10-Q

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

|X|  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004

OR

|_|  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)  

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ________________ TO ________________ .

Commission file number 0-2500111

21^st Century Holding Company
(Exact name of registrant as specified in its charter)

Florida	65-0248866
(State or Other Jurisdiction of	(IRS Employer
Incorporation or Organization)	Identification No.)

3661 West Oakland Park Boulevard, Suite 300, Lauderdale Lakes, Florida 33317
(Address of principal executive offices) (Zip Code)

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

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such period 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 |_|

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

      Yes |_|  No |X|

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $.01 par value – 3,940,551 outstanding as of August 13, 2004.

1

21^ST CENTURY HOLDING COMPANY

INDEX

PART I: FINANCIAL INFORMATION	PAGE
ITEM 1
FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003	3
Consolidated Statements of Operations for the six months ended June 30, 2004 and 2003	4
Consolidated Cash Flow Statements for the six months ended June 30, 2004 and 2003	5
Notes to Consolidated Financial Statements	6
ITEM 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
ITEM 3
Quantitative and Qualitative Disclosures About Market Risk	28
ITEM 4
Controls and Procedures	28
PART II: OTHER INFORMATION
ITEM 1
Legal Proceedings	29
ITEM 2
Unregistered Sales of Equity Securities and Use of Proceeds	30
ITEM 3
Defaults upon Senior Securities	30
ITEM 4
Submission of Matters to a Vote of Security Holders	30
ITEM 5
Other Information	30
ITEM 6
Exhibits and Reports on Form 8-K	31
Signatures	32

2

PART I: FINANCIAL INFORMATION
ITEM I.FINANCIAL STATEMENTS

21^ST CENTURY HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS

	June 30, 2004			December 31, 2003
	Unaudited			See Note 1
ASSETS
Investments
Fixed maturities, available for sale, at fair value	$	72,152,579		$	43,489,598
Equity securities		6,517,812			3,663,251
Mortgage loans		—			137,571
Total investments		78,670,391			47,290,420
Cash and cash equivalents		2,040,650			6,770,169
Receivable for investments sold		—			2,118,595
Finance contracts, net of allowance for credit
losses of $723,756 in 2004 and $832,231 in 2003		9,145,058			9,891,642
Prepaid reinsurance premiums		1,727,630			7,823,374
Premiums receivable, net of allowance for credit losses of $199,311 and $123,000, respectively		6,997,857			7,328,256
Reinsurance recoverable, net		7,793,362			11,645,468
Deferred policy acquisition costs		6,155,510			1,739,685
Income taxes recoverable		—			824,787
Deferred income taxes		3,837,616			3,030,183
Property, plant and equipment, net		4,165,513			4,153,643
Goodwill, net		1,739,716			1,739,715
Other assets		2,070,808			2,339,656
Total assets	$	124,344,111		$	106,695,593
LIABILITIES AND SHAREHOLDERS’ EQUITY
Unpaid losses and loss adjustment expenses	$	21,185,177		$	24,570,198
Unearned premiums		48,621,880			34,122,663
Premiums deposits		447,561			621,777
Revolving credit outstanding		2,857,693			4,098,786
Income taxes payable		1,119,047			—
Subordinated debt		5,625,000			6,875,000
Accounts payable and accrued expenses		4,266,322			4,360,793
Total liabilities		84,122,680			74,649,217
Commitments and contingencies
Shareholders’ equity:
Common stock, $0.01 par value. Authorized 25,000,000 shares; issued 4,357,027 and
4,088,924 shares, respectively; Outstanding 3,893,061 and 3,625,058, respectively		43,571			40,889
Additional paid-in capital		24,162,527			20,454,917
Accumulated other comprehensive income (deficit)		(1,535,931	)		(324,881	)
Retained earnings		19,321,235			13,643,225
Treasury stock, 463,966 shares and 463,866 shares, at cost, respectively		(1,769,971	)		(1,767,774	)
Total shareholders’ equity		40,221,431			32,046,376
Total liabilities and shareholders’ equity	$	124,344,111		$	106,695,593

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3

21^ST CENTURY HOLDING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

	Three Months Ended						Six Months Ended
	June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003
Revenue:
Gross premiums written	$	31,810,045		$	17,578,594		$	49,627,771		$	34,190,574
Gross premiums ceded		217,036			(5,803,990	)		904,044			(10,202,865	)
Net premiums written		32,027,081			11,774,604			50,531,815			23,987,709
Decrease in prepaid reinsurance premiums		(2,327,592	)		(574,778	)		(6,095,744	)		(2,517,671	)
Increase in unearned premiums		(12,770,311	)		(250,825	)		(14,499,217	)		(64,093	)
Net change in prepaid reinsurance premiums
and unearned premiums		(15,097,903	)		(825,603	)		(20,594,961	)		(2,581,764	)
Net premiums earned		16,929,178			10,949,001			29,936,854			21,405,945
Commission income		801,435			315,478			1,308,869			748,517
Finance revenue		949,164			1,135,203			2,039,984			2,263,029
Managing general agent fees		539,822			621,316			987,180			1,253,863
Net investment income		773,921			350,465			1,302,045			715,670
Net realized investment gains		58,508			1,068,818			180,427			1,419,700
Other income		521,240			504,498			2,390,210			2,000,065
Total revenue		20,573,268			14,944,779			38,145,569			29,806,789
Expenses:
Loss and loss adjustment expenses		7,618,159			7,493,747			14,092,992			14,281,456
Operating and underwriting expenses		3,108,601			2,713,391			6,450,666			5,339,257
Salaries and wages		2,200,806			2,211,484			4,640,330			4,357,819
Interest expense		213,841			54,472			444,922			109,884
Policy acquisition costs, net of amortization		1,682,440			(677,311	)		2,124,168			(1,037,492	)
Total expenses		14,823,847			11,795,783			27,753,078			23,050,924
Income before provision for income tax expense		5,749,421			3,148,996			10,392,491			6,755,865
Provision for income tax expense		2,074,643			1,035,062			3,793,705			2,333,530
Net income	$	3,674,778		$	2,113,934		$	6,598,786		$	4,422,335
Basic net income per share		$0.95			$0.69			$1.73			$1.46
Weighted average number of common shares outstanding		3,863,262			3,063,105			3,812,069			3,034,220
Fully diluted net income per share		$0.91			$0.66			$1.63			$1.41
Weighted average number of common shares outstanding
(assuming dilution)		4,055,944			3,194,747			4,058,732			3,125,479
Dividends declared per share		$0.12			$0.09			$0.24			$0.16

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4

21^ST CENTURY HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

	Six months ended June 30,
	2004			2003
Cash flow from operating activities:
Net income	$	6,598,786		$	4,422,335
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Amortization of investment premium, net		124,962			105,772
Depreciation and amortization of property plant and equipment, net		256,704			8,442
Deferred income tax expense		(807,433	)		434,864
Net realized investment gains		(180,427	)		(1,419,700	)
Common Stock issued for interest on Notes		196,875			—
Provision for credit losses, net		634,736			487,246
Provision for uncollectible premiums receivable		195,845			22,627
Recognition of deferred income from sale of franchises		(110,638	)		—
Changes in operating assets and liabilities:
Premiums receivable		134,554			(61,330	)
Prepaid reinsurance premiums		6,095,744			2,517,671
Due from reinsurers, net		3,852,106			(4,224,903	)
Income taxes recoverable		824,787			—
Policy acquisition costs, net of amortization		(4,415,825	)		(821,321	)
Goodwill		—			(220,362	)
Finance contracts receivable		111,848			1,844,620
Other assets		268,847			108,738
Unpaid losses and loss adjustment expenses		(3,385,021	)		7,143,826
Unearned premiums		14,499,217			64,093
Premium deposits		(174,216	)		321,680
Income taxes payable		1,119,047			(611,953	)
Accounts payable and accrued expenses		(94,471	)		(958,297	)
Net cash provided by operating activities		25,746,027			9,164,048
Cash flow (used in) provided by investing activities:
Proceeds from sale of investment securities available for sale		34,275,107			115,612,596
Purchases of investment securities available for sale		(66,948,234	)		(125,067,838	)
Receivable for investments sold		2,118,595			—
Collection of mortgage loans		137,571			4,537
Purchases of property and equipment		(157,936	)		(262,277	)
Proceeds from sale of assets		—			270,000
Net cash used in investing activities		(30,574,897	)		(9,442,982	)
Cash flow (used in) provided by financing activities:
Exercised stock options		2,263,417			1,272,741
Dividends paid		(920,776	)		(491,106	)
Purchases of treasury stock		(2,197	)		(11,842	)
Revolving credit outstanding		(1,241,093	)		(484,996	)
Net cash provided by financing activities		99,351			284,797
Net (decrease) increase in cash and cash equivalents		(4,729,519	)		5,863
Cash and cash equivalents at beginning of period		6,770,169			4,478,383
Cash and cash equivalents at end of period	$	2,040,650		$	4,484,246
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	113,626		$	109,884
Income taxes	$	2,095,000		$	2,450,000
Non - cash investing and finance activities:
Accrued dividends payable	$	436,229		$	279,527
Retirement of subordinated debt by Common Stock issuance	$	1,250,000		$	—
Notes reveivable, net of deferred gains, received for sale of agencies	$	214,220		$	14,304

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5

21^st Century Holding Company
Notes to Consolidated Financial Statements

(1)   ORGANIZATION AND BUSINESS

     The accompanying unaudited consolidated financial statements of 21^st Century Holding Company (the “Company”) have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. These financial statements do not include all information and notes required by GAAP for a complete financial statement presentation, and should be read in conjunction with the audited consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2003. The December 31, 2003 year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. The financial information furnished reflects all adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. The results of operations are not necessarily indicative of the results of operations that may be achieved in the future.

     We are a vertically integrated insurance holding company, which, through our subsidiaries, control substantially all aspects of the insurance underwriting, distribution and claims process. We underwrite personal automobile insurance, general liability insurance, flood insurance, homeowners’ insurance and mobile home property and casualty insurance in Florida, Georgia and Louisiana through our wholly owned subsidiaries, Federated National Insurance Company (“Federated National”) and American Vehicle Insurance Company (“American Vehicle”). American Vehicle was approved in August 2003 to be a foreign insurer in the State of Georgia on an excess and surplus lines basis. Additionally, during March 2004, American Vehicle was admitted as a foreign insurer in the State of Louisiana to write homeowners’ and general liability insurance.

     During the six months ended June 30, 2004, 23.7%, 61.7%, 1.8% and 12.8% of the policies we underwrote were for personal automobile insurance, homeowners’ property and casualty insurance, mobile home property and casualty insurance, and commercial general liability, respectively. During the year ended December 31, 2003, 67.5%, 23.0%, 2.4% and 7.1% of the policies we underwrote were for personal automobile insurance, homeowners’ property and casualty insurance, mobile home property and casualty insurance and commercial general liability, respectively. We internally process claims made by our own and third party insureds through our wholly owned claims adjusting company, Superior Adjusting, Inc. (“Superior”). We also offer premium financing to our own and third-party insureds through our wholly owned subsidiary, Federated Premium Finance, Inc. (“Federated Premium”).

     We market and distribute our own and third-party insurers’ products and our other services primarily in Central and South Florida, through a network of 24 agencies owned by Federated Agency Group, Inc. (“Federated Agency Group”), a wholly owned subsidiary, 45 franchised agencies, approximately 1500 independent agents and a select number of general agents. Our independent agents and general agents are primarily responsible for the distribution of our homeowner insurance and commercial general liability products. Through our wholly owned subsidiary, FedUSA, Inc. (“FedUSA”), we franchise agencies under the FedUSA name. As of June 30, 2004, franchises were granted for 45 FedUSA agencies, of which 40 were operating and 5 are pending. We intend to focus our future expansion efforts for our agency network on franchised agencies.

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

We offer electronic tax filing services through Express Tax Service, Inc. (“Express Tax”), an 80%-owned subsidiary, as well as franchise opportunities for these services through EXPRESSTAX Franchise Corporation. As of June 30, 2004, there were 235 franchises granted in 18 states. Revenue is generated through franchise sales, collection of royalties on tax preparation fees, incentives from business partners as well as fees from the preparation of income tax returns and income tax refund anticipation loans. In addition, Express Tax offers tax preparation services through approximately 500 licensees nationwide.

6

21^st Century Holding Company
Notes to Consolidated Financial Statements

(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

     (A)      CRITICAL ACCOUNTING POLICIES

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.

     The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with our evaluation of the determination of liability for unpaid losses and loss adjustment expenses. In addition, significant estimates form the basis for our reserves with respect to finance contracts, premiums receivable, deferred income taxes, deferred policy acquisition costs and loss contingencies and the recoverability of goodwill. Various assumptions and other factors underlie the determination of these significant estimates. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, as well as current and expected economic conditions. We periodically re-evaluate these significant factors and make adjustments where facts and circumstances dictate.

     (B)      IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

     In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”), which requires the consolidation of certain entities considered to be variable interest entities (“VIEs”). An entity is considered to be a VIE when it has equity investors who lack the characteristics of having a controlling financial interest, or its capital is insufficient to permit it to finance its activities without additional subordinated financial support. Consolidation of a VIE by an investor is required when it is determined that the investor will absorb a majority of the VIE’s expected losses if they occur, receive a majority of the entity’s expected residual returns if they occur, or both. The adoption of Interpretation No. 46 did not have any impact on our Consolidated Financial Statements.

