21ST CENTURY HOLDING CO, 10KSB40, 1999-03-31

21ST CENTURY HOLDING CO
10KSB40, 1999-03-31
FIRE, MARINE & CASUALTY INSURANCE

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-KSB

(MARK ONE)
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF
1934
(Fee Required)

For the fiscal year ended DECEMBER 31, 1998

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
(No Fee Required)

For the transition period of _____________to_______________

Commission file number 0-2500111

21ST CENTURY HOLDING COMPANY
(Exact name of small business issuer as specified in its Charter)

FL 65-0248866
------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No)

4161 N.W. 5TH STREET PLANTATION, FLORIDA 33317
-------------------------------------------------------------
(Address of Principal executive offices) (Zip Code

Registrant's telephone number, including area code (954) 581-9993

Securities registered pursuant to Section 12(b) of the Exchange Act: None

Securities registered pursuant to Section 12(g) of the Exchange Act:

COMMON STOCK, PAR VALUE $.01 PER SHARE
--------------------------------------
(Title of Class)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter periods that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. YES x NO ___

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge. In definitive proxy or information
statements incorporated by reference in Part III of this Form 100KSB or any
amendment to this Form 10-KSB. [ X ]

State issuer's revenues for its most recent fiscal year: $20,668,467

The aggregate market value of the Issuer's Common Stock, $.01 par value, held by
non-affiliates on March 29, 1999, based on the last sale price of the Common
Stock as reported by the Nasdaq National Market was: $7,709,873

As of March 29, 1999 there were 3,390,000 the issuer's Common Stock, $.01 par
value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

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<PAGE>

FORWARD-LOOKING STATEMENTS

21st Century Holding Company (the "Company") cautions readers that
certain important factors may affect the Company's actual results and could
cause such results to differ materially from any forward-looking statements
which may be deemed to have been made in this Report or which are otherwise made
by or on behalf of the Company. For this purpose, any statements contained in
this Report that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the generality of the foregoing,
words such as "may", "will", "expect", "believe", "anticipate", "intend",
"could", "would", "estimate", or "continue" or the negative other variations
thereof or comparable terminology are intended to identify forward-looking
statements. Factors which may affect the Company's results include, but are not
limited to, risks related to the nature of the Company's business; the limit on
the Company's ability to expand due to a consent order entered into with the
Florida Department of Insurance reinsurance; dependence on investment income;
the adequacy of its liability for LAE regulation; insurance agents; claims
experience; limited experience in the insurance industry; competition; ratings
by industry services; catastrophe losses; reliance on key personnel and other
risks discussed elsewhere in this Report and in the Company's other filings with
the Securities and Exchange Commission ("the Commission"). See "Glossary of
Selected Terms" at the end of Item 1 for definitions of insurance terms used in
this Report.

PART I

ITEM 1. BUSINESS

GENERAL

The Company is a vertically integrated insurance holding company,
which, through its subsidiaries, controls substantially all aspects of the
insurance underwriting, distribution and claims process. The Company underwrites
nonstandard and standard personal automobile insurance and mobile home property
and casualty insurance in the State of Florida through its subsidiary, Federated
National Insurance Company ("Federated National"). The Company has underwriting
authority for third-party insurance companies which it represents through a
wholly-owned managing general agent, Assurance Managing General Agents, Inc.
("Assurance MGA"). The Company internally processes claims made by Federated
National's insureds through a wholly-owned claims adjusting company, Superior
Adjusting, Inc. ("Superior"). The Company also offers premium financing to its
own and third-party insureds through its wholly-owned subsidiary, Federated
Premium Finance, Inc. ("Federated Premium"), and offers auto title loans and
other ancillary services through its wholly-owned subsidiary, Florida State
Discount Auto Title Loans, Inc. ("Florida Auto Title").

The Company markets and distributes Federated National's and
third-party insurers' products and its other services primarily in South
Florida, through a network of 34 Company-owned agencies and approximately 300
active independent agents. The Company believes that it can be distinguished
from its competitors because it generates revenue from substantially all aspects
of the insurance underwriting, distribution and claims process. The Company
provides quality service to both its agents and insureds by utilizing an
integrated computer system, which links the Company's insurance and service
entities. The Company's computer and software systems allow for rapid automated
premium quotation, policy issuance, billing and payment and claims processing
and enable the Company to continuously monitor substantially all aspects of its
business. Using these systems, the Company's agents can access a customer's
driving record, quote a premium, offer premium financing and, if requested,
generate a policy on-site. The Company believes that these systems have
facilitated its ability to market and underwrite insurance products on a
cost-efficient basis, and that they will enhance the Company's ability to expand
to other regions in Florida and to other states.

The Company's primary product is nonstandard personal automobile
insurance, which is principally provided to insureds who are unable to obtain
preferred or standard insurance coverage because of their payment history,
driving record, age, vehicle type or other factors, including market conditions
for preferred or standard risks. Underwriting standards for preferred or
standard insurance coverage have become more restrictive, thereby requiring more
drivers to seek coverage in the nonstandard automobile

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<PAGE>

insurance market. These factors have contributed to an increase in the size of
the nonstandard personal automobile insurance market. Based on information
provided by A.M. Best, a leading rating agency for the insurance industry, from
1993 to 1997, the nonstandard personal automobile insurance market in the United
States grew from approximately $14.2 billion to approximately $22.0 billion of
annual premium volume and from approximately 15.1% to approximately 19.2% of the
total personal automobile insurance market. Also, according to A.M. Best, from
1993 to 1997 annual premium volume in the nonstandard personal automobile
insurance market in Florida grew from approximately $1.5 billion to
approximately $2.6 billion and from approximately 27.8% to approximately 35.6%
of the total personal automobile insurance market in Florida.

BACKGROUND

Operations currently conducted by the Company commenced in November
1983 when Edward J. Lawson and Michele V. Lawson, the Company's co-founders,
opened an independent insurance agency in South Florida to sell private
passenger automobile insurance. Through internal growth and acquisitions, the
number of Company-owned agencies expanded to 15, located principally in
South Florida. In September 1987, Mr. and Mrs. Lawson organized Federated
Premium to offer premium financing services. The Company was incorporated in the
State of Florida in March 1991 for the purpose of functioning as a holding
company for Federated National, which commenced underwriting operation in 1992.

In January 1997, the Company acquired all of the outstanding capital stock of
Assurance MGA, Federated Premium and Superior, and in January and February 1998,
the Company acquired all other insurance agencies and other affiliated companies
not previously owned by the holding company. Unless the context requires
otherwise, all references herein to the "Company" refer to 21st Century Holding
Company and its subsidiaries and their respective businesses as presently
conducted and as historically conducted prior to such reorganization.

The Company's executive offices are located at 4161 N.W. 5th Street,
Plantation, Florida and its telephone number is (954) 581-9993.

RECENT DEVELOPMENTS

In November 1998, the Company consummated an initial public offering
(the "IPO") of 1,250,000 shares of its Common Stock at a price of $7.50 per
share. Proceeds from the IPO, which were approximately $7.9 million net of
underwriting costs and expenses of the offering, have been and are being used
for contributions to Federated National's capital, repayment of debt under the
Company's credit facility (the "Credit Facility"), the financing of acquisitions
and working capital and other general corporate purposes.

In December 1998 and January 1999, the Company, in two separate
transactions acquired a total of 20 independent insurance agencies located in
South and Central Florida one of which was subsequently consolidated with an
existing agency. As a result of such acquisitions, the Company also expanded its
ancillary services to include check cashing and tax preparation.

In February 1999, the Company launched FedFirst, a program for
marketing insurance directly to Florida consumers through a television, radio
and billboard advertising campaign and an Internet web site.

BUSINESS STRATEGY

The Company's strategy is to seek continued growth of its business by
capitalizing on the efficiencies of its vertical integration and

/bullet/ selectively expanding the Company's product offerings by underwriting
additional insurance products and programs such as standard automobile
insurance, which the Company commenced offering in August 1998,
commercial vehicle insurance and homeowners' insurance, and marketing
these products and programs through its distribution network;

/bullet/ further penetrating the Florida market by acquiring additional
insurance agencies, such as the 20 agencies the Company acquired in
December 1998 and January 1999 and establishing relationships with
additional independent agents in order to expand the Company's
distribution network to and market its products and services in other
regions of Florida;

/bullet/ expanding direct marketing of insurance products to customers through
mailings, media advertising and the Internet;

/bullet/ maintaining a commitment to provide quality service to its agents and
insureds by emphasizing customer service;

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

/bullet/ identifying and reviewing opportunities to acquire additional insurers;
and

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<PAGE>

/bullet/ employing the business practices developed and used in Florida to
ultimately expand to other selected states.

INSURANCE OPERATIONS

Underwriting

GENERAL. The Company underwrites its nonstandard and standard personal
automobile insurance and mobile home property and casualty insurance through
Federated National. Federated National is licensed to conduct business only in
Florida.

In connection with the Company obtaining approval from the Florida
Department of Insurance to underwrite mobile home insurance, the Company entered
into a Consent Order with the Florida Department of Insurance (the "Consent
Order"), which limits the amount of premiums it may underwrite. Consent orders,
are normally entered into by an insurance company with the Florida Department of
Insurance when an insurance company desires to underwrite a new product. In
1998, Federated National was only permitted to underwrite $21.0 million in gross
premiums written and $14.0 million in total net premiums written. In 1999, this
limit increases to $24.0 million and $15.0 million, respectively. Federated
National is also required to maintain a minimum capital surplus to support its
underwriting program. In 1998 and 1999, Federated National is also required to
have capital surplus of $4.7 million and $5.9 million, respectively. The premium
limits and capital surplus requirements impact Federated National's potential
growth. Federated National's ability to exceed these requirements will be
subject to the prior approval of the Florida Department of Insurance. The
Florida Department of Insurance has indicated in writing its willingness to
modify the Consent Order and increase Federated National's underwriting
authority. At December 31, 1998, Federated National's capital surplus was $7.3
million. Accordingly, the Company believes it will be able to substantially
increase the amount of premiums Federated Nationalmay underwrite. Accordingly,
the Company is currently negotiating with the Florida Department of Insurance.
However, there can be no assurance that the Company will obtain the approval of
the Florida Department of Insurance to exceed the underwriting limitations or
that it will not be subject to other regulatory limits on the amount of premiums
it can underwrite.

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1998 1997
PREMIUM PERCENT PREMIUM PERCENT
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Written:
Nonstandard Automobile........................ $19,062 89.9% $17,332 98.1%
Mobile Home................................... 2,133 10.1 343 1.9
------- ----- ------- -----
Total Written................................ 21,195 100.0% 17,675 100.0%
Ceded:
Nonstandard Automobile........................ (5,698) 85.3% (4,536) 97.4%
Mobile Home................................... (930) 14.7 (123) 2.6
------- ----- ------- -----
Total Ceded.................................. (6,628) 100.0% (4,659) 100.0%
Net:
Nonstandard Automobile........................ 13,364 92.1% 12,796 98.3%
Mobile Home................................... 1,203 7.9 220 1.7
------- ----- ------- -----
Total Net.................................... $14,567 100.0% $13,016 100.0%
======= ===== ======= =====
</TABLE>

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<PAGE>

NONSTANDARD AUTOMOBILE. Nonstandard personal automobile insurance is
principally provided to insureds who are unable to obtain standard insurance
coverage because of their payment history, 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 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 limited because premiums usually are at higher
rates than those charged for standard insurance coverage and because
approximately 30% of the policies issued by Federated National provide the
minimum coverage required of the policyholder by statute and provide no bodily
injury coverage. Federated National currently underwrites nonstandard personal
automobile insurance in Florida, where the minimum limits are $10,000 per
individual and $20,000 per accident for bodily injury and $10,000 per accident
for property damage and comprehensive and collision up to $50,000. The average
annual premium on policies currently in force is approximately $650. Federated
National underwrites this coverage on an annual and semi-annual basis.

Due to the purchasing habits of nonstandard automobile insureds (for
example, insureds seeking the least expensive insurance required of the
policyholder by statute which satisfies the requirements of state laws to
register a vehicle), policy renewal rates tend to be low compared to standard
policies. Federated National's experience has been that a significant number of
existing policyholders allow their policies to lapse and then reapply for
insurance as new policyholders. Federated National's average policy renewal rate
is 35.0%. The success of Federated National's nonstandard automobile insurance
program, therefore, depends in part on its ability to replace non-renewing
insureds with new policyholders through marketing efforts.

The Company markets Federated National's nonstandard personal
automobile coverage primarily through its network of Company-owned agencies and
independent agents. The Company also markets its insurance on a limited basis
directly to insureds through its FedFirst direct advertising program.

The Company emphasizes customer service to both its agents and insureds
by utilizing an integrated computer system which links all of the Company's
insurance and service entities. The Company's computer and software systems
allow for rapid automated premium quotation, policy issuance, billing and
payment and claims processing and enable the Company to monitor substantially
all aspects of its business. This system enables the Company's agents to rapidly
access the customer's driving record, quote a premium and, if requested,
generate the policy on-site.

The Company is focusing its efforts on further penetrating the Florida
nonstandard personal automobile insurance market. Ultimately, the Company
intends to expand to other selected states. The Company will select states for
expansion based on a number of criteria, including the size of the personal
automobile insurance market, statewide loss results, competition and the
regulatory climate. The Company's ability to expand into other states will be
subject to the prior regulatory approval of each state. Certain states impose
seasoning requirements upon licensee applicants, which, due to the Company's
limited operating history, may impose burdens on the Company's ability to obtain
a license to conduct insurance business in those other states. There can be no
assurance that the Company will be able to obtain the required licenses, and the
failure to do so would limit the Company's ability to expand geographically.

STANDARD AUTOMOBILE. Standard personal automobile insurance is
principally provided to insureds that present an average risk profile in terms
of payment history, driving record, vehicle type and other factors. As part of
its expansion strategy, in August 1998 Federated National commenced underwriting
standard personal automobile insurance. 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 is initially underwriting standard personal automobile
insurance policies providing coverage no higher than $100,000 per individual and
$300,000 per accident for bodily injury and $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 Company is marketing Federated

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National's standard personal automobile insurance through its network of
Company-owned agencies and independent agents and directly to insureds through
its FedFirst direct advertising program.

MOBILE HOME. In 1997, Federated National commenced underwriting
homeowners insurance for mobile homes, principally in Central and Northern
Florida, where the Company believes that the risk of catastrophe loss from
hurricanes is less than in other areas of the state. Homeowners insurance
generally protects an owner of real or personal property against covered causes
of loss to that property. Homeowners insurance for mobile homes generally
involves the potential for above-average loss exposure. In the absence of major
catastrophe losses, loss exposure is limited because premiums usually are at
higher rates than those charged for non-mobile home property and casualty
insurance. Additionally, Federated National's property lines typically provide
maximum coverage in the amount of $75,000, with the average policy limit being
approximately $31,000. In addition, the Company presently intends to limit its
mobile home coverage to no more than 10.0% of its underwriting exposure. The
average annual premium on policies currently in force is approximately $379 and
the typical deductible is $500. As the Company-owned agencies are located
primarily in South Florida, the Company markets Federated National's mobile home
property and casualty insurance through independent agents in Central and
Northern Florida.

FUTURE PRODUCTS. The Company intends to expand its product offerings by
underwriting additional insurance products and programs and marketing them
through its distribution network. During 1999, the Company intends to expand its
product offerings to include homeowners' insurance and increase its current
limited offering of commercial vehicle insurance. Expansion of the Company's
product offerings will result in an increase in expenses due to additional costs
incurred in additional actuarial rate justifications, software and personnel.
Future products, such as homeowners' insurance, may require regulatory approval.
There can be no assurance that the Company can successfully obtain the necessary
regulatory approval and underwrite and profitably market and distribute any of
these products.

ASSURANCE MGA

Assurance MGA acts as Federated National's managing general agent.
Assurance MGA currently provides all underwriting policy administration,
marketing, accounting and financial services to Federated National and the
Company's agencies and participates in the negotiation of reinsurance contracts.

Assurance MGA has established a relationship with and has underwriting
authority for Gainsco, Inc. for commercial property and casualty lines and
Lloyds of London for various other insurance products. Assurance MGA also
generates revenue through policy fee income and other administrative fees from
the marketing of these companies' products through the Company's distribution
network. Assurance MGA plans to establish relationships with additional carriers
and add additional insurance products and products.

SUPERIOR

The Company internally processes claims made by Federated National's
insureds through Superior. The Company-owned agencies and independent agents
have no authority to settle claims or otherwise exercise control over the claims
process. Management believes that the employment of salaried claims personnel,
as opposed to independent adjusters, results in reduced ultimate loss payments,
lower LAE and improved customer service. The Company only retains independent
appraisers and adjusters on an as needed basis.

Claims settlement authority levels are established for each adjuster or
manager based on the employee's ability and level of experience. Upon receipt,
each claim is reviewed and assigned to an adjuster based on the type and
severity of the claim. All claims related litigation is monitored by Company
personnel. The claims policy of the Company emphasizes prompt and fair
settlement of meritorious claims and the establishment of appropriate liability
for claims. The Company believes that the internal processing of claims enables
it to provide quality customer service while controlling claims adjustment
expenses.

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FEDERATED PREMIUM

Federated Premium provides premium financing to both Federated
National's insureds and to third-party insureds. Premium financing is marketed
through the Company's distribution network of Company-owned agencies and
independent agents. Lending operations are supported by Federated Premium's own
capital base and are currently leveraged through the Credit Facility.

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 the life of the policy. 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. As part of its premium
financing offered to third-party insureds, Federated Premium may advance funds
for financed premiums to independent insurance agencies who represent
third-party insurers. If remittance is not made by the agency to the third-party
insurer, 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. Premium financing which the Company offers to its own insureds involves
limited credit risk.

