to update or revise any forward-looking statements to reflect new information, future events or circumstances, or otherwise.

Now at this time, I’d like to turn the conference over to Mr. Michael Braun, Chief Executive Officer and President of 21st Century Holding Company. Please go ahead, sir.

Michael Braun

Thank you, operator. Good afternoon and thank you for joining us today to discuss 21st Century Holding Company’s first quarter 2011 financial results. I'd like to start the call off the call with the highlights of our results this quarter and a general outlook for 2011. Pete Prygelski, our Chief Financial Officer, is here with me. Following my remarks, we will open up the call and Pete and I will be glad to answer your questions.

For the three months ended March 31, 2011, we reported a net loss of $2 million or $0.25 per share, and $7.9 million average undiluted and diluted shares outstanding compared with a net loss of $900,000 million or $0.12 per share on $7.9 million average undiluted and diluted shares outstanding in the same three-month period in last year. For the three months ended March 31, 2010, the company would have reported a net loss of $2.3 million or $0.29 per share on $7.9 million average undiluted and diluted shares outstanding, if we had not realized a $2.2 million of net realized investment gains.

Gross premiums written increased $100,000 or 0.5% to $27.1 million for the three months ended March 31, 2011, compared with $27 million for the same three-month period last year. Homeowners gross premiums written increased $1.3 million or 6.1% to $22.4 million for the three months ended March 31, 2011, compared with $21.1 million for the same three month period last year.

Unearned premium increased $3 million or 6.3%, to $50.1 million as of March 31, 2011, compared with $47.1 million as of December 31, 2010.

Net premiums earned increased $100,000 or 1.2% to $11.1 million for the three months ended March 31, 2011, compared with $11 million for the same three-month period last year. Total revenue decreased $2.7 million or 16.8% to $13.1 million for the three months ended March 31, 2011, compared with $15.8 million for the same three months period last year.

Total expenses decreased $1 million or 5.9% to $16.3 million for the three months ended March 31, 2011, compared with $17.3 million for the same three-month period last year.

Our improved performance this quarter in written premium and earned, as a result of both in improved book of business as we continue to be more calculative in our risk management and continued discipline in our underwriting in which we only pursue business as profitable for the long-term benefit of the company.

We expect to see continued performance improvements for the remainder of 2011 driven by the following

First, continued underwriting discipline and exposure management, which has improved our property book of business over the past few years, while we see a very strong demand in the market, we are focused on writing only the business that will have long-term benefits to the company and our shareholders versus taking on less profitable business for short-term bump in our performance.

Second, we continue to see the positive effect of the rate increases we have received over the past few years. Our latest increase which was granted by the Florida Office of Insurance Regulation on February 16 2011, called for a 20% average of statewide increase on our voluntary homeowners program. This increase became effective on March 23 for new business and April 14 for renewals. As the year progresses we should see an increasing benefit from the rate increases as rates return to a more adequate and normalized level.

Third, as we mentioned last quarter, we continue to realize benefits from the merger of our two insurance subsidiaries, which should also help improve our performances we continue through 2011. And as part of the effect, as we negotiate our reinsurance due to our improved capital structure and lastly the Florida Legislative Session has recently approved and formed a new legislation that would allow insurance companies to withhold full payment on certain Claims until repairs have actually been made, shorten the length of time that Claims can be reported and narrow the definition of what is covered in a single plan. We are optimistic that Florida’s new Governor will sign this into law. With that, we are glad to open up the call to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Douglas Ruth of Lennox Financial Services. Your line is open.

Douglas Ruth – Lennox Financial Services

Hi, good afternoon. Could you talk, do you think you are done adjusting the reserves at this point?

Michael Braun

Reserves is something that we continuously look at and that’s done on a quarterly, it’s done on a monthly, quarterly, annual basis. But as we close out the year and where we are at the quarter we’re comfortable with where the reserves are, but that’s something that as always open to be evaluated. But we are comfortable with where we are at the moment.