     In May 2003, the FASB issued Statement of Financial Accounting Standard Number 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and it requires that an issuer classify a financial instrument that is within its scope as a liability because the financial instrument embodies an obligation of the issuer. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective in the first interim period beginning after June 15, 2003. On July 31, 2003, we completed a private placement of our 6% Senior Subordinated Notes (the “Notes”), which were offered and sold to accredited investors as units consisting of one Note with a principal amount of $1,000 and warrants (the “Warrants”) to purchase shares of our Common Stock. These Notes fall within the definition of financial instruments as described in Financial Accounting Standard Number 150 and were originally presented as a liability in conformity with Statement of Financial Accounting Standard Number 150. As such, the adoption of this Statement did not have any impact on our Consolidated Financial Statements.

     (C)      STOCK OPTIONS

     We continue to account for stock-based compensation using the intrinsic value method prescribed by APB Opinion No. 25, under which no compensation cost for stock options is recognized for stock option awards granted to employees at or above fair market value. Had compensation expense for our stock compensation plans been determined based upon fair values at the grant dates for awards under the plan in accordance with SFAS No. 123, our net income and net income per share would have been reduced to the pro forma amounts indicated below.

7

     21^st Century Holding Company
Notes to Consolidated Financial Statements

	For the three months ending June 30,				For the six months ending June 30,
	2004		2003		2004		2003
Net Income as reported	$	3,674,778	$	2,113,934	$	6,598,786	$	4,422,335
Compensation, net of tax effect		329,851		260,560		542,558		260,560
Pro forma net income	$	3,344,927	$	1,853,374	$	6,056,228	$	4,161,775
Net income per share
As reported - Basic	$	0.95	$	0.69	$	1.73	$	1.46
As reported - Diluted	$	0.91	$	0.66	$	1.63	$	1.41
Pro forma - Basic	$	0.87	$	0.61	$	1.59	$	1.37
Pro forma - Diluted	$	0.82	$	0.58	$	1.49	$	1.33

Additional stock option awards are anticipated in future years.

      The weighted average fair value of options granted during the six months ended June 30, 2004, estimated on the date of grant using the Black-Scholes option-pricing model, was $27.01. The weighted average fair value of options granted during 2004 and 2003, estimated on the date of grant using the Black-Scholes option-pricing model, was $10.00 to $14.69 in 2004 and $6.32 to $12.46 in 2003. The fair value of options granted is estimated on the date of grant using the following assumptions:

	June 30, 2004	December 31, 2003
Dividend yield	2.24%	1.96% to 2.10%
Expected volatility	100.98%	105.91% to 108.73%
Risk-free interest rate	3.25% - 3.33%	2.30% to 3.94%
Expected life (in years)	3.44	3.00 to 6.36

(D)      EARNINGS PER SHARE

     Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during each period presented. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents during the period presented; outstanding warrants and stock options are considered common stock equivalents and are included in the calculation using the treasury stock method.

(E)      RECLASSIFICATIONS

      Certain amounts in 2003 financial statements have been reclassified to conform with the 2004 presentation.

(3)      REVOLVING CREDIT OUTSTANDING

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

     The amount of FPF’s advance is subject to availability under a borrowing base calculation, with maximum advances outstanding not to exceed the credit commitment. The annual interest rate on advances under the Revolving Agreement is the prime rate plus additional interest varying from 1.25% to 3.25% based on the prior month’s ratio of contracts receivable related to insurance companies with an A. M. Best rating of B or lower to total contracts receivable. As of June 30, 2004, our rate was 5.75% as compared to our rate as of June 30, 2003 of 6.00%

The Revolving Agreement contains various operating and financial covenants, with which we were in compliance at June 30, 2004 and December 31, 2003. The Revolving Agreement, as amended, expires September 30, 2004 and we have begun to negotiate a similar agreement to replace the expiring agreement. Outstanding borrowings under the Revolving Agreement as of June 30, 2004 and December 31, 2003 were $2.9 million and $4.1 million, respectively. Outstanding borrowings in excess of the $4.0 million commitment totaled $98,786 as of December 31, 2003. The excess amount, permissible by reason of a compensating cash balance of $200,430 for December 31, 2003, was held for the benefit of FPF and is included in other assets. Interest expense on this revolving credit line for the six months ended June 30, 2004 and 2003 totaled approximately $104,000 and $110,000, respectively. For the six months ended June 30, 2004 and 2003 the effective interest rate on this line of credit, based on our average outstanding borrowings under the Revolving Agreement, was 5.97% and 5.68%, respectively.

8

21^st Century Holding Company
Notes to Consolidated Financial Statements

     We also implemented a direct bill program during 2001 for policies underwritten by our carriers. Direct billing is where the insurance company accepts from the insured, as a receivable, a promise to pay the premium, as opposed to requiring the full amount of the policy, either directly from the insured or from a premium finance company.

(4)      COMMITMENTS AND CONTINGENCIES

     We are 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 our consolidated financial position, results of operations, or liquidity.

     In June 2000, a lawsuit was filed against us, our directors and our executive officers seeking compensatory damages in an undisclosed amount on the basis of allegations that our amended registration statement dated November 4, 1998 was inaccurate and misleading concerning the manner in which we recognized ceded insurance commission income, in violation of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The lawsuit was filed in the United States District Court for the Southern District of New York. The plaintiff class purportedly includes purchasers of our Common Stock between November 5, 1998 and August 13, 1999. The Court granted the plaintiffs class status.

     Specifically, the plaintiffs allege that we recognized ceded commission income on a written basis, rather than amortized on a pro rata basis. The plaintiffs allege that this was contrary to the Statement of Financial Accounting Concepts Nos. 1, 2 and 5. We believe, however, that the lawsuit is without merit and we have vigorously defended the action, because we reasonably relied upon outside subject matter experts to make these determinations at the time. We have also since accounted for ceded commission on a pro rata basis and have done so since these matters were brought to our attention in 1998. Nevertheless, we have also continued to actively participate in settlement negotiations with the plaintiffs and have tentatively agreed to settle the case. The parties are currently negotiating the final terms of a Memorandum of Understanding, which will have to be executed by the parties and then approved by the court. We have reserved and charged against fourth quarter 2003 earnings $600,000 for the potential settlement and associated costs.

     As a direct premium writer in the State of Florida, we are required to participate in certain insurer solvency pools under Florida Statutes section 631.57(3)(a) . Participation in these pools is based on our written premium by line of business to total premiums written statewide by all insurers. Participation may result in assessments against us.

     Federated National and American Vehicle are also required to participate in an insurance apportionment plan under Florida Statutes section 627.351 referred to as a Joint Underwriting Association Plan (“JUA Plan”). The JUA Plan provides for the equitable apportionment of any profits realized, or losses and expenses incurred, among participating insurers. In the event of an underwriting deficit incurred by the JUA Plan and the deficit is not recovered through the policyholders in the JUA Plan, such deficit shall be recovered from the companies participating in the JUA Plan in the proportion that the net direct premiums of each such member written during the preceding calendar year bear to the aggregate net direct premiums written in this state by all members of the JUA Plan.

     No assessments have been incurred by either insurance company through the date of issuance of this report pursuant to our participation in the above noted participation pool and JUA plan.

9

21^st Century Holding Company
Notes to Consolidated Financial Statements

(5)      COMPREHENSIVE INCOME

     For the three and six months ended June 30, 2004 and 2003, comprehensive income consisted of the following:

	Three months ended June 30,						Six months ended June 30,
	2004			2003			2004			2003
Net income	$	3,674,778		$	2,113,934		$	6,598,786		$	4,422,335
Change in net unrealized gains on investments available for sale		(2,751,268	)		(373,706	)		(1,941,719	)		159,461
Comprehensive income, before tax		923,510			1,740,228			4,657,067			4,581,796
Income tax benefit (expense) related to items of other comprehensive
income		1,036,371			94,030			730,669			(62,987	)
Comprehensive income	$	1,959,881		$	1,834,258		$	5,387,736		$	4,518,809

(6)      SEGMENT INFORMATION

     We operate principally in two business segments consisting of insurance and financing. The insurance segment consists of underwriting through Federated National and American Vehicle, managing general agent operations through Assurance MGA, claims processing through Superior, and marketing and distribution through Federated Agency Group. The insurance segment sells personal automobile, general liability, homeowner’s and mobile homeowner’s insurance and includes substantially all aspects of the insurance, distribution and claims process. The financing segment consists of premium financing through Federated Premium. The financing segment provides premium financing to our insureds and is marketed through our distribution network of Company-owned agencies and franchised agents.

     The accounting policies of the segments are the same as those described in the summary of significant accounting policies and practices. We evaluate our business segments based on GAAP pretax operating earnings. Corporate overhead expenses are allocated to business segments. Transactions between reportable segments are accounted for at fair value.

     Operating segments that are not individually reportable, based on the extent of the current operations in such segments, are included in the “All Other” category. The “All Other” category currently includes the operations of 21st Century Holding Company, franchise operations and income tax preparation.

10

21^st Century Holding Company
Notes to Consolidated Financial Statements

      Information regarding components of operations for the six months ended June 30, 2004 and 2003 follows:

	Three months ended June 30,						Six months ended June 30,
	2004			2003			2004			2003
Total revenue
Insurance segments	$	20,970,381		$	14,264,666		$	37,416,278		$	29,714,031
Financing segment		727,331			600,427			1,524,192			1,280,241
All other segments		958,794			2,306,362			3,207,113			3,491,122
Total operating segments		22,656,506			17,171,455			42,147,583			34,485,394
Intercompany eliminations		(2,083,239	)		(2,226,676	)		(4,002,014	)		(4,678,605	)
Total revenues	$	20,573,267		$	14,944,779		$	38,145,569		$	29,806,789
Earnings before income taxes
Insurance segments	$	5,624,649		$	2,061,813		$	9,220,756		$	5,183,083
Financing segment		448,840			72,176			586,761			270,849
All other segments		(324,068	)		1,015,007			584,974			1,301,933
Total earnings before income taxes	$	5,749,421		$	3,148,996		$	10,392,491		$	6,755,865
Information regarding total assets as of June 30, 2004 and December 31, 2003 follows:
	June 30, 2004			December 31, 2003
Total assets
Insurance segments	$	113,255,956		$	93,301,125
Financing segment		9,480,319			10,105,548
All other segments		3,031,736			3,602,606
Total operating segments		125,768,011			107,009,279
Intercompany eliminations		(1,423,900	)		(313,686	)
Total assets	$	124,344,111		$	106,695,593

(7)     REINSURANCE AGREEMENTS

     We are not subscribing to quota-share reinsurance for automobile insurance policies issued with an effective date beyond December 31, 2003. The quota-share reinsurance treaties for 2003 automobile insurance policies include loss corridors with varying layers of coverage based on ultimate incurred loss ratio results whereby Federated National and American Vehicle will retain 100% of the losses between incurred loss ratios of 66% and 86%. Despite the loss corridors, substantially all of the insurance risk relating to the reinsured portions of the underlying insurance agreements has been assumed by the reinsurer, wherein the reinsurer’s exposure to loss is essentially the same as ours.

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

11

21^st Century Holding Company
Notes to Consolidated Financial Statements

(8)      STOCK COMPENSATION PLANS

     In 1998, we issued warrants to two employees to purchase a total of 62,500 shares of our common stock at $9.00 per share. The warrants vested immediately and are exercisable until December 2004, at which time if they have not been exercised, they will be canceled. The estimated fair value of these warrants at the date issued was approximately $226,000 using a Black-Scholes option pricing model and assumptions similar to those used for valuing the Company’s stock options as described below. During the six months ended June 30, 2004, all of the 7,800 remaining warrants were exercised.

      We implemented a stock option plan in November 1998 that provides for the granting of stock options to officers, key employees and consultants. The objectives of this plan include attracting and retaining the best personnel, providing for additional performance incentives, and promoting our success by providing employees the opportunity to acquire common stock. Options outstanding under this plan have been granted at prices that 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. Under this plan, we are authorized to grant options to purchase up to 600,000 common shares, and, as of June 30, 2004 and December 31, 2003, we had outstanding exercisable options to purchase 169,938 and 272,353 shares, respectively.

     In 2001, we implemented a franchisee stock option plan that provides for the granting of stock options to individuals purchasing Company-owned agencies that are then converted to franchised agencies. The purpose of the plan is to advance our interests by providing an additional incentive to encourage managers of Company-owned agencies to purchase the agencies and convert them to franchises. Options outstanding under the plan have been granted at prices that are above the market value of the stock on the date of grant, vest over a ten-year period, and expire ten years after the grant date. Under this plan, we are authorized to grant options to purchase up to 689,000 common shares, and as of June 30, 2004 and December 31, 2003, we had outstanding exercisable options to purchase 13,780 and 26,640 shares, respectively.

     In 2002, we implemented the 2002 Option Plan. The purpose of this plan is to advance our interests by providing an additional incentive to attract, retain and motivate highly qualified and competent persons who are key to the Company, including key employees, consultants, independent contractors, officers and directors, upon whose efforts and judgment our success is largely dependent, by authorizing the grant of options to purchase Common Stock to persons who are eligible to participate thereunder, thereby encouraging stock ownership by such persons, all upon and subject to the terms and conditions of the plan. Options outstanding under the plan have been granted at prices that are above the market value of the stock on the date of grant, vest over a five-year period, and expire six years after the grant date. Under this plan, we are authorized to grant options to purchase up to 1,200,000 common shares, and, as of June 30, 2004 and December 31, 2003, we had outstanding exercisable options to purchase 615,800 and 625,400 shares, respectively.