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------
1998 1997
--------------------- ----------------------
PREMIUMS PERCENT PREMIUMS PERCENT
-------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Federated National......................... $11,843 60.5% $1,972 51.4%
Other insurers............................. 7,728 39.5 1,865 48.6
------- ----- ------ -----
Total................................... $19,571 100.0% $3,837 100.0%
======= ===== ====== =====

<FN>
(1) In July 1996 the Company ceased all new premium financing because of an
unfavorable premium finance lending arrangement. In early 1997 the premium
finance lending arrangement was terminated and in September 1997 a new premium
finance lending arrangement was established and the Company recommended premium
financing activities.
</FN>
</TABLE>

AUTO TITLE LOANS AND ANCILLARY SERVICES

In 1998, the Company began offering auto title loans, which are
short-term (30-day) loans secured by free and clear automobile titles. These
loans bear interest rates, which by law may range from 5.0% to 22.0% per month
and, in the Company's case, average 7.0% per month. The criteria for a loan is
that the borrower, must show proof that he or she is currently employed and has
utility (telephone and electricity) accounts. If a borrower qualifies, he or she
may obtain a loan for up to 50.0% of the wholesale book value of the automobile.
Insurance is required and a lien is taken out on the title for security. The
Company offers ancillary automobile services at most of its Company-owned
agencies such as the issuance of license tags and renewals. In early 1999, the
Company expanded its ancillary services to include check cashing and tax return
preparation.

MARKETING AND DISTRIBUTION

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media.

Company-employed and independent agents have the authority to sell and
bind insurance coverages in accordance with procedures established by Assurance
MGA. Assurance MGA reviews all coverages bound by the agents promptly and
generally accepts all coverages, which fall within stated underwriting criteria.
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 its underwriting criteria.

The Company believes that it provides its independent agents with
attractive commission structures. The Company compensates its agents by paying a
commission based on a percentage of premiums produced. The Company also offers
its agents a contingent commission based on premium levels and loss ratios,
which is intended to encourage the agents to place an increased portion of their
profitable business with the Company.

The Company believes that its integrated computer system, which allows
for rapid automated premium quotation and policy issuance by its agents, is a
key element in providing quality service to both its 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 generates the policy on-site.

The Company believes that its distribution system will ultimately
enable it to lower its expense ratio and operate with more favorable loss
experience. A lower expense ratio will, in turn, allow the Company to more
effectively compete with larger providers of nonstandard automobile and other
forms of insurance.

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1998 1997
---- ----
PREMIUMS PERCENT PREMIUMS PERCENT
-------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Through Company-owned agencies......................... $ 7,846 37.0% $ 4,518 26.1%
Through independent agents............................. 13,349 63.0 13,157 73.9%
------- ----- ------- -----
Total............................................... $21,195 100.0% $17,675 100.0%
======= ===== ======= =====
</TABLE>

In the future the Company plans to continue to expand its distribution
network and market its products and services in other regions of Florida by
acquiring additional insurance agencies and establishing relationships with
additional independent agents. Ultimately, as the Company expands its insurance
operations to other states, the Company will seek to replicate its distribution
network in those states. There can be no assurance that the Company will be able
to obtain the required regulatory approvals to offer additional insurance
products or expand into states other than Florida. Moreover, pursuant to the
Consent Order, the Company's growth in Florida is currently subject to limits on
the amount of premiums it can underwrite.

In December 1998 and January 1999, the Company, in two separate
transactions acquired a total of 20 independent insurance agencies located in
South and Central Florida (one of which was subsequently consolidated with an
existing agency). As a result of such acquisitions, the Company also expanded
its ancillary services to include check cashing and tax return preparation.

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<PAGE>

REINSURANCE

Federated National follows the customary industry practice of
reinsuring a portion of its 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. The Company ceded $6,628,270 in
premiums written for the year ended December 31, 1998. Federated National's
reinsurance for automobile insurance is primarily ceded with Transatlantic Re,
an A++ rated reinsurance company. Federated National cedes 30.0% of automobile
premiums written to Transatlantic Re. Federated National maintains reinsurance
contracts for mobile home insurance with A rated reinsurers including
Transatlantic Re. Federated National cedes 40.0% of mobile home premiums written
to Transatlantic Re, Everest Reinsurance Company ("Everest Re"), CNA Reinsurance
Company Limited ("CNA Re") and Terranova Insurance Company Limited ("Terranova
Re"). Everest Re, CNA Re and Terranova Re are A rated reinsurance companies. The
reinsurance program renews annually, although the Company continually reviews
the program and may elect to change it more frequently. Reinsurance is placed
directly by the Company and through national reinsurance intermediaries.

The Company is selective in choosing a reinsurer and considers numerous
factors, the most important of which is the financial stability of the
reinsurer, its history of responding to claims and its overall reputation. In an
effort to minimize its exposure to the insolvency of a reinsurer, the Company
evaluates the acceptability and reviews the financial condition of the reinsurer
at least annually. The Company's current policy is to use only reinsurers that
have an A.M. Best rating of "A (Excellent)" or better.

LIABILITY FOR UNPAID LOSSES AND LAE

The Company is directly liable for loss and LAE payments under the
terms of the insurance policies that it writes. In many cases, several years may
elapse between the occurrence of an insured loss, the reporting of the loss to
the Company and the Company's payment of that loss. As required by insurance
regulations and accounting rules, the Company reflects its 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 involving a probable loss is reported, the Company
establishes a liability for the estimated amount of the Company's 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 nonstandard personal
automobile policies are set up with an initial average liability. The average
liability for these claims are determined every quarter by dividing the number
of closed claims into the total amount paid during the three month period. If a
claim is open more than 30 days, that open case liability is evaluated and the
liability is adjusted upward or downward according to the facts and damages of
that particular claim. The Company anticipates that it will adopt a similar
policy with respect to standard automobile policies.

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<PAGE>

In addition, management provides for a liability on an aggregate basis
to provide for IBNR. The Company utilizes independent actuaries to help
establish its liability for unpaid losses and LAE. The Company does not discount
the liability for unpaid losses and LAE for financial statement purposes. There
are no differences in the liability for unpaid losses and LAE established under
GAAP and those established under SAP.

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, the Company reviews historical data and
considers 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 the classes of insurance underwritten by the Company, the
automobile and mobile home liability claims historically tend to have longer
time lapses between the occurrence of the event, the reporting of the claim to
the Company and the final settlement than do automobile physical damage and
mobile home 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 settle in a
shorter time frame with less occurrence of litigation.

There can be no assurance that the Company's liability for unpaid
losses and LAE will be adequate to cover actual losses. If the Company's
liability for unpaid losses and LAE proves to be inadequate, the Company will be
required to increase the liability with a corresponding reduction in the
Company's 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 the Company's 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 the Company's consolidated and
combined financial statements for the periods indicated.

YEARS ENDED DECEMBER 31
1998 1997
---- ----
(DOLLARS IN THOUSANDS)

Balance at January 1 $6,726 $6,234
Less reinsurance recoverables.......... (2,091) (1,702)
------ ------
Net balance at January 1.............. $4,635 $4,532

Incurred related to:
Current year........................... $9,404 $7,612
Prior years............................ (271) (198)
------ ------
Total incurred........................ $9,133 $7,414

Paid related to:
Current year........................... $5,699 $4,459
Prior years............................ 2,703 2,852
------ ------
Total paid............................ $8,402 $7,311
====== ======

Net balance at period ending............. $5,366 $4,635
Plus reinsurance recoverables.......... 2,237 2,091
------ ------
Balance at period ending.............. $7,603 $6,726
====== ======

Based upon consultations with the Company's independent actuarial
consultants and their statement of opinion on losses and LAE, the Company
believes that the liability for unpaid losses and LAE is adequate to cover all
claims and related expenses which may arise from incidents reported and IBNR.

10
<PAGE>

The following table presents total unpaid loss and LAE, net and total
reinsurance recoverables shown in the Company's consolidated and combined
financial statements for the periods indicated.

YEARS ENDED DECEMBER 31
1998 1997
---- ----
(DOLLARS IN THOUSANDS)

Loss and LAE, net.............................. $3,488 $3,383
IBNR, net...................................... 1,878 1,252
------ =-----
Total unpaid loss and LAE, net.............. $5,366 $4,635
====== ======

Reinsurance recoverable........................ 1,437 1,267
IBNR recoverable............................... 800 824
------ ------
Total reinsurance recoverable............... $2,237 $2,091
====== ======

The following table presents the liability for unpaid losses and LAE
for the Company for the years ended December 31, 1998, 1997, 1996, 1995, 1994,
1993 and 1992. 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.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31(1)
--------------------------
1998 1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Liability $5,366 $4,635 $4,532 $3,688 $3,355 $2,507 $611
Cumulative paid as of:
One year later............................. 2,690 2,852 2,638 2,449 1,964 499
Two years later............................ 3,539 2,658 2,792 2,426 554
Three years later.......................... 2,924 3,018 2,449 585
Four years later........................... 3,114 2,529 580
Five years ................................ 2,560 583
Six years later............................ 583
Re-estimated net liability as of:
End of year................................ $5,366 $4,635 $4,532 $3,688 $3,355 $2,507 $611
One year later............................. 4,311 4,334 3,750 3,570 2,566 628
Two years later............................ 4,204 3,252 3,231 2,780 586
Three years later.......................... 3,255 3,305 2,596 593
Four years later........................... 3,289 2,619 580
Five years later........................... 2,638 583
Six years later............................ 583
Cumulative redundancy (deficiency)........... -- $324 $328 $433 $66 $(131) $28
</TABLE>
- ----------
(1) To evaluate the information in the table properly it should be noted that,
although the Company recorded its participation in the Florida Joint
Underwriting Association ("FJUA"), an assigned risk pool for automobile
insurance drivers, from 1992 until 1995 in its 1996 statutory financial
statements, this table properly reflects the Company's participation in the FJUA
in the corresponding years.

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

11
<PAGE>

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.

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 nonstandard automobile insurance
business of the Company. The ratios, inclusive of ULAE expenses, are shown in
the table below, and are computed based upon GAAP.

YEARS ENDED DECEMBER 31
1998 1997
---- ----
Loss Ratio........................... 72% 75%
Expense Ratio........................ 24 29
-- ---
Combined Ratio....................... 96% 104%
=== ===

INVESTMENTS

The Company's investment objective is to maximize total rate of return
after Federal income taxes while maintaining liquidity and minimizing risk. The
Company's current investment policy limits investment in non-investment grade
fixed maturity securities (including high-yield bonds), and limits total
investments in equity securities and mortgage notes receivable to approximately
20.0% and 5.0%, respectively, of total consolidated investments. The Company
also complies with applicable laws and regulations, which further restrict the
type, quality and concentration of investments. In general, these laws and
regulations permit investments, within specified limits and subject to certain
qualifications, in Federal, state and municipal obligations, corporate bonds,
preferred and common equity securities and real estate mortgages.

The Company's investment policy is established by the Board of
Directors and is reviewed on a regular basis. Pursuant to this investment
policy, as of December 31, 1998, approximately 82.5% of the Company's
investments were in investment-grade fixed income securities and short-term
investments, which are considered to be either available for sale or held to
maturity, based upon the Company's intent at the time of purchase. Fixed
maturities are considered available for sale and are marked to market. The
Company may in the future also consider fixed maturities held to maturity and
carried at amortized cost. The Company does not use any material swaps, options,
futures or forward contracts to hedge or enhance its investment portfolio.

The Company's investment portfolio is managed by the Company's
Investment Committee consisting of the Company's President, the President of
Federated National and one outside advisor, in accordance with guidelines
established by the Florida Department of Insurance.

12
<PAGE>

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

YEARS ENDED DECEMBER 31
1998 1997
---- ----
(DOLLARS IN THOUSANDS)

Interest on fixed maturities.................... $878 $ 817
Dividends on equity securities.................. 94 147
Interest on short-term investments.............. 3 38
Other........................................... 24 64
---- ------
Total investment income......................... 999 1,066
Investment expense.............................. (15) (19)
---- ------
Net investment income........................... $984 $1,047
==== ======
Net realized gain (losses)...................... $442 $ (19)
==== ======

The following table summarizes, by type, the investments of the Company as of
December 31, 1998.

<TABLE>
<CAPTION>
CARRYING PERCENT
AMOUNT OF TOTAL
------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Fixed maturities, at market:
U.S. government agencies and authorities $0 0%
Obligations of states and political subdivisions 10,976 62.0
Corporate securities......................................... 3,257 18.4
Collateralized mortgage obligations.......................... 373 2.1
------- ----
Total fixed maturities 14,606 82.5
------- ----
Equity securities, at market................................. 2,936 16.6
Mortgage notes receivable.................................... 163 .9
------- ----
Total investments........................................... $17,705 100%
======= ====
</TABLE>

Fixed maturities are carried on the Company's balance sheet at market. At
December 31, 1998, fixed maturities had the following quality ratings (by
Moody's Investors Service, Inc. ("Moody's") and for securities not assigned a
rating by Moody's, by Standard and Poor's Corporation):

CARRYING PERCENT OF
AMOUNT TOTAL
------ -----
(DOLLARS IN THOUSANDS)
AAA................... $4,415 30.3%
AA.................... 3,653 25.0
A..................... 2,357 16.1
BBB................... 3,868 26.5
BB++.................. 313 2.1
------- -----
$14,606 100.0%
======= =====

13
<PAGE>

The following table summarizes, by maturity, the fixed maturities of the Company
as of December 31, 1998

CARRYING PERCENT OF
AMOUNT TOTAL
------ -----
(DOLLARS IN THOUSANDS)
Matures In:
One year or less............................. $0 0%
One year to five years....................... 423 2.9
Five years to 10 years....................... 4,693 32.1
More than 10 years........................... 9,489 65.0
------- -----
Total fixed maturities................... $14,606 100.0%
======= =====

At December 31, 1998 , the average maturity of the fixed maturities portfolio
was 16 years.

COMPETITION

The Company operates in a highly competitive market and faces
competition from both national regional insurance companies, many of whom are
larger and have greater financial and other resources than the Company, have
favorable A.M. Best ratings and offer more diversified insurance coverage. The
Company's competitors include other 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. The Company may also face
competition from new or temporary entrants in its niche markets. In some cases,
such entrants may, because of inexperience, desire for new business or other
reasons, price their insurance below that of the Company. Although the Company's
pricing is inevitably influenced to some degree by that of its competitors,
management of the Company believes that it is generally not in the Company's
best interest to compete solely on price, choosing instead to compete on the
basis of underwriting criteria, its distribution network and superior service to
its agents and insureds. The Company competes with respect to automobile
insurance in Florida with more than 100 companies which underwrite personal
automobile insurance. Companies of comparable or smaller size which compete with
the Company in the nonstandard automobile insurance industry include Fortune
Insurance Company, U.S. Security Insurance Company, United Automobile Insurance
Company, Direct General Insurance Company and Security National, as well as
major insurers such as Progressive Casualty Insurance Company. Competition could
have a material adverse effect on the Company's business, results of operations
and financial condition.

REGULATION

GENERAL

The Company is subject to the laws and regulations in Florida and will
be subject to the laws and regulations of any other states in which it seeks to
conduct business in the future. The regulations cover all aspects of its
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, maximum amount of interest
allowable for title loans and a variety of other financial and non-financial
components of the Company's business.

In connection with the Company obtaining approval from the Florida
Department of Insurance to underwrite mobile home insurance, the Company entered
into the Consent Order with the Florida Department of Insurance which limits the
amount of premiums it may underwrite. Consent orders are

14
<PAGE>

normally entered into by an insurance company with the Florida Department of
Insurance when an insurance company desires to underwrite a new product. The
following addresses the statutory accounts and amounts related to the Company's
insurance subsidiary Federated National. In 1998, Federated National was only
permitted to underwrite $21.0 million in gross premiums written and $14.0
million in total net premiums written. In 1999, Federated National is limited to
$24.0 million and $15.0 million, respectively. Federated National also is
required to maintain a minimum capital surplus to support its underwriting
program. In 1998 and 1999, Federated National is required to have capital
surplus of $4.7 million and $5.9 million, respectively. The premium limits and
capital surplus requirements impact Federated National's potential growth.
Federated National's ability to exceed these requirements will be subject to the
prior approval of the Florida Department of Insurance. The Florida Department of
Insurance has indicated in writing its willingness to modify the Consent Order
and increase Federated National's underwriting authority. At December 31, 1998,
Federated National's capital and surplus was $7.3 million. Accordingly, the
Company believes it will be able to substantially increase the amount of
premiums Federated National may underwrite. The Company is currently negotiating
with the Florida Department of Insurance. However, there can be no assurance
that the Company will obtain the prior approval of the Florida Department of
Insurance to exceed the underwriting limitations or that it will not be subject
to other regulatory limits on the amount of premiums Federated National may
underwrite. The failure of the Company to comply with certain provisions of
applicable insurance laws and regulations could have a material adverse effect
on the Company's 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 the operations of the Company's,
ability to expand its operations. The Company, however, is unaware of any
consumer initiatives which could have a material adverse effect on the Company's
business, results of operations or financial condition.

Florida has recently adopted laws regarding personal injury protection.
The Company believes that these recently adopted laws will not have a material
adverse effect on the Company's 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. The Company is permitted to file rates for nonstandard
policies which are usually higher than those charged for standard risks,
reflecting the higher probability of loss. Florida and several states have
recently adopted laws or their legislatures are considering proposed laws 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 private passenger automobile insurance.

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 its officers and directors, rates, forms and other
financial and non-financial aspects of the Company. The regulatory authorities
may not allow entry into a new market by withholding approval or not granting a
license which, in turn, would have a material adverse effect on the Company's
ability to expand its operations.

