GENERAL

21st Century Holding Company ("21st Century") is an insurance holding company, which, through our subsidiaries and our contractual relationships with our independent agents, controls substantially all aspects of the insurance underwriting, distribution and claims process. We underwrite personal automobile insurance, general liability insurance, homeowners' and mobile home property and casualty insurance in Florida, Georgia and Louisiana through our wholly owned subsidiaries, Federated National Insurance Company ("Federated National") and American Vehicle Insurance Company ("American Vehicle"). American Vehicle has recently been authorized to write commercial general liability policies in Kentucky and Texas and expects to begin writing policies in that state in the near future. American Vehicle is a fully admitted insurance carrier in Florida, Louisiana and Texas and is admitted as a surplus lines carrier in Georgia and Kentucky.

During the year ended December 31, 2004, 62.0%, 24.1%, 12.4% and 1.5% of the policies we underwrote were for homeowners' property and casualty insurance, personal automobile insurance, commercial general liability insurance, and mobile home property and casualty insurance, respectively. During the year ended December 31, 2003, 67.5%, 23.0%, 2.4% and 7.1% of the policies we underwrote were for personal automobile insurance, homeowners' property and casualty insurance, mobile home property and casualty insurance, and commercial general liability insurance, respectively. We internally process claims made by our own and third-party insureds through our wholly owned claims adjusting company, Superior Adjusting, Inc. ("Superior"). We also offer premium financing to our own and third-party insureds through our wholly owned subsidiary, Federated Premium Finance, Inc. ("Federated Premium").

Our executive offices are located at 3661 West Oakland Park Boulevard, Suite 300, Lauderdale Lakes, Florida and our telephone number is (954) 581-9993.

21st Century Holding Company

RECENT DEVELOPMENTS

Impact of 2004 Hurricane Season

In August and September 2004, the State of Florida experienced four hurricanes, Charley, Frances, Ivan and Jeanne. Since then, we have been receiving and processing claims made under our homeowners' and mobile home owners' policies, a process that is expected to be substantially completed during the first half of 2005. One of our subsidiaries, Federated National, incurred significant losses relative to its homeowners' insurance line of business. As of December 31, 2004, approximately 8,500 policyholders had filed hurricane-related claims totaling an estimated $105.4 million, of which we currently estimate that our share of the costs associated with these hurricanes will be approximately $43.5 million, net of our reinsurance recoveries and amortized reinstatement premiums.

We have a reinsurance structure that is a combination of private reinsurance and the Florida Hurricane Catastrophe Fund (FHCF). For each catastrophic occurrence, the excess of loss treaty will insure us for $24 million with the company retaining the first $10 million of loss and loss adjustment expense ("LAE") There are two layers involved with our excess of loss reinsurance treaties, the $24 million is considered the 1st layer. The treaty has a provision which, for an additional prorated premium will insure us for another $24 million of loss and LAE for subsequent occurrences with the company retaining the first $10 million in loss and LAE. As a result of the loss and LAE incurred in connection with the Hurricanes Charles and Frances the company has exhausted its recoveries of $48 million under the terms of this treaty.

The 2nd layer of our excess of loss treaty insures us for an additional $34 million in excess of the $34 million 1st layer noted above with the same reinstatement provision. The excess of loss treaties expire on June 30, 2005 and the company is negotiating a new reinsurance treaty.

The FCAT treat provides protection for 90% of loss and LAE and attaches at approximately $36.2 million. This treaty inures to the benefit of our excess of loss treaty and expires on June 1, 2005. For a further discussion of our reinsurance please see our section titled "REINSURANCE"

Since our initial preliminary provision for losses from these hurricanes of $33 million, net of reinsurance recoveries, as of September 30, 2004, we revised our provision for losses as described above. Because the storms occurred during the third quarter of 2004, we were not able to complete physical inspections of a sufficiently large percentage of claims, nor were complete repair estimates available. During the fourth quarter of 2004, as physical property inspections and repair estimates were completed, our initial estimates of losses for these storms were increased to reflect increased estimates of claim severity on our homeowners' policies in Florida. We do not currently anticipate further material increases to our loss estimates from the 2004 hurricanes.

In August 2004, A.M. Best Company notified us that Federated National and American Vehicle were being placed under review with negative implications. A.M. Best in 2003 had assigned Federated National a B rating ("Fair," which is the seventh of 14 rating categories) and American Vehicle a B+ rating ("Very Good," which is the sixth of 14 rating categories). In connection with this review, we requested that A.M. Best cease its ratings of these subsidiaries "NR-4 Not rated, company's request". The withdrawal of our ratings could limit or prevent us from writing or renewing desirable insurance policies, from obtaining adequate reinsurance, or from borrowing on our line of credit, as described below. Federated National and American Vehicle are currently rated "A" ("Unsurpassed," which is first of six ratings) by Demotech, Inc.

To retain our certificates of authority, Florida insurance laws and regulations require that our insurance company subsidiaries, Federated National and American Vehicle, maintain capital surplus equal to the greater of 10% of its liabilities or $4.0 million, as defined in the Florida Insurance Code. As of December 31, 2004, Federated National and American Vehicle were in compliance with statutory minimum capital and surplus requirement.

The insurance companies are also required to adhere to prescribed premium-to-capital surplus ratios. As of December 31, 2004, Federated National did not comply with the prescribed premium-to-capital surplus ratio, primarily based on the incurred losses associated with the four 2004 hurricanes. As a result of a $6.1 million capital contribution made during the first quarter of 2005 from 21st Century, Federated National's compliance with the prescribed premium-to-capital surplus ratios has been restored. American Vehicle has remained in compliance with the prescribed premium-to-capital surplus ratios.

Throughout the post-hurricane period, we have been and continue to be in regular communications with the Florida Office of Insurance Regulation and have complied with the office's verbal requests. We have relied on the office's verbal representation that regulatory action will not be imposed at this time because of Federated National's non-compliance with the prescribed premium-to-capital surplus ratio.

21st Century Holding Company

In the aftermath of the hurricanes in Florida, the Florida Office of Insurance Regulation issued emergency orders that imposed a moratorium on cancellations and non-renewals of various types of insurance coverages and that require mediation to resolve disputes over personal property insurance claims. For personal residential and commercial residential policies, the moratorium ran through November 30, 2004. The orders also prohibit cancellations or non-renewals based solely upon claims resulting from the hurricanes.

We believe that our company is sufficiently capitalized to operate our business as it now exists and as we currently plan to expand it. Our existing sources of funds include our revolving loan from Flatiron Funding Company LLC, sales of our securities such as our September 2004 private placement described below, possible sales of our investment securities, and our earnings from operations and investments. Additional unexpected catastrophic events in our market areas, such as the 2004 hurricanes, have resulted and will result in greater claims losses than anticipated, which could require us to limit or halt our growth while we redeploy our capital to pay these unanticipated claims unless we are able to raise additional capital or increase our earnings in our other divisions. During September 2004, we negotiated a new revolving loan agreement in which the maximum credit commitment available to us was reduced at our request to $2.0 million with built-in options to incrementally increase the maximum credit commitment up to $4.0 million over the next three years. Our lender could determine to change our available credit based on a number of factors, including the A.M. Best ratings of Federated National and American Vehicle. Pursuant to our loan agreement, if the A.M. Best rating of Federated National falls below a "C," or if the financial condition of American Vehicle, as determined by our lender (in its sole and absolute discretion) suffers a material adverse change, then under the terms of our loan agreement, policies written by that subsidiary will no longer be eligible collateral, causing our available credit to be reduced if we do not have other collateral qualifying as eligible collateral. As of December 31, 2004, policies written by Federated National were not considered by our lender to be eligible collateral. In March 2005, our lender agreed to permit policies written by Federated National to be eligible collateral up to $165,000. We currently believe that our available credit under this loan agreement will be sufficient based on our current operations. If policies written by our insurance subsidiaries again do not qualify as eligible collateral under our loan agreement and we are not able to obtain working capital from our operations or other sources, then we would have to restrict our growth and, possibly, our operations.