     Activity in the Company’s stock option plans for the period from January 1, 2002 to June 30, 2004 is summarized below:

	1998 Plan					2001 Franchisee Plan					2002 Plan
			Weighted Average					Weighted Average					Weighted Average
	Number of		Option Exercise			Number of		Option Exercise			Number of		Option
	Shares		Price			Shares		Price			Shares		Exercise Price
Outstanding at December 31,
2002	534,338			$	10.00	78,155			$	10.00	727,000			$	13.35
Granted	—			$	10.00	10,000			$	13.75	101,500			$	15.77
Exercised	(250,247	)		$	10.00	(61,515	)		$	10.00	(144,600	)		$	12.85
Cancelled	(11,738	)		$	10.00	—					(58,500	)		$	14.05
Outstanding at December 31,
2003	272,353			$	10.00	26,640			$	11.41	625,400			$	13.80
Granted	—					—					111,500			$	27.01
Exercised	(93,415	)		$	10.00	(12,860	)		$	10.00	(82,200	)		$	13.74
Cancelled	(9,000	)		$	10.00	—					(38,900	)		$	15.96
Outstanding at June 30, 2004	169,938			$	10.00	13,780			$	12.72	615,800			$	16.06

12

21^st Century Holding Company
Notes to Consolidated Financial Statements

Options outstanding as of June 30, 2004 are exercisable as follows:

	1998 Plan				2001 Franchisee Plan				2002 Plan
		Weighted Average				Weighted Average
		Option Exercise			Number of	Option Exercise			Number of	Weighted Average
Options Exercisable at:	Number of Shares	Price			Shares	Price			Shares	Option Exercise Price
June 30, 2004	106,438		$	10.00	13,780		$	10.00	274,084		$	13.35
December 31, 2004	—		$	10.00	—		$	10.00	12,200		$	13.35
December 31, 2005	31,750		$	10.00	—		$	10.00	91,072		$	13.35
December 31, 2006	31,750		$	10.00	—		$	10.00	91,072		$	13.35
December 31, 2007	—				—		$	10.00	91,072		$	13.35
December 31, 2008	—				—		$	10.00	34,900		$	13.35
Thereafter	—				—		$	10.00	21,400		$	13.35
Total options exercisible	169,938				13,780				615,800

     We continue to account for stock-based compensation using the intrinsic value method prescribed by APB Opinion No. 25, under which no compensation cost for stock options is recognized for stock option awards granted to employees at or above fair market value. Had compensation expense for the Company’s stock compensation plans been determined based upon fair values at the grant dates for awards under the plan in accordance with SFAS No. 123, our net income and net income per share would have been reduced to the pro forma amounts indicated below.

	For the three months ending June 30,				For the six months ending June 30,
	2004		2003		2004		2003
Net Income as reported	$	3,674,778	$	2,113,934	$	6,598,786	$	4,422,335
Compensation, net of tax effect		329,851		260,560		542,558		260,560
Pro forma net income	$	3,344,927	$	1,853,374	$	6,056,228	$	4,161,775
Net income per share
As reported - Basic	$	0.95	$	0.69	$	1.73	$	1.46
As reported - Diluted	$	0.91	$	0.66	$	1.63	$	1.41
Pro forma - Basic	$	0.87	$	0.61	$	1.59	$	1.37
Pro forma - Diluted	$	0.82	$	0.58	$	1.49	$	1.33

Additional stock option awards are anticipated in future years.

      The weighted average fair value of options granted during the six months ended June 30, 2004, estimated on the date of grant using the Black-Scholes option-pricing model, was $27.01. The weighted average fair value of options granted during 2004 and 2003, estimated on the date of grant using the Black-Scholes option-pricing model, was $10.00 to $14.69 in 2004 and $6.32 to $12.46 in 2003. The fair value of options granted is estimated on the date of grant using the following assumptions:

	June 30, 2004	December 31, 2003
Dividend yield	2.24%	1.96% to 2.10%
Expected volatility	100.98%	105.91% to 108.73%
Risk-free interest rate	3.25% - 3.33%	2.30% to 3.94%
Expected life (in years)	3.44	3.00 to 6.36

13

21^st Century Holding Company
Notes to Consolidated Financial Statements

Summary information about the Company’s stock options outstanding at June 30, 2004:

				Weighted Average	Weighted
	Range of		Outstanding	Contractual	Average			Exercisable
	Exercise Price		at 06/30/2004	Periods in Years	Exercise Price			at 06/30/2004
1998 Plan		$10.00	169,938	2.47		$	10.00	106,438
2001 Franchise Plan	$	10.00 - $13.75	13,780	3.55		$	12.72	13,780
2002 Plan	$	12.50 - $30.00	615,800	3.60		$	16.06	274,084

(9)      SUBORDINATED DEBT

      On July 31, 2003, we completed a private placement of our 6% Senior Subordinated Notes (the “Notes”), which were offered and sold to accredited investors as units consisting of one Note with a principal amount of $1,000 and warrants (the “Warrant”) to purchase shares of our Common Stock. We sold an aggregate of $7.5 million of Notes in this placement, which resulted in proceeds to us (net of placement agent fees of $450,724 and offering expenses of $110,778) of $6,938,498.

      The Notes pay interest at the annual rate of 6%, are subordinated to senior debt of the Company, and mature on July 31, 2006. Quarterly payments of principal and interest due on the Notes may be made in cash or, at our option, in shares of our Common Stock. If paid in shares of Common Stock, the number of shares to be issued shall be determined by dividing the payment due by 95% of the weighted-average volume price for the Common Stock on Nasdaq as reported by Bloomberg Financial Markets (“Bloomberg”) for the 20 consecutive trading days preceding the payment date.

      We issued Warrants to purchase shares of our Common Stock to the purchasers of the Notes and to the placement agent in the offering, J. Giordano Securities Group (“J. Giordano”). Each Warrant entitles the holder to purchase one-half of one share of our Common Stock. The total number of shares issuable upon exercise of Warrants issued to the purchasers of the Notes and to J. Giordano were determined after the expiration of 60 consecutive trading days following July 31, 2003, which was the date of closing of the offering and totaled 408,050. The number of shares issued upon exercise of the Warrants issued to purchasers equaled $7.5 million divided by the exercise price of the Warrants and totaled 392,356 shares. The number of shares issuable upon exercise of the Warrants issued to J. Giordano equaled $300,000 divided by the exercise price of the Warrants and totaled 15,694 shares. The exercise price of the Warrants equals 115% of the weighted-average volume price of the Common Stock on Nasdaq as reported by Bloomberg for the 60 consecutive trading days following July 31, 2003, with a maximum of $25.00 per share and a minimum of $15.00 per share. As computed, the exercise price of the Warrants equaled $19.1153. The terms of the Warrants provide for adjustment of the exercise price and the number of shares issuable thereunder upon the occurrence of certain events typical for private offerings of this type. The Warrants will be exercisable until July 31, 2006. GAAP requires that detachable warrants be valued separately from debt and included in paid-in capital. Based on the terms of the unit purchase agreement with the investors in the private placement, management believes that the Warrants had zero value at the date of issuance of the Notes.

      Quarterly principal and interest payments, totaling approximately $0.7 million per payment, are due on January 31, April 30, July 31, and October 31 with the last installment due on July 31, 2006. The scheduled loan payments for the next three years are as follows:

For the period
Six months ending December 31, 2004		1,250,000
Year ending December 31, 2005		2,500,000
Year ending December 31, 2006		1,875,000
Total	$	5,625,000

     On or about January 31, 2004, April 30, 2004 and July 31, 2004, we paid, pursuant to the terms of the Notes, the quarterly payments of principal and interest due in shares of our Common Stock and in accordance with the contractual computations issued 36,009, 35,819 and 33,310 shares of Common Stock, respectively.

14

21^st Century Holding Company
Management’s Discussion and Analysis of Financial Condition and Results of Operations

ITEM 2:

Forward-Looking Statements

     Statements in this report or in documents that are incorporated by reference that are not historical fact are forward-looking statements that are subject to certain risks and uncertainties that could cause actual events and results to differ materially from those discussed herein. Without limiting the generality of the foregoing, words such as “may”, “will”, “expect”, “believe”, “anticipate”, “intend”, “could”, “would”, “estimate”, or “continue” or the negative other variations thereof or comparable terminology are intended to identify forward-looking statements. The risks and uncertainties include, without limitation, uncertainties related to estimates, assumptions and projections generally; inflation and other changes in economic conditions (including changes in interest rates and financial markets); pricing competition and other initiatives by competitors; ability to obtain regulatory approval for requested rate changes and the timing thereof; legislative and regulatory developments; the outcome of litigation pending against us, including the terms of any settlements; risks related to the nature and the type of our business; dependence on investment income and the composition of our investment portfolio; the adequacy of our liability for loss and loss adjustment expense; insurance agents; claims experience; ratings by industry services; catastrophe losses; reliance on key personnel; weather conditions (including the severity and frequency of storms, hurricanes, tornadoes and hail); changes in driving patterns and loss trends; acts of war and terrorist activities; court decisions and trends in litigation and health care and auto repair costs; and other matters described from time to time by us in this report, and our other filings with the SEC.

     You are cautioned not to place reliance on these forward-looking statements, which are valid only as of the date they were made. We undertake no obligation to update or revise any forward-looking statements to reflect new information or the occurrence of unanticipated events or otherwise. In addition, readers should be aware that GAAP prescribes when a company may reserve for particular risks, including litigation exposures. Accordingly, results for a given reporting period could be significantly affected if and when a reserve is established for a major contingency. Reported results may therefore appear to be volatile in certain accounting periods.

Overview

     We are a vertically integrated insurance holding company, which, through our subsidiaries, control substantially all aspects of the insurance underwriting, distribution and claims process. We underwrite personal automobile insurance, general liability insurance, flood insurance, homeowners’ insurance and mobile home property and casualty insurance in Florida, Georgia and Louisiana through our wholly owned subsidiaries, Federated National Insurance Company (“Federated National”) and American Vehicle Insurance Company (“American Vehicle”). American Vehicle was approved in August 2003 to be a foreign insurer in the State of Georgia on an excess and surplus lines basis. Additionally, during March 2004, American Vehicle was admitted as a foreign insurer in the State of Louisiana to write homeowners’ and general liability insurance.

     During the six months ended June 30, 2004, 23.7%, 61.7%, 1.8% and 12.8% of the policies we underwrote were for personal automobile insurance, homeowners’ property and casualty insurance, mobile home property and casualty insurance, and commercial general liability, respectively. During the year ended December 31, 2003, 67.5%, 23.0%, 2.4% and 7.1% of the policies we underwrote were for personal automobile insurance, homeowners’ property and casualty insurance, mobile home property and casualty insurance, and commercial general liability, respectively. We internally process claims made by our own and third party insureds through our wholly owned claims adjusting company, Superior Adjusting, Inc.(“Superior”). We also offer premium financing to our own and third-party insureds through our wholly owned subsidiary, Federated Premium Finance, Inc. (“Federated Premium”).

     We market and distribute our own and third-party insurers’ products and our other services primarily in Central and South Florida, through a network of 24 agencies owned by Federated Agency Group, Inc. (“Federated Agency Group”), a wholly owned subsidiary, 45 franchised agencies, approximately 1,500 independent agents and a select number of general agents. Our independent agents and general agents are primarily responsible for the distribution of our homeowner insurance and commercial general liability products. Through our wholly owned subsidiary, FedUSA, Inc. (“FedUSA”), we franchise agencies under the FedUSA name. As of June 30, 2004, franchises were granted to 45 FedUSA agencies, of which 40 were operating and 5 are pending. We intend to focus our future expansion efforts on our agency network of franchised agencies.

15

21^st Century Holding Company
Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

      We offer electronic tax filing services through Express Tax Service, Inc. (“Express Tax”), an 80%-owned subsidiary, as well as franchise opportunities for these services. As of June 30, 2004, there were 235 franchises granted in 18 states. Revenue is generated through franchise sales, collection of royalties on tax preparation fees, incentives from business partners as well as fees from the preparation of income tax returns and income tax refund anticipation loans. In addition, Express Tax offers tax preparation services through approximately 500 licensees nationwide.

     Our business, results of operations and financial condition are subject to fluctuations due to a variety of factors. Abnormally high severity or frequency of claims in any period could have a material adverse effect on our business, results of operations and financial condition. Also, if our estimated liabilities for unpaid losses and loss adjustment expenses are less than actual losses and loss adjustment expenses, we will be required to increase reserves with a corresponding reduction in our net income in the period in which the deficiency is identified.

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

     Our executive offices are located at 3661 West Oakland Park Boulevard, Suite 300, Lauderdale Lakes, Florida 33313 and our telephone number is (954) 581-9993.

Recent Events

      On August 12 and 13, 2004, the Gulf Coast of Florida was affected by two storms, Tropical Storm Bonnie and Hurricane Charley. As of the date of this report, we have begun determining the extent of claims made and likely to be made under our homeowners’ and mobile homeowners’ policies in the affected areas. We do not currently expect claims from Tropical Storm Bonnie to be significant. The claims from Hurricane Charley are expected to be more significant, although as of the date of this report there are not enough facts available in order for us to estimate the extent of the damages.

     On June 14, 2004 we announced a 3-for-2 stock split. The stock split will be in the form of a stock dividend to be distributed on or about September 7, 2004, to shareholders of record at the close of business on August 23, 2004. Shareholders will receive three shares of common stock for every two shares of our stock held on the record date.

16

21^st Century Holding Company
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Analysis of Financial Condition
As of June 30, 2004 as Compared to December 31, 2003

     Investments.