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, 1995. No material deficiencies were
found during this regulatory examination.

15
<PAGE>

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, 1998, a certificate of deposit in the amount of $250,000, was on
deposit with the State of Florida.

INSURANCE HOLDING COMPANY REGULATION

The Company is subject to laws governing insurance holding companies in
Florida where Federated National is domiciled. These laws, among other things,
(i) require the Company to file periodic information with the Florida Department
of Insurance, including information concerning its capital structure, ownership,
financial condition and general business operations, (ii) regulate certain
transactions between the Company and its affiliates, including the amount of
dividends and other distributions and the terms of surplus notes and (iii)
restrict the ability of any one person to acquire certain levels of the
Company's voting securities without prior regulatory approval. Any purchaser of
5% or more of the outstanding shares of Common Stock of the Company will be
presumed to have acquired control of Federated National unless the Florida
Insurance Commissioner, upon application, has determined otherwise.

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 Department of Insurance if
the dividend or distribution would exceed the larger of (i) the lesser of (a)
10.0% of 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 Department of Insurance (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 policyholder
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 department 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 115.0% 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 Department of
Insurance or (ii) 30 days after the Florida Department of Insurance has received
notice of such dividend or distribution and has not disapproved it within such
time.

Under these laws, Federated National is not permitted to pay dividends
to the Company in 1998 without prior regulatory approval. Although the Company
believes that amounts required for it to meet its financial and operating
obligations will be available, there can be no assurance in this regard.
Further, there can be no assurance that, if requested, the Florida Department of
Insurance will allow any dividends to be paid by Federated National 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.

16
<PAGE>

While the non-insurance company subsidiaries are not subject directly
to the dividend and other distribution limitations, insurance holding company
regulations govern the amount which a subsidiary 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 NAIC
enacted a model law (the "Model Law") to implement its risk-based capital
requirements for insurance companies. The Model Law became effective with
respect to property and casualty insurance companies as of year-end 1994. The
requirements are designed to assess capital adequacy and to raise the level of
protection that statutory surplus provides for policyholders. The Model Law
measures 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
(iii) other business risks from investments. Insurers having less statutory
surplus than required by the Model Law will be subject to varying degrees of
regulatory action, depending on the level of capital inadequacy. The Model Law
establishes various levels of regulatory action. Based upon the 1998 statutory
financial statements for Federated National, the Company's insurance subsidiary,
Federated National's statutory surplus exceeds all regulatory action levels
established by the NAIC. The Florida Department of Insurance could require
Federated National to cease operations in the event Federated National fails to
maintain the required statutory capital.

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 Model Law, 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 regulators to rehabilitate or liquidate the
insurer if statutory surplus falls below 70.0% of the ACL amount. Federated
National's ratio of statutory surplus to its ACL, as calculated under the Model
Law, was 517.7% at December 31, 1998 and 261.3% at December 31, 1997. Regulatory
action is triggered if surplus falls below 200.0% of the ACL amount.

The NAIC has also developed IRIS ratios to assist state insurance
departments in identifying companies which may be developing performance or
solvency problems, as signaled by significant changes in the companies'
operations. Such changes may not necessarily result from any problems with an
insurance company, but may merely indicate changes in certain ratios outside the
ranges defined as normal by the NAIC. When an insurance company has four or more
ratios falling outside "usual ranges", state regulators may investigate to
determine the reasons for the variance and whether corrective action is
warranted. As of December 31, 1998, Federated National was outside of only one
NAIC usual range with respect to its IRIS tests. The failed ratio was ratio
number 6, which indicated a change in surplus, caused mainly by the capital
infusion by the Company in the amount of $2,000,000, relating to the Initial
Public Offering of November 1998.

The Company's premium financing program is also subject to certain laws
governing the operation of premium finance companies. These laws pertain to such
matters as books and records that must be kept, forms, licensing, fees and
charges. For example, in Florida, the maximum late payment fee Federated Premium
may charge is the greater of $10 per month or 5% of the amount of the overdue
payment.

17
<PAGE>

UNDERWRITING AND MARKETING RESTRICTIONS

During the past several years, various regulatory and legislative
bodies have adopted or proposed new laws or regulations to deal with the
cyclical nature of the insurance industry, catastrophic events and insurance
capacity and pricing. These regulations include (i) the creation of "market
assistance plans" under which insurers are induced to provide certain coverages,
(ii) restrictions on the ability of insurers to rescind or otherwise cancel
certain policies in mid-term, (iii) advance notice requirements or limitations
imposed for certain policy non-renewals and (iv) limitations upon or decreases
in rates permitted to be charged.

LEGISLATION

From time to time, new regulations and legislation are proposed to
limit damage awards, to control plaintiffs' counsel fees, to bring the industry
under regulation by the Federal government, to control premiums, policy
terminations and other policy terms and to impose new taxes and assessments. It
is not possible to predict whether, in what form or in what jurisdictions, any
of these proposals might be adopted, or the effect, if any, on the Company.

INDUSTRY RATINGS SERVICES

Federated National does not qualify for a letter rating by A.M. Best
because of insufficient operating history. Typically, A.M. Best requires a
company to have a five-year operating history before issuing ratings. Such
period may be extended by management. Federated National expects to receive an
A.M. Best letter rating in 1999. Although Federated National has not yet
received a letter rating from A.M. Best, A.M. Best has issued a FPR of "3 out of
9 (below average)" to Federated National. An FPR reflects A.M. Best's opinion of
the financial strength and operating performance of property and casualty
insurance companies on which it reports, that have not been assigned a letter
rating due to, among other factors, insufficient operating history. A.M. Best's
ratings are based upon factors of concern to agents, reinsurers and
policyholders are not primarily directed toward the protection of investors.
Federated National is rated "BBB" (Adequate and Secure) by Standard and Poor's
Corporation and is rated "A" (Strong) by Demotech, Inc.

EMPLOYEES

As of December 31, 1998, the Company and its subsidiaries had 192
employees, including three executive officers. The Company is not a party to any
collective bargaining agreement and has not experienced work stoppages or
strikes as a result of labor disputes. The Company considers relations with its
employees to be satisfactory.

18
<PAGE>

GLOSSARY OF SELECTED TERMS

CEDE To transfer to an insurer or
reinsurer all or part of the
insurance written by an insurance
entity.

CEDING COMMISSION A payment by a reinsurer to the
ceding company, generally on a
proportional basis, to compensate
the ceding company for its policy
acquisition costs.

EXPENSE RATIO Under SAP, the ratio of underwriting
expenses to net written premiums. On
a GAAP basis, the ratio of
underwriting expenses to net
premiums earned.

GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES ("GAAP") Accounting practices and principles,
as defined principally by the
American Institute of Certified
Public Accountants, the Financial
Accounting Standards Board, and the
Commission. GAAP is the method of
accounting typically used by the
Company for reporting to persons or
entities other than insurance
regulatory authorities.

GROSS PREMIUMS WRITTEN The total of premiums received or to
be received for insurance written by
an insurer during a specific period
of time without any reduction for
reinsurance ceded.

HARD MARKET The portion of the market cycle of
the property and casualty insurance
industry characterized by
constricted industry capital and
underwriting capacity, increasing
premium rates and, typically,
enhanced underwriting performance.

INCURRED BUT NOT REPORTED
LOSSES ("IBNR") The estimated liability of an
insurer, at a given point in time,
with respect to losses that have
been incurred but not yet reported
to the insurer, and for potential
future developments on reported
claims.

INSURANCE REGULATORY INFORMATION
SYSTEM ("IRIS") A system of ratio analysis developed
by the NAIC primarily intended to
assist state insurance departments
in executing their statutory
mandates to oversee the financial
condition of insurance companies.

LOSS ADJUSTMENT EXPENSE ("LAE") The expenses of investigating and
settling claims, including legal
fees, outside adjustment expenses
and other general expenses of
administering the claims adjustment
process.

LOSS RATIO For SAP and GAAP, net losses and LAE
incurred, divided by net premiums
earned, expressed as a percentage.

LOSS RESERVES The estimated liability of an
insurer, at a given point in time,
with respect to unpaid incurred
losses, including losses which are
IBNR and related LAE.

19
<PAGE>

LOSSES INCURRED The total of all policy losses
sustained by an insurance company
during a period, whether paid or
unpaid. Incurred losses include a
provision for claims that have
occurred but have not yet been
reported to the insurer.

MODEL LAW A Model Law to implement RBC
requirements for insurance
companies. The Model Law became
effective with respect to property
and casualty insurance companies as
of year-end 1994.

NATIONAL ASSOCIATION OF INSURANCE
COMMISSIONERS ("NAIC") A voluntary organization of state
insurance officials that promulgates
model laws regulating the insurance
industry, values securities owned by
insurers, develops and modifies
insurer financial reporting,
statements and insurer performance
criteria and performs other services
with respect to the insurance
industry.

NET PREMIUMS EARNED The amount of net premiums written
allocable to the expired period of
an insurance policy or policies.

NET PREMIUMS WRITTEN The gross premiums written during a
specific period of time, less the
portion of such premiums ceded to
(reinsured by) other insurers.

NONSTANDARD Risks that generally have been found
unacceptable by standard lines
insurers for various underwriting
reasons.

REINSURANCE A procedure whereby a primary
insurer transfers (or "cedes") a
portion of its risk to a reinsurer
in consideration of a payment of
premiums by the primary insurer to
the reinsurer for their assumption
of such portion of the risk.
Reinsurance can be effected by a
treaty or individual risk basis.
Reinsurance does not legally
discharge the primary insurer from
its liabilities with respect to its
obligations to the insured.

REINSURERS Insurers (known as the reinsurer or
assuming company) who agree to
indemnify another insurer (known as
the reinsured or ceding company)
against all or part of a loss which
the latter may incur under a policy
or policies it has issued.

RISK-BASED CAPITAL REQUIREMENTS
("RBC") Capital requirements for property
and casualty insurance companies
adopted by the NAIC to assess
minimum capital requirements and to
raise the level of protection that
statutory surplus provides for
policyholder obligations.

SOFT MARKET The portion of the market cycle of
the property and casualty insurance
industry characterized by heightened
premium rate competition among
insurers, increased underwriting
capacity and, typically, depressed
underwriting performance.

STANDARD AUTOMOBILE INSURANCE Personal automobile insurance
written for those individuals
presenting an average risk profile
in terms of loss history, driving
record, type of vehicle driven and
other factors.

20
<PAGE>

STATUTORY ACCOUNTING PRACTICES
("SAP") Those accounting principles and
practices which provide the
framework for the preparation of
financial statements, and the
recording of transactions, in
accordance with the rules and
procedures adopted by regulatory
authorities, generally emphasizing
solvency consideration rather than a
going concern concept of accounting.
The principal differences between
SAP and GAAP are as follows: (a)
SAP, certain assets (non-admitted
assets) are eliminated from the
balance sheet; (b) under SAP, policy
acquisition costs are expensed upon
policy inception, while under GAAP
they are deferred and amortized over
the term of the policies; (c) under
SAP, no provision is made for
deferred income taxes; and (d) under
SAP, certain reserves are recognized
which are not recognized under GAAP.

UNDERWRITING The process whereby an underwriter
reviews applications submitted for
insurance coverage and determines
whether it will provide all or part
of the coverage being requested, and
the price of such premiums.
Underwriting also includes an
ongoing review of existing policies
and their pricing.

UNDERWRITING EXPENSE The aggregate of policy acquisition
costs, including that portion of
general and administrative expenses
attributable to underwriting
operations.

UNEARNED PREMIUMS The portion of premiums written
representing unexpired policy terms
as of a certain date.

21
<PAGE>

ITEM 2. PROPERTIES

In August 1998, the Company consolidated its executive offices and
administrative operations into a 14,000 square foot facility built to its
specifications in Plantation, Florida. The facility is owned by the Company.
Prior to such consolidation, these operations were based in four locations in
Fort Lauderdale, Florida. See "Item 12. Certain Relationships and Related
Transactions."

The Company's agencies are located in leased locations pursuant to leases
expiring at various times through February 2016. The aggregate annual rental for
the facilities is approximately $658,000. In January 1999 the Company purchased
two of such locations. See "Item 12. Certain Relationships and Related
Transactions."

ITEM 3. LEGAL PROCEEDINGS

The Company is subject to routine legal proceedings in the ordinary course of
business. The Company believes that the ultimate resolution of these lawsuits
will not have a material adverse effect on its business, financial condition or
results of operations. The Company provides for a liability for both the amount
of estimated damages attributable to these lawsuits and the estimated costs of
litigation.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

22
<PAGE>

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS

(A) MARKET INFORMATION

The Company's Common Stock has been listed for trading on the Nasdaq
National Market under the symbol TCHC since November 5, 1998. The high and low
sales prices for the Common Stock during the period from November 5, 1998 to
December 31, 1998 ranged from $6.25 to $7.63 according to information furnished
by the Nasdaq National Market. Such quotations represent inter-dealer prices,
without retail mark-up, mark-down or commission and may not be necessarily
represent actual transactions.

(B) HOLDERS

As of March 29, 1999, there were approximately 35 holders of record of
the Company's Common Stock. The Company believes that the number of beneficial
owners of its Common Stock is in excess of 1,100.

The Company has not paid dividends on its Common Stock and anticipates
that for the foreseable future all earnings, if any, will be retained for the
operation and expansion of the Company's business. Moreover, the ability of the
Company to pay dividends if and when its board of directors determines to do so
may be restricted by regulatory limits on the amount of dividends which
Federated National is permitted to pay to the Company.

(D) USE OF PROCEEDS

On November 5, 1998, the Commission declared effective the Company's
Registration Statement on Form SB-2 (File No. 333-63623). The IPO registered
pursuant to the Registration Statement also commenced on November 5, 1998. The
IPO terminated after the sale of 1,250,000 shares of the Company's Common Stock
for $7.50 per share. The managing underwriter for the IPO was Gilford Securities
Incorporated.

The Company incurred expenses of $1.5 million in connection with the
IPO. These expenses represented direct payments to others and not direct or
indirect payments to directors or executive officers of the Company or to
persons owning more than 10% of any class of securities of the Company. Net
proceeds from the IPO were $7.9 million and have been used for a contribution to
Federated National's capital ($2.0 million), repayment of indebtedness under the
Credit Facility ($1.0 million) and to finance acquisitions ($1.7 million). The
balance of net proceeds have been and are being used for working capital and
general corporate purposes. None of the payments from the use of proceeds were
made to directors or executive officers of the Company or to persons owning more
than 10% of any class of securities of the Company.

23
<PAGE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The Company, through its subsidiaries, is engaged in the insurance
underwriting, distribution and claims business. Federated National, the
Company's insurance subsidiary, generates revenues from the collection and
investment of premiums. The Company's agency operations generate income from
policy fees, commissions, premium financing referral fees, auto tag agency fees
and the marketing of ancillary services. Federated Premium generates revenue
from premium financing provided to Company and third party insureds. Assurance
MGA, the Company's managing general agent, generates revenue through policy fee
income and other administrative fees from the marketing of third parties'
insurance products through the Company's distribution network.

The Company's business, results of operations and financial condition
are subject to fluctuations due to a variety of factors. Abnormally high
severity or frequency of claims in any period could have a material adverse
effect on the Company's business, results of operations and financial condition.
Also, if Federated National's estimated liabilities for unpaid losses and LAE is
less than actual losses and LAE, Federated National will be required to increase
reserves with a corresponding reduction in Federated National's net income in
the period in which the deficiency is identified. The Company operates in a
highly competitive market and faces competition from both national and regional
insurance companies, many of whom are larger and have greater financial and
other resources than the Company, have favorable A.M. Best ratings and offer
more diversified insurance coverage. The Company's competitors include other
companies which market their products through agents, as well as companies which
sell insurance directly to customers.

Large national writers may have certain competitive advantages over
agency writers, including increased name recognition, increased loyalty of their
customer base and reduced acquisition costs. The Company may also face
competition from new or temporary entrants in its niche markets. In some cases,
such entrants may, because of inexperience, desire for new business or other
reasons, price their insurance below that of the Company. Although the Company's
pricing is inevitably influenced to some degree by that of its competitors,
management of the Company believes that it is generally not in the Company's
best interest to compete solely on price, choosing instead to compete on the
basis of underwriting criteria, its distribution network and superior service to
its agents and insureds. The Company competes with respect to automobile
insurance in Florida with more than 100 companies which underwrite personal
automobile insurance.

RESULTS OF OPERATIONS

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

GROSS PREMIUMS WRITTEN. Gross premiums written increased 19.8% to $21.2
million in 1998 from $17.7 million in 1997. The increase was mainly due to an
increase in premium volume by our Company-owned agencies of approximately $3.3
million or 73.3% from the same period in 1997. The remaining increase was due to
an increase in the number of independent agents generating premiums for the
Company. Additionally, during 1998, gross premiums written for the mobile home
lines increased 512.2% from $343,000 in 1997 to $2.1 million in 1998

NET PREMIUMS WRITTEN. Net premiums written increased 12.3% to $14.6
million in 1998 from $13.0 million in 1997. The increase was mainly due to an
increase in premium volume by our Company-owned agencies of approximately $3.3
million or 73.37% from the same period in 1997, in addition to the increase in
mobile home premiums which increased 512.2% from $343,000 in 1997 to $2.1
million in 1998

NET PREMIUMS EARNED. Net premiums earned increased 28.4% to $14.0
million in 1998 from

24
<PAGE>

$10.9 million in 1997. This increase is mainly due to the increase in volume
experienced during 1998.