Douglas Ruth – Lennox Financial Services

Okay, and are you seeing any increase at all in the commercial general liability insurance sales?

Michael Braun

Yes, we are seeing some opportunities there. There are a couple of different things. We see that there is opportunity from perhaps improved economy, but we think that our distribution, primarily in Florida is pretty aggressive and in terms of our agency force that we have our agents tend to, or that was distributed more through general agents in the years past.

We sell it directly from the retail agents and we think we have a better quality book of business that comes in, but we also think that we have better control that we can increase the volume as well. And I think that GL book which has decreased over the last three four years has definitely stabilized and I think that we’ll see some improvement on that, but it’s better quality book than it’s ever been and we see opportunities for growth there.

Douglas Ruth – Lennox Financial Services

Do you think you could have year-over-year growth in that segment?

Michael Braun

I do believe that we’re seeing signs of that, yes, it’s a bit early to say. But I can tell you in the last 90 days, we’ve seen a significant uptick and some of that premium coming in and we carefully review what we have, but it looks positive at this point.

Douglas Ruth – Lennox Financial Services

Okay, that’s encouraging. Could you talk about….

Pete Prygelski

Also in the business that we’re writing currently is better quality business which is being reserved. That particular business in the current year is being reserved. It is a better quality book. So you would expect that with the development of the losses to be less than previous years.

Michael Braun

It’s a significant change improvement in our underwriting over the last two years Doug, where we have much better control and quality of selling at direct. And that’s important how strong underwriting and we think that changes that we’ve made over the last couple of years will definitely pan out to be very positive for us.

Douglas Ruth – Lennox Financial Services

We’re optimistic that we’ll see the combined ratio will come down; could you talk some about the reinsurance cost for the year?

Michael Braun

The reinsurance we are currently negotiating. That goes in effect in July. I feel very good about where we are at on the reinsurance program. There is more than enough capacity in the market for it. I would say that prices look like they were going down, maybe 5% or 10%. And then with the Japan quake and some of the other events, the reinsurers have become more firm on their pricing and there is talk that they could go up because my belief that they will be fairly flat. In terms of what we are doing with our book, I can’t underestimate what we’re doing with our book.

Part of the pain that we are feeling now, with our earnings is because we shed policies, so we have a lot of policies where we purchased reinsurance last July, that we’ve shed before the reinsurance expense is done. So, perhaps policy we’ve not renewed in January, and we have no premium on that. We’re continuing to pay for that reinsurance through July, but we don’t have the benefit of the premium coming in on that policy. And what I’m trying to say is, as we’ve shed a lot of policies that are hurting us in the short-term, but will help us significantly with our new reinsurance buy.

Last year with the adjustment and the final numbers on our reinsurance came to approximately $45 million, that was down from about $52 million. This year, I feel very good; I think we’ll be below $40 million. I can’t guarantee that, and there is some more aggressive numbers that we’re looking to achieve, but that’s significant, because you are going to see earned premium stabilized which have has, but these non-renewals and I was being very selective on the amount of business that we’re taking in. There is ample opportunity to write business. But us being very selective that discipline we think is the right thing to do. And I think that benefit is going to show up fairly soon.

Douglas Ruth – Lennox Financial Services

I support you on that that we only want to obviously sell insurance so you can make money on, and I’m grateful that you’re doing what you are doing as far as that goes. Could you talk some about the investment portfolio and where you are with, are you increasing the percent of the portfolio that’s in stock, or are you decreasing or is it flat?

Pete Prygelski

Doug, it’s flat. Basically, we have an investment policy and we invest – it’s based on the Florida Statutes. So about 90% of our portfolio is in fixed income and another 10% in equities. It fluctuates, we might be $0.92 fixed, 8% equities, but by and large, we are 90% fixed, 10% equities. I don’t see us reducing our equity position. So fairly confident with the managers we’re using, so fairly confident with our asset class diversification, our sector diversification with the equities.