Although we believe that the occurrence of four hurricanes hitting Florida within one year has not previously occurred for as long as records for weather events have been kept, some weather analysts believe that a period of greater hurricane activity has begun. To address this possibility, we are exploring alternatives to reduce our exposure to these types of storms. Although these measures may increase operating expenses, management believes that they will assist us in protecting long-term profitability, although there can be no assurances that will be the case.

Sale of Assets Related to Our Non-Standard Automobile Insurance Agency Business

On December 31, 2004, we, along with our wholly owned subsidiaries, Federated Agency Group, Inc., Fed USA, Inc. and Assurance Managing General Agents, Inc., sold certain assets related to our non-standard automobile insurance agency business located in Florida to Fed USA Retail, Inc. and Fed USA Franchising, Inc. As consideration for these assets, we received a cash payment at closing of $7,000,000. In addition, we are entitled to receive an additional payment of up to $2,500,000 calculated based on 10% of the "Gross Net Written Premiums" (as defined in the asset purchase agreement) through our two insurance company subsidiaries, Federated National and American Vehicle, or through any insurance company affiliated with the buyers for gross net written premiums that exceed $15,000,000 in the aggregate and that are less than $40,000,000 in the aggregate with respect to agency business written by the buyers during the 12-month period following the closing. Fed USA Retail, Inc. and Fed USA Franchising, Inc., which also assumed certain liabilities related to the assets that were sold, are affiliates of Affirmative Insurance Holdings, Inc., an insurance holding company based in Addison, Texas. Affirmative has agreed to guarantee the buyers' obligations to make the post-closing payment described above.

Sale of Express Tax

Effective January 1, 2005, we sold our 80% interest in Express Tax Service, Inc. ("Express Tax"), along with its wholly owned subsidiary, EXPRESSTAX Franchise Corporation. The purchasers were Robert J. Kluba, the president of Express Tax and the holder of the 20% minority interest in Express Tax, and Robert H. Taylor. In exchange for our shares, we received a net cash payment of $311,351, which reflected a purchase price of $660,000 less $348,649. in inter-company receivables we owed to Express Tax. In addition, we received a payment of $1,200,000 in exchange for our agreement not to compete with the current businesses of Express Tax for five years after the sale.

21st Century Holding Company

Private Placement

On September 30, 2004, we completed a private placement of 6% Senior Subordinated Notes due September 30, 2007. These notes were offered and sold to accredited investors as units consisting of one note with a principal amount of $1,000 and warrants to purchase shares of our common stock, the terms of which are similar to our notes and warrants sold in July 2003, except as described below. We sold an aggregate of $12.5 million of units in this placement, which resulted in proceeds (net of placement agent fees of $700,000 and offering expenses of $32,500) to us of $11,767,500.

The notes pay interest at the annual rate of 6%, mature on September 30, 2007, and rank pari passu in terms of payment and priority to the 6% Senior Subordinated Notes due July 31, 2006 in the original principal amount of $7,500,000 that we sold in 2003. Quarterly payments of principal and interest due on these notes, like the notes we sold in 2003, may be made in cash or, at our option, in shares of our common stock. If paid in shares of common stock, the number of shares to be issued shall be determined by dividing the payment due by 95% of the weighted-average volume price for the common stock on Nasdaq as reported by Bloomberg Financial Markets for the 20 consecutive trading days preceding the payment date.

We also issued warrants to purchase shares of our common stock to the purchasers of the notes and to the placement agent in the offering, J. Giordano Securities Group. Each warrant entitles the holder to purchase one share of our common stock at an exercise price of $12.75 per share and will be exercisable until September 30, 2007. The number of shares issuable upon exercise of the warrants issued to the purchasers in our 2004 private placement equaled $12.5 million divided by the exercise price of the warrants, and totaled 980,392. The number of shares issuable upon exercise of the warrants issued to J. Giordano equaled $500,000 divided by the exercise price of the warrants, and totaled 39,216. The terms of the warrants provide for adjustment of the exercise price and the number of shares issuable thereunder upon the occurrence of certain events typical for private offerings of this type.

Stock Split

On September 7, 2004, we completed a three-for-two stock split in the form of a stock dividend, whereby shareholders received three shares of common stock for every two shares of our common stock held on the record date. Just prior to the three-for-two stock split, we had approximately 3,957,000 shares outstanding, and following the stock split, we had approximately 5,936,000 shares outstanding.

BUSINESS STRATEGY

Although our operations were dominated in the latter part of 2004 by the claims made in connection with the four hurricanes, we expect that in 2005 we will return to a focus on the key aspects of our business strategy. We will seek continued growth of our business by capitalizing on the efficiencies of our business model and by:

o expanding into additional states. Currently, we have obtained licenses to underwrite and sell our insurance products in Alabama, Texas and Louisiana;

o a shift in emphasis of our product mix to balance our nonstandard automobile insurance products with our continued emphasis on homeowners' and commercial general liability lines of insurance and by expanding our product offerings to include other insurance products, subject to regulatory approval;

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

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

o encouraging agents to place a high volume of high quality business with us by providing them with attractive commission structures tied to premium levels and loss ratios;

o forming a strategic relationship with Affirmative, the parent company of the purchasers of our non-standard agency assets located in Florida, which is intended to enable us to market our insurance products through Affirmative's retail distribution network and which, in turn, should increase our revenues. For more information regarding this strategic relationship, please see Note 24 to our Consolidated Financial Statements included under Item 8 of this Report on Form 10-K; and

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

21st Century Holding Company

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

INSURANCE OPERATIONS AND RELATED SERVICES

General

We underwrite personal automobile, homeowners' and mobile home property casualty insurance through Federated National and personal automobile property and casualty insurance and commercial general liability insurance through American Vehicle. Federated National and American Vehicle are both currently licensed to conduct business in Florida as domestic admitted insurers. American Vehicle is also licensed to conduct business in Texas and Louisiana as an admitted foreign insurer and in Georgia and Kentucky as a non-admitted foreign insurer. American Vehicle has been approved for admission into Alabama, subject to our funding of a statutorily required deposit, which is in process.