COMMISSION INCOME. Commission income decreased 16.7% to $2.0 million in
1998 from $2.4 million in 1997. Commission income consists of fees earned by the
Company-owned agencies placing business with third party insurers and third
party premium finance companies. The decrease is partially attributable to a
$300,000 decrease in commissions earned on business placed with third party
finance companies. During 1997, premium financing was placed almost exclusively
with third party companies for which commissions were received, as compared to
1998, where premium financing was placed substantially with Federated Premium
for which no commissions are paid.

FINANCE REVENUES. Finance revenues increased 718.2% to $1.8 million in
1998 from $220,000 in 1997. In order to terminate a premium finance lending
arrangement which was not favorable to the Company's overall growth strategy,
Federated Premium ceased all new premium financing with its customers in July
1996 and subsequently terminated the premium finance lending arrangement with
its lender in early 1997. In September 1997, a new premium finance lending
arrangement was established and the Company recommenced its premium financing
activities. In addition, during 1998 the Company began offering auto title loans
which generated $217,000in revenue for the year.

INVESTMENT INCOME. Investment income consists of net investment income
and net realized investment gains (losses). Investment income increased 40% to
$1.4 million in 1998 from $1.0 million in 1997. The Company experienced realized
gains of $442 in 1998 compared to realized losses of ($19) in 1997 and net
investment income of $984 in 1998 compared to $1.0 in 1997.

OTHER INCOME. Other income increased 16.7% to $1.4 million in 1998 from
$1.2 million in 1997, due to the expansion of the agency network and the
increase in the business they generate. Other income is comprised mainly of the
managing general agent's policy fee income on all new and renewal insurance
policies and revenue on auto tag products. Policy fee income increased 18.5% to
$972,000 in 1998 from $820,000 in 1997. In addition, auto tag income increased
39.4% to $386,000 in 1998 from $277,000 in 1997.

LOSSES AND LAE. The Company's Loss Ratio, as determined in accordance
with GAAP, for 1998 was 65.4% compared with 67.9% in 1997. The loss and LAE
increased 23.0% to $9.1 million in 1998 from $7.4 million in 1997 as compared to
net premium earned which increased by 28.4% to $14.0 million in 1998 from $10.9
million in 1997. The lower Loss Ratio in 1998 was primarily attributable to the
hiring of experienced key personnel, improvement on the claims evaluation
process and implementing a strategy to minimize legal expenses. In addition, the
Loss Ratio related to the mobile home product is below that of non-standard
automobile products. The increase in written premiums related to the program
further contributed to the reduction of the Loss Ratio during 1998. Non-standard
automobile insurance rates increased in 1998, further contributing to the
decrease in the Loss Ratio.

OPERATING AND UNDERWRITING EXPENSES. Operating and underwriting
expenses increased 30.3% to $4.3 million in 1998 from $3.3 million in 1997. This
increase is primarily due to the additional expenses incurred during 1998 as it
relates to the increase in premiums written. In addition, operating expenses
increased with the additional agencies, which were acquired during 1998.
Interest expense increased $272,000 from $54,000 in 1997 to $322,000 in 1998.
This is attributable to the new lending arrangement Federated Premium
established in September 1997 and the increase in the amount outstanding.

SALARIES AND WAGES. Salaries and wages increased 29.0% to $4.0 in 1998,
from $3.1 million in 1997. This increase is mainly due to the increase in
business in addition to the increase in Company-owned agencies that were
acquired during 1998.

AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS. Amortization of
deferred policy acquisition costs decreased 48.0% to $179,000 in 1998 from
$344,000 in 1997. Amortization of deferred acquisition costs consists of the
actual amortization of deferred policy acquisition costs less commission earned
on reinsurance ceded. The decrease in the amortization of deferred policy
acquisition costs is attributable to the increase in commissions from
reinsurance ceded and is also the result of the modification of the reinsurance
agreement in April 1997. Also, contributing to the decrease was a settlement
with the reinsurer

25
<PAGE>

on the ceding commissions for the 1995 and 1996 underwriting years, resulting in
additional ceding commissions of $223,000.

INCOME TAX EXPENSES. The Company's estimated effective income tax rate
was 34.7% for 1998 compared with 22.6% for 1997. This increase in the effective
tax rate is primarily the result of the January 1998 agency acquisitions by the
Company, which, prior to their acquisition, were S Corporations for Federal
income tax purposes.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary sources of capital are revenues generated from
operations, the net proceeds of the IPO, investment income and borrowings under
the credit facility. Because the Company is a holding company, it is largely
dependent upon dividends from its subsidiaries for cash flow.

In November 1998, the Company generated net proceeds of approximately
$7.9 million from the IPO in which it sold 1,250,000 shares of Common Stock at a
price of $7.50 per share. The net proceeds of the IPO have been and are being
used for contributions to Federated National's capital, repayment of debt under
the Credit Facility, the financing of acquisitions and working capital and other
general corporate purposes.

Federated Premium is party to the credit facility (the "Credit
Facility"), which is used to fund its operations. Each advance is subject to
availability under a borrowing base calculation based upon a percentage of
eligible accounts receivable, with maximum advances outstanding not to exceed
the maximum credit commitment which is currently $5.0 million, increased from
$4.0 million pursuant to a modification effective January 25, 1999. The
outstanding balance of the Credit Facility as of December 31, 1998 was $2.1
million. The annual interest rate on borrowings under the Credit Facility is
currently the prime rate plus .75%,decreased from the prime rate plus 1.75% due
to the January 1999 modification. The Credit Facility contains various operating
and financial covenants and is collateralized by a first lien and assignment of
all of Federated Premium's finance contracts receivable. Federated Premium was
in compliance with all covenants under the Credit Facility as of December 31,
1998. The Credit Facility expires on September 30, 2000.

For the year ended December 31, 1998, operations generated operating
cash flow deficiency of $2.5 million which was primarily attributable to the
increased volume of premium financing and auto title loans. Operating cash flow
is expected to be positive in both the short-term and reasonably foreseeable
future. In addition, the Company's investment portfolio is highly liquid as it
consists almost entirely of readily marketable securities.

In October 1996, Federated National purchased land in Plantation,
Florida to construct a headquarters building. In August 1998, the building was
completed and the Company consolidated its executive offices and administrative
operations in the building, which consists of approximately 14,000 square feet.
The cost of the project was approximately $1.4 million.

To retain its certificate of authority, the Florida insurance laws and
regulations require that Federated National maintain capital surplus equal to
the greater of 10.0% of its liabilities or the 1998 statutory minimum capital
and surplus requirement of $2.25 million as defined in the Florida Insurance
Code. The Company is also required to adhere to prescribed premium-to-capital
surplus ratios. The Company is in compliance with these requirements.

The maximum amount of dividends, which can be paid by Florida insurance
companies without prior approval of the Florida Commissioner, is subject to
restrictions relating to statutory surplus. The maximum dividend that may be
paid in 1999, by the Company without prior approval, is limited to the lesser of
statutory net income from operations of the preceding calendar year or 10.0% of
statutory unassigned capital surplus as of the preceding December 31. No
dividends were paid during 1998.

26
<PAGE>

The Company is party to the Consent Order which limits the amount of
premiums it can underwrite in 1998 and 1999.

The Company is required to comply with the NAIC's risk-based capital
requirements. The NAIC's risk-based capital requirements are a method of
measuring the amount of capital appropriate for an insurance company to support
its overall business operations in light of its size and risk profile. NAIC's
risk-based capital standards are used by regulators to determine appropriate
regulatory actions relating to insurers who show signs of weak or deteriorating
condition. As of December 31, 1998, based on calculations using the appropriate
NAIC formula, the Company's total adjusted capital is in excess of ratios, which
would require any form of regulatory action. GAAP differs in some respects from
reporting practices prescribed or permitted by the Florida Department of
Insurance. Federated National's statutory capital surplus was approximately $4.1
million as of December 31, 1997 and $7.3 million as of December 31, 1998.
Statutory net income was $591,000 for the year ended December 31, 1997 and $1.4
million for 1998.

IMPACT OF INFLATION AND CHANGING PRICES

The consolidated and combined financial statements and related data
presented herein have been prepared in accordance with GAAP which requires the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation. The primary assets and liabilities of the Company
are monetary in nature. As a result, interest rates have a more significant
impact on the Company's performance than the effects of the general levels of
inflation. Interest rates do not necessarily move in the same direction or with
the same magnitude as the cost of paying losses and LAE.

Insurance premiums are established before the Company knows the amount
of loss and LAE and the extent to which inflation may affect such expenses.
Consequently, the Company attempts to anticipate the future impact of inflation
when establishing rate levels. While the Company attempts to charge adequate
rates, the Company may be limited in raising its premium levels for competitive
and regulatory reasons. Inflation also affects the market value of the Company's
investment portfolio and the investment rate of return. Any future economic
changes which result in prolonged and increasing levels of inflation could cause
increases in the dollar amount of incurred loss and LAE and thereby materially
adversely affect future liability requirements.

YEAR 2000 MATTERS

In 1996, the Company began converting its computer systems to be year
2000 compliant. The Company has evaluated its internal systems, both hardware
and software, facilities, and interactions with business partners in relation to
year 2000 issues. As of December 31, 1998, the Company believes that it had
completed its efforts to bring the systems in compliance. The total cost
incurred during the year ended December 31, 1998 to modify these existing
systems, which include both internal and external costs of programming, coding
and testing, was not material. The Company continually evaluates computer
hardware and software upgrades and, therefore, many of the costs to replace
existing items with year 2000 compliant upgrades are not likely to be
incremental costs to the Company. During 1999, the Company will continue to
contact its business partners (including agents, banks, motor vehicle
departments and rating agencies) to determine the status of their compliance and
to assess the impact of noncompliance on the Company. The Company believes that
it is taking the necessary measures to mitigate issues that may arise relating
to the year 2000. To the extent that any additional issues arise, the Company
will evaluate the impact on its business, results of operations and financial
condition and, if material, make the necessary disclosures and take appropriate
remedial action.

27
<PAGE>

FORWARD-LOOKING STATEMENTS

Except for the historical information contained herein, this "Item 6
Management's Discussion and Analysis of Financial Condition and Results of
Operations", contains forward-looking statements that
involve a number or risks and uncertainties, including the risks described
elsewhere in this Report and detailed from time to time in the Company's filings
with the Commission.

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See pages F-1 through F-30 appearing at the end of this Report.

28
<PAGE>

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS, COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Set forth below is certain information concerning the directors and executive
officers of the Company:

NAME AGE POSITION
- ---- --- --------
Edward J. Lawson (1)(3) 49 President, Chief Executive Officer and Director
Michele V. Lawson 41 Treasurer and Director
Ronald A. Raymond(3) 54 President, Federated National and Director
Patrick D. Doyle(1)(2) 39 Secretary and Director
Joseph A. Epstein (1)(2) 44 Director
Wallace J. Hilliard 66 Director
Carla L. Leonard 37 Director
Bruce Simberg 50 Director

- ----------
(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) Member of Investment Committee

- ----------
EDWARD J. LAWSON co-founded the Company and has served as its President
and Chief Executive Officer since inception. Mr. Lawson has over 16 years
experience in the insurance industry commencing with the founding of the
Company's initial insurance agency in 1983.

MICHELE V. LAWSON co-founded the Company and has served as a director
and executive officer since inception. Mrs. Lawson is currently the Company's
Treasurer. Mrs. Lawson has 16 years experience in the insurance industry
commencing with the founding of the Company's initial insurance agency in 1983
and also holds a property and casualty license in Florida.

RONALD A. RAYMOND has served as a director of the Company and as
Federated National's President since June 1995. From May 1970 to the present
date, Mr. Raymond has been a shareholder and president of Raymond/Patterson
Agency, Inc., a managing general agency, in Ft. Lauderdale, Florida. From May
1992 to the present date, Mr. Raymond has been a shareholder of Gulfstream
Insurance Group, Inc., a multi-lines insurance agency, in Fort Lauderdale,
Florida. Mr. Raymond holds general lines, and life insurance licenses in Florida
and is a past President of the Independent Insurance Agents of Broward County.

PATRICK D. DOYLE has served as Secretary and a director of the Company
since April 1998. Since April 1990, Mr. Doyle has been Chief Financial Officer
of Effjohn North America Limited, a lessor and manager of cruise ships. From May
1982 to April 1990, Mr. Doyle was employed by KPMG Peat Marwick LLP, most
recently as a Senior Manager focusing on the emerging growth business sector.
Mr. Doyle is a certified public accountant. Mr. Doyle is also currently a
director of a subsidiary of Silja OY AB, a Finish Company.

29
<PAGE>

JOSEPH A. EPSTEIN has served as a director of the Company since April
1998. Since January 1998, Mr. Epstein has been the Chief Financial Officer at
the Center of English Studies, Inc., a provider of lauguage services. From
November 1996 to January 1998, Mr. Epstein was a partner at the accounting firm
of Mallah, Furman & Company, P.A. From May 1989 to October 1996, Mr. Epstein was
a shareholder firm of Rachlin, Cohen & Holtz.

WALLACE J. HILLIARD joined the Company's Board of Directors in January
1999. Since May 1997, Mr. Hilliard has been the owner of a private company which
charters business jets. Mr. Hilliard co-founded and was the Chairman of American
Medical Security, Inc., a provider of medical and specialty health and life
insurance products and administrative services, which was sold to United
Wisconsin Services, Inc. in 1996. Prior to that, Mr. Hilliard co-founded
Employers Health Insurance, which was sold to Humana, Inc. in 1995.

CARLA L. LEONARD has served as a director of the Company since its
inception. Since September 1983, Ms. Leonard has also owned and operated
Statewide Insurance and Auto Tag Agency, Inc., an independent insurance agency.

BRUCE SIMBERG has served as a director of the Company since January 28,
1998. Mr. Simberg has been a practicing attorney for the last 22 years, most
recently as managing partner of Conroy, Simberg & Ganon, a law firm in Ft.
Lauderdale, Florida since October 1979.

Edward J. Lawson and Michele V. Lawson are husband and wife. There are
no other family relationships among the Company's directors and executive
officers.

The Company's Articles provide that the Board of Directors is divided
into three classes, and directors serve staggered three-year terms. Joseph A.
Epstein and Carla Leonard will hold office until the annual meeting of Sharehold
ers scheduled to be held in 1999. Bruce Simberg, Wallace J. Hilliard and Patrick
Doyle will hold office until the 2000 annual meeting, and Edward J. Lawson,
Michele V. Lawson and Ronald A. Raymond will hold office until the 2001 annual
meeting.

The Company has agreed to elect one designee of the managing
underwriter of the IPO to the Company's Board of Directors through November
2001. Mr. Hilliard currently serves as such designee.

Officers of the Company serve at the pleasure of the Board of Directors
and until the first meeting of the Board of Directors following the next annual
meeting of the Company's shareholders and until their successors have been
chosen and qualified. The Company is actively seeking to secure the services of
a Chief Financial Officer.

DIRECTOR COMPENSATION

The Company has historically paid fees to all of its directors. Such
fees were paid at the rate of $6,000 per annum during 1996 and 1997 and at rates
ranging from $12,000 to $25,000 per annum since January 1, 1998 through August
31, 1998.

Commencing September 1, 1998, non-employee directors receive a fee of
$500 per meeting of the Board of Directors or committee thereof attended and
received annual grants of stock options under the Company's 1998 Stock Option
Plan (the "1998 Plan") Plan to purchase 3,000 shares of Common Stock. All
directors are also reimbursed for travel and lodging expenses in connection with
their attendance of meetings.

In September 1998, each of Ms. Leonard and Messrs. Doyle, Epstein and
Simberg were granted ten-year options under the 1998 Plan to purchase 3,000
shares of Common Stock at an exercise price of $10.00 per share. Such options
vest over a four-year period commencing September 1999. Mr. Doyle has also been
granted additional options under the 1998 Plan.

30
<PAGE>

INDEMNIFICATION AGREEMENTS

The Company has entered into an indemnification agreement with each of
its directors and executive officers. Each indemnification agreement provides
that the Company will indemnify such person against certain liabilities
(including settlements) and expenses actually and reasonably incurred by him or
her in connection with any threatened or pending legal action, proceeding or
investigation (other than actions brought by or in the right of the Company) to
which he or she is, or is threatened to be, made a party by reason of his her
status as a director, officer or agent of the Company, provided that such
director or executive officer acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interest of the Company
and, with respect to any criminal proceedings, had no reasonable cause to
believe his or her conduct was unlawful. With respect to any action brought by
or in the right of the Company, a director or executive officer will also be
indemnified, to the extent not prohibited by applicable law, against expenses
and amounts paid in settlement, and certain liabilities if so determined by a
court of competent jurisdiction, actually and reasonably incurred by him or her
in connection with such action if he or she acted in good faith and in a manner
he or she reasonably believed to be or not opposed to the best interest of the
Company. The Company has secured $3 million in directors' and officers'
liability insurance.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's executive officers, directors and holders of more than
ten percent of the Company's Common Stock, to file reports of ownership and
changes in ownership with the Commission. Such persons are required to furnish
the Company with copies of all Section 16(a) forms they file.

Based solely on it review of the copies of such forms received by it,
or oral or written representations from certain reporting persons from whom no
Form 5 were required, the Company believes that, within 1998, its executive
officers, directors and greater than ten percent beneficial owners complied with
all such filing requirements.

ITEM 10. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth information concerning compensation for
1998 and 1997 received by the Chief Executive Officer (the "CEO") and for the
other executive officers whose annual salary and bonus exceeded $100,000 for
1998 (collectively, with the CEO, the "Named Executive Officers").