On the fixed income side, our average yield excluding cash was about 3.1% for the most recent quarter and that compares to 3.9% last year first quarter to a drop slightly. The reason for the drop was we rebalanced the portfolio and obviously rates moved down instead of the anticipation that eventually here that going to move up to curb inflation, but they didn’t, so we’ve kind of got caught and a little bit of a squeeze there. So we did lose some yield. But overall, the position of the portfolio and the way it’s diversified, I’m comfortable with and I believe the investment community is comfortable with.

Douglas Ruth – Lennox Financial Services

That sounds encouraging. And can you comment some on the trend as far as what you’ve seen and what you saw in April or is it trend positive?

Michael Braun

Well, I think, and a generic answer to that, things continue to move in the right direction. And let me say what I mean by right direction. We’re very careful with our underwriting. We’ve non-renewed a lot of policies. That helps us with our loss in LAE which as a percentage has been coming down. We’re very encouraged with new legislations that appears to be, and will be signed by the Governor, which I think will help the entire state, but it will clearly help us.

In terms of GL, we think we’ve got a very good quality distribution. We think we are writing all very good business and the lines of business. So we’re very confident that, but as I said earlier, I think what you’re going to see is, that rate increase, let me just do a math where you have a 20% increase on an $80 million book, that $16 million, that’s significant. But it earns out extremely slow, and each successive month, their earn out is definitely better than the prior month.

We need to make sure that we continue to control our expenses and our largest expense is reinsurance, a $5 million savings is almost what that about $450,000 a month that could be. Once again, I don’t know what the reinsurance spend will be, but we think with our careful underwriting that we’ve done, we’re clearly headed in the right direction.

Douglas Ruth – Lennox Financial Services

Okay and my last item is more of comment than a question. But I would encourage the company for – you two gentlemen and perhaps the Board of Directors, if you could consider buying some stock, I think it would really send a strong message that you are confident about the future and you are confident about the decisions that you are making and I just think with the stock trading at a fairly large discount to its book value, I think it is a very good buy at this time.

Michael Braun

Michael Braun

I appreciate what you are saying there. And, I understand that you think that that would send out a good strong vote of confidence and I’m aware of that personally and we’ll continue to evaluate for what we do on go forward. But there is nothing I’m going to commit you on the call at the moment.

Douglas Ruth – Lennox Financial Services

Okay, well I’m grateful for the work that you are behalf of the shareholders and we’re hoping to see the company become profitable later in the year. Thank you for answering my questions.

Michael Braun

Thank you.

Operator

Thank you. (Operator Instructions) Our next question is from William Meyers of Miller Asset Management. Your line is open.

William Meyers – Miller Asset Management

Hi, thanks for taking my question. I guess, what I would be interested in is, on the 20% increase, what the linearity of that? Is it’s mostly from renewals? Would we expect about the same level of renewals each quarter or is there going to be some seasonality to that?

Michael Braun

In terms of the book, we tend to write less business during the wind season traditionally. But that obviously rate increase, hedge the entire book. And what we’re seeing is that’s an average. Some people actually may see a decrease, some people may see an increase of single-digits, some people may see 30%, 40% 50 plus percent.

But the biggest challenge and as you know is that, it just earns out so darn slow. And it’s significant, about 20%. And we incorporate that 20%, that kind of puts us back to where we were in terms of rate about two years ago,

These mitigation credits really eroded a significant amount of our premium and now really what’s happened in the industry is now you are getting excessive base rates to offset for the excessive credits as they've impacted the underwriting on insurance companies and they’ve clearly impacted us. But in terms of seasonality, we traditionally write less business over the peak hurricane months which tend to be in August, primarily August but September as well.

William Meyers – Miller Asset Management

Okay, that’s all for me. Thank you, so much.

Michael Braun

Thank you.

Operator

There are no further questions at this time; I would turn the conference back over to management.

Michael Braun

Just want to thank everyone for the questions that we had today, but also any questions that may develop after the call, Pete and myself are always available. Thank you very much.

Operator

Ladies and gentlemen, this concludes today’s conference. You may now disconnect. Good day.

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