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

                                                                              Years Ended December 31
                                                    ----------------------------------------------------------------------------
                                                              2004                      2003                        2002
                                                    ----------------------     ----------------------      ---------------------
                                                     Premium       Percent      Premium       Percent      Premium       Percent
                                                    ---------      -------     ---------     --------      -------       -------
                                                                               (Dollars in Thousands)
Gross written premiums:
          Automobile                                $  24,239        24.1%      $  49,298       67.5%      $  52,586       83.4%
          Homeowners                                   62,400        62.0%         16,804       23.0%          8,670       13.8%
          Mobile Home                                   1,513         1.5%          1,739        2.4%          1,780        2.8%
          Commercial General Liability                 12,510        12.4%          5,151        7.1%             --        0.0%
                                                    ---------       ------      ---------      ------      ---------      ------

                  Total gross written premiums      $ 100,662       100.0%      $  72,992      100.0%      $  63,036      100.0%
                                                    =========       ======      =========      ======      =========      ======

Ceded premiums:
          Automobile                                $    (992)       (6.4%)     $  22,091      100.0%      $  27,765      100.0%
          Homeowners                                   14,932        96.4%             --        0.0%             --        0.0%
          Mobile Home                                   1,546        10.0%             --        0.0%             --        0.0%
          Commercial General Liability                     --         0.0%             --        0.0%             --        0.0%
                                                    ---------       ------      ---------      ------      ---------      ------

                  Total ceded premiums              $  15,486       100.0%      $  22,091      100.0%      $  27,765      100.0%
                                                    =========       ======      =========      ======      =========      ======

Net written premiums
          Automobile                                $  25,231        29.6%      $  27,207       53.5%      $  24,821       70.4%
          Homeowners                                   47,468        55.7%         16,804       33.0%          8,670       24.6%
          Mobile Home                                     (33)        0.0%          1,739        3.4%          1,780        5.0%
          Commercial General Liability                 12,510        14.7%          5,151       10.1%             --        0.0%
                                                    ---------       ------      ---------      ------      ---------      ------

                  Total net written premiums        $  85,176       100.0%      $  50,901      100.0%      $  35,271      100.0%
                                                    =========       ======      =========      ======      =========      ======

During the years ended December 31, 2004, 2003 and 2002, we marketed our insurance products through a network of company-owned agencies, franchised agencies, independent agents and general agents. Because we sold our company-owned agencies and franchised agencies at the end of 2004, in 2005 and thereafter we expect to continue to market our products through our existing network of independent agents and general agents.

NONSTANDARD AUTOMOBILE

Nonstandard personal automobile insurance is principally provided to insureds who are unable to obtain standard insurance coverage because of their driving record, age, vehicle type or other factors, including market conditions. Underwriting standards for preferred and standard coverage have become more restrictive, thereby requiring more insureds to seek nonstandard coverage and contributing to the increase in the size of the nonstandard automobile market. Nonstandard automobile insurance, however, generally involves the potential for increased loss exposure and higher claims experience. Loss exposure is mitigated because premiums usually are written at higher rates than those written for standard insurance coverage.

21st Century Holding Company

Both of our insurance subsidiaries currently underwrite nonstandard personal automobile insurance only in Florida, where the minimum limits are $10,000 per individual, $20,000 per accident for bodily injury, $10,000 per accident for property damage and comprehensive, and $50,000 for collision. The average annual premium on policies currently in force is approximately $1,057, as compared to $751 for 2003, and represented approximately 97.25% of our written premiums for automobile insurance as of the year ended December 31, 2004. Both Federated National and American Vehicle underwrite this coverage on an annual and semi-annual basis.

Due to the purchasing habits of nonstandard automobile insureds (for example, nonstandard automobile insureds tend seek the least expensive insurance required of the policyholder by statute that satisfies the requirements of state laws to register a vehicle), policy renewal rates tend to be low compared to standard policies. Our experience has been that a significant number of existing nonstandard policyholders allow their policies to lapse and then reapply for insurance as new policyholders. Our average policy renewal rate for our nonstandard policies is 35% to 40% on policies that mature to full term. The success of our nonstandard automobile insurance program, therefore, depends in part on our ability to replace non-renewing insureds with new policyholders through marketing efforts.

STANDARD AUTOMOBILE

Standard personal automobile insurance is principally provided to insureds who present an average risk profile in terms of driving record, vehicle type and other factors. Limits on standard personal automobile insurance are generally significantly higher than those for nonstandard coverage, but typically provide for deductibles and other restrictive terms. Federated National underwrites standard personal automobile insurance policies providing coverage no higher than $100,000 per individual, $300,000 per accident for bodily injury, $50,000 per accident for property damage and comprehensive and collision up to $50,000 per accident, with deductibles ranging from $200 to $1,000. The average premium on the policies currently in force is approximately $1,402, as compared to $1,472 for 2003, and represented approximately 2.75% of our written premiums for automobile insurance as of the year ended December 31, 2004.

HOMEOWNERS' AND MOBILE HOMEOWNERS'

We underwrite homeowners' insurance principally in Central and Southern Florida. Homeowners' insurance generally protects an owner of real and personal property against covered causes of loss to that property. Limits on homeowners' insurance are generally significantly higher than those for mobile homes, but typically provide for deductibles and other restrictive terms. Our property insurance products typically provide maximum coverage in the amount of $200,000, with the average policy limit being approximately $250,000. The approximate average premium on the policies currently in force is approximately $1,571, as compared to $1,050 for 2003, and the typical deductible is $1,000 for non-hurricane-related claims and generally 2% of the coverage amount for the structure for hurricane-related claims.

We underwrite homeowners' insurance for mobile homes, principally in Central and Northern Florida, where we believe that the risk of catastrophe loss from hurricanes is in a typical year less than in other areas of the state. Mobile homeowners' insurance generally involves the potential for above-average loss exposure, as compared to homeowners' insurance. In the absence of major catastrophe losses, however, loss exposure is limited because premiums usually are at higher rates than those charged for non-mobile home-property and casualty insurance. Additionally, our property lines for mobile homes typically provide maximum coverage in the amount of $75,000, with the average policy limit being approximately $31,000. In addition, we presently limit our mobile home coverage to no more than 10% of our underwriting exposure. The average annual premium on policies currently in force is approximately $315 and remains unchanged from 2003. The typical non-hurricane deductible is $500 and generally 2% of the coverage amount for the structure for hurricane-related claims.

Federated National incurred significant losses relative to its homeowner's and mobile homeowners' insurance lines of business as a result of the four Florida hurricanes in 2004. Approximately 8,500 policyholders have filed hurricane-related claims totaling an estimated $105.4 million, of which we estimate that our share of the costs associated with these hurricanes will be approximately $43.5 million, net of reinsurance recoveries and amortized reinstatement premiums. For a further discussion of our reinsurance please see our section titled "REINSURANCE"

Since our initial preliminary provision for losses from these hurricanes of $33 million, net of reinsurance recoveries, as of September 30, 2004, we revised our provision for losses as described above. Because the storms occurred during the third quarter of 2004, we were not able to complete physical inspections of a sufficiently large percentage of claims, nor were complete repair estimates available. During the fourth quarter of 2004, as physical property inspections and repair estimates were completed, our initial estimates of losses for these storms were increased to reflect increased estimates of claim severity on our homeowners' policies in Florida. We do not currently anticipate further materials increases to our loss estimates from the 2004 hurricanes.

21st Century Holding Company

We continue to evaluate the premium rates that our property insurance policyholders are charged and have implemented an average rate increase of 21.9% for new and renewal policies in effect as of December 1, 2004 and December 15, 2004, respectively. These increases in premium rates are subject to approval by the Florida Office of Insurance Regulation. There can be no assurances that our requested rate increases will be approved.

FLOOD

We write flood insurance through the National Flood Insurance Program ("NFIP"). We write the policy for the NFIP, which assumes 100% of the flood risk while we retain a commission for our service. The average flood policy premium is $300 with limits up to $250,000.

COMMERCIAL GENERAL LIABILITY

We underwrite commercial general liability insurance for approximately 250 classes of artisan contracting trades (excluding home-builders and developers) and for certain special events. The limits of liability range from $100,000 per occurrence and $200,000 policy aggregate to $1 million per occurrence and $2 million policy aggregate. The average policy premium is approximately $520 with deductibles of $250 to $500 per claim. We market the commercial general liability insurance products through a limited number of general agencies unaffiliated with the Company.