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------ ------------
SECURITIES ALL OTHER
FISCAL SALARY BONUS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR $ $ OPTIONS ($)(1)
- --------------------------- ------ -------- ----- ---------- ------------
<S> <C> <C> <C> <C> <C>
Edward J. Lawson 1998 $129,438 0 $17,014
President and CEO 1997 $290,936 0 3,000

Michele V. Lawson 1998 $104,618 0 $17,744
Treasurer 1997 $192,991 0 2,000

Ronald A. Raymond 1998 $103,320 0 $17,264
President, Federated National 1997 $106,000 0 5,000
- --------------
<FN>
(1) Represents $3,030 in contributions for Mr. Lawson, Mrs. Lawson and Mr.
Raymond to the Company's 401(k) Plan and $49,992 in directors fees for Mr.
Lawson, Mrs. Lawson and Mr. Raymond during 1998

31
<PAGE>

(1).Represents $3,000 in contributions for Mr. Lawson and Mr. Raymond to the
Company's 401(k) Plan and $2,000 in directors fees for Mrs. Lawson and Mr.
Raymond during 1997
</FN>
</TABLE>

32
<PAGE>

EMPLOYMENT AGREEMENTS

Effective September 1, 1998, the Company entered into employment
agreements with each of Edward J. Lawson, the Company's President and Chief
Executive Officer and Michele V. Lawson, the Treasurer. Each employment
agreement, has a "rolling" two-year term, so that at all times the remaining
term of the agreement is two years. The employment agreements provide for annual
salaries initially set at $156,000 for Mr. Lawson, and $78,000 for Mrs. Lawson,
and such bonuses and increases as may be awarded by the Board of Directors.

Each employment agreement provides that the executive officer will
continue to receive his salary for a period of two years after the termination
of employment, if his or her employment is terminated by the Company for any
reason other than death, disability or Cause (as defined in the employment
agreement), or for a period of 24 months after termination of the agreement as a
result of his or her disability and a bonus equal to twice the amount paid to
the executive officer during the 12 months preceding the termination, and the
executive officer's estate will receive a lump sum payment equal to two year's
salary plus a bonus equal to twice the amount paid to the executive officer
during the 12 months preceding the termination by reason of his death. Each
employment agreement also prohibits the executive officer from directly or
indirectly competing with the Company for one year after termination for any
reason except a termination without Cause. Notwithstanding the foregoing, no
assurance can be given that a court of competent jurisdiction will enforce the
provisions restricting these executives from competing with the Company. If a
change of Control (as defined in the employment agreement) occurs, the
employment agreement provides for the continued employment of the executive
officer for a period of two years following the Change of Control. In addition,
following the Change of Control, if the executive officer's employment is
terminated by the Company other than for Cause or by reason of his death or
disability, or by the executive officer for certain specified reasons (such as a
reduction of compensation or a diminution of duties), he or she will receive a
lump sum cash payment equal to 299% of the cash compensation received by him of
her during the 12 calendar months prior to such termination.

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth information concerning individual grants
of stock options made during 1998 to each of the named Executive Officers:

<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
- --------------------------------------------------------------------------------------------------
NUMBER OF
SECURITIES # OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE
OPTIONS TO EMPLOYEES IN OR BASE EXPIRATION
NAME GRANTED (1) FISCAL YEAR PRICE ($/SHARE) DATE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Edward J. Lawson 16,000 310,800 $10.00 11/05/08
Michele V. Lawson 10,000 310,800 $10.00 11/05/08
Ronald A. Raymond 10,000 310,800 $10.00 11/05/08

<FN>
- ----------
(1) Represents options granted under the 1998 Plan. Such options vest over a
four year period commencing one year from the date of grant.
</FN>
</TABLE>

33
<PAGE>

STOCK OPTIONS HELD AT END OF 1998

The following table indicates the total number and value of exercisable
and unexercisable stock options held by each named Executive Officer as of
December 31, 1998. No options were exercised by the Named Executive Officers
during the year ended December 31, 1998.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END (1)
------------------------------ -------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Edward J. Lawson 0 16,000 0 0
Michele V. Lawson 0 10,000 0 0
Ronald A. Raymond 0 10,000 0 0

<FN>
(1) Based on the Nasdaq National Market last sale price for the Company's Common
Stock on December 31, 1998.
</FN>
</TABLE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

The following table sets forth certain information regarding the
beneficial ownership of the Common Stock, as of March 29, 1999, of (i) each of
the shareholders of the Company owning more than 5% of the outstanding shares of
Common Stock, (ii) each director of the Company, (iii) each of the Named
Executive Officers and (iv) all directors and executive officers of the Company
as a group:

<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED(2) PERCENTAGE OF CLASS
- --------------------------------------- --------------------- -------------------
<S> <C> <C>
Edward J. Lawson (3) 1,269,078 37.4
Michele V. Lawson (4) 1,269,078 37.4
Ronald A. Raymond 318,659 9.4
Patrick D. Doyle --
Joseph A. Epstein --
Wallace J. Hilliard 200,380 5.9
Carla L. Leonard 166,740 4.9
Bruce Simberg 33,348 1.0
All directors and executive officers as a group
(eight persons) 1,988,205 58.6

<FN>
- ----------
(1) The Address of each person named in the table is c/o 21st Century Holding
Company, 4161 N.W. 5th Street, Plantation, Florida 33317.
(2) Except as otherwise indicated, the persons named in this table have sole
voting and investment power with respect to all shares of Common Stock
listed, which include shares of Common Stock that such persons have the
right to acquire a beneficial interest within 60 days from the date of this
Report.
(3) Includes 634,539 shares of Common Stock held of record by Mrs. Lawson.
(4) Includes 634,539 shares of Common Stock held of record by Mr. Lawson.
(5) Includes 194,950 shares of Common Stock held by a trust and 4,400 shares of
Common Stock held in an individual retirement account.
</FN>
</TABLE>

34
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

SALES AND REDEMPTION OF COMMON STOCK

In June 1997, the Company redeemed 33,348 shares of Common Stock held
by Carla Leonard for cash consideration of $120,000.

In December 1997, the Company sold 33,348 shares of Common Stock to
Bruce Simberg in a private transaction for cash consideration of $120,000.

CORPORATE REORGANIZATION TRANSACTIONS

In January 1997, the Company acquired all of the issued and outstanding
capital stock of each of Assurance MGA, Federated Premium and Superior for cash
consideration of $65,000, $42,500 and $2,500, respectively. Edward J. Lawson,
Michele V. Lawson and Ronald A. Raymond were principal shareholders of Assurance
MGA, Federated Premium and Superior.

In January 1998, The Company acquired all of the issued and outstanding
capital stock of eight affiliated corporations, principally the Company's
insurance agencies, in exchange for the issuance of 954.124 shares of Common
Stock to eight persons. Included in such shares were 377,481 shares of Common
Stock issued to each of Edward J. Lawson and Michele V. Lawson, who were
principal shareholders of seven of such corporations and 18,526 shares of Common
Stock issued to Ronald a. Raymond, who was the principal shareholder of the
eighth corporation.

In February 1998, the Company acquired all of the issued and
outstanding capital stock of one additional insurance agency in exchange for the
issuance of 27,792 shares of Common Stock to five persons, including 6,948
shares of Common Stock issued to each of Edward J. Lawson and Michele V. Lawson,
who were principal shareholders of the agency.

REAL ESTATE TRANSACTIONS

In October 1997, the Company sold an office property housing one of its
agencies to Edward J. Lawson and Michele V. Lawson for $255,000. In connection
with the sale, the Company lent the Lawsons the sum of $200,000. Such loan is
evidenced by a promissory note which matures in October 2002, bearing interest
at the rate of 8.0% per annum and providing for monthly payments of principal
and interest. The outstanding balance of the promissory note was $163,164 and
$197,278 at December 31, 1998 and December 31, 1997, respectively. The
promissory note is secured by a first mortgage lien on the property. The Company
leases the property from the Lawsons at a rental of $3,000 per month, pursuant
to a lease expiring in May 2001.

The Company also leases a second insurance agency location from Edward
J. Lawson and Michele V. Lawson at a rental of $3,500 per month pursuant to a
lease expiring in May 2001.

In January 1999, the Company purchased the two agency locations from
Mr. and Mrs. Lawson. Consideration for the purchase was cash of $442,000
and satisfaction of the mortgage balance of $163,000.

Prior to the Company's consolidation of its executive offices and
administrative operations, the Company leased a location from Ronald A. Raymond
at a rental of $2,650 per month and two other locations from Edward J. Lawson
and Michele V. Lawson at a rental of $6,500 per month.

The Company believes that its transactions with Edward J. Lawson,
Michele V. Lawson and Ronald A. Raymond are on terms at least as favorable as
those the Company could secure from a non-affiliated third party.

35
<PAGE>

OTHER TRANSACTIONS

Bruce F. Simberg, a director of the Company, is a partner of the Fort
Lauderdale, Florida law firm of Conroy, Simberg & Ganon, which renders legal
services to the Company. In 1997 and 1998 the Company paid legal fees to Conroy,
Simberg & Ganon for services rendered in the amount of $113,929 and $189,444,
respectively.

APPROVAL OF AFFILIATED TRANSACTIONS

The Company has adopted a policy that any transactions between the
Company and its executive officers, directors, principal shareholders or their
affiliates take place on an arms-length basis and require the approval of a
majority of the independent directors of the company. The January 1999
transaction between the Company and Mr. and Mrs. Lawson was so approved.

PART IV

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(A) EXHIBITS

EXHIBIT DESCRIPTION
- ------- -----------
3.1 Form of Registrant's Amended and Restated Articles of Incorporation(1)
3.2 Form of Registrant's Amended and Restated Bylaws(1)
4.1 Specimen of Common Stock Certificate(1)
4.2 Revised Representative's Warrant Agreement including form of
Representative's Warrant(1)
10.1 Form of Stock Option Plan(1)*
10.2 Employment Agreement between the Registrant and Edward J. Lawson(1)*
10.3 Employment Agreement between the Registrant and Michele V. Lawson(1)*
10.4 Form of Indemnification Agreement between the Registrant and its
directors and executive officers(1)*
10.5 Revolving Credit and Term Loan Agreement between FlatIron Funding
Company, LLC and FPF, Inc., as amended(1)
10.6 Sale and Assignment Agreement between Federated Premium and FPF, Inc.,
as amended(1)
10.7 Reinsurance Agreement between Federated National and Transatlantic
Re(1)
21.1 Subsidiaries of the Registrant(1)
27.1 Financial Data Schedule (SEC use only)

- ----------
* Management Compensation Plan or Arrangement
(1) Previously filed exhibit of the number to the Registrant's Registration
Statement on Form SB-2 (File No. 333-63623) and incorporated herein by
reference.

(B) REPORTS ON FORM 8-K
None.

36
<PAGE>

SIGNATURES

Pursuant to the requirements of Section D the Securities Exchange Act
of 1934, as amended, the Registrant has duly caused this report or amendment to
be signed on its behalf by the undersigned, thereto duly authorized.

21ST HOLDING COMPANY

By: /s/ Edward J. Lawson
----------------------------------------
Edward J. Lawson, Chairman of the Board,
President and Chief Executive Officer

Dated: March 30, 1999

Pursuant to the requirements of the Securities Exchange Act of 1934,
this Registration has been signed by the following persons in the capacities and
on the date indicated.

SIGNATURE TITLE DATE
--------- ----- ----
/s/ Edward J. Lawson Chairman of the Board March 30, 1999
- ------------------------- President, Chief Executive
Edward J. Lawson Officer (principal executive,
Financial and accounting officer)

/s/ Michele V. Lawson Vice President-Agency Operations, March 30, 1999
- ------------------------- Treasurer and Director
Michele V. Lawson

/s/ Ronald A. Raymond President, Federated National March 30, 1999
- ------------------------- and Director
Ronald A Raymond

/s/ Patrick D. Doyle Director March 30, 1999
- -------------------------
Patrick D. Doyle

/s/ Joseph A. Epstein Director March 30, 1999
- -------------------------
Joseph A. Epstein

/s/ Wallace J. Hilliard Director March 30, 1999
- -------------------------
Wallace J. Hilliard

/s/ Carla L. Leonard Director March 30, 1999
- -------------------------
Carla L. Leonard

/s/ Bruce Simberg Director March 30, 1999
- -------------------------
Bruce Simberg

37
<PAGE>

21ST CENTURY HOLDING COMPANY

INDEX TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

PAGE
----
Independent Auditor's Report........................................... F-2
Consolidated and Combined Balance Sheets
as of December 31, 1998 and December 31, 1997........................ F-3
Consolidated and Combined Statements of Income
For the years ended December 31, 1998 and 1997....................... F-4
Consolidated and Combined Statements of Changes in
Shareholders' Equity and Comprehensive Income
For the years ended December 31, 1998 and 1997....................... F-5
Consolidated and Combined Statements of Cash Flows
For the years ended December 31, 1998 and 1997....................... F-6
Notes to Consolidated and Combined Financial Statements................ F-7

F-1

<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors
21st Century Holding Company:

We have audited the accompanying consolidated and combined balance sheets of
21st Century Holding Company (the "Company") as of December 31, 1998 and 1997,
and the related consolidated and combined statements of income, changes in
shareholders' equity and comprehensive income, and cash flows for the years
ended December 31, 1998 and 1997. These consolidated and combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated and combined
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated and combined financial statements referred to
above present fairly, in all material respects, the financial position of 21st
Century Holding Company as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for the years ended December 31, 1998 and
1997, in conformity with generally accepted accounting principles.

KPMG LLP

Miami, Florida
March 30, 1999

F-2

<PAGE>

<TABLE>
<CAPTION>
21ST CENTURY HOLDING COMPANY

CONSOLIDATED AND COMBINED BALANCE SHEETS

DECEMBER 31, 1998 AND DECEMBER 31, 1997

DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Available for sale at fair value:
Investments
Fixed maturities ....................................................... $ 14,605,582 13,267,284
Equity securities ...................................................... 2,936,520 2,208,594
Mortgage loan ............................................................ 163,164 283,712
------------ ------------
Total investments .................................................. 17,705,266 15,759,590
------------ ------------
Cash and cash equivalents ................................................ 2,250,061 1,684,450
Finance contracts receivable and auto title loans receivable,
net of allowance for credit losses of $195,883 and $36,980,
respectively ........................................................... 7,093,593 2,226,777
Prepaid reinsurance premiums ............................................. 2,648,098 2,217,664
Due from reinsurers ...................................................... 1,926,736 1,024,512
Deferred acquisition costs ............................................... 89,524 160,934
Deferred income taxes .................................................... 1,085,255 713,819
Property, Plant and Equipment net ........................................ 1,763,254 385,730
Other assets ............................................................. 866,335 535,410
Goodwill ................................................................. 2,748,281 476,006
------------ ------------
Total assets ....................................................... $ 38,176,403 $ 25,184,892
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses ............................... $ 7,603,460 6,726,462
Unearned premiums ........................................................ 8,534,320 7,499,742
Premium deposits ......................................................... 492,422 1,341,556
Revolving credit outstanding ............................................. 2,062,948 1,593,752
Bank overdraft ........................................................... 1,199,941 730,289
Unearned commissions ..................................................... 586,592 645,594
Accounts payable and accrued expenses .................................... 1,932,950 1,040,809
Notes payable ............................................................ 500,000 552,625
Drafts payable to insurance companies .................................... 295,947 269,160
Due to shareholders ...................................................... 0 57,250
------------ ------------
Total liabilities .................................................. 23,208,580 20,457,239
------------ ------------
Shareholders' equity:
Common stock of $0.01 par value. Authorized 25,000,000 shares,
issued and outstanding 3,350,000 and 1,042,121 shares,
respectively ......................................................... 33,500 10,421
Common stock of $1 par value. Authorized, issued and
outstanding 840 shares ............................................... -- 840
Additional paid-in capital ............................................. 12,460,287 4,304,758
Accumulated other comprehensive income ................................. (257,227) 124,677
Retained earnings ...................................................... 2,731,263 286,957
------------ ------------
Total shareholders' equity ......................................... 14,967,823 4,727,653
Commitments and contingencies
Total liabilities and shareholders' equity ......................... $ 38,176,403 25,184,892
============ ============
</TABLE>

See accompanying notes to consolidated and combined financial statements.

F-3

<PAGE>

21ST CENTURY HOLDING COMPANY

CONSOLIDATED AND COMBINED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

DECEMBER 31,
1998 1997
------------ ------------
Revenue:
Gross premiums written ................... $ 21,195,144 $ 17,675,375
Gross premiums ceded ..................... (6,628,270) (4,659,378)
------------ ------------

Net premiums written ................. 14,566,874 13,015,997
Decrease in unearned premiums, net
of prepaid reinsurance premiums .......... (604,143) (2,091,718)
------------ ------------
Net premiums earned .................. 13,962,731 10,924,279
Commission income ......................... 2,036,637 2,357,579
Finance revenue ........................... 1,825,268 220,434
Net investment income ..................... 983,592 1,047,348
Net realized investment gains (losses) .... 441,810 (19,395)
Other income .............................. 1,418,429 1,218,895
------------ ------------
Total revenue ........................ 20,668,467 15,749,140
------------ ------------
Expenses:
Losses and loss adjustment expenses ...... 9,133,332 7,414,151
Operating and underwriting expenses ...... 4,291,613 3,300,713
Salaries and wages ....................... 4,042,226 3,148,558
Amortization of deferred acquisition
costs ................................ 179,057 343,716
Amortization of goodwill ................. 239,619 38,102
------------ ------------
Total expenses ....................... 17,885,847 14,245,240
------------ ------------
Income before provision for income
tax expense ....................... 2,782,620 1,503,900
Provision for income tax expense .......... 965,000 339,369
------------ ------------
Net income ........................... $ 1,817,620 $ 1,164,531
============ ============
Net income per share ................. $ 0.79 $ 0.55
============ ============
Net income per share--
assuming dilution ................. $ 0.79 $ 0.55
============ ============
Pro forma information: (Unaudited)
Historical income before provisions for
income tax expense ..................... -- 1,503,900
Pro forma income tax expense ............. -- 524,043
Pro forma net income ..................... -- 979,857
Pro forma net income per share (basic) ... -- 0.46
Pro forma net income per share (diluted) . -- 0.46
Weighted average shares outstanding
(basic) ................................ -- 2,100,000
Weighted average shares outstanding
(diluted) .............................. -- 2,100,000

See accompanying notes to the consolidated and combined financial statements.