     Investments increased $31.4 million, or 66.4%, to $78.7 million as of June 30, 2004, as compared to $47.3 million as of December 31, 2003, primarily as a result of our investment of the proceeds from an increase in written insurance premiums and positive underwriting experience.

     As a result of the adverse market conditions that occurred in 2002, management more carefully monitors its concentrations, industries and asset allocations. There were no other instances of large concentrations of investment securities requiring write-downs.

     Financial Accounting Standards (“FAS”) number 115 addresses accounting and reporting for (a) investments in equity securities that have readily determinable fair values and (b) all investments in debt securities. FAS 115 requires that these securities be classified in three categories and given specific accounting treatment as follows:

Classification	Accounting Treatment
Held-to-maturity
Debt securities with the intent and ability	Amortized cost
to hold to maturity
Trading securities
Debt and equity securities bought and	Fair value, with unrealized holding gains and
held primarily for sale in the near term	losses included in operations
Available-for-sale
Debt and equity securities not classified	Fair value, with unrealized holding gains and
as held-to-maturity or trading securities	losses excluded from earnings and reported as a
	separate component of shareholders’ equity,
	namely “Other Comprehensive Income”

     In accordance with the above we have classified all of our investment portfolio as available-for-sale during the six months ending June 30, 2004 and the year ended December 31, 2003.

     Below is a summary of unrealized gains and (losses) at June 30, 2004 and December 31, 2003 by category.

17

21^st Century Holding Company

	Unrealized Gain and (Loss)
	June 30, 2004			December 31, 2003
Fixed maturities:
U.S. government obligations	$	(1,617,158	)	$	(793,613	)
Obligations of states and political subdivisions		(238,458	)		(4,840	)
		(1,855,616	)		(798,453	)
Corporate securities:
Communications		175,365			209,226
Financial		697			14,694
Other		(32,460	)		45,475
		143,602			269,395
Equity securities:
Preferred stocks		(16,500	)		400
Common stocks		(738,710	)		3,154
		(755,210	)		3,554
Total unrealized gain and (loss)	$	(2,467,224	)	$	(525,504	)

     For further detail, see the sectiontitledITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     Receivable for Investments Sold.

      The receivable for investments sold decreased $2.1 million, or 100%, from $2.1 million as of December 31, 2003. The decrease is a result of investment trading activity that occurred in late December 2003 and did not settle until early January 2004.

     Prepaid Reinsurance Premiums.

     Prepaid reinsurance premiums decreased $6.1 million, or 77.9%, to $1.7 million as of June 30, 2004, as compared to $7.8 million as of December 31, 2003. The decline reflects the decrease in our insurance subsidiaries’ reliance on automobile quota-share reinsurance. During 2003 we ceded 40% of our automobile premiums to our reinsurer, and for the first six months of 2004, the company has not ceded any automobile premiums.

     Deferred Policy Acquisition Costs.

     Deferred policy acquisition costs increased $4.5 million, or 253.8%, to $6.2 million as of June 30, 2004, as compared to $1.7 million as of December 31, 2003. For the six months ended June 30, 2004, commission expense and commission income, net, were approximately $5.5 million and expenses connected with the writing of premiums such as salaries and premium taxes, net of policy fees, totaled approximately $0.6 million. Deferred policy acquisition costs increased primarily due to a $2.3 million increase in deferred commission expenses and a $1.8 million decrease in ceded unearned commissions income during the six months ended June 30, 2004. The increase in deferred commission expenses primarily related to the increase in lines of insurance other than automobile, which are not subject to quota-share agreements. The decrease in ceded commissions income is due to a $6.1 million decline in ceded commissions and is due to the intentional absence of a quota-share agreement in place for premiums written in 2004. Deferred policy acquisition costs was formerly titled Deferred acquisition costs.

18

21^st Century Holding Company

     Unpaid Losses and Loss Adjustment Expenses.

     Unpaid losses and loss adjustment expenses decreased $3.4 million, or 13.8%, to $21.2 million as of June 30, 2004, as compared to $24.6 million as of December 31, 2003. The decline in estimated reserves primarily relates to our intentional reduction in automobile insurance exposure during the first and second quarters of 2004, which traditionally take a longer period of time to settle. Secondarily, the decline in overall reserves is a reflection of the nature and the type of other property and casualty insurance products that we now offer, which is generally settled more expeditiously.

     Factors that affect unpaid losses and loss adjustment expenses include the estimates made on a claim-by-claim basis known as “case reserves” coupled with bulk estimates known as “incurred but not reported” (IBNR). Periodic estimates by management of the ultimate costs required to settle all claim files are based on the Company’s analysis of historical data and estimations of the impact of numerous factors such as (i) per claim information; (ii) company and industry historical loss experience; (iii) legislative enactments, judicial decisions, legal developments in the awarding of damages, and changes in political attitudes; and (iv) trends in general economic conditions, including the effects of inflation. Management revises its estimates based on the results of its analysis. This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for estimating the ultimate settlement of all claims. There is no precise method for subsequently evaluating the impact of any specific factor on the adequacy of the reserves, because the eventual redundancy or deficiency is affected by multiple factors. For further discussion, see “Loss and Loss Adjustment Expenses” below.

     Unearned Premiums.

     Unearned premiums increased by $14.5 million or, 42.5%, to $48.6 million as of June 30, 2004, as compared to $34.1 million as of December 31, 2003. The increase was due to an $18.1 million increase in unearned homeowner’s insurance premiums and $2.0 million in unearned premiums associated with the newly launched commercial liability program. Offsetting these increases was a $5.6 million decrease in automobile unearned premiums. These changes reflect our emphasis on property and commercial general liability insurance products. During the quarter ending June 30, 2004, our plans to assume homeowner policies from the insurer created by the State of Florida, Citizens Property Insurance Corporation (“Citizens”), came to fruition. Of the $18.1 million increase in our homeowner’s insurance unearned premiums as of June 30, 2004, 51.2 %, or $9.3 million relates to our assumption of homeowner insurance policies from Citizens.

     Income Taxes Payable.

     Income taxes payable increased by 100% to $1.1 million as of June 30, 2004, as compared to December 31, 2003 and are primarily due to payment patterns established by our estimations of taxable income.

Results of Operations
Three Months Ended June 30, 2004 as Compared to Three Months Ended June 30, 2003

Gross Premiums Written.

      Gross premiums written increased $14.2 million, or 81.0%, to $31.8 million for the three months ended June 30, 2004, as compared to $17.6 million for the comparable period in 2003. The following table denotes gross premiums written by major product line.

	Three months ended June 30,
	2004				2003
Automobile	$	3,489,678	10.97	%	$	12,189,273	69.34	%
Homeowners’		24,044,220	75.59	%		4,891,436	27.83	%
Commercial liability		3,815,356	11.99	%		—	0.00	%
Mobile home owners’		460,791	1.45	%		497,885	2.83	%
Gross written premiums	$	31,810,045	100.0	%	$	17,578,594	100.0	%

     As noted above, our efforts to expand our lines of insurance products to emphasize products other than automobile insurance are coming to fruition. Furthermore, our assumption of policies from Citizens during the three months ended June 30, 2004 totaled 34.9% or $11.1 million of the $31.8 million of gross written premiums.

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     Gross Premiums Ceded.

     Gross premiums ceded decreased $6.0 million to $0.2 million for the three months ended June 30, 2004, as compared to a charge to operations of $5.8 million for the three months ended June 30, 2003. The decrease is due to the decline in our ceded quota-share reinsurance associated with our automobile insurance. For the quarter ended June 30, 2004, we did not cede any automobile insurance premiums, as compared to a 40% cession for the same period last year.

     Decrease in Prepaid Reinsurance Premiums.

     The change in the decrease in prepaid reinsurance premiums was $1.8 million, or ($2.3) million for the three months ended June 30, 2004, compared to ($0.6) million for the three months ended June 30, 2003. The decrease is due to the intentional absence of a quota-share agreement in place for premiums written in 2004.

     Increase in Unearned Premiums.

     Unearned premiums increased by $12.5 million to ($12.8) million as of June 30, 2004, as compared to ($0.3) million as of June 30, 2003. The increase was due to a $16.4 million increase in unearned homeowners’ insurance premiums and $1.1 million in unearned premiums associated with the commercial liability insurance program. Offsetting these increases was a $4.8 million decrease in automobile unearned premiums. During the three months ended June 30, 2004, unearned homeowner’s insurance premiums increased by $16.4 million, of which $11.1 million is associated with the homeowner insurance premiums assumed from Citizens. For further discussion, see “Unearned Premiums” above.

     Net Investment Income.

     Net investment income increased by $0.4 million, or 120.8%, to $0.8 million for the three months ended June 30, 2004, as compared to $0.4 million for the same three month period ended June 30, 2003. The increase in investment income is a result of the additional amounts of invested assets. Also affecting our net investment income were our relatively stable yields of 4.36% for the three months ended June 30, 2004 as compared to 4.44% for the three months ended June 30, 2003.

Net Realized Investment Gains.

      Net realized investment gains decreased by $1.0 million, or 94.5% to $0.1 million for the three months ended June 30, 2004, as compared to $1.1 million for the three months ended June 30, 2003. The table below depicts the gains by investment category.

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21^st Century Holding Company

	Net Realized Gains
	Three Months Ended June 30
	2004			2003
Fixed maturities:
U.S. government obligations	$	27,464		$	415,328
Obligations of states and political subdivisions		(16	)		339,404
		27,448			754,732
Corporate securities:
Communications		—			(10,326	)
Financial		—			13,074
Other		—			28,656
		—			31,404
Equity securities:
Preferred stocks		—			—
Common stocks		31,060			282,682
		31,060			282,682
Total net realized gains	$	58,508			1,068,818

     Loss and Loss Adjustment Expenses.

     Loss and loss adjustment expenses increased by $0.1 million, or 1.7%, to $7.6 million for the three months ended June 30, 2004, as compared to $7.5 million as of June 30, 2003. The modest increase is predominantly due to the decline in automobile premiums as a percentage of our overall premium volume and an increase in homeowner premiums as a percentage of our overall premium volume. Our loss ratio, as determined in accordance with GAAP, for the three month period ended June 30, 2004 was 45.0% compared with 68.4% for the same period in 2003. The table below reflects the loss ratios by product line.

	Three months ending June 30,
	2004		2003
Automobile	78.75	%	86.96	%
Home owners	26.61	%	15.83	%
Commercial liability	25.45	%	—
Mobile home owners	12.02	%	19.98	%
All product lines	45.00	%	68.44	%

     Losses and loss adjustment expense, our most significant expense, represent actual payments made and changes in estimated future payments to be made to or on behalf of our policyholders, including expenses required to settle claims and losses. Management revises its estimates based on the results of its analysis of estimated future payments to be made. This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events. We attribute the “all lines” decrease in the loss ratio primarily to the increasingly significant operational contributions made by our lines of insurance other than automobile.

     Operating and Underwriting Expenses.

     Operating and underwriting expenses rose by $0.4 million, or 14.6%, to $3.1 million for the three months ended June 30, 2004, as compared to $2.7 million for the three months ended June 30, 2003. The increase is primarily associated with our cost of obtaining various types of insurance products.

     Policy Acquisition Costs, Net of Amortization.

     Policy acquisition costs, net of amortization, increased by $2.4 million, charging earnings $1.7 million for the three months ended June 30, 2004, as compared to a credit of $0.7 million as of June 30, 2003. Policy acquisition costs, net of amortization consists of the actual policy acquisition costs, including commissions, payroll and premium taxes, less commissions earned on reinsurance ceded and policy fees earned attributable to premiums earned during the period.

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21^st Century Holding Company

     During the three months ended June 30, 2004, the difference between the ceded commissions earned of $0.7 million and amortized costs of $2.4 million resulted in a charge to earnings of $1.7 million. The $2.4 million increase in the amortization of deferred policy acquisition costs in the 2004 period as compared to the 2003 period is attributable to the decrease in ceded commissions earned totaling $1.3 million, and increased amortized costs of $1.1 million during the three month period ended June 30, 2004. Policy acquisition costs, net of amortization was formerly titled Amortization of deferred acquisition costs, net.

     Provision for Income Tax Expense.

     The effective rate for income tax expense is 36.1% for the three months ended June 30, 2004, compared with 32.9% for the same three-month period in 2003. The increase in the estimated income tax provision is primarily associated with the increase in pre-tax income.

Results of Operations
Six Months Ended June 30, 2004 as Compared to Six Months Ended June 30, 2003
     
      Gross Premiums Written.

     Gross premiums written increased $15.4 million, or 45.2%, to $49.6 million for the six months ended June 30, 2004, as compared to $34.2 million for the comparable period in 2003. The following table denotes gross premiums written by major product line.

	Six months ended June 30,
	2004				2003
Automobile	$	11,778,327	23.7	%	$	25,954,630	75.9	%
Homeowners’		30,567,544	61.7	%		7,258,461	21.2	%
Commercial liability		6,373,915	12.8	%		—	0.0	%
Mobile home owners’		907,985	1.8	%		977,483	2.9	%
Gross written premiums	$	49,627,771	100.0	%	$	34,190,574	100.0	%

      As noted above, our efforts to expand our lines of insurance products to emphasize products other than automobile insurance are coming to fruition. Furthermore, our assumption of policies from Citizens during the six months ended June 30, 2004 totaled 22.4% or $11.1 million of the $49.6 million of gross written premiums as of June 30, 2004.

      Gross Premiums Ceded.