FUTURE PRODUCTS

We currently intend to expand our product offerings by underwriting additional insurance products and programs, and marketing them through our distribution network. Expansion of our product offerings will result in increases in expenses due to additional costs incurred in actuarial rate justifications, software and personnel. Offering additional insurance products may also require regulatory approval, further increasing our costs.

ASSURANCE MGA

Assurance Managing General Agents, Inc. ("Assurance MGA"), a wholly owned subsidiary, acts as Federated National's and American Vehicle's exclusive managing general agent. Assurance MGA currently provides all underwriting policy administration, marketing, accounting and financial services to Federated National and American Vehicle, and participates in the negotiation of reinsurance contracts. Assurance MGA generates revenue through policy fee income and other administrative fees from the marketing of companies' products through the Company's distribution network. Assurance MGA plans to establish relationships with additional carriers and add additional insurance products in the future.

SUPERIOR ADJUSTING

Superior processes claims made by insureds from Federated National, American Vehicle and third-party insurance companies. Our agents have no authority to settle claims or otherwise exercise control over the claims process. Furthermore, we believe that the employment of salaried claims personnel, as opposed to independent adjusters, results in reduced ultimate loss payments, lower loss adjustment expenses and improved customer service for most of our insurance products. Where this is not the case, we retain independent appraisers and adjusters. We also employ an in-house legal department to cost-effectively manage claims-related litigation and to monitor our claims handling practices for efficiency and regulatory compliance.

FEDERATED PREMIUM FINANCE

Federated Premium provides premium financing to Federated National's, American Vehicle's and third-party's insureds. Premium financing has been marketed through our distribution network of general agencies and a small number of independent agents whose customer base and operational history meets our strict criteria for creditworthiness and, prior to our sale at the end of 2004 of our company-owned and franchised agencies, also through those agencies. Lending operations are supported by Federated Premium's own capital base and are currently leveraged through our credit facility with FlatIron Funding Company LLC, which is described in more detail below.

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

21st Century Holding Company

At times, Federated Premium may advance funds for financed premiums to independent insurance agencies that represent third-party insurers. A risk exists if remittance is not made by the agency to the third-party insurer, as advances made by Federated Premium may only be recoverable to the extent that the agency's receipt of such advances is received by the third-party insurer. In order to reduce this risk, we have in place strict criteria for the creditworthiness of the agency's operational history and customer base. Additionally, we closely monitor these agencies on an ongoing basis.

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

                                         Years Ended December 31,
                            2004                   2003                   2002
                    ====================   ====================   ====================
                     Premium    Percent     Premium    Percent     Premium    Percent
                                          (Dollars in Thousands)
Federated National  $  11,510       34.0%  $  19,227       49.9%  $  22,331       55.4%
American Vehicle        9,390       27.8%     15,519       40.3%     12,850       31.9%
Other insurers         12,925       38.2%      3,767        9.8%      5,124       12.7%
                    ---------  ---------   ---------  ---------   ---------  ---------
      Total         $  33,825      100.0%  $  38,513      100.0%  $  40,305      100.0%
                    =========  =========   =========  =========   =========  =========

Federated Premium's operations are funded by a revolving loan agreement ("Revolving Agreement") with FlatIron Funding Company LLC ("FlatIron"). The Revolving Agreement is structured as a sale of contracts receivable under a sale and assignment agreement with WPAC (Westchester Premium Acceptance Corporation) (a wholly-owned subsidiary of FlatIron), which gives WPAC the right to sell or assign these contracts receivable. Federated Premium, which services these contracts, has recorded transactions under the Revolving Agreement as secured borrowings.

During September 2004, we negotiated a new revolving loan agreement in which the maximum credit commitment available to us was reduced at our request to $2.0 million with built-in options to incrementally increase the maximum credit commitment up $4.0 million over the next three years. Our lender could determine to change our available credit based on a number of factors, including the A.M. Best ratings of Federated National and American Vehicle. Pursuant to our loan agreement, if the A.M. Best rating of Federated National falls below a "C," or if the financial condition of American Vehicle, as determined by our lender (in its sole and absolute discretion) suffers a material adverse change, then under the terms of our loan agreement, policies written by that subsidiary will no longer be eligible collateral, causing our available credit to be reduced if we do not have other collateral qualifying as eligible collateral. As of December 31, 2004, policies written by Federated National were not considered by our lender to be eligible collateral. In March 2005, our lender agreed to permit policies written by Federated National to be eligible collateral and agreed to increase our total available credit by $0.5 million from $2.0 million to $2.5 million. We currently believe that this higher available credit limit will be sufficient based on our current operations. If policies written by our insurance subsidiaries again do not qualify as eligible collateral under our loan agreement and we are not able to obtain working capital from our operations or other sources, then we would have to restrict our growth and, possibly, our operations.

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

21st Century Holding Company

The amount of WPAC's advances are subject to availability under a borrowing base calculation, with maximum advances outstanding not to exceed the maximum credit commitment. The annual interest rate on advances under the Revolving Agreement equals the prime rate plus additional interest varying from 1.25% to 3.25% based on the prior month's ratio of contracts receivable related to insurance companies with an A. M. Best rating of B or lower to total contracts receivable. The effective interest rate on this line of credit, based on our average outstanding borrowings under the Revolving Agreement, was 5.71%, 4.83% and 6.23% for the years ended December 31, 2004, 2003 and 2002, respectively.

Outstanding borrowings under the Revolving Agreement as of December 31, 2004 were approximately $2.1 million. Outstanding borrowings under the line of credit agreement as previously in effect as of December 31, 2003 was approximately $4.1. Outstanding borrowings in excess of the $2.0 million and $4.0 million respective credit limits totaled $148,542 and $98,786 as of December 31, 2004 and 2003, respectively. The excess amounts are permissible by reason of a compensating cash balance of $156,095 and $200,430 for December 31 2004 and 2003, respectively, that was held for the benefit of WPAC and was included in other assets. Interest expense on this revolving credit line for the years ended December 31, 2004, 2003 and 2002 totaled approximately $178,000, $203,000 and $342,000, respectively.

DISCONTINUED OPERATIONS

TAX PREPARATION SERVICES AND ANCILLARY SERVICES

During 2004, we also offered other services at our company-owned and franchised agencies, including tax return preparation and electronic filing and the issuance and renewal of license tags. On January 13, 2005, with an effective date of January 1, 2005, we sold our 80% interest in Express Tax Service, Inc. (along with its wholly owned subsidiary, EXPRESSTAX Franchise Corporation) to Robert J. Kluba, the president of Express Tax and the holder of the 20% minority interest in Express Tax, and Robert H. Taylor. In exchange for our shares, we received a net cash payment of $311,351. which reflected a purchase price of $660,000 less $348,649. in intercompany receivables we owed to Express Tax. In addition, we received a payment of $1,200,000 in exchange for our agreement not to compete with the current businesses of Express Tax for five years after the sale. For further information about this transaction, please see Note 24 to our Consolidated Financial Statements included under Item 8 of this Report on Form 10-K.

FRANCHISE OPERATIONS

On December 31, 2004, we sold most of the non-current assets related to our franchise operations to Fed USA Retail, Inc. and Fed USA Franchising, Inc. We retained ownership of the current assets and liabilities. For further information about this transaction, please see "Recent Developments" above and Note 24 to our Consolidated Financial Statements included under Item 8 of this Report on Form 10-K.