F-4

<PAGE>

<TABLE>
<CAPTION>
21ST CENTURY HOLDING COMPANY

CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

ACCUMULATED
ADDITIONAL OTHER
COMPREHENSIVE COMMON PAID-IN COMPREHENSIVE RETAINED
DESCRIPTION INCOME STOCK CAPITAL INCOME (LOSS) EARNINGS
- ----------- ------------- ---------- ---------- -------------- --------
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1996........... 26,930 4,598,595 (20,721) (795,089)
Capital contributions.................... -- 222,500 -- --
Acquisition and consolidation of
affiliates previously combined......... (15,669) (359,399) -- 375,068
Distributions to affiliated
corporations' shareholders............. -- -- -- (457,553)
Distributions to shareholders............ -- (156,938) -- --
Net income............................... 1,164,531 -- -- -- 1,164,531
Net appreciation on investments,
net of reclassification adjustment
net of tax of......................... 145,398 -- -- 145,398 --
---------
Comprehensive Income..................... 1,309,929
========= ------- ----------- --------- ----------
Balance as of December 31, 1997........... 11,261 4,304,758 124,677 286,957
Acquisition and consolidation of
affiliates previously combined......... 9,739 358,687 -- 626,686
Distributions to shareholders............ -- (100,000) -- --
Net income............................... 1,817,620 -- -- -- 1,817,620
Net depreciation on investments,
net of tax of (381,904) (381,904)
---------
Comprehensive Income 1,435,716
=========
Net Proceeds from relating to IPO......... 12,500 7,896,842
------- ----------- --------- ----------
Balance as of December 31, 1998.......... $33,500 $12,460,287 $(257,227) $2,731,263
======= =========== ========= ==========

TOTAL
STOCKHOLDERS'
DESCRIPTION EQUITY
- ----------- -------------
<S> <C>
Balance as of December 31, 1996........... 3,809,715
Capital contributions.................... 222,500
Acquisition and consolidation of
affiliates previously combined......... --
Distributions to affiliated
corporations' shareholders............. (457,553)
Distributions to shareholders............ (156,938)
Net income............................... 1,164,531
Net appreciation on investments,
net of reclassification adjustment
net of tax of......................... 145,398

Comprehensive Income.....................
-----------
Balance as of December 31, 1997........... 4,727,653
Acquisition and consolidation of
affiliates previously combined......... 995,112
Distributions to shareholders............ (100,000)
Net income............................... 1,817,620
Net depreciation on investments,
net of tax of (381,904)

Comprehensive Income

Net Proceeds from relating to IPO......... 7,909,342
-----------
Balance as of December 31, 1998.......... $14,967,823
===========
</TABLE>

See accompanying notes to consolidated and combined financial statements.

F-5

<PAGE>

<TABLE>
<CAPTION>
21ST CENTURY HOLDING COMPANY

CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

1998 1997
------------ ------------
<S> <C> <C>
Cash flow from operating activities:
Net income ........................................................................ $ 1,817,620 $ 1,164,531
Adjustments to reconcile net income to net cash flow used in
operating activities:
Amortization of investment premiums ............................................. 6,759 1,175
Depreciation and amortization ................................................... 54,089 50,935
Amortization of goodwill ........................................................ 239,619 38,102
Deferred income tax expense ..................................................... (143,226) 105,291
Loss (gain) on sale of investment securities .................................... (441,810) 19,395
Gain on sale of property and equipment .......................................... -- (11,433)
Provision for credit losses ..................................................... 158,903 38,362
Changes in operating assets and liabilities:
Finance contracts receivables and auto title loans receivable .................. (5,025,719) (1,674,974)
Prepaid reinsurance premiums ................................................... (430,434) 707,320
Due from reinsurers ............................................................ (902,224) (484,134)
Deferred acquisition costs ..................................................... 71,410 (338,322)
Other assets ................................................................... (330,925) (319,626)
Unpaid losses and loss adjustment expenses ..................................... 876,998 492,502
Unearned premiums .............................................................. 1,034,578 1,255,201
Premium deposits ............................................................... (849,134) 398,826
Revolving credit outstanding ................................................... 469,196 1,593,752
Unearned commissions ........................................................... (59,001) 37,700
Accounts payable and accrued expenses .......................................... 892,141 770,880
Drafts payable to insurance companies .......................................... 26,787 269,160
------------ ------------
Net cash flow (used in) provided by operating activities ...................... (2,534,373) 4,114,643
------------ ------------
Cash flow from investing activities:
Proceeds from sale of investment securities available for sale .................... 39,841,097 21,088,211
Purchases of investment securities available for sale ............................. (42,087,422) (24,469,367)
Loans from Shareholders ........................................................... 31,000 --
Cost of mortgage loan ............................................................. -- (200,000)
Sale of mortgage loan ............................................................. 120,548 89,421
Acquisition of affiliates previously combined ..................................... -- (80,175)
Purchases of property and equipment ............................................... (1,431,608) (102,073)
Proceeds from sales of property and equipment ..................................... -- 314,874
Acquisitions of Agencies .......................................................... (4,626,325) --
------------ ------------
Net cash flow used in investing activities .................................... (4,626,385) (3,359,109)
------------ ------------
Cash flow from financing activities:
Bank overdraft .................................................................... 469,652 211,477
Capital contribution .............................................................. 0 222,500
Distributions to shareholders ..................................................... (100,000) (457,553)
Net proceeds from IPO ............................................................. 7,909,342 --
Borrowings from bank .............................................................. -- 431,000
Repayment of indebtedness ......................................................... (552,625) (710,146)
------------ ------------
Net cash flow (used in) provided by financing activities ...................... 7,726,369 (302,722)
------------ ------------
Net increase in cash and cash equivalents ..................................... 565,611 452,812
Cash and cash equivalents at beginning of year ...................................... 1,684,450 1,231,638
------------ ------------
Cash and cash equivalents at end of year ............................................ $ 2,250,061 $ 1,684,450
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest ......................................................................... $ 322,313 $ 21,758
============ ============
Income taxes ..................................................................... $ 226,047 $ 26,211
============ ============
Cash received during the year from:
Income taxes ..................................................................... $ -- $ 61,000
============ ============

<FN>
See note 2(a) regarding non-cash financing and investing activities
</FN>
</TABLE>

See accompanying notes to consolidated financial statements

F-6

<PAGE>

21ST CENTURY HOLDING COMPANY

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

(1) ORGANIZATION AND BUSINESS

The accompanying consolidated and combined financial statements include
the accounts of 21st Century Holding Company and its wholly owned subsidiaries
and those entities which are under common control through common ownership
(collectively referred to as the "Company"). All significant intercompany
balances and transactions have been eliminated in consolidation.

The Company is a vertically integrated insurance holding company,
which, through its subsidiaries, controls substantially all aspects of the
insurance underwriting, distribution and claims process. The Company's Federated
National Insurance Company ("Federated National") subsidiary underwrites
nonstandard and standard personal automobile insurance and mobile home property
and casualty insurance in the State of Florida. Through a wholly-owned managing
general agent, Assurance Managing General Agents, Inc. ("Assurance MGA"), the
Company has underwriting and claims authority for third-party insurance
companies. The Company also offers premium financing, auto title loans and other
ancillary services to its customers.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

(A) BASIS OF ACCOUNTING

In January 1997, the Company acquired all of the issued and outstanding
capital stock of Assurance MGA, Federated Premium Finance, Inc. and Superior
Adjusting, Inc., the Company's claims processing subsidiary, for cash
consideration. Principal shareholders of the Company were also principal
shareholders of Assurance MGA, Federated Premium Finance, Inc. and Superior
Adjusting, Inc. The Company has accounted for the acquisitions at historical
cost in a manner similar to that in pooling of interests accounting due to the
entities being under the common control of the owners of 21st Century Holding
Company. The cash paid to individuals of the control group for their shares in
these entities was recorded as a distribution in the statement of changes in
shareholders' equity. In addition, the Company purchased the assets of two
independent agencies for cash consideration of $540,000. These transactions were
accounted for by the purchase method of accounting, generating goodwill
amounting to approximately $533,000.

In January 1998, the Company acquired all of the issued and outstanding
capital stock of eight affiliated corporations, principally the Company's
insurance agencies, in exchange for the issuance of shares of common stock. The
financial statements of these entities have been presented in the combined
statements of the Company based on the common control of ownership interest. The
minority interest relative to the ownership of the affiliated corporations,
whose results are combined prior to their acquisition on January 1, 1998, was
accounted for as a component of equity of the Company. This treatment was
applied because the minority interest was in a deficit position due to
distributions to shareholders in excess of basis and deemed uncollectible from
the unaffiliated shareholders. The acquisition of the minority interest in the
affiliated corporations was accounted for by the purchase method. The aggregate
acquisition price was allocated to the portion of the net identifiable assets
pertaining to the minority interest based on their fair value. The allocation of
the acquisition price to the minority interest's net identifiable assets had an
excess of fair value over the new adjusted book basis creating goodwill of
approximately $1,035,000 and eliminated the minority interest deficit of
approximately $113,000. The acquisition of the net retained deficit of the
affiliated corporations which are presented on a combined basis and the
elimination of their common stock resulted in the net credit to the equity of
the Company of approximately $995,000. The issuance of $100,000 to individuals
of the control group for their shares in these entities, was recorded as a
distribution in the statement of changes in shareholders' equity.

F-7

<PAGE>

21ST CENTURY HOLDING COMPANY

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES--(CONTINUED)

In November 1998, the company consummated an initial public offering
(the "IPO") of 1,250,000 shares of its Common Stock at a price of $7.50 per
share. Proceeds from the IPO, which were approximately $7.9 million net of
underwriting costs and expenses of the offering, have been and are being used
for contributions to Federated National's capital, repayment of debt under the
Company's credit facility (the "Credit Facility"), the financing of
acquisitions, working capital and other general corporate purposes.

In December 1998, the Company consummated an asset acquisition of 18
agencies in exchange for $1.1 million in cash and a $500,000 note payable. The
aggregate acquisition price was allocated to the net identifiable assets based
on their fair value. The allocation of acquisition price to net identifiable
assets had an excess of fair value over the new adjusted book basis creating
goodwill of approximately $1.4 million.

Amounts included herein and referring to 1997 have been restated from
those previously filed in conjuction with the Company's initial public offering
filed on Form SB-2. Amounts restated have been identified in the Company's Form
10-QSB for the quarter ended September 30, 1998.

(B) CASH AND CASH EQUIVALENTS

The Company considers all short-term highly liquid investments with
original maturities of three months or less to be cash equivalents.

All of the Company's investment securities have been classified as
available-for-sale because all of the Company's securities are available to be
sold in response to the Company's liquidity needs, changes in market interest
rates and asset-liability management strategies, among other reasons.
Investments available-for-sale on the balance sheet are stated at fair value.
Unrealized gains and losses are excluded from earnings and reported as a
separate component of shareholders' equity, net of related deferred income
taxes.

A decline in the fair value of an available-for-sale security below
cost that is deemed other than temporary results in a charge to income,
resulting in the establishment of a new cost basis for the security. For the
years ending December 31, 1998 and 1997, the realized losses for declines in
fair value deemed to be other than temporary were $51,570 and $0, respectively
and is reported as a component of net realized investment gains (losses).

Premiums and discounts are amortized or accreted, respectively, over
the life of the related fixed maturity security as an adjustment to yield using
a method that approximates yield to maturity. Dividends and interest income are
recognized when earned. Realized gains and losses are included in earnings and
are derived using the specific-identification method for determining the cost of
securities sold.

(D) PREMIUM REVENUE

Premium revenue on property and casualty insurance is earned on a pro
rata basis over the life of the policies. Unearned premiums represent the
portion of the premium related to the unexpired policy terms.

F-8

<PAGE>

21ST CENTURY HOLDING COMPANY

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES--(CONTINUED)

(E) DEFERRED ACQUISITION COSTS

Deferred acquisition costs represent commissions paid to the Company's
agents at the time of policy issuance (to the extent they are recoverable from
future premium income) net of ceding premium commission earned from reinsurers
and are amortized over the life of the related policy in relation to the amount
of premiums earned. The method followed in computing deferred acquisition costs
limits the amount of such deferred costs to their estimated realizable value,
which gives effect to the premium to be earned, related investment income,
unpaid losses and loss adjustment expenses and certain other costs expected to
be incurred as the premium is earned. There is no indication that these costs
will not be fully recoverable in the near term.

An analysis of deferred acquisition costs follows:

DECEMBER 31
1998 1997
--------- ---------
Balance, beginning of period .. $ 160,934 $(177,389)
Acquisition costs deferred .... 107,647 682,039
Amortized to expense during
the period ............... (179,057) (343,716)
--------- ---------
Balance, end of period .... $ 89,524 $ 160,934
========= =========

(F) PREMIUM DEPOSITS

Premium deposits represent premiums received on policies not yet
written. The Company takes approximately 35 working days to write the policy
from the date the cash and policy application are received.

(G) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

Unpaid losses and loss adjustment expenses are provided for through the
establishment of liabilities in amounts estimated to cover incurred losses and
loss adjustment expenses. Such liabilities are determined based upon the
Company's assessment of claims pending and the development of prior years' loss
liability. These amounts include liabilities based upon individual case
estimates for reported losses and loss adjustment expenses and estimates of such
amounts that are incurred but not reported ("IBNR"). Changes in the estimated
liability are charged or credited to operations as the estimates are revised.
Unpaid losses and loss adjustment expenses are reported net of estimates for
salvage and subrogation recoveries which totaled $329,172 and $341,118, net of
reinsurance, at December 31, 1998 and 1997, respectively.

The estimates of unpaid losses and loss adjustment expenses are subject
to the effect of trends in claims severity and frequency and are continually
reviewed. As part of the process, the Company reviews historical data and
considers various factors, including known and anticipated legal developments,
changes in social attitudes, inflation and economic conditions. As experience
develops and other data becomes available, these estimates are revised, as
required, resulting in increases or decreases to the existing unpaid losses and
loss adjustment expenses. Adjustments are reflected in results of operations in
the period in which they are made and the liabilities may deviate substantially
from prior estimates.

F-9

<PAGE>

21ST CENTURY HOLDING COMPANY

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES--(CONTINUED)

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

The Company does not discount unpaid losses and loss adjustment
expenses for financial statement purposes.

(H) COMMISSION INCOME

Commission income consists of fees earned by the Company-owned agencies
placing business with third party insurers and third party premium finance
companies. Commission income is earned on a pro rata basis over the life of the
policies. Unearned commissions represent the portion of the commissions related
to unexpired policy terms.

(I) FINANCE REVENUE

Interest and service income, resulting from the financing of insurance
premiums and auto title loans, is recognized using a method that approximates
the effective interest method. Late charges are recognized as income when
chargeable.

(J) CREDIT LOSSES

Provisions for credit losses are charged to operations in amounts
sufficient to maintain the allowance for credit losses at a level considered
adequate to cover anticipated losses in the existing finance contracts
receivables and auto title loans receivable.

(K) POLICY FEES

Policy fees represent a $25 non-refundable application fee for
insurance coverage, which is intended to reimburse the Company for the incurred
cost. The fees are recognized as income when charged and are included in other
income.

(L) REINSURANCE

The Company recognizes the income and expense on reinsurance contracts
principally on a pro-rata basis over the life of the policies covered under the
reinsurance agreements. The Company is reinsured under separate reinsurance
agreements for the different lines of business underwritten. Reinsurance
contracts do not relieve the Company from its obligations to policyholders. The
Company continually monitors its reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies. The Company only cedes risks to
reinsurers whom the Company believes to be financially sound. The Company's
reinsurance is primarily ceded to Transatlantic Re, an A++ rated reinsurance
company, on a quota share basis. At December 31, 1998, all reinsurance
recoverables are considered collectible.

F-10

<PAGE>

21ST CENTURY HOLDING COMPANY

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES--(CONTINUED)

(M) INCOME TAXES

Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and operating loss and tax-credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

Pro forma income taxes presented for 1997 represents the total of
historical income taxes that would have been reported had the respective
entities filed income tax returns as a taxable C corporation for each of the
periods presented.

(N) CONTINGENT REINSURANCE COMMISSION

The Company's reinsurance contracts provide ceding commissions for
premiums written which are subject to adjustment. The amount of ceding
commissions is determined by the loss experience for the reinsurance agreement
term. The reinsurer provides commissions on a sliding scale with maximum and
minimum achievable levels. The reinsurer provides the Company with the
provisional commissions. The Company has recognized the commissions based on the
current loss experience for the policy year premiums. This results in
establishing a contingent liability, included in due from reinsurers, for the
excess of provisional commissions retained compared to amounts recognized, which
is subject to variation until the ultimate loss experience is determinable.

(O) CONCENTRATION OF CREDIT RISK

Financial instruments, which potentially expose the Company to
concentrations of credit risk consist primarily of premiums receivable, amounts
due from reinsurers on unpaid losses and auto title loans. The Company has not
experienced significant losses related to premiums receivable from individual
policyholders or groups of policyholders in a particular industry or geographic
area. The Company has not experienced significant losses related to auto title
loans. Management believes no credit risk beyond the amounts provided for
collection losses is inherent in the Company's premiums receivable or auto title
loans. In order to reduce credit risk for amounts due from reinsurers, the
Company seeks to do business with financially sound reinsurance companies and
regularly reviews the financial strength of all reinsurers used.