     Gross premiums ceded decreased $11.1 million to $0.9 million for the six months ended June 30, 2004, as compared to a charge to operations of $10.2 million for the six months ended June 30, 2003. The decrease is due to the decline in our ceded quota-share reinsurance associated with our automobile insurance. For the quarter ended June 30, 2004, we did not cede any automobile insurance premiums, as compared to a 40% cession for the same period last year.

     Decrease in Prepaid Reinsurance Premiums.

     The change in the decrease in prepaid reinsurance premiums was $3.6 million, or ($6.1) million for the six months ended June 30, 2004, compared to ($2.5) million for the six months ended June 30, 2003. The decrease is due to the intentional absence of a quota-share agreement in place for premiums written in 2004.

     Increase in Unearned Premiums.

     Unearned premiums increased by $14.4 million to ($14.5) million as of June 30, 2004, as compared to $0.1 million as of June 30, 2003. The increase was due to a $15.4 million increase in unearned homeowners’ insurance premiums and $2.0 million in unearned premiums associated with the commercial liability insurance program.

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21^st Century Holding Company

Offsetting these increases was a $2.9 million decrease in automobile unearned premiums. During the six months ended June 30, 2004, unearned homeowner’s insurance premiums increased by $15.4 million, of which $11.1 million is associated with the homeowner insurance premiums assumed from Citizens. For further discussion, see “Unearned Premiums” above.

     Net Investment Income.

     Net investment income increased by $0.6 million, or 81.9%, to $1.3 million for the six months ended June 30, 2004, as compared to $0.7 million for the same six month period ended June 30, 2003. The increase in investment income is a result of the additional amounts of invested assets. Also affecting our net investment income were our relatively stable yields of 4.1% for the six months ended June 30, 2004 as compared to 4.6% for the six months ended June 30, 2003.

     Net Realized Investment Gains.

      Net realized investment gains decreased by $1.2 million, or 87.3% to $0.2 million for the six months ended June 30, 2004, as compared to $1.4 million for the six months ended June 30, 2003. The table below depicts the gains by investment category.

	Net Realized Gains
	Six Months Ended June 30,
	2004			2003
Fixed maturities:
U.S. government obligations	$	62,513		$	500,761
Obligations of states and political subdivisions		(116	)		345,177
		62,397			845,938
Corporate securities:
Communications		—			38,859
Financial		(219	)		89,376
Other		—			136,010
		(219	)		264,245
Equity securities:
Preferred stocks		—			23,555
Common stocks		118,249			285,962
		118,249			309,517
Total net realized gains	$	180,427		$	1,419,700

     Loss and Loss Adjustment Expenses.

     Loss and loss adjustment expenses decreased by $0.2 million, or 1.3%, to $14.1 million for the six months ended June 30, 2004, as compared to $14.3 million as of June 30, 2003. The modest decrease is predominantly due to the decline in automobile premiums as a percentage of our overall premium volume and an increase in homeowner premiums as a percentage of our overall premium volume. Our loss ratio, as determined in accordance with GAAP, for the six month period ended June 30, 2004 was 47.0% compared with 66.7% for the same period in 2003. The table below reflects the loss ratios by product line.

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21^st Century Holding Company

	Six months ending June 30,
	2004		2003
Automobile	79.65	%	83.77	%
Home owners	25.37	%	14.64	%
Commercial liability	22.80	%	—
Mobile home owners	22.14	%	27.39	%
All product lines	47.08	%	66.72	%

     Losses and loss adjustment expense, our most significant expense, represent actual payments made and changes in estimated future payments to be made to or on behalf of our policyholders, including expenses required to settle claims and losses. Management revises its estimates based on the results of its analysis of estimated future payments to be made. This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events. We attribute the “all lines” decrease in the loss ratio primarily to the increasingly significant operational contributions made by our lines of insurance other than automobile.

     Operating and Underwriting Expenses.

     Operating and underwriting expenses rose by $1.1 million, or 20.8%, to $6.4 million for the six months ended June 30, 2004, as compared to $5.3 million for the six months ended June 30, 2003. The increase is primarily associated with our cost of obtaining various types of insurance products.

     Policy Acquisition Costs, Net of Amortization.

     Policy acquisition costs, net of amortization, increased by $3.2 million, charging earnings by $2.1 million for the six months ended June 30, 2004, as compared to a credit of $1.1 million as of June 30, 2003. Policy acquisition costs, net of amortization consists of the actual policy acquisition costs, including commissions, payroll and premium taxes, less commissions earned on reinsurance ceded and policy fees earned attributable to premiums earned during the period.

     During the six months ended June 30, 2004, the difference between the ceded commissions earned of $1.6 million and amortized costs of $3.7 million resulted in a charge to earnings of $2.1 million. The $3.2 million increase in the amortization of deferred policy acquisition costs in the 2004 period as compared to the 2003 period is attributable to the decrease in ceded commissions earned totaling $2.1 million, and increased amortized costs of $1.1 million during the six month period ended June 30, 2004. Policy acquisition costs, net of amortization was formerly titled Amortization of deferred acquisition costs, net.

     Provision for Income Tax Expense.

     The effective rate for income tax expense is 36.5% for the six months ended June 30, 2004, compared with 34.5% for the same six-month period in 2003. The increase in the estimated income tax provision is primarily associated with the increase in pre-tax income.

     Liquidity And Capital Resources

     Our primary sources of capital during the six months ended June 30, 2004 are revenues generated from operations, issuance of debt securities, investment income and borrowings under the Revolving Agreement, described below. Because we are a holding company, we are largely dependent upon fees from our subsidiaries for cash flow.

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

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21^st Century Holding Company

     The amount of FPF’s 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 underthe Revolving Agreement is the prime rate plus additional interest varying from 1.25% to 3.25% based on the prior month’s ratio of contracts receivable related to insurance companies with an A. M. Best rating of B or lower to total contracts receivable. As of June 30, 2004 our rate was 5.75% as compared to our rate as of June 30, 2003 of 6.00%

     The Revolving Agreement contains various operating and financial covenants, with which we were in compliance at June 30, 2004 and December 31, 2003.

     The Revolving Agreement, as amended, expires September 30, 2004 and we have begun to negotiate a similar agreement to replace the expiring agreement. Outstanding borrowings under the Revolving Agreement as of June 30, 2004 and December 31, 2003 were $2.9 million and $4.1 million, respectively. Outstanding borrowings in excess of the $4.0 million commitment totaled $98,786 as of December 31, 2003. The excess amount, permissible by reason of a compensating cash balance of $200,430 for December 31, 2003, was held for the benefit of FPF and is included in other assets. Interest expense on this revolving credit line for the six months ended June 30, 2004 and 2003 totaled approximately $104,000 and $110,000, respectively. For the six months ended June 30, 2004 and 2003 the effective interest rate on this line of credit, based on our average outstanding borrowings under the Revolving Agreement, was 5.97% and 5.68%, respectively.

     We also implemented a direct bill program during 2001 for policies underwritten by our carriers. Direct billing is where the insurance company accepts from the insured, as a receivable, a promise to pay the premium, as opposed to requiring the full amount of the policy, either directly from the insured or from a premium finance company.

     On July 31, 2003, we completed a private placement of our 6% Senior Subordinated Notes (the “Notes”), which were offered and sold to accredited investors as units consisting of one Note with a principal amount of $1,000 and warrants (the “Warrant”) to purchase one-half of one share of our Common Stock. We sold an aggregate of $7.5 million of Notes in this placement, which resulted in proceeds to us (net of placement agent fees of $450,724 and offering expenses of $110,778) of $6,938,498.

      The Notes pay interest at the annual rate of 6%, are subordinated to senior debt of the Company, and mature on July 31, 2006. Quarterly payments of principal and interest due on the Notes may be made in cash or, at the our option, in shares of the our Common Stock. If paid in shares of Common Stock, the number of shares to be issued shall be determined by dividing the payment due by 95% of the weighted-average volume price for the Common Stock on Nasdaq as reported by Bloomberg Financial Markets (“Bloomberg”) for the 20 consecutive trading days preceding the payment date.

     We issued Warrants to purchase shares of our Common Stock to the purchasers of the Notes and to the placement agent in the offering, J. Giordano Securities Group (“J. Giordano”). Each Warrant entitles the holder to purchase one-half of one share of our Common Stock. The total number of shares issuable upon exercise of Warrants issued to the purchasers of the Notes and to J. Giordano was determined after the expiration of 60 consecutive trading days following July 31, 2003, which was the date of closing of the offering and totals 408,050. The number of shares issuable upon exercise of the Warrants issued to purchasers equaled $7.5 million divided by the exercise price of the Warrants and totaled 392,356. The number of shares issuable upon exercise of the Warrants issued to J. Giordano equaled $300,000 divided by the exercise price of the Warrants and totaled 15,694. The exercise price of the Warrants equals 115% of the weighted-average volume price of the Common Stock on Nasdaq as reported by Bloomberg for the 60 consecutive trading days following July 31, 2003, with a maximum of $25.00 per share and a minimum of $15.00 per share. As computed, the exercise price of the Warrants equals $19.1153. The terms of the Warrants provide for adjustment of the exercise price and the number of shares issuable thereunder upon the occurrence of certain events typical for private offerings of this type. The Warrants will be exercisable until July 31, 2006.

     On or about October 31, 2003, we elected, pursuant to the terms of the Notes, to make our quarterly estimated payment in shares of our Common Stock and in accordance with the contractual computations issued a total of 41,195 shares of our Common Stock. On or about January 31, 2004, April 30, 2004 and July 31, 2004, we again elected to make our quarterly payments of principal and interest due in shares of our Common Stock and in accordance with the contractual computations issued 36,009, 35,819 and 33,310 shares of our Common Stock, respectively.

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21^st Century Holding Company

     For the six months ended June 30, 2004, operations generated net operating cash flow of $25.7 million as compared to $9.2 million for the six months ended June 30, 2003. Gross cash flow provided by operations generated approximately $28.3 million, mostly by increased unearned premiums liability totaling $14.5 million, increased prepaid reinsurance premiums totaling $6.1 million, decreased balances due from reinsurer, net totaling $3.9 million and income taxes totaling $1.9 million, in conjunction with net income of $6.6 million. The same operations for the six-month period ended June 30, 2004 used $9.1 million of gross cash flow primarily to reduce unpaid loss and loss adjustment expenses totaling $3.4 million and amortization of deferred policy acquisition costs totaling $4.4 million. Operating cash flow is currently expected to be positive in both the short-term and the reasonably foreseeable future.

     In addition, our investment portfolio is highly liquid as it consists almost entirely of readily marketable securities. Cash flow used in net investing activities was $30.7 million and $9.4 million for the six months ended June 30, 2004 and June 30, 2003, respectively, as we invested the cash flow from operating and financing activities. While in a period in which written premiums are increasing, it is reasonably expected that cash from insurance premiums will be used for investing activities. In the future, we expect a continued cash flow deficit from investing activities, as we invest cash from operations.

     Net cash provided by financing activities was $0.1 million for the six months ended June 30, 2004, reflecting the receipt of $2.3 million from exercised stock options netted against the use of $0.9 million to pay dividends and $1.2 million to reduce our revolving line of credit. For the six months ended June 30, 2003, net cash provided by financing activities was $0.3 million reflecting the receipt of $1.3 million from exercised stock options netted against the use of $0.5 million to pay dividends and $0.5 million to reduce our revolving line of credit. We believe that our current capital resources will be sufficient to meet our currently anticipated working capital requirements. There can be no assurances, however, that such will be the case.

     To retain our certificates of authority, Florida insurance laws and regulations require that Federated National and American Vehicle maintain capital surplus equal to the greater of 10% of its liabilities or the 2003 statutory minimum capital and surplus requirement of $3.60 million as defined in the Florida Insurance Code. The insurance companies are also required to adhere to prescribed premium-to-capital surplus ratios.

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

     Under these laws, Federated National would be permitted to pay dividends of approximately $629,500 to the Company in 2004, and American Vehicle would be permitted to pay approximately $141,000 in dividends to the Company in 2004. No dividends were paid by Federated National or American Vehicle in the second quarter of 2004, 2003 nor 2002 and none are anticipated in 2004. Although we believe that amounts required to meet our financial and operating obligations will be available from sources other than dividends from its insurance subsidiaries, there can be no assurance in this regard. Further, there can be no assurance that, if requested, the Florida Department of Financial Services will allow any dividends in excess of the amount available to be paid by Federated National or American Vehicle 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. The ability to pay dividends 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.

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21^st Century Holding Company

     Insurance companies are required to comply with the risk-based capital requirements of the National Association of Insurance Commissioners (“NAIC”). 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. Based on calculations using the appropriate NAIC formula and the respective insurance company data for the year ended December 31, 2003, both of the insurance companies total adjusted capital were in excess of ratios that would require regulatory action. GAAP differs in some respects from statutory reporting practices prescribed or permitted by the Florida Department of Financial Services. Federated National’s and American Vehicle’s statutory capital surplus levels as of June 30, 2004 were approximately $19.6 million and $11.0 million, respectively, and their statutory net income for the six months ended June 30, 2004 was $1.5 million and $0.2 million, respectively.

     Federated National Insurance Company entered into an agreement with the insurer created by the State of Florida, Citizens to assume the unexpired portion of specifically chosen homeowner insurance policies on varying dates during May, June and July of 2004. As part of the assumption agreement, there exists provisions which provide for a “take out” bonus to be afforded to Federated National based upon the successful retention of the assumed policies for the next three subsequent years, subject to certain qualifications. Citizens has agreed to fund an escrow account in the name of both Citizens and Federated National in accordance with the contract provisions; however, Federated National is prevented from recognizing the take out bonus until it has fulfilled its policyholder retention responsibilities, which is expected to be some time subsequent to May 2007. As of June 30, 2004, the escrow account has been funded for $2.3 million and in accordance with generally accepted accounting principle is not included in our consolidated balance sheet nor our consolidated statement of operations.