At the time of sale, we had 42 operating franchises and six pending franchises. The form of franchise agreement in effect during 2004 granted the franchisee a license for the operation of an agency within an exclusive territory for a 10-year period, with two additional 10-year options. We collected from the franchisees a non-refundable initial franchise fee of $14,950, royalty fees, advertising fees, and other fees. Our rights under these franchise agreements were among the assets sold.

In addition, at the time of the sale of our interest in Express Tax, 231 EXPRESSTAX franchises had been granted. The form of EXPRESSTAX franchise agreement in effect during 2004 granted the franchisee a non-exclusive license to open and operate a center for a 10-year period, with two additional 10-year options. As a result of the sale of our interest in Express Tax, we will no longer be entering into such franchise agreements.

MARKETING AND DISTRIBUTION

During 2004, we marketed and distributed our own and third-party insurers' products and other services primarily in Central and South Florida, through a network of 24 agencies owned by Federated Agency Group, Inc. ("Federated Agency Group"), a wholly owned subsidiary, 42 franchised agencies, approximately 1,500 independent agents and a select number of general agents. Our independent agents and general agents are primarily responsible for the distribution of our homeowners' insurance and commercial general liability products. As described above, on December 31, 2004, we sold most of the non-current assets and the deferred policy acquisition liability related to our network of 24 company-owned agencies and 48 franchised agencies located in Florida, including our franchise operations. The company-owned agencies sold were located in Miami-Dade, Broward, Palm Beach, Martin, Orange, Osceola, Volusia and Seminole counties in Florida. The franchised agencies sold were located in Miami-Dade, Broward, Palm Beach, Martin, St. Lucie, Orange, Lee and Collier counties in Florida. Our independent agents are located primarily in South Florida.

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

21st Century Holding Company

Our agents have the authority to sell and bind insurance coverage in accordance with procedures established by Assurance MGA. Assurance MGA reviews all coverage bound by the agents promptly and generally accepts all coverage that falls within stated underwriting criteria. For automobile and commercial general liability policies, Assurance MGA also has the right, within a period of 60 days from a policy's inception, to cancel any policy, upon 45 days' notice, even if the risk falls within our underwriting criteria.

Except for the period as defined by the Florida Office of Insurance Regulation, which following the four Florida hurricanes in the third quarter of 2004 issued an emergency order that imposed a moratorium on cancellations and non-renewals of various types of insurance coverages, our homeowners' and mobile home policies as underwritten by Assurance MGA provided for the right, within a period of 90 days from a policy's inception, of Assurance MGA to cancel any policy upon 25 days' notice or after 90 days from policy inception with 95 days' notice, even if the risk falls within our underwriting criteria.

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

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

The following table sets forth the amount and percentages of insurance premiums written through company-owned agencies, franchised agencies and independent agents for the periods indicated:

                                             Years Ended December 31,
                                             ------------------------
                                2004                   2003                   2002
                        ====================   ====================   ====================
                         Premium    Percent     Premium    Percent     Premium    Percent
                                              (Dollars in Thousands)
Company-owned agencies  $  11,421       11.4%  $  22,320       30.6%  $  20,403       32.3%
Franchised agencies         7,999        7.9%     11,630       15.9%     11,761       18.7%
Independent agencies       81,242       80.7%     39,041       53.5%     30,872       49.0%
                        ---------  ---------   ---------  ---------   ---------  ---------
     Total              $ 100,662      100.0%  $  72,991      100.0%  $  63,036      100.0%
                        =========  =========   =========  =========   =========  =========

REINSURANCE

We follow industry practice of reinsuring a portion of our risks and paying for that protection based upon premiums received on all policies subject to such reinsurance. Reinsurance involves an insurance company transferring or "ceding" all or a portion of its exposure on insurance underwritten by it to another insurer, known as a "reinsurer." The reinsurer assumes a portion of the exposure in return for a portion, or quota share, of the premium, and pays the ceding company a commission based upon the amount of insurance ceded. The ceding of insurance does not legally discharge the insurer from its primary liability for the full amount of the policies. If the reinsurer fails to meet its obligations under the reinsurance agreement, the ceding company is still required to pay the loss.

Reinsurance is ceded under separate contracts or "treaties" for the separate lines of business underwritten and terms of coverage. The Company collectively ceded $15.5 million and $22.1 million in premiums written for the years ended December 31, 2004 and 2003, respectively. During 2004, we primarily reinsured Federated National's homeowners' insurance lines of business, while during 2003 we primarily reinsured our American Vehicle's and Federated National's automobile insurance lines of business. The Company's reinsurance for homeowners' is with several participants, all of which are AM Best rated "A" or better.

In August and September 2004, the State of Florida experienced four hurricanes, Charley, Frances, Ivan and Jeanne. One of our subsidiaries, Federated National, incurred significant losses relative to its homeowners' and mobile homeowners' insurance lines of business. Approximately 8,500 policyholders have filed hurricane-related claims totaling an estimated $105.4 million, of which we estimate that our share of the costs associated with these hurricanes will be approximately $43.5 million, net of reinsurance recoveries and amortized reinstatement premiums.

21st Century Holding Company

For each catastrophic occurrence, the excess of loss treaty will insure us for $24 million with the company retaining the first $10 million of loss and LAE. The treaty has a provision which, for an additional prorated premium will insure us for another $24 million of loss and LAE for subsequent occurrences with the company retaining the first $10 million in loss and LAE. As a result of the loss and LAE incurred in connection with the Hurricanes Charles and Frances the company has exhausted its recoveries of $48 million under the terms of this treaty.

The excess of loss treaty also insures us for an additional $34 million in excess of the company's $10 million retention plus the next $24 million as described above. Accordingly, loss and LAE incurred for Hurricanes Ivan, Jeanne and any subsequent catastrophic events through June 30, 2005, up to $34 million each, are the responsibility of the company, as illustrated in the accompanying table.

                                             (in millions)
                                     Gross    Reinsurance    Net
   Hurricane                         Losses    Recoveries   Losses
   ---------                        ---------  ----------  ---------
Charley (August 13)                 $    44.2  $    34.2   $    10.0
Frances (September 3)                    37.7       27.7        10.0
Ivan (September 14)                      13.7       --          13.7
Jeanne (September 25)                     9.8       --           9.8
                                    ---------  ---------   ---------
Total Loss Estimate                 $   105.4  $    61.9   $    43.5
                                    =========  =========   =========

Furthermore, as a result of the 2004 hurricanes, we incurred a net reinstatement insurance premium of $3.0 million that is amortized through operations from the reinstatement date of August 13, 2004 to June 30, 2005.

We continue to participate in the Florida Hurricane Catastrophe Fund ("FCAT") and we subscribe to an excess of loss reinsurance policy to protect our interest in the insurable risks associated with our homeowner and mobile home owner insurance products. Maximum coverage afforded from the combined policies of our FCAT and excess of loss policies in effect for varying dates from June 1, 2004 to June 30, 2005 total approximately $200.0 million where we will retain the first $10 million of insurable losses on each event. Our amount of reinsurance coverage was determined by subjecting our homeowner and mobile homeowner exposures to statistical forecasting models that are designed to quantify a catastrophic event in terms of the frequency of a storm occurring once in every "n" years. Our reinsurance coverage contemplated a catastrophic event occurring once every 100 years.

We are selective in choosing a reinsurer and consider numerous factors, the most important of which is the financial stability of the reinsurer, their history of responding to claims and their overall reputation. In an effort to minimize our exposure to the insolvency of a reinsurer, we evaluate the acceptability and review the financial condition of the reinsurer at least annually. Our current policy is to use only reinsurers that have an A.M. Best rating of "A" (Excellent) or better.