(P) DUE FROM FLORIDA JOINT UNDERWRITING ASSOCIATION (THE "ASSOCIATION")
PARTICIPATION

The amount recorded as a component of other assets represents the
Company's proportionate share of the net assets of the Association. The
Company's proportionate share of premiums, losses, loss expenses, and other
related items is recorded and presented in their respective accounts in the
accompanying consolidated and combined financial statements.

F-11

<PAGE>

21ST CENTURY HOLDING COMPANY

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES--(CONTINUED)

(Q) ACCOUNTING CHANGES

On January 1, 1998, the Company adopted FAS No. 130, "Reporting
Comprehensive Income." Comprehensive income presents a measure of all changes in
shareholders' equity except for changes resulting from transactions with
shareholders in their capacity as shareholders. The Company's total
comprehensive income presently consists of net unrealized holding gains (losses)
on investments available for sale. The Statement also requires the separate
presentation of the accumulated balance of comprehensive income other than net
earnings in the consolidated and combined balance sheets.

Effective December 31, 1998, the Company adopted FAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." This
statement establishes standards for reporting information about a company's
operating segments and related disclosures about its products, services,
geographic areas of operations and major customers. Adoption of this statement
did not impact the Company's results of operations or financial position.

(R) ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

In June 1998, the Financial Accounting Standards Board issued FAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
requires all derivatives to be recognized at fair value as either assets or
liabilities on the balance sheet. Any gain or loss resulting from changes in
such fair value is required to be recognized in earnings, to the extent the
derivatives are not effective as hedges. This statement is effective for fiscal
years beginning after June 15, 1999, and is effective for interim periods in the
initial year of adoption.

In December 1997, the Accounting Standards Executive Committee issued
Statement of Position 97-3, "Accounting by Insurance and Other Enterprises for
Insurance Related Assessments," which requires entities to recognize liabilities
for insurance related assessments when such assessments are probable and the
amount of the assessment can be reasonably estimated. The Statement of Position
is effective for fiscal years beginning after December 15, 1998.

Adoption of these statements is not expected to have a material impact
on the Company's results of operations or financial position.

(S) USE OF ESTIMATES

The preparation of the consolidated and combined financial statements
in conformity with GAAP requires management to make estimates and assumptions
that affect the reported financial statement balances as well as the disclosure
of contingent assets and liabilities. Actual results could differ materially
from those estimates used.

Similar to other property and casualty insurers, the Company's
liability for unpaid losses and loss adjustment expenses, although supported by
actuarial projections and other data is ultimately based on management's
reasoned expectations of future events. Although considerable variability is
inherent in these estimates, management believes that this liability is
adequate. Estimates are reviewed regularly and adjusted as necessary. Such
adjustments are reflected in current operations. In addition, the realization of
the Company's deferred income tax assets is dependent on generating sufficient
future taxable income. It is reasonably possible that the expectations
associated with these accounts could change in the near term and that the effect
of such changes could be material to the consolidated and combined financial
statements.

F-12

<PAGE>

21ST CENTURY HOLDING COMPANY

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES-(CONTINUED)

(T) NATURE OF OPERATION

The following is a description of the most significant risks facing the
Company and how it mitigates those risks:

(I) LEGAL/REGULATORY RISKS--the risk that changes in the regulatory
environment in which insurer operates will create additional expenses
not anticipated by the insurer in pricing its products. That is,
regulatory initiatives designed to reduce insurer profits, restrict
underwriting practices and risk classifications, mandate rate
reductions and refunds, and new legal theories or insurance company
insolvencies through guaranty fund assessments may create costs for the
insurer beyond those recorded in the financial statements. The Company
attempts to mitigate this risk by monitoring proposed regulatory
legislation and by assessing the impact of new laws. As the Company
writes business only in the state of Florida, it is more exposed to
this risk than some of its more geographically balanced competitors.

(II) CREDIT RISK--the risk that issuers of securities owned by the
Company will default or that other parties, including reinsurers to
whom business is ceded, which owe the Company money, will not pay. The
Company attempts to minimize this risk by adhering to a conservative
investment strategy and by maintaining sound reinsurance agreements
with a number of reinsurers, and by providing for any amounts deemed
uncollectible.

(III) INTEREST RATE RISK--the risk that interest rates will change and
cause a decrease in the value of an insurer's investments. To the
extent that liabilities come due more quickly than assets mature, an
insurer might have to sell assets prior to maturity and potentially
recognize a gain or a loss. The Company attempts to mitigate this risk
by attempting to match the maturity schedule of its assets with the
expected payouts of its liabilities.

(U) FAIR VALUE

The fair value of the Company's investments are estimated based on bid
prices published by financial services or quotations received from securities
dealers and is reflective of the interest rate environment that existed as of
the close of business on December 31, 1998. Changes in interest rates subsequent
to December 31, 1998 may affect the fair value of the Company's investments.
Refer to Note 3(a) for details.

The carrying amounts for the following financial instrument categories
approximate their fair values at December 31, 1998 and December 31, 1997 because
of their short-term nature: cash and cash equivalents, finance contracts
receivable, and auto title loans receivable, due from reinsurers, prepaid
reinsurance premiums, unearned premiums, finance contracts payable and notes
payable.

The fair value of mortgage loans is estimated using the present value
of future cash flows based on the market rate for similar types of loans.
Carrying value approximates market value as rates used are commensurate with
market rate.

F-13

<PAGE>

21ST CENTURY HOLDING COMPANY

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES--(CONTINUED)

(V) GOODWILL

Goodwill, representing the excess of cost over the fair value of assets
acquired and the cost of a purchased book of business, is amortized on a
straight-line basis over seven years. The carrying value of goodwill is
periodically reviewed by the Company based on the expected future undiscounted
operating cash flows of the related item. Based upon its most recent analysis,
the Company believes that no material impairment of goodwill exists at December
31, 1998.

(W) PRO FORMA NET INCOME

Pro forma net income represents the results of operations for the year
ended December 31, 1997, adjusted to reflect a provision for income tax on
historical income before income taxes which gives effect to the change in the
affiliated corporations' income tax status to C corporations.

(X) STOCK OPTION PLAN

The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees". Compensation cost for stock options,
if any, is measured as the excess of the quoted market price of the Company's
stock at the date of grant over the amount an employee must pay to acquire the
stock.

Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation, established accounting and disclosure
requirements using a fair-value-based method of accounting for stock-based
employee compensation plans.

(Y) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation on property, plant and equipment is calculated on a
straight line method over the following estimated useful lives: building and
improvements - 30 years and furniture and fixtures 7 years.

(Z) RECLASSIFICATION

Certain 1997 financial statement amounts have been reclassified to
conform with 1998 presentation.

F-14

<PAGE>

21ST CENTURY HOLDING COMPANY

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

(3) INVESTMENTS

(A) FIXED MATURITIES AND EQUITY SECURITIES

A summary of the amortized cost, estimated fair value, gross unrealized
gains and gross unrealized losses of fixed maturities and equity securities at
December 31, 1998 and December 31, 1997 is as follows:

<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Fixed Maturities:
U.S. treasury securities and obligations
of U.S. government corporations
and agencies ..................................... $ 0 $ 0 $ 0 $ 0
Mortgage-backed securities .......................... 379,494 -- 6,969 372,525
Obligations of states and political
subdivisions ..................................... 10,926,135 111,983 62,118 10,976,000
Corporate securities ................................ 3,264,047 48,163 55,153 3,257,057
----------- ----------- ----------- -----------
$14,569,676 $ 160,146 $ 124,240 $14,605,582
=========== =========== =========== ===========
Equity Securities:
Preferred stocks .................................... $ 1,507,041 $ 44,595 $ 11,590 $ 1,540,046
Common stocks ....................................... 1,882,943 15,142 501,611 1,396,474
----------- ----------- ----------- -----------
$ 3,389,984 $ 59,737 $ 513,201 $ 2,936,520
=========== =========== =========== ===========
</TABLE>

F-15

<PAGE>

21ST CENTURY HOLDING COMPANY

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

3) INVESTMENTS (CONTINUED)

(A) FIXED MATURITIES AND EQUITY SECURITIES

<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Fixed Maturities:
U.S. treasury securities and obligations
of U.S. government corporations
and agencies .................................... $ 7,291,936 $ 105,335 $ 3,135 $ 7,394,136
Mortgage-backed securities ......................... 519,439 -- 3,473 515,966
Obligations of states and political
subdivisions .................................... 4,422,736 109,601 -- 4,532,337
Corporate securities ............................... 804,420 21,029 604 824,845
----------- ----------- ----------- -----------
$13,038,531 $ 235,965 $ 7,212 $13,267,284
=========== =========== =========== ===========
Equity Securities:
Preferred stocks ................................... $ 1,089,268 $ 10,613 $ 2,749 $ 1,097,132
Common stocks ...................................... 1,159,826 3,706 52,070 1,111,462
----------- ----------- ----------- -----------
$ 2,249,094 $ 14,319 $ 54,819 $ 2,208,594
=========== =========== =========== ===========
</TABLE>

A summary of fixed maturities available for sale at December 31, 1998
and December 31, 1997 are shown below by contractual or expected maturity
periods. Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.

<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less ............................... $ 0 $ 0 $ 275,850 $ 275,358
Due after one year through
five years ........................................... 400,403 423,402 2,200,570 2,229,280
Due after five years through ten
years ................................................ 4,688,377 4,693,108 5,491,936 5,592,622
Due after ten years ................................... 9,480,896 9,489,072 5,070,175 5,170,024
----------- ----------- ----------- -----------
$14,569,676 $14,605,582 $13,038,531 $13,267,284
=========== =========== =========== ===========
</TABLE>

A summary of the sources of net investment income follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
Fixed maturities ............................. $ 878,319 $ 816,904
Equity securities ............................ 94,144 146,942
Cash and cash equivalents .................... 2,886 38,463
Other ........................................ 23,659 63,726
----------- -----------
Total investment income ................... 999,008 1,066,035
Less investment expenses ..................... (15,416) (18,687)
----------- -----------
Net investment income ..................... $ 983,592 $ 1,047,348
=========== ===========
</TABLE>

F-16

<PAGE>

21ST CENTURY HOLDING COMPANY

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

(3) INVESTMENTS--(CONTINUED)

Proceeds from sales of fixed maturities and equity securities for the
years ending December 31, 1998 and 1997 were $39,841,097 and $21,088,211,
respectively.

A summary of realized gains (losses) and increases (decreases) in net unrealized
gains (losses) follows:

YEARS ENDED DECEMBER 31,
1998 1997
--------- ---------
Net realized gains (losses):
Fixed maturities ...................... $ 222,645 $ 18,891
Equity securities ..................... 219,165 (33,798)
Other ................................. -- --
Cash and cash equivalents ............. -- (4,488)
--------- ---------
Total .............................. $ 441,810 $ (19,395)
========= =========
Change in net unrealized gains (losses):
Fixed maturities ...................... $(192,847) $ 203,504
Equity securities ..................... (412,964) 16,144
--------- ---------
Total .............................. $(605,811) $ 219,648
========= =========

(B) MORTGAGE LOANS

The amount represents outstanding balances from related party
transactions. Refer to note 14 for details.

(4) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment at December 31, 1998 and 1997 consist of
the following:

1998 1997
----------- -----------
Land .............................. 155,000 155,000
Building and Improvements ......... 1,218,143 68,885
Furniture and Fixtures ............ 663,488 381,133
----------- -----------
2,036,631 605,018
Accumulated Depreciation .......... (273,377) (219,288)
----------- -----------
$ 1,763,254 $ 385,730
=========== ===========

Total depreciation on property, plant, and equipment was $54,089 and
$50,028 during 1998 and 1997 respectively.

(5) REINSURANCE

The Company reinsures (cedes) a portion of its written premiums on a
quota-share basis to nonaffiliated insurance companies in order to limit its
loss exposure. The Company also maintains coverages to limit losses from large
exposures, which the Company believes are adequate for its current volume. To
the extent that reinsuring companies are unable to meet their obligations
assumed under the reinsurance agreements, the Company remains primarily liable
to its policyholders.

F-17

<PAGE>

21ST CENTURY HOLDING COMPANY

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

(5) REINSURANCE--(CONTINUED)

The impact of reinsurance on the financial statements is as follows:

YEARS ENDED DECEMBER 31,
1998 1997
------------ ------------
Premiums written:
Direct ................................... $ 21,195,144 $ 17,675,375
Ceded .................................... (6,628,270) (4,659,378)
------------ ------------
$ 14,566,874 $ 13,015,997
Premiums earned:
Direct ................................... $ 20,160,566 $ 16,420,172
Ceded .................................... (6,197,835) (5,495,893)
------------ ------------
$ 13,962,731 $ 10,924,279
Losses and loss adjustment expenses incurred:
Direct ................................... $ 12,885,795 $ 11,241,218
Ceded .................................... (3,752,463) (3,827,067)
------------ ------------
$ 9,133,332 $ 7,414,151
============ ============

AS OF DECEMBER 31,
1998 1997
----------- -----------
Unpaid losses and loss adjustment expenses:
Direct ................................. $ 7,603,460 $ 6,726,462
Ceded .................................. (2,237,688) (2,090,998)
----------- -----------
$ 5,365,772 $ 4,635,464
=========== ===========
Unearned premiums:
Direct ................................. $ 8,534,320 $ 7,499,742
Ceded .................................. (2,648,098) (2,217,664)
----------- -----------
$ 5.886,222 $ 5,282,078
=========== ===========

The Company received approximately $2.0 million and $1.4 million in
commissions on premiums ceded during the years ended December 31, 1998 and
December 31, 1997. Had all of the Company's reinsurance agreements been canceled
at December 31, 1998, the Company would have returned a total of approximately
$356,000 in contingent reinsurance commissions to its reinsurers; in turn, its
reinsurers would have returned approximately $2.6 million in unearned premiums
to the Company.

F-18

<PAGE>

21ST CENTURY HOLDING COMPANY

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

(5) REINSURANCE--(CONTINUED)

At December 31, 1998 and December 31, 1997, the Company had an
unsecured aggregate recoverable for losses paid, unpaid losses and loss
adjustment expenses including IBNR and unearned premiums with the following
companies:

<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
Transatlantic Reinsurance Company (A++A.M. Best Rated):
Unearned premiums ....................................... $ 2,218,734 $ 2,119,819
Reinsurance recoverable on loss payments ................ 1,495,035 717,569
Unpaid losses and loss adjustment liability ............. 2,173,174 2,090,998
----------- -----------
5,886,943 4,928,386
Other:
Unearned premium ........................................ 429,364 97,845
----------- -----------
$ 6,316,307 $ 5,026,231
=========== ===========
Amounts due from reinsurers consisted of amounts related to:
Unpaid losses and loss adjustment expense ............... $ 2,237,688 $ 2,090,998
Paid losses and loss adjustment expense ................. 1,514,262 717,569
Reinsurance payable ..................................... (1,469,273) (1,114,520)
Contingent ceded commissions payable..................... (355,941) (669,535)
----------- -----------
$ 1,926,736 $ 1,024,512
=========== ===========
</TABLE>

(6) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

The liability for unpaid losses and loss adjustment expenses is
determined on an individual-case basis for all incidents reported. The liability
also includes amounts for unallocated expenses, anticipated future claim
development and IBNR.

F-19

<PAGE>

21ST CENTURY HOLDING COMPANY

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS-(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

(6) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES--(CONTINUED)

Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows:

DECEMBER 31,
1998 1997
----------- -----------
Balance at January 1 ......................... $ 6,726,462 $ 6,233,962
Less reinsurance recoverables ............... (2,090,998) (1,701,685)
----------- -----------
Net balance at January 1 .................. $ 4,635,464 $ 4,532,277
=========== ===========
Incurred related to:
Current year ................................ $ 9,403,866 $ 7,612,167
Prior years ................................. (270,534) (198,016)
----------- -----------
Total incurred ............................ $ 9,133,332 $ 7,414,151
=========== ===========
Paid related to:
Current year ................................ $ 5,700,515 $ 4,458,527
Prior years ................................. 2,702,509 2,852,437
----------- -----------
Total paid ................................ $ 8,403,024 $ 7,310,964
=========== ===========
Net balance at year end ...................... $ 5,365,772 $ 4,635,464
Plus reinsurance recoverables ............... 2,237,688 2,090,998
----------- -----------
Balance at year end ....................... $ 7,603,460 $ 6,726,462
=========== ===========

Based upon consultations with the Company's independent actuarial
consultants and their statement of opinion on losses and loss adjustment
expenses, the Company believes that the liability for unpaid losses and loss
adjustment expenses is adequate to cover all claims and related expenses which
may arise from incidents reported.

(7) NOTES PAYABLE

The following is a summary of outstanding debt at December 31, 1998 and December
31, 1997:

<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
-------- --------
<S> <C> <C>
Notes payable:
Line of credit, expiration date December 30, 1998, interest only at
1.25% over bank's variable base rate is due monthly (bank's
base rate at December 31, 1997 was 10%). Line is collateralized
by all assets of 21st Century Holding Company .................... $ 0 $400,000
Bank loan, principal and interest due February 1998, interest at
18.00%. Note is collateralized by finance contracts receivables of
Federated Premium Finance, Inc. .................................. 0 152,625
-------- --------
Unsecured note payable in the amount of $500,000 at 6% interest
Due on January 1, 2000 ........................................... 500,000 0
-------- --------
$500,000 $552,625
======== ========
</TABLE>

F-20

<PAGE>

21ST CENTURY HOLDING COMPANY

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

(8) REVOLVING CREDIT OUTSTANDING

On September 24, 1997, the Company, through Federated Premium Finance,
Inc. entered into a revolving loan agreement ("Revolving Agreement") with
Flatiron Funding Company LLC. Under the Revolving Agreement, the Company can
borrow up to the maximum credit commitment of $4.0 million. The amount of an
advance is 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 loan is the prime
rate plus 1.75 percent, which amounted to 9.5% at December 31, 1998. The
Revolving Agreement contains various operating and financial covenants and is
collateralized by a first lien and assignment of all of the Company's assigned
finance contracts receivables. The Revolving Agreement expires on September 30,
2000. Outstanding borrowings under the Revolving Agreement as of December 31,
1998 and 1997 were $2,062,948 and $1,593,752, respectively, and interest expense
for the years ended December 31, 1998 and 1997 totaled $287,175 and $12,702,
respectively. At December 31, 1998 and 1997, the Company was in compliance with
all covenants under the Revolving Agreement. In January 1999, the maximum credit
commitment was increased to $5.0 million and the annual interest rate was
changed to the prime rate plus .75 percent.