     Impact of Inflation and Changing Prices

     The consolidated 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 our performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the inflationary effect on the cost of paying losses and loss adjustment expenses.

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

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

      Information related to quantitative and qualitative disclosures about market risk was included under Item 7a, “Quantitative and Qualitative Disclosures about Market Risk”, in our Annual Report on Form 10-K as of December 31, 2003. No material changes have occurred in market risk since this information was disclosed except as discussed below.

      Our investment portfolio is available for sale and is carried at fair value. Gains that represent securities with a fair value in excess of amortized cost, and losses (amortized cost is in excess of fair value) that are deemed temporary by management are recorded in shareholders’ equity in accumulated other comprehensive income. Losses that are deemed other than temporary by management are recorded as net realized losses in the consolidated statement of operations. A summary of the investment portfolio as of June 30, 2004 follows:

									Unrealized Gain
	Amortized Cost				Fair Value				(Loss)
Fixed maturities:
U.S. government obligations	$	57,795,898	71.23	%	$	56,178,738	71.41	%	$	(1,617,160	)
Obligations of states and political subdivisions		8,627,759	10.63	%		8,389,301	10.66	%		(238,458	)
		66,423,657	81.86	%		64,568,039	82.07	%		(1,855,618	)
Corporate securities:
Communications		497,035	0.61	%		672,425	0.85	%		175,390
Financial		2,300,582	2.84	%		2,296,910	2.92	%		(3,672	)
Other		4,643,320	5.72	%		4,615,205	5.87	%		(28,115	)
		7,440,937	9.17	%		7,584,540	9.64	%		143,603
Equity securities:
Preferred stocks		250,000	0.31	%		233,500	0.30	%		(16,500	)
Common stocks		7,023,022	8.66	%		6,284,312	7.99	%		(738,710	)
		7,273,022	8.97	%		6,517,812	8.29	%		(755,210	)
Total fixed, corporate and equity securities	$	81,137,616	100.00	%	$	78,670,391	100.00	%	$	(2,467,225	)

     As of June 30, 2004, there were no concentrations greater than 5% of total investments in any single investment other than United States government obligations.

Item 4. Controls And Procedures

     Evaluation of Disclosure Controls and Procedures

     An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures within 90 days of this report was carried out by us under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures have been designed and are being operated in a manner that provides reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Nevertheless, the controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

     Changes in Internal Controls

     Subsequent to the date of the most recent evaluation of our internal controls, there were no significant changes in our internal controls or in other factors that could significantly affect the internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

28

21 st Century Holding Company
Other Information 

PART II: OTHER INFORMATION

Item 1. 

Legal Proceedings 

     We are 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 our consolidated financial position, results of operations, or liquidity.

     In June 2000, a lawsuit was filed against us, our directors and our executive officers seeking compensatory damages in an undisclosed amount on the basis of allegations that our amended registration statement dated November 4, 1998 was inaccurate and misleading concerning the manner in which we recognized ceded insurance commission income, in violation of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The lawsuit was filed in the United States District Court for the Southern District of New York. The plaintiff class purportedly includes purchasers of our common stock between November 5, 1998 and August 13, 1999. The Court granted the plaintiffs class status.

     Specifically, the plaintiffs allege that we recognized ceded commission income on a written basis, rather than amortized on a pro rata basis. The plaintiffs allege that this was contrary to the Statement of Financial Accounting Concepts Nos. 1, 2 and 5. We believe, however, that the lawsuit is without merit and we have vigorously defended the action, because we reasonably relied upon outside subject matter experts to make these determinations at the time. We have also since accounted for ceded commission on a pro rata basis and have done so since these matters were brought to our attention in 1998. Nevertheless, we have also continued to actively participate in settlement negotiations with the plaintiffs and have tentatively agreed to settle the case. The parties are currently negotiating the final terms of a Memorandum of Understanding, which will have to be executed by the parties and then approved by the court. We have reserved and charged against fourth quarter 2003 earnings $600,000 for the potential settlement and associated costs.

     Prior to its acquisition by us in 2001, American Vehicle was involved in litigation with a former officer and director. The litigation was adjudicated and American Vehicle, among others, was found liable and paid the final judgment. A petition was filed seeking costs of $136,000 and appellate attorneys’ fees in excess of $2.0 million. To secure this obligation, American Vehicle’s previous owners have agreed to indemnify the Company against any award of fees and costs and the $500,000 purchase price for American Vehicle was placed in escrow. On February 26, 2003, the court entered an amended final judgment awarding the plaintiffs $1,140,387 in attorneys’ fees and costs. On or about May 10, 2004, the parties finalized this case without further costs to us and all parties have now agreed that this case is closed.

     As a direct premium writer in the State of Florida, we are required to participate in certain insurer solvency pools under Florida Statutes Section 631.57(3)(a) . Participation in these pools is based on our written premiums by line of business to total premiums written statewide by all insurers. Participation may result in assessments against us.

     Federated National and American Vehicle are also required to participate in an insurance apportionment plan under Florida Statutes Section 627.351 referred to as a Joint Underwriting Association Plan (“JUA Plan”). The JUA Plan provides for the equitable apportionment of any profits realized, or losses and expenses incurred, among participating motor vehicle insurers. In the event of an underwriting deficit incurred by the JUA Plan which is not recovered through the policyholders in the JUA Plan, such deficit shall be recovered from the companies participating in the JUA Plan in the proportion that the net direct written premiums of each such member during the preceding calendar year bear to the aggregate net direct premiums written in this state by all members of the JUA Plan.

     No assessments have been incurred by either insurance company through the date of issuance of this report pursuant to our participation in the above noted participation pool and JUA plan.

29

21^st Century Holding Company
Other Information

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

     On April 30, 2004 and July 31, 2004 we issued an aggregate of 35,819 and 33,310 shares, respectively, of our common stock to holders of our Notes in payment of the quarterly interest and principal payment due pursuant to the terms of the Notes. These shares were issued without registration under the Securities Act of 1933 (the “Act”) by reason of the exemption from registration pursuant to Section 4(2) of the Act and Regulation D thereunder.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Submission of Matters to a Vote of Security Holders

      On June 8, 2004 we held our Annual Meeting of Shareholders (the “Meeting”). At the Meeting, the shareholders reelected Edward J. Lawson and Richard A. Widdicombe to the Board of Directors and the shareholders also authorized the possible issuance of 20% or more of our Common Stock, $.01 par value (the “Common Stock”), in connection with the July 2003 private placement in which we received net proceeds of approximately $6.9 million from the sale of units consisting of one note with a principal amount of $1,000 and one warrant to purchase one-half one share of our Common Stock. Directors whose terms of office continued after the meeting were: Charles B. Hart, Jr, Richard W. Wilcox, Jr, Bruce F. Simberg, Carl Dorf and Peter J. Prygelski.

     For Mr. Lawson and Mr. Widdicombe, there were 4,027,597 votes in favor, no votes withheld and 44,183 abstentions. With respect to the possible issuance of 20% or more of our Common Stock, there were 2,289,916 votes in favor, 86,638 votes withheld and 7,853 abstentions. There were 1,687,373 broker non-votes.

Item 5

Other Information

None.

30

21^st Century Holding Company
Other Information

Item 6

Exhibits And Reports On Form 8-K

(a)	Exhibits:
	10.1		Assumption agreement dated as of May 3, 2004 between Federated National Insurance Company
			and Citizens Property Insurance Corporation.
	10.2		Escrow Agreement dated as of May 3, 2004 among Citizens Property Insurance Corporation,
			Federated National Insurance Company and Wells Fargo Bank, N.A.
	10.3	*	Employment Agreement dated as of June 8, 2004 between James Gordon Jennings III, and 21st
			Century Holding Company.
	31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
	31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
	32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act.
	32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.
(b)	Reports on Form 8-K.
	Form 8K dated August 5, 2004 attaching a press release announcing our results for our fiscal quarter ended
	June 30, 2004.

* Management contract or compensatory plan.

31

21^st Century Holding Company
Other Information

 Signatures

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	21 st CENTURY HOLDING COMPANY
	By:	/s/ Richard A. Widdicombe
		Richard A. Widdicombe, Chief Executive Officer
		/s/ James G. Jennings III
		James G. Jennings III, Chief Financial Officer
Date: August 16, 2004

32

EX-10.1

                            PLA ASSUMPTION AGREEMENT

      THIS ASSUMPTION AGREEMENT (the "Agreement") is executed as of the 3rd day
of May, 2004 ("Execution Date") by and between Federated National Insurance
Company, a Florida licensed and authorized insurance company (hereinafter
referred to as "Carrier") and Citizens Property Insurance Corporation
(hereinafter referred to as "CITIZENS").

                                    RECITALS

      I. Definitions. Any term not defined in this section which is defined
elsewhere in this Agreement shall have the meaning ascribed to it therein.

            a. "Aggregate Losses" shall mean those losses which include, but are
not limited to, compensatory, punitive, bad faith and other damages arising
from, and all loss adjustment expenses relating to, the adjustment or defense of
any and all claims with respect to losses occurring on or after the Assumption
Date with respect to the Policies.

            b. "Assumed Premium" shall mean Initial Assumed Premium as adjusted
by a monthly remittance and bordereau process developed by the Carrier and
CITIZENS to account for policy cancellations, return premiums and policyholder
requested coverage changes after the Assumption Date with the positive and
negative adjustments.

            c. "Assumption" shall mean the transference of risks from CITIZENS
to the Carrier whereby the Carrier agrees to assume all obligations of CITIZENS
with respect to the Policies and agrees to pay one hundred percent (100%) of the
Aggregate Losses of the Policies as of a date and time certain.

            d. "Assumption Date" shall mean that date upon which an Assumption
is consummated.

            e. "Assumption Procedures" shall mean those procedures required by
CITIZENS to comply with the provisions of Section 627.3517, Florida Statutes,
and this Agreement, as set forth in Exhibit E attached hereto.

            f. "Carrier" shall mean the insurance company designated above which
company is, and shall remain during the term of this Agreement, a duly licensed
entity authorized to transact property and casualty insurance business in the
State of Florida.




            g. "Carrier's Policy" shall mean the insurance policy offered by the
Carrier to a CITIZENS insured upon expiration of a Policy pursuant to this
Agreement.

            h. "Ceding Commission Rate" shall be as defined in Exhibit B
attached hereto.

            i. "CITIZENS" shall mean Citizens Property Insurance Corporation as
created by the Legislature of the State of Florida pursuant to Section
627.351(6), Florida Statutes, and any successor entity.

            j. "Department" shall mean the Office of Insurance Regulation.

            k. "Escrow Agent" shall mean the party that shall join in the
execution of the Escrow Agreement in the capacity of the Escrow Agent.

            l. "Escrow Agreement" shall mean the Escrow Agreement to be executed
between the parties establishing an escrow account (the "Escrow Account") in
accordance with the requirements of this Agreement.

            m. "Independent Auditor" shall mean a certified public accountant or
certified public accounting firm, licensed in the State of Florida, to perform
professional auditing services and who is without bias with respect to the
outcome of the audit services and with respect to the Carrier.

            n. "Initial Assumed Premium" shall mean Written Premium, less the
Written Premium earned by CITIZENS with respect to the Policies as of the
Assumption Date.

            o. "Parties" shall mean the Carrier and CITIZENS.

            p. "Plan" shall mean the Plan of Operation of CITIZENS, as amended.

            r. "Policy" or "Policies" or "Removed Policy or "Removed Policies"
shall mean those CITIZENS Policies removed by the Carrier from the Personal
Lines Account of CITIZENS pursuant to this Agreement. "Policy" or "Policies" as
the context requires, may refer to individual Policies.

            s. "Program" shall mean the Takeout Incentive Program(s) approved by
CITIZENS and the Department pursuant to ss.627.351(6)(g)3, Florida Statutes, and
available to the Carrier on the Execution Date for removal of certain Policies
from the Personal Lines Account of CITIZENS.


                                       2


            t. "Takeout Bonus" shall mean those monies to which the Carrier is
eligible for removing Policies from CITIZENS pursuant to this Agreement.

            u. "Written Premium" shall mean the gross written premium of
CITIZENS on the Policies, less policy cancellation and return premiums, as of
the Assumption Date.

            Written Premium shall not include fees or surcharges invoiced for
collection by CITIZENS on the Policies for (i) Market Equalization Surcharges,
(ii) Tax-Exempt Surcharge, and (iii) the mandatory $2.00 per policy EMPA charge.

      II. Carrier and CITIZENS desire, pursuant to this Agreement, to have the
Carrier remove up to a maximum of 31,000 Policies by Assumption from CITIZENS
and offer at renewal the Carrier's Policy in accordance with the requirements of
this Agreement and the Program.

      NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, the Parties hereto do covenant and agree as follows:

      WHEREAS, CITIZENS has adopted a Program pursuant to which Program the
Carrier has made application to CITIZENS to remove policies; and

      WHEREAS, CITIZENS finds the Carrier eligible to participate in the
Program.

      1. Agreement to Remove Policies.

            A. The Carrier and CITIZENS shall, prior to an Assumption Date,
agree upon those Policies eligible to be removed under the Program by the
Carrier on the Assumption Date and shall set forth those Policies by CITIZENS
policy number and expiration date on Exhibit A or any supplement thereto, which
Exhibit A or supplement shall be attached hereto and made a part hereof by
reference.