The Company's reinsurance for automobile insurance was ceded with Transatlantic Reinsurance Company ("Transatlantic"), an A+ rated reinsurance company. During 2004, Federated National did not reinsure any of its automobile insurance. In 2003 and 2002, Federated National ceded 40% of its automobile premiums written and losses incurred to Transatlantic. Beginning in November 2001, and continuing through December 31, 2003, American Vehicle reinsured all of its automobile insurance with Transatlantic at various levels. During 2004 American Vehicle did not reinsure any of its products.

The automobile quota-share reinsurance treaties for 2003 include loss corridors with varying layers of coverage based on ultimate incurred loss ratio results whereby the two insurance companies will retain 100% of the losses between incurred loss ratios of 66% and 86% for policies with an effective date of 2003. Despite the loss corridor, the reinsurer assumes significant insurance risk under the reinsured portions of the underlying insurance contracts and it is reasonably possible that the reinsurer may realize a significant loss from the transaction. Our ultimate incurred loss ratios for these treaties are estimated to be 69.2% and 72.5% for Federated National and American Vehicle, respectively.

During 2002, Federated National entered into a 10% quota-share agreement with our affiliate American Vehicle. The agreement ceded 10% of its premium and losses on all policies with an effective date of 2002. For presentation purposes, and in accordance with the principles of consolidation, the agreement between the two affiliated insurance companies has been eliminated.

21st Century Holding Company

LIABILITY FOR UNPAID LOSSES AND LAE

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

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

All newly reported claims received with respect to personal automobile policies are set up with an initial average liability. The average liability for these claims is determined no less than annually by dividing the number of reported claims into the total amount paid during the same period. If a claim is open more than 45 days, that open case liability is evaluated and the liability is adjusted upward or downward according to the facts and circumstances of that particular claim.

In addition, management provides for a liability on an aggregate basis to provide for losses incurred but not reported ("IBNR"). We utilize independent actuaries to help establish liability for unpaid losses and LAE. We do not discount the liability for unpaid losses and LAE for financial statement purposes.

The estimates of the liability for unpaid losses and LAE are subject to the effect of trends in claims severity and frequency and are continually reviewed. As part of this process, we review historical data and consider various factors, including known and anticipated legal developments, changes in social attitudes, inflation and economic conditions. As experience develops and other data become available, these estimates are revised, as required, resulting in increases or decreases to the existing liability for unpaid losses and LAE. Adjustments are reflected in results of operations in the period in which they are made and the liabilities may deviate substantially from prior estimates. Among our classes of insurance, the automobile and homeowners' liability claims historically tend to have longer time lapses between the occurrence of the event, the reporting of the claim and the final settlement, than do automobile physical damage and homeowners' property claims. Liability claims often involve parties filing suit and therefore may result in litigation. By comparison, property damage claims tend to be reported in a relatively shorter period of time and settled in a shorter time frame with less occurrence of litigation. We do not experience changes in payment patterns due to portfolio loss transfers or structured settlements.

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

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

                          21st Century Holding Company

                                              For the years ending December 31,
                                              ---------------------------------
                                                 2004       2003        2002
                                                 ----       ----        ----
                                                   (Dollars in Thousands)
Balance at January 1:                         $  24,570   $  16,984   $  11,005
    Less reinsurance recoverables                (9,761)     (7,848)     (4,798)
                                              ---------   ---------   ---------
      Net balance at January 1                $  14,809   $   9,136   $   6,207
                                              =========   =========   =========

Incurred related to:
    Current year                              $  76,423   $  26,275   $  15,896
    Prior years                                  (1,430)      1,234          91
                                              ---------   ---------   ---------
      Total incurred                          $  74,993   $  27,509   $  15,987
                                              =========   =========   =========

Paid related to:
    Current year                              $  42,304   $  14,205   $   8,148
    Prior years                                  10,342       7,631       4,910
                                              ---------   ---------   ---------
      Total paid                              $  52,646   $  21,836   $  13,058
                                              =========   =========   =========

Net balance at year-end                       $  37,156   $  14,809   $   9,136
    Plus reinsurance recoverables                 9,415       9,761       7,848
                                              ---------   ---------   ---------
      Balance at year-end                      $ 46,571   $  24,570   $  16,984
                                              =========   =========   =========

As shown above, and as a result of our review of liability for losses and LAE, which includes a re-evaluation of the adequacy of reserve levels for prior year's claims, we decreased the liability for loss and LAE for claims occurring in prior years by $1,431,000 for the year ended December 31, 2004 and we increased the liability for loss and LAE for claims occurring in prior years by $1,234,000 and $91,000 for the years ended December 31, 2003 and 2002, respectively. There can be no assurance concerning future adjustments of reserves, positive or negative, for claims through December 31, 2004.

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

The following table presents total unpaid loss and LAE, net, and total reinsurance recoverables due (to) or from our automobile reinsures as shown in our consolidated financial statements for the periods indicated.

                                                                                                    As of December 31,
                                                                                                    ------------------
                                                                                                   2004           2003
                                                                                                   ----           ----
Transatlantic Reinsurance Company (A+ A.M. Best Rated):
              Unearned premiums                                                                $      2,559  $  7,823,374
              Reinsurance recoverable on paid losses and loss adjustment expenses                 1,661,751     2,457,228
              Unpaid losses and loss adjustment expenses                                          2,507,403     9,761,353
                                                                                               ------------  ------------
                                                                                               $  4,171,713  $ 20,041,955
                                                                                               ============  ============
Amounts due from reinsurers consisted of amounts related to:
              Unpaid losses and loss adjustment expenses                                       $  2,507,403  $  9,761,353
              Reinsurance recoverable on paid losses and loss adjustment expenses                 1,661,751     2,457,228
              Reinsurance receivable (payable)                                                      11,301     (1,339,162)
                                                                                               ------------  ------------
                                                                                               $  4,180,455  $ 10,879,419
                                                                                               ============  ============

In addition to our reinsurance recoverable from our automobile reinsurers, we also have reinsurance recoveries due from our catastrophic reinsurance companies relating to the four hurricanes that occurred in August and September of 2004. The following table presents total unpaid loss and LAE, net, and total reinsurance recoverables due from our catastrophic reinsurers as shown in our consolidated financial statements.

                                                                        As of December 31,
                                                                        ------------------
                                                                        2004          2003
                                                                        ----          ----
Catastrophe Excess of Loss (Various participants)
and Florida Hurricane Catastrophe Fund:

        Reinsurance recoverable on paid losses and loss adjustment
        expenses                                                    $ 18,191,799   $        --
        Unpaid losses and loss adjustment expenses                     6,907,390
                                                                    ------------

                                                                    $ 25,099,189   $        --
                                                                    ============   ============
Amounts due from reinsurers consisted of amounts related to:

        Unpaid losses and loss adjustment expenses                  $  6,907,390   $        --
        Reinsurance recoverable on paid losses and loss adjustment
        expenses                                                      18,191,799            --
        Reinsurance receivable (payable)                              (3,371,458)
                                                                    ------------

                                                                    $ 21,727,731   $        --
                                                                    ============   ============

21st Century Holding Company

The following table presents the liability for unpaid losses and LAE for the years ended December 31, 1995 through 2004. The top line of the table shows the estimated net liabilities for unpaid losses and LAE at the balance sheet date for each of the periods indicated. These figures represent the estimated amount of unpaid losses and LAE for claims arising in all prior years that were unpaid at the balance sheet date, including losses that had been incurred but not yet reported. The portion of the table labeled "Cumulative paid as of" shows the net cumulative payments for losses and LAE made in succeeding years for losses incurred prior to the balance sheet date. The lower portion of the table shows the re-estimated amount of the previously recorded liability based on experience as of the end of each succeeding year.