(9) INCOME TAXES

A summary of the provision (benefit) for income tax expense for the
years ended December 31, 1998 and 1997 is as follows:

DECEMBER 31,
------------
1998 1997
--------- ---------
Federal:
Current ......................... $ 929,938 $ 195,623
Deferred ........................ (129,410) 99,604
--------- ---------
800,528 295,227
--------- ---------
State:
Current ......................... 178,288 38,454
Deferred ........................ (13,816) 5,688
--------- ---------
164,472 44,142
--------- ---------
$ 965,000 $ 339,369
========= =========

F-21

<PAGE>

21ST CENTURY HOLDING COMPANY

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

(9) INCOME TAXES--(CONTINUED)

The actual income tax expense differs from the "expected" income tax
expense for the years ended December 31, 1998 and 1997 (computed by applying
U.S. federal tax rate of 34 percent to income before provision for income tax
expense) as follows:

DECEMBER 31,
1998 1997
--------- ---------
Computed "expected" tax expense,
at federal rate .............................. $ 946,091 $ 512,111
Effect of S corporation income ................ -- (184,674)
State tax expense ............................. 100,796 32,260
Tax-free interest ............................. (122,583) (40,000)
Goodwill ...................................... 90,169 10,035
Other, net .................................... (49,473) 9,637
--------- ---------
Income tax expense, as reported ............... $ 965,000 $ 339,369
========= =========

Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's net deferred tax assets and liabilities as of
December 31, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Unpaid losses and loss adjustment expenses ........... $ 222,105 $ 191,876
Unearned premiums .................................... 442,997 397,529
Unrealized loss on investments available for sale .... 157,127 --
Allowance for credit losses .......................... 67,734 15,052
Unearned Commissions ................................. 220,735 242,937
Other ................................................ 17,473 --
---------- ----------
Total gross deferred tax assets .................... 1,128,171 847,394
Less valuation allowance ........................... -- --
---------- ----------
Net deferred tax assets ............................ $1,128,171 $ 875,947
---------- ----------
Deferred tax liabilities:
Unrealized gain on investments available for sale .... -- 71,083
Deferred acquisition costs ........................... 33,688 60,834
Depreciation ......................................... 9,228 --
Other................................................. -- 1,658
---------- ----------
Total gross deferred tax liabilities ............... 42,916 133,575
---------- ----------
Net deferred tax asset ............................. $1,085,255 $ 713,819
========== ==========
</TABLE>

In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. At December 31, 1998 and
1997, based upon the level of historical taxable income and projections for
future taxable income over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not that the Company will
realize the benefits of these deductible differences.

F-22

<PAGE>

21ST CENTURY HOLDING COMPANY

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

(10) REGULATORY REQUIREMENTS AND RESTRICTIONS

To retain its certificate of authority, the Florida Insurance Code (the
"Code") requires that Federated National maintain capital and surplus equal to
the greater of 10 percent of its liabilities or the 1998 statutory minimum
capital and surplus requirement of $2,250,000 as defined in the Code. The
Company is also required to adhere to prescribed premium-to-surplus ratios. The
Company is in compliance with these requirements as of December 31, 1998. As of
December 31, 1998, to meet regulatory requirements, the Company had a
certificate of deposit in the amount of $250,000 pledged to the Insurance
Commissioner of the State of Florida (the "Commissioner").

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 Department of Insurance if
the dividend or distribution would exceed the larger of (i) the lesser of (a) 10
percent of capital surplus (b) net income, not including realized capital gains,
plus a two-year carryforward, (ii) 10 percent of capital surplus with dividends
payable constrained to unassigned funds minus 25 percent of unrealized capital
gains of (iii) the lesser of (a) 10 percent of capital surplus or (b) net
investment income plus a three-year carryfoward with dividends payable
constrained to unassigned funds minus 25 percent of unrealized capital gains.
Alternatively, a Florida domestic insurer may pay a dividend or distribution
without the prior written approval of the Florida Department of Insurance (i) if
the dividend is equal to or less than the greater of (a) 10 percent 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
policyholder capital surplus equal to or exceeding 115 percent 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 department 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 percent 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 Department of
Insurance of (ii) 30 days after the Florida Department of Insurance has received
notice of such dividend or distribution and has not disapproved it within such
time. No dividends were declared or paid in 1998.

Under these laws, Federated National is not permitted to pay dividends
to the Company in 1999 without prior regulatory approval. Although the Company
believes that amounts required for it to meet its financial and operating
obligations will be available, there can be no assurance in this regard.
Further, there can be no assurance that, if requested, that the Florida
Department of Insurance will allow any dividends to be paid by Federated
National.

The Company is required to comply with NAIC risk-based capital ("RBC")
requirements. RBC is a method of measuring the amount of capital appropriate for
an insurance company to support its overall business operations in light of its
size and risk profile. NAIC's RBC standards are used by regulators to determine
appropriate regulatory actions relating to insurers who show signs of weak or
deteriorating condition. As of December 31, 1998, based on calculations using
the appropriate NAIC formula, The Company's total adjusted capital is in excess
of ratios, which would require any form of regulatory action.

F-23

<PAGE>

21ST CENTURY HOLDING COMPANY

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS-(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

(10) REGULATORY REQUIREMENTS AND RESTRICTIONS-(CONTINUED)

Pursuant to a consent order issued in conjunction with the Company's
authorization to underwrite mobile home insurance (the "Consent Order"), the
Company's growth is subject to regulatory limits on the amount of premiums it
can underwrite. In 1998, Federated National may only underwrite $21 million in
direct written premiums and $14 million in total net written premiums. In 1999,
Federated National is limited to $24 million and $15 million, respectively.
Federated National also is required to maintain a minimum capital surplus to
support its underwriting program. In 1998 and 1999, Federated National is
required to have capital surplus of $4.7 million and $5.9 million, respectively.
The premium limits and capital surplus requirements impact Federated National's
potential growth. Federated National's ability to exceed these limitations will
be subject to the prior approval of the Florida Department of Insurance. . At
December 31, 1998, Federated National's capital surplus was $7.3 million. . The
Florida Department of Insurance has indicated in writing its willingness to
modify the Consent Order and increase Federated National's underwriting
authority. The Company is currently negotiating with the Department of
Insurance. However, there can be no assurance that the Company will obtain the
approval of the Florida Department of Insurance to exceed the underwriting
limitations or that it will not be subject to other regulatory limits on the
amount of premiums it can underwrite.

Generally accepted accounting principles differ in some respects from
reporting practices prescribed or permitted by the Department of Insurance of
the State of Florida. Federated National's statutory capital and surplus was
$7,281,326 and $4,112,265 as of December 31, 1998 and 1997, respectively. The
Company's statutory net income was $1,390,110 and $591,090 for the year ended
December 31, 1998 and 1997, respectively.

(11) COMMITMENTS AND CONTINGENCIES

The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations, or liquidity.

The Company, as a direct premium writer in the state of Florida, is required to
participate in certain risk pools. Participation in these pools is based on the
Company's written premium by line of business to total premiums written
statewide by all insurers. Participation may impact the Company's financial
position or results of operations.

F-24

<PAGE>

21ST CENTURY HOLDING COMPANY

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS-(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

(12) LEASES

The Company leases office space under various lease agreements with
expirations dates through September 2016. Rental expense associated with
operating leases is charged to expense in the year incurred. Rental expenses for
1998 and 1997 was approximately $539,356 and $392,486, respectively.

At December 31, 1998, the minimum aggregate rental commitments are as follows:

FISCAL YEAR LEASES
---------------------------------
1999 $743,872
2000 709,861
2001 582,463
2002 426,566
2003 311,540
Thereafter 757,416
----------
Total $3,531,718

(13) SEGMENT INFORMATION

The Company and its subsidiaries operate principally in two business
segments consisting of insurance and financing. The insurance segment consist of
underwriting through Federated National, managing general agent through
Assurance MGA, claims processing through Superior Adjusting and marketing and
distribution through Federated Agency Group. The insurance segment sells
primarily nonstandard personal automobile insurance and includes substantially
all aspects of the insurance, distribution and claims process. The financing
segment consists of premium financing through Federated Premium Finance and auto
title loans through Florida State Discount Auto Title Loans. The financing
segment provides premium financing to both Federated National's insureds and to
third-party insureds and short-term auto title loans and is marketed through the
Company's distribution network of Company-owned agencies (Federated Agency
Group) and independent agents.

The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company evaluates its
business segments based on GAAP pretax operating earnings. Corporate overhead
expenses are not allocated to business segments.

Operating segments that are not individually reportable are included in
the "All Other" category, which includes the operations of 21st Century (holding
company).

F-25

<PAGE>

21ST CENTURY HOLDING COMPANY

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS-(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

(13) SEGMENT INFORMATION (CONTINUED)

Information regarding components of operations for the years ended December 31
follows:

1998 1997
------------ ------------
TOTAL REVENUES
Insurance Segment
Earned Premiums 13,962,731 10,924,279
Investment Income 1,451,464 1,027,953
Adjusting Income 909,019 773,959
MGA Fee Income 971,794 819,576
Commission Income 3,122,492 3,111,092
Miscellaneous Income 426,990 329,953
------------ ------------
Total Insurance Revenue 20,844,499 16,986,812
============ ============
Financing Segment:
Premium Finance Income 1,608,145 220,434
Title Loan Interest 217,122 0
Investment Income 9,450 0
Miscellaneous Income 13,525 29,433
------------ ------------
Total Financing Revenues 1,848,242 249,867
============ ============
All Other
Total All Other 535,118 63,057
============ ============
Total Operating Segments 23,227,859 17,299,736
Intercompany Eliminations (2,559,392) (1,550,596)
------------ ------------
Total Revenues $ 20,668,467 $ 15,749,140
============ ============
EARNINGS BEFORE INCOME TAXES
Insurance Segment 2,663,740 1,512,838
Financing Segment 619,461 (14,023)
All Other (497,724) 5,085
------------ ------------
Total Operating Segments 2,803,477 1,503,900
Intercompany Eliminations (2,857) 0
------------ ------------
Total Earnings before Income Taxes $ 2,800,620 $ 1,503,900
============ ============
TOTAL ASSETS
Insurance Segment $ 28,706,376 $ 22,288,678
Finance Segment 7,076,524 2,279,388
All Others 4,523,632 987,799
------------ ------------
Total Operating Segments 40,306,532 25,555,865
Intercompany Eliminations (2,130,129) (370,973)
------------ ------------
TOTAL ASSETS $ 38,176,403 $ 25,184,892
============ ============

F-26

<PAGE>

21ST CENTURY HOLDING COMPANY

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS-(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

(14) RELATED PARTY TRANSACTIONS

In October 1997, the Company sold an office property to a group of
officers and shareholders. The sale price of the property was $255,000, which
generated a profit of approximately $13,000. In connection with the sale, the
Company provided seller-financing in an amount of $200,000. The note bears
interest at 8.00 percent per annum with monthly payments of principal and
interest. The note matures on October 31, 2002. The outstanding principal
balance of the note at December 31, 1998 and December 31, 1997 was $163,164 and
$197,278, respectively.

The Company also leases a second insurance agency location from
principal shareholders at a rental of $3,500 per month pursuant to a lease
expiring in May 2001.

Prior to the Company's consolidation of its executive offices and
administrative operations, the Company leased two locations at a rental of
$9,150 per month from principle shareholders.

The Company believes these arrangements are on terms at least as
favorable as those the Company could secure from a nonaffiliated third party.

One of the Company's directors is a partner at Conroy, Simberg, Ganon a
law firm which handles the Company's claims litigation.

One December 1998, the Company executed a one-year, 7% interest, note
receivable with one of its employees in the amount of $25,000. Principal and
interest is due on January 2000.

(15) STOCK COMPENSATION PLANS

The Company initiated a stock option plan in November 1998 that
provides for the granting of stock options to officer, key employees and
consultants. The objectives of the plan includes attracting and retaining the
best personnel, providing for additional performance incentives, and promoting
the success of the Company by providing employees the opportunity to acquire
common stock. The Company is authorized to grant options up to 350,000 common
shares under the Plan of which 310,800 have been granted. Options outstanding
under the plan have been granted at prices which are either equal to or above
the market value of the stock on the date of grant, vest over a four year
period, and expire ten years after the grant date.

The status of the Company's stock option plans is summarized below as
of December 31, 1998:

WEIGHTED AVERAGE
NUMBER OF SHARES OPTION EXERCISE PRICE
---------------- ---------------------
Outstanding at December 31, 1997 0
Granted 310,800 $ 10
Exercised 0
Canceled 0
------- -------
Outstanding at December 31, 1998 310,800 $ 10
======= =======

F-27

<PAGE>

21ST CENTURY HOLDING COMPANY

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS-(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

(15) STOCK COMPENSATION PLANS (CONTINUED)

WEIGHTED AVERAGE
Options exercisable at: NUMBER OF SHARES OPTION EXERCISE PRICE
---------------- ---------------------
December 31, 1999 77,700 $10
December 31, 2000 77,700 $10
December 31, 2001 77,700 $10
December 31, 2002 77,700 $10
December 31, 2003 77,700 $10
------ ---
310,800 $10

The Company continues to account for stock-based compensation using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," under which no compensation cost for
stock options is recognized for stock option awards granted at or above fair
market value. Had compensation expense for the Company's stock compensation plan
been determined based upon fair values at the grant dates for awards under those
plans in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net earnings and earnings per share would have been
reduced to the pro forma amounts indicated below. Additional stock option awards
are anticipated in future years.

1998
----
Net earnings
As reported $ 1,817,620
Pro forma $ 1,805,443
Earnings per share
As reported $ 0.79
Pro forma $ 0.78

The weighted average fair value of options granted during 1998
estimated on the date of grant using the Black-Scholes option-pricing model was
$1.61. The fair value of 1998 options granted is estimated on the date of grant
using the following assumptions: dividends yield of 0% expected volatility of
50%, risk-free interest rate of 4.4% and an expected life of 10 years.

Summary information about the Company's stock options outstanding at
December 31, 1998:

<TABLE>
<CAPTION>
WEIGHTED
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
RANGE OF AT 12/31/98 CONTRACTUAL AVERAGE AT 12/31/98 AVERAGE
EXERCISE PRICE (IN THOUSANDS) PERIODS IN YEARS EXERCISE PRICE (IN THOUSANDS) EXERCISE PRICE
- -------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$10 310,000 9.9 $10 0 $0
</TABLE>

F-28

<PAGE>

21ST CENTURY HOLDING COMPANY

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS-(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

(16) NET INCOME PER SHARE

Net income per share is computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the periods presented. Options granted in accordance with the
Company's stock option plan are anti dilutive.

A reconciliation of the numerators and denominators of the "income per
share" and "income per share-assuming dilution" computations for income before
cumulative effect of change in accounting method' are presented below:

INCOME SHARE PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
For the year ended December 31, 1998:
Income per share $1,817,620 2,308,333 $ 0.79
---------- ---------- ------
Income per share - basic and
assuming dilution $1,817,620 2,308,333 $ 0.79
========== ========== ======
For the year ended December 31, 1997:
Income per share $1,164,531 2,100,000 $ 0.55
---------- ---------- ------
Income per share - basic and
assuming dilution $1,164,531 2,100,000 $ 0.55
========== ========== ======

The weighted average shares outstanding gives effect to a 1.8-for-one,
1.2-for-one and 926.33-for-one stock splits effected in November 1996, January
1997 and September 1998, respectively; and gives effect to the consolidation of
the Company effected in January 1997 and January 1998 and February 1998. The
Company's Common Stock par value of $.01 per share remained unchanged. All
historical share and per share amounts have been restated to retroactively
reflect the stock splits.

(17) COMPREHENSIVE INCOME

Reclassification adjustments related to the investment securities
included in comprehensive income for the years ended December 31, 1998 and 1997
are as follows:

1998 1997
-------- --------
Unrealized holdings gains (170,510) 200,286
(losses) arising during the year
Reclassification adjustment for
gains/losses included in
net income (441,810) 19,395
-------- --------
(605,811) 219,684
Tax effect 223,907 (74,286)
-------- --------
Net (depreciation) appreciation on investment
securities (381,904) 145,398
======== ========

F-29

<PAGE>

21ST CENTURY HOLDING COMPANY

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS-(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

(18) SUBSEQUENT EVENTS (UNAUDITED)

In January 1999, the Company consummated an asset acquisition of two agencies in
exchange for $125,000 cash and 40,000 shares of the Company's stock.

In January 1999, the Company purchased two office properties from officers,
which have been utilized for agencies' operations. One of the properties had
previously been sold to the officers at the same sales price, resulting in no
gain or loss to the officer. Consideration for both acquisitions was cash of
$442,000 and satisfaction of mortgage loan receivable of $163,000.

F-30

<PAGE>

EXHIBIT INDEX

EXHIBIT DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule

<ARTICLE> 7

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
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