            B. Pursuant to this Agreement and the Assumption Procedures, the
Carrier shall remove by Assumption all of the Removed Policies set forth on
Exhibit A or supplements thereto, if available for removal on the Assumption
Date.

      2. Terms of Assumption.

            A. Liabilities:


                                       3


                  (i) The Carrier agrees to assume and pay one hundred percent
(100%) of the Aggregate Losses occurring on or after 12:01 A.M. Eastern Standard
Time on May 4, 2004 (the "Assumption Date") for which CITIZENS is or becomes
obligated under the approximately 3,000 Policies initially set forth in Exhibit
A.

                  (ii) The Carrier, in addition, agrees to assume and undertake
all other obligations ofCITIZENS with respect to the Policies in the manner
provided herein.

                  (iii) CITIZENS shall remain liable for all Aggregate Losses
for the Policies occurring prior to the Assumption Date, and the Carrier shall
have no responsibility with respect to such losses.

                  (iv) For the purposes of this Agreement, annual Emergency
Management Preparedness and Assistance Trust Fund Policy Surcharge ("EMPA")
charges, if any, applicable premium taxes and any remittance obligations related
to the Policies will be the sole responsibility of CITIZENS in the same manner
as if this Agreement did not exist, and CITIZENS agrees to pay all such charges,
taxes and obligations on a timely basis.

                  (v) The cost of any notice and ancillary documentation to
current CITIZENS policyholders to effectuate Assumption of the Policies shall be
borne equally by the Parties. The Carrier agrees that its portion of such cost
may be withheld from any Assumed Premium paid to Carrier by CITIZENS pursuant to
this Agreement or any amendments or addenda to this Agreement. In the event
CITIZENS, for whatever reason, does not withhold the Carrier's portion of such
cost from any Assumed Premium paid to Carrier, Carrier agrees to pay said sum to
CITIZENS within thirty (30) days of its receipt of a billing statement from
CITIZENS.

                  (vi) CITIZENS shall pay by wire transfer to the Carrier the
Assumed Premium multiplied by 1.000 minus the applicable Ceding Commission Rate
on or before the 20th day following the Assumption Date. Any subsequent amounts
due to or from CITIZENS as a result of the monthly remittance and bordereau
process shall be remitted to the appropriate Party net of Ceding Commission
within ten (10) days following the end of each month without interest.

            B. Servicing of Policies:

                  (i) The consideration for services to be performed by CITIZENS
on behalf of the Carrier is specifically encompassed in the Ceding Commission
Rate referenced in Exhibit B attached hereto.


                                       4


                  (ii) From an Assumption Date until expiration of the Policies,
CITIZENS shall continue to process endorsements and cancellations for Policies
which have not yet been replaced by the Carrier at renewal pursuant to
subsection (iii) below, and accordingly shall remain responsible for all agent
commissions and fees to CITIZENS servicing companies with respect to such
Policies.

                  (iii) Commencing on an Assumption Date, the Carrier shall
become responsible for offering and processing renewals with respect to the
Policies, utilizing its own approved rates and forms and for processing
endorsements to, and cancellations and renewals of, the Carrier's Policies. The
Carrier shall be responsible for all agent and brokerage commissions for the
Carrier's Policies, for all return premiums for cancellations of the Carrier's
Policies occurring after renewal, and for all fees to its servicing companies
accruing on or after the initial issuance of the Carrier's Policies. The Carrier
shall be entitled to one hundred percent (100%) of the premiums payable with
respect to the Carrier's Policies from date of renewal forward.

            C. Loss Payments and Settlements:

                  (i) Commencing on an Assumption Date, CITIZENS shall, with
respect to the Policies, service all claims for Aggregate Losses occurring prior
to the Assumption Date.

                  (ii) Servicing of claims for losses occurring on or after an
Assumption Date shall be the sole responsibility of the Carrier. CITIZENS shall
have no responsibility for payment of losses or loss adjustment expenses or for
the servicing of claims with respect to losses occurring under the Policies on
or after the Assumption Date.

                  (iii) CITIZENS agrees to abide by the loss settlements of the
Carrier and/or its claims administration contractor with respect to the
obligations assumed hereunder, such settlement to be considered as satisfactory
payment of loss. The Carrier undertakes to settle losses on Policies assumed
hereunder and to provide staffing for the adjustment of such losses in
accordance with CITIZENS Claims Manual and prudent insurance practice.

                  (iv) With regard to the Policies, CITIZENS agrees that it
shall give notice promptly to the Carrier of any claim by a third party or the
commencement of any legal proceedings against CITIZENS with respect to such
claim. The Carrier shall have the exclusive right to control the contest and
defense of any such claim or litigation and the result of any such proceeding
will be binding upon the parties hereto. The liability of the Carrier under the
Policies shall always follow that of CITIZENS, and any error or omission of
CITIZENS or its agents shall in no way relieve the Carrier of its liability or
obligations in respect of the matters affected by such errors or omissions, it
being understood and agreed that the Carrier shall follow and share the same
fortune as CITIZENS under all circumstances.


                                       5


                  (v) CITIZENS agrees to assign to the Carrier any and all
salvage and subrogation rights arising with respect to losses occurring on or
after an Assumption Date, which CITIZENS may have with respect to the Policies.

            D. Conditions to Closing:

      The following conditions must be met prior to an Assumption Date:

                  (i) Department approval of an Assumption by issuance of a
Consent Order, which Consent Order shall be attached hereto as Exhibit C.

                  (ii) The Carrier shall enter into a Confidentiality Agreement
with CITIZENS as such relates to the Policies. CITIZENS agrees to allow the
Carrier to make coverage verifications electronically with CITIZENS servicing
companies, subject to the Confidentially Agreement.

      3. Takeout Bonus.

      The following provisions shall be applicable if the Carrier has applied
for and qualifies for a Takeout Bonus for Removed Policies:

            A. The Carrier shall remove by Assumption the Policies set forth on
Exhibit A in accordance with this Agreement and the Assumption Procedures and
shall offer to issue and renew the Carrier's Policy for a period of three (3)
years subsequent to the expiration of the assumed Policy. During the aforenoted
period, the Carrier's renewals of a Carrier's Policy shall be at the Carrier's
approved rates and on substantially similar terms unless the Carrier's Policy is
cancelled by the Carrier for a lawful reason other than reduction of hurricane
exposure.

            B. Contemporaneously with the execution of this Agreement, the
parties shall negotiate, execute and deliver an Escrow Agreement establishing an
escrow account and Escrow Agent. The Escrow Agreement executed by the parties
hereto shall, among other matters, specify (i) the investment policy and (ii)
the terms and procedures by which the Carrier will be able to draw on the Escrow
Account for claim payments.


                                       6


            C. Once the Carrier removes at least 10,000 Policies in the
aggregate from CITIZENS under this Agreement, CITIZENS shall, within fifteen
(15) days after an Assumption Date, deposit with the Escrow Agent under the
Bonus Escrow Agreement a sum equal to the Written Premium for the Removed
Policies eligible for a Takeout Bonus times the relevant Takeout Bonus
percentage from Exhibit D. If necessary, CITIZENS shall also deposit any
additional Takeout Bonus amounts to reflect the total number of Removed Policies
eligible for a Takeout Bonus under this Agreement.

            D. The following rules will be used to adjust the amount of money
ultimately received by the Carrier under this Agreement:

                  (i) If the insured later voluntarily terminates the Carrier's
Policy or subsequently does not accept the Carrier's offer of the Carrier's
Policy, the Carrier will be entitled to retain the Takeout Bonus for that
policy. Cancellation of a Policy or a Carrier's Policy for nonpayment of premium
shall be deemed a voluntary termination by the insured. Failure of the insured
to accept the Carrier's offer of renewal, if such renewal is in accordance with
the terms of this Agreement, shall be deemed a voluntary termination by the
insured.

                  (ii) If the Carrier fails to offer to issue or renew, cancels
or non-renews a Carrier's Policy for any reason other than non-payment of
premium, the Carrier will forfeit its entitlement to a Takeout Bonus for that
Policy, and the bonus amount will be returned to CITIZENS from the Bonus Escrow
Account together with any investment income thereon.

                  (iii) All monies, if any, in the Escrow Account shall be
returned to CITIZENS at the time it is determined that the total number of
Policies with wind coverage removed, or to be removed, and eligible for a
Takeout Bonus by the Carrier under this Agreement will be less than Ten Thousand
(10,000).

            E. Thirty-six (36) months after the first Assumption Date, the
Carrier shall provide to CITIZENS an Independent Auditor's report performed in
accordance with instructions received from CITIZENS and containing all pertinent
data to verify the satisfactory completion of the Carrier's performance
hereunder. Prior to commencing work hereunder, the Independent Auditor shall be
approved by CITIZENS, which approval shall not be unreasonably withheld. All
expenses of the Independent Auditor shall be paid by the Carrier. Based upon the
report of the Independent Auditor and its own review, CITIZENS shall adjust the
number of policies for which payment of a Takeout Bonus pursuant to this
Agreement is due.


                                       7


            F. If the Carrier is not otherwise in material breach or default of
a material provision of this Agreement or any applicable provision of law, as
the Policies issued by the Carrier reach the end of the thirty-six (36) month
coverage period and any adjustment pursuant to 3.E. above has been completed,
CITIZENS shall instruct the Escrow Agent to transfer from the Bonus Escrow
Account to the Carrier an amount equal to the Takeout Bonus on the Removed
Policies reaching the end of the thirty-six (36) month coverage period or
otherwise due a bonus pursuant to the terms of this Agreement at such time. The
applicable Takeout Bonus shall be determined in accord with the Program
Requirements and Incentives in Exhibit D. The Carrier must meet all of the
requirements in a Takeout Incentive Program to qualify for the Takeout Bonus
associated with that Program.

            G. At the time the final Takeout Bonus amounts are paid the Carrier,
the Carrier shall also be paid any funds in the Escrow Account attributable as
investment income on the Takeout Bonus paid the Carrier.

      4. Policy Data. CITIZENS shall provide, or has provided, to the Carrier,
by electronic data transfer, or by such other means as is acceptable to the
Carrier, relevant information regarding the Policies. The first such
transmission of data shall be provided to the Carrier at the earliest possible
date convenient to the Carrier and CITIZENS and thereafter on a basis as agreed
to by the Carrier and CITIZENS until none of the Policies remain in CITIZENS.

      5. Department Oversight. CITIZENS shall provide a fully executed copy of
this Agreement to the Department. The Carrier shall respond to any requests for
information by the Department regarding the proposal or this Agreement. The
Carrier and CITIZENS are, and shall remain, subject to all applicable laws of
the State of Florida and the supervision, rules, regulations and orders of the
Department.

      6. Right of Audit. CITIZENS or its representatives, upon reasonable
advance written notice, shall be entitled to audit, at its own cost and expense,
the relevant books and records of the Carrier during normal business hours to
confirm the Carrier's compliance with the terms and conditions of this
Agreement.

      7. Indemnification. Carrier shall indemnify CITIZENS, its Board of
Governors, officers, agents and employees ("CITIZENS Indemnitees") against any
costs, expenses (including reasonable counsel fees and costs of litigation),
claims, demands, actions, losses or liabilities that CITIZENS Indemnitees may
suffer or that may be asserted or claimed against CITIZENS Indemnitees, caused
by or arising directly out of the negligent acts or omissions or any breach of
this Agreement by the Carrier in connection with this Agreement or the
Assumption of Policies from CITIZENS.


                                       8


      CITIZENS shall indemnify Carrier, its officers, directors, agents,
employees, subsidiaries and affiliates ("Carrier Indemnitees") against any
costs, expenses, (including reasonable counsel fees and costs of litigation),
claims, demands, actions, losses or liabilities that the Carrier Indemnitees may
suffer, caused by or arising directly out of the negligent acts or omissions of
CITIZENS in connection with this Agreement.

      8. Carrier's Continuing Status. The Carrier, during such period as it is
entitled to Takeout Bonuses pursuant to this Agreement, shall remain licensed
and authorized to transact property and casualty insurance business in the State
of Florida. Should the Carrier fail to maintain its authority and licensing to
conduct such business, or should the Carrier become the subject to an adverse
finding pursuant to Chapter 631, Florida Statutes, or any other order of the
Department or a court of competent jurisdiction that in any material form or
manner limits or constrains the ability of the Carrier to engage in the business
of property and casualty insurance, other than the initial Consent Order issued
by the Department in connection with this Agreement, such occurrence shall
constitute and be deemed a material breach and default of this Agreement by the
Carrier.

      9. Default, Curative Period and Remedies. Should any breach or default
occur concerning any material obligation, representation or undertaking as set
forth herein, the non-defaulting party shall give the defaulting party written
notice of the material breach or default. Failure of the defaulting party to
cure the material breach or default within fifteen (15) days of the receipt of
the written notice as herein provided shall constitute and be deemed a material
breach and default of this Agreement unless the material breach or default is
not capable of being cured within such period of time, and the defaulting party
has commenced good faith efforts to cure such material breach or default within
fifteen (15) days, and thereafter continues in good faith to diligently pursue
curing until the material breach or default is cured to the reasonable
satisfaction of the non-breaching party. Should the Carrier materially breach or
default in any obligation as set forth in this Agreement and not timely cure
such material default and breach as set forth in this paragraph, CITIZENS may
terminate this Agreement. Upon such a termination by CITIZENS this Agreement
shall be deemed as voided, and the Carrier shall lose all rights to any Takeout
Bonus pursuant to this Agreement. In addition to any rights and remedies set
forth in this Agreement, the non-defaulting party shall have all rights and
remedies available at law and/or equity, including, but not being limited to,
the right to specific performance, damages or injunctive relief.


                                       9


      Notwithstanding any breach of this Agreement, the Carrier shall remain
responsible for Removed Policies unless and until a judicial determination is
rendered relieving, altering or limiting Carrier's responsibility.

      10. Attorney's Fees. If either of the parties hereto shall bring a Court
action alleging material breach of this Agreement or seeking to enforce,
rescind, renounce, declare void or terminate this Agreement or any provisions
thereof, the prevailing party shall be entitled to recover all of its legal
expenses, including reasonable attorney's fees and costs (including attorney's
fees and costs for any appeals taken), and to have the same awarded as part of
the judgment in the proceeding in which such legal expenses and attorney's fees
and costs were incurred.

      11. Benefits. This Agreement shall be binding upon the parties, their
heirs, legal representatives, successors and assigns.

      12. Captions. The paragraph captions as to contents of the particular
paragraphs herein are inserted only for convenience and are in no way to be
construed as part of this Agreement or as a limitation of the scope of the
particular paragraph in which they are referred.

      13. Construction of Agreement. Words of a gender used in this Agreement
shall be held to include any other gender, and words in a singular number shall
be held to include the plural, when the sentence so requires.

      14. Entire Agreement. This Agreement contains all of the oral and/or
previously written agreements, representations, and arrangements between the
parties hereto concerning the Program, and all rights which the respective
parties may have had under any prior written or oral agreements are hereby
canceled and terminated, and all parties agree that there are no representations
or warranties other than those set forth herein.

      15. Florida Law. It is acknowledged that this Agreement was executed in
and shall be construed and governed in accordance with the laws of the State of
Florida and the rules, orders and regulations of the Department in effect at the
time of the execution of this Agreement.

      16. Insolvency. Notwithstanding any other provision to the contrary, in
the event of the insolvency of CITIZENS, the obligations assumed under this
Agreement shall be payable by the Carrier on the basis of the liability of the
Carrier for the business assumed hereunder, without diminution because of such
insolvency, directly to the payees under such Policies and in substitution for
the obligations of CITIZENS to such payees. The Carrier shall be given written
notice of the pendency of each claim or loss which may involve the
indemnification provided by this Agreement within a reasonable time after such
claim or loss is filed in the insolvency proceedings. The Carrier shall have the
right to investigate each such claim or loss and interpose at its own expense,
in the proceedings where the claim or loss is to be adjudicated, any defense
available to CITIZENS, its liquidator, receiver, or statutory successor. The
expense thus incurred by the Carrier shall be chargeable, subject to court
approval, against the insolvent CITIZENS as part of the expense of liquidation
to the extent of a proportionate share of the benefit which may accrue to
CITIZENS solely as a result of the defense undertaken by the Carrier.


                                       10


      Nothing contained in this section is intended to change the relationship
of the parties to this Agreement or to enlarge upon the rights and obligations
of either party hereunder except as provided herein, to wit, to pay or satisfy
the obligations of the statutory successor of CITIZENS on the basis of the
amount of liability determined in the liquidation or receivership proceeding
rather than on the basis of the actual amount of loss paid by the liquidator,
receiver or statutory successor to allowed claimants.

      17. Invalidation. Should any part, provision or term of this Agreement for
any reason be declared invalid, or should any term or performance under this
Agreement by either Party be held as a violation of law by a court of competent
jurisdiction or the Department, this Agreement shall terminate. Upon such
termination, if CITIZENS is required to take back any of the Policies removed by
the Carrier, the Carrier will not be entitled to any Takeout Bonus for such
Policies and the Carrier shall reimburse CITIZENS for all administrative and
legal costs and expenses incurred by CITIZENS in taking back the Policies. In
addition, upon a termination the Parties shall enter into an agreement
concerning, but not being limited to, an allocation of any unearned premium,
responsibility for incurred claims and such other matters as may be necessary to
effectuate the prompt and equitable return of the Policies.

      18. No Intermediary. The Carrier represents and warrants that it has not,
and CITIZENS represents and warrants that it has not, incurred an obligation to
make payment of any fees to any intermediary with respect to the obligations
afforded under this Agreement.

      19. Modification. No change or modification of this Agreement shall be
valid unless the same shall be in writing and signed by all of the parties
hereto and not disapproved by the Department.


                                       11


      20. Notices. Any and all notices, designations, consents, offers,
acceptances, or any other communications provided for herein shall be given in
writing, by hand delivery, by overnight carrier, by registered or certified
mail, or by facsimile transmission and shall be addressed as follows:

                  As to Carrier:    FEDERATED NATIONAL INSURANCE COMPANY
                                    P.O. Box 407193
                                    Fort Lauderdalae, Florida  33340

                                    Attn:    Chief Executive Officer
                                    Telefax: (954) 316-9201

                  As to CITIZENS:   CITIZENS PROPERTY INSURANCE CORPORATION
                                    101 North Monroe Street, Suite 1000
                                    Tallahassee, FL  32301

                                    Attn:    Executive Director
                                    Telefax: (850) 513-3900

      Notices sent by hand delivery shall be deemed delivered on the date of
hand delivery. Notices sent by overnight carrier shall be deemed delivered on
the next business day after being placed into the hands of the overnight
carrier. Notices sent by registered or certified mail shall be deemed delivered
on the third business day after being deposited into the post office. Notices
sent by facsimile transmission shall be deemed to be delivered on the day when
sent if sent prior to 4:30 p.m. (the time being determined by the time zone of
the recipient) otherwise they shall be deemed delivered on the next business
day.

      21. Parties Represented. The parties acknowledge that each party and its
counsel have reviewed and revised this Agreement and that the normal rule of
construction to the effect that any ambiguities are to be resolved against the
drafting party shall not be employed in the interpretation of this Agreement or
any amendments or exhibits hereto.

      22. Special Provisions:

            A. The parties shall coordinate the mailing of any documentation or
notices required by this Agreement.


                                       12


            B. The parties hereto acknowledge that, pursuant to the Program,
CITIZENS will use its sole judgment and discretion in implementing the
Assumption Procedures for participating Carriers.

            C. Should the parties fail to agree on the Removed Policies to be
set forth on Exhibit A, no obligation shall be created pursuant to this
Agreement.

            D. The Carrier and CITIZENS agree to allow the Carrier to supplement
Exhibit A from time to time with lists of additional CITIZENS Policies to be
removed from CITIZENS, but such additional Policies must be designated and
assumed by the Carrier not later than eighteen (18) months from the initial
Assumption Date. All Assumptions for each supplement to Exhibit A (e.g., Exhibit
A-1, A-2, etc.) shall be in accordance with the terms and provisions of this
Agreement and the Assumption Procedures. The Policies so identified in any such
supplement to Exhibit A shall be treated as Removed Policies as of the date of
their Assumption for the purposes of this Agreement. All such supplements to
this Agreement shall be executed in writing by the Parties to effectuate and
document such additional Assumptions.

            E. CITIZENS shall not enter into an agreement with any other insurer
for the removal of the Policies listed in Exhibit A and, further, shall not post
the Policies on an electronic bulletin board or on a list of policies published
for the industry for purposes of depopulation unless such Policies are not
removed by the Carrier in accordance with the terms and provisions of this
Agreement.

      IN WITNESS WHEREOF, the parties hereto have set their hands and seals as
of the day and year first above set forth.

WITNESSES:

                                       CITIZENS PROPERTY INSURANCE CORPORATION
                                       ("CITIZENS")


                                       BY:
- ---------------------------               -------------------------------------
                                          As its Executive Director

- ---------------------------
As to "CITIZENS"

                                       FEDERATED NATIONAL INSURANCE COMPANY
                                       ("Carrier")


                                       BY:
- ---------------------------               -------------------------------------
                                          As its Chief Executive Officer

- ---------------------------
As to the "Carrier"


                                       13


Exhibits:

      A.    Schedule of Policies
      B.    Ceding Commission Rate
      C.    Department Notification and Consent Order
      D.    Program Requirements and Incentives
      E.    Assumption Procedures


                                       14


                                    EXHIBIT B

                             CEDING COMMISSION RATE

      "Ceding Commission Rate" shall be set initially at .160, which is
multiplied by either the Initial Assumed Premium or the Assumed Premium, as
appropriate, to determine the amount owed (i.e., the Ceding Commission) by the
Carrier to CITIZENS for the expenses and services described in Section 2.A.(iv)
and Section 2.B.(ii) of this Agreement.

      As an additional incentive for a Carrier that removes a large number of
policies from the Personal Lines Account, CITIZENS agrees to reduce the Ceding
Commission Rate stated above according to the schedule below:

                             PERSONAL LINES ACCOUNT
           NUMBER OF POLICIES
       ELIGIBLE FOR A TAKEOUT BONUS              CEDING COMMISSION RATE
       ----------------------------              ----------------------
            LESS THAN 60,000                         REMAINS AT .160
            60,000 TO 74,999                         REDUCED TO .120
            75,000 TO 89,999                         REDUCED TO .090
             90,000 AND UP                           REDUCED TO .060

      At the time the number of Removed Policies qualifies for a reduced Ceding
Commission Rate, CITIZENS will recalculate the Ceding Commission due from the
Carrier and make such payment to the Carrier as is appropriate without interest.

      At the time the number of Removed Policies eligible for a Takeout Bonus is
determined for the purpose of releasing funds to the Carrier from the Escrow
Account, the final Ceding Commission Rate will also be determined. CITIZENS
shall pay such funds, if any, at that time that it owes the Carrier. If the
Carrier's previous Ceding Commission payments to CITIZENS are determined to be
less than the amount owed to CITIZENS based on the number of Removed Policies
actually eligible for a Takeout Bonus, the amount owed to CITIZENS shall be
deducted first from the investment earnings on the funds in the Escrow Account.
If this is insufficient to pay CITIZENS the amount owed, the Carrier shall pay
the remaining balance to CITIZENS within 10 days of the date CITIZENS provides
the Carrier with a statement showing the amount owed. CITIZENS will not
authorize the Escrow Agent to release bonus funds from the Escrow Account until
the Carrier has made the required payment to CITIZENS.

                                    EXHIBIT D

                        PROGRAM REQUIREMENTS & INCENTIVES

TAKEOUT INCENTIVE PROGRAM A

1.    The Carrier must remove a minimum of 10,000 Policies with wind coverage
      from the Personal Lines Account during the takeout contract period.

2.    Of the Policies with wind coverage removed from the Personal Lines
      Account, at least 40% must cover residential properties with HO2, HO3 or
      Dwelling Fire policies located in Miami-Dade, Broward or Palm Beach
      Counties.

3.    A Takeout Bonus will be paid at the rate of 12.5% of Written Premium for
      the Policies with wind coverage in coastal counties removed from the
      Personal Lines Account.

TAKEOUT INCENTIVE PROGRAM B

1.    The Carrier must remove a minimum of 30,000 Policies with wind coverage
      from the Personal Lines Account during the takeout contract period.

2.    Of the Policies with wind coverage removed from the Personal Lines
      Account, at least 60% must cover residential properties with HO2, HO3 and
      Dwelling Fire policies located in Miami-Dade, Broward or Palm Beach
      Counties.

3.    A Takeout Bonus will be paid at the rate of 15.0% of Written Premium for
      the Policies with wind coverage in coastal counties removed from the
      Personal Lines Account.

TAKEOUT INCENTIVE PROGRAM C

1.    The Carrier must remove a minimum of 50,000 Policies with wind coverage
      from the Personal Lines Account during the takeout contract period.

2.    Of the Policies with wind coverage removed from the Personal Lines
      Account, at least 80% must cover residential properties with HO2, HO3 and
      Dwelling Fire policies located in Miami-Dade, Broward or Palm Beach
      Counties.

3.    A Takeout Bonus at the rate of 17.5% of Written Premium will be paid for
      the Policies with wind coverage in coastal counties removed from the
      Personal Lines Account.



                                    EXHIBIT E

                        TAKEOUT OF POLICIES BY ASSUMPTION
                              UNDER CONSUMER CHOICE

                          PROCESS FOR REMOVING POLICIES

o     At any point in time, an Insurer may request, for purposes of
      depopulation, a data file of policies from Citizens. All policies not
      currently pending cancellation, not set for non-renewal or tagged for
      another insurer as described below, will be included in the data file.

o     Takeouts/Assumptions will only occur on the 1st of any given month (or
      other day so specified by Citizens to account for weekends and holidays).

o     Each Takeout will consist of paired Assumptions one month apart. The first
      Assumption is for Group A policies (the Initial Assumption) and the second
      is for Group B policies (the Final Assumption). (See below for Group
      definitions).

                               TIMELINE OF EVENTS

AT LEAST 45 DAYS BEFORE INITIAL ASSUMPTION

o     The Insurer must have obtained approval for the proposed Takeout from the
      Citizens Board and have an executed Consent Order from the Office of
      Insurance Regulation to proceed with the next steps in the assumption
      process.

45 DAYS BEFORE INITIAL ASSUMPTION

o     45 days prior to the specified Assumption date, the Insurer must execute
      an Assumption Agreement with Citizens and provide Citizens with a policy
      pre-selection file and a list of its Appointed Agents. As of the Execution
      Date, the Assumption Agreement will not have Exhibit A attached and no
      policies will be tagged at that time.

45 TO 30 DAYS BEFORE INITIAL ASSUMPTION

o     Citizens will review the policy pre-selection file and the agent
      appointment list to determine the status of each selected policy. Each
      policy will be examined to determine if it is still eligible for the
      Takeout (not cancelled