Years Ended December 31,

                              2004     2003      2002      2001     2000     1999      1998      1997       1996      1995
                              ----     ----      ----      ----     ----     ----      ----      ----       ----      ----
                                                                   Dollars in Thousands
Balance Sheet Liability   $37,156   $14,809    $9,136    $6,207    $6,976    $4,428    $5,366    $4,635    $4,532    $3,688

Cumulative paid as of:

      One year later                  9,969     7,622     5,275     8,228     4,289     3,460     2,694     2,850     3,250
      Two years later                           9,401     7,222     9,568     5,799     4,499     3,533     3,539     3,898
      Three years later                                   7,711    10,101     6,328     5,111     3,972     3,882     4,164
      Four years later                                             10,352     6,408     5,387     4,241     4,107     4,300
      Five years later                                                        6,542     5,227     4,325     4,223     4,404
      Six years later                                                                   5,216     4,121     4,262     4,493
      Seven years later                                                                           4,035     3,985     4,423
      Eight years later                                                                                     3,746     3,786
      Nine years later                                                                                                3,800

                           2004      2003      2002      2001      2000      1999      1998      1997      1996      1995
                           ----      ----      ----      ----      ----      ----      ----      ----      ----      ----

Re-estimated net liability as of:
      End of year        $ 37,156  $ 14,809  $  9,136  $  6,207  $  6,976  $  4,428  $  5,366  $  4,635  $  4,532  $  3,688
      One year later                 14,256    10,897     6,954     9,445     5,872     4,676     4,360     4,332     4,728
      Two years later                          10,625     7,842    10,200     6,284     5,157     4,063     4,255     4,867
      Three years later                                   8,069    10,425     6,605     5,352     4,314     4,102     4,872
      Four years later                                             10,616     6,561     5,515     4,386     4,304     4,748
      Five years later                                                        6,664     5,384     4,395     4,321     4,899
      Six years later                                                                   5,396     4,277     4,321     4,808
      Seven years later                                                                           4,284     4,189     4,792
      Eight years later                                                                                     4,191     4,796
      Nine years later                                                                                                4,796


Cumulative redundancy
(deficiency)                       $    553  $ (1,489) $ (1,862) $ (3,640) $ (2,236) $    (30) $    351  $    341  $ (1,108)

Cumulative redundancy
-deficiency as a % of
reserves originally
established                             3.7%    -16.3%    -30.0%    -52.2%    -50.5%     -0.6%      7.6%      7.5%    -30.0%

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

The table below sets forth the differences between loss and LAE reserves as disclosed for GAAP basis compared to Statutory Accounting Principles ("SAP") basis of presentation for the years ended 2004 and 2003.

                          21st Century Holding Company

                                                       Years Ended December 31,
                                                       ------------------------
                                                         2004           2003
                                                        -------        -------
GAAP basis Loss and LAE reserves                        $46,571        $24,570
Less unpaid Losses and LAE ceded                          9,415          9,761
                                                        -------        -------
    Balance Sheet Liability                              37,156         14,809
Add Insurance Apportionment Plan                            234            505
                                                        -------        -------
    SAP basis Loss and LAE reserves                     $37,390        $15,314
                                                        =======        =======

The table below sets forth the differences between loss and LAE incurred as disclosed for GAAP basis compared to SAP basis presentation for the years ended 2004, 2003 and 2002.

                                                    Years Ended December 31,
                                                    ------------------------
                                                    2004      2003      2002
                                                  --------  --------  --------
                                                      (Dollars in Thousands)
GAAP basis Loss and LAE incurred                  $ 74,993  $ 27,509  $ 15,987
Intercompany adjusting and other expenses            5,597     3,579     2,484
Insurance apportionment plan                           185     1,940       700
                                                  --------  --------  --------
SAP basis Loss and LAE incurred                   $ 80,775  $ 33,028  $ 19,171
                                                  ========  ========  ========

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

The following table sets forth Loss Ratios, Expense Ratios and Combined Ratios for the periods indicated for the insurance business of Federated National and American Vehicle for 2004, 2003 and 2002. The ratios, inclusive of unallocated loss adjustment expenses ("ULAE"), are shown in the table below, and are computed based upon SAP.

                                                Years Ended December 31,
                                                ------------------------
                                            2004           2003          2002
                                           ------         ------         ------

Loss Ratio                                 117.7%          67.4%          59.6%
Expense Ratio                               23.1%          25.7%          24.7%
                                           ------         ------         ------
Combined Ratio                             140.8%          93.1%          84.3%
                                           ======         ======         ======

The 47.8% increase in the SAP loss ratio from 2004 to 2003 in part reflects our experience relating to the four hurricanes that occurred in August and September of 2004, net of improved non-catastrophic loss ratio experience as the following table reflects.

                                                   Calendar year 2004
                                                   ------------------
                                            Non-
                                        Catastrophic    Catastrophic
                                         experience     experience      Total
                                         ----------     ----------      -----
Net Written Premiums             (a)      $  83,660     $   3,000     $  86,660
Net Earned  Premiums             (b)      $  67,293     $   1,308     $  68,601
Net Incurred Losses & LAE        (c)      $  39,791     $  40,984     $  80,775
Net Underwriting Expense         (d)      $  18,743     $   1,286     $  20,029

Loss Ratio                       (c/b)         59.1%       3132.4%        117.7%

Expense Ratio                    (d/a)         22.4%         42.9%         23.1%
                                          ---------     ---------     ---------
Combined Ratio                                 81.5%       3175.3%        140.8%
                                          =========     =========     =========

Main factors for the improved, non-catastrophic ratios between 2004 and 2003 include, but are not limited to, the termination of unprofitable agency relations, increased scrutiny over fraudulently asserted claims, streamlined paperless claims processing system, new claims management supervision, in house legal counsel, as well as overall stricter underwriting guidelines.

21st Century Holding Company

An increase in severity primarily associated with the personal injury protection line of automobile insurance can be attributed to the $1.2 million adverse development incurred in 2003 relative to accidents that occurred prior to 2003. Main factors for the 2003 loss ratio include unanticipated severity associated with adjusting personal injury protection claims which were mitigated by favorable loss experience associated with the property and commercial general liability lines of insurance. Additionally, during 2003, both of the insurance companies revised their respective automobile rates and the available deductibles limits.

COMPETITION

We operate in highly competitive markets and face competition from both national and regional insurance companies, many of whom are larger and have greater financial and other resources, have better A.M. Best ratings and offer more diversified insurance coverage. Our competitors include companies which market their products through agents, as well as companies which sell insurance directly to their customers. Large national writers may have certain competitive advantages over agency writers, including increased name recognition, increased loyalty of their customer base and reduced policy acquisition costs. We may also face competition from new or temporary entrants in our niche markets. In some cases, such entrants may, because of inexperience, desire for new business or other reasons, price their insurance below ours. Although our pricing is inevitably influenced to some degree by that of our competitors, we believe that it is generally not in our best interest to compete solely on price. We instead tend to compete on the basis of underwriting criteria, our distribution network and superior service to our agents and insureds. With respect to automobile insurance in Florida, we compete with more than 100 companies, which underwrite personal automobile insurance. Comparable companies which compete with us in the personal automobile insurance market include U.S. Security Insurance Company, United Automobile Insurance Company, Direct General Insurance Company and Security National Insurance Company, as well as major insurers such as Progressive Casualty Insurance Company. Comparable companies which compete with us in the homeowners' market include Florida Family Insurance Company, Florida Select Insurance Company, Atlantic Preferred Insurance Company and Vanguard Insurance Company. Comparable companies which compete with us in the general liability insurance market include Century Surety Insurance Company, Atlantic Casualty Insurance Company, Colony Insurance Company and Burlington/First Financial Insurance Companies. Competition could have a material adverse effect on our business, results of operations and financial condition.

REGULATION

GENERAL

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

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

Most states have insurance laws requiring that rate schedules and other information be filed with the state's insurance regulatory authority, either directly or through a rating organization with which the insurer is affiliated. The regulatory authority may disapprove a rate filing if it finds that the rates are inadequate, excessive or unfairly discriminatory. Rates, which are not necessarily uniform for all insurers, vary by class of business, hazard covered, and size of risk. Certain states have recently adopted laws or are considering proposed legislation which, among other things, limit the ability of insurance companies to effect rate increases or to cancel, reduce or non-renew insurance coverage with respect to existing policies, particularly personal automobile insurance.

21st Century Holding Company

The Company's experience in Florida to date, however, has been that although legislative proposals of this type have been considered from time to time, none have yet been adopted. Nevertheless, the Florida legislature may adopt laws of this type in the future, which could adversely affect the Company's business.

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

All insurance companies must file quarterly and annual statements with certain regulatory agencies and are subject to regular and special examinations by those agencies. The last regulatory examination of Federated National covered the three-year period ended on December 31, 2001. The last regulatory examination of American Vehicle covered the three-year period ended on December 31, 2002. No material deficiencies were found during either of the regulatory examinations. In some instances, various states routinely require deposits of assets for the protection of policyholders either in those states or for all policyholders. As of December 31, 2004, Federated National and American Vehicle held investment securities with a fair value of approximately $1,024,000, each as deposits with the State of Florida. Additionally, as of December 31, 2004, American Vehicle has a $100,000 deposit with the State of Louisiana and is in the process of funding a $400,000 deposit in connection with its approval in Alabama.

Under Florida law, a domestic insurer may not pay any dividend or distribute cash or other property to its shareholders except out of that part of its available and accumulated capital surplus funds which is derived from realized net operating profits on its business and net realized capital gains. A Florida domestic insurer may not make dividend payments or distributions to shareholders without prior approval of the Florida Office of Insurance Regulation if the dividend or distribution would exceed the larger of (i) the lesser of (a) 10.0% of its capital surplus or (b) net income, not including realized capital gains, plus a two-year carryforward, (ii) 10.0% of capital surplus with dividends payable constrained to unassigned funds minus 25% of unrealized capital gains or (iii) the lesser of (a) 10.0% of capital surplus or
(b) net investment income plus a three-year carryforward with dividends payable constrained to unassigned funds minus 25.0% of unrealized capital gains. Alternatively, a Florida domestic insurer may pay a dividend or distribution without the prior written approval of the Florida Office of Insurance Regulation
(i) if the dividend is equal to or less than the greater of (a) 10.0% of the insurer's capital surplus as regards policyholders derived from realized net operating profits on its business and net realized capital gains or (b) the insurer's entire net operating profits and realized net capital gains derived during the immediately preceding calendar year, (ii) the insurer will have policy holder capital surplus equal to or exceeding 115.0% of the minimum required statutory capital surplus after the dividend or distribution, (iii) the insurer files a notice of the dividend or distribution with the Florida Office of Insurance Regulation at least ten business days prior to the dividend payment or distribution and (iv) the notice includes a certification by an officer of the insurer attesting that, after the payment of the dividend or distribution, the insurer will have at least 115% of required statutory capital surplus as to policyholders. Except as provided above, a Florida domiciled insurer may only pay a dividend or make a distribution (i) subject to prior approval by the Florida Office of Insurance Regulation or (ii) 30 days after the Florida Office of Insurance Regulation has received notice of such dividend or distribution and has not disapproved it within such time.

Under these laws, based on their respective 2004 surplus and income, Federated National and American Vehicle would not be permitted to pay dividends in 2004. No dividends were paid by Federated National or American Vehicle in 2003, 2002 or 2001, and none are anticipated in 2005. Although we believe that amounts required to meet our financial and operating obligations will be available from sources other than dividends from insurance subsidiaries, there can be no assurance in this regard. Further, there can be no assurance that, if requested, the Florida Office of Insurance Regulation will allow any dividends in excess of the amount available, to be paid by Federated National and American Vehicle to us in the future. The maximum dividends permitted by state law are not necessarily indicative of an insurer's actual ability to pay dividends or other distributions to a parent company, which also may be constrained by business and regulatory considerations, such as the impact of dividends on capital surplus, which could affect an insurer's competitive position, the amount of premiums that can be written and the ability to pay future dividends. Further, state insurance laws and regulations require that the statutory capital surplus of an insurance company following any dividend or distribution by it be reasonable in relation to its outstanding liabilities and adequate for its financial needs.

While the non-insurance company subsidiaries are not subject directly to the dividend and other distribution limitations, insurance holding company regulations govern the amount that any affiliate within the holding company system may charge any of the insurance companies for service (e.g., management fees and commissions). In order to enhance the regulation of insurer solvency, the National Association of Insurance Commissioners ("NAIC") established risk-based capital requirements for insurance companies that are designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policy holders. These requirements measure three major areas of risk facing property and casualty insurers: (i) underwriting risks, which encompass the risk of adverse loss developments and inadequate pricing;
(ii) declines in asset values arising from credit risk; and

21st Century Holding Company

(iii) other business risks from investments. Insurers having less statutory surplus than required will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. Based upon the 2004 statutory financial statements for American Vehicle, statutory surplus exceeded all regulatory action levels established by the NAIC. Based upon the 2004 statutory financial statements for Federated National, statutory surplus did not exceed regulatory action levels established by the NAIC. Federated National's results required us to submit a plan containing corrective actions. Federated has submitted its plan for corrective action and is currently in discussions with the Florida Office of Insurance Regulation regarding the merits of the action plan points. The regulatory action level permits the insurance regulators to perform an examination or other analysis and issue a corrective order. Federated National is scheduled to have its statutorily required triennial examination during 2005 for the three years ended December 31, 2004 to be performed by the Florida Office of Insurance Regulation. We may be subject of additional targeted examinations or analysis. These examinations or analysis may result in one or more corrective orders being issued by the Florida Office of Insurance Regulation.

The Florida Office of Insurance Regulation, which follows these requirements, could require Federated National or American Vehicle to cease operations in the event they fail to maintain the required statutory capital.

Based on Risk Based Capital requirements, the extent of regulatory intervention and action increases as the ratio of an insurer's statutory surplus to its Authorized Control Level ("ACL"), as calculated under the NAIC's requirements, decreases. The first action level, the Company Action Level, requires an insurer to submit a plan of corrective actions to the insurance regulators if statutory surplus falls below 200.0% of the ACL amount. The second action level, the Regulatory Action Level, requires an insurer to submit a plan containing corrective actions and permits the insurance regulators to perform an examination or other analysis and issue a corrective order if statutory surplus falls below 150.0% of the ACL amount. The Authorized Control Level, the third action level, allows the regulators to rehabilitate or liquidate an insurer in addition to the aforementioned actions if statutory surplus falls below the ACL amount. The fourth action level is the Mandatory Control Level, which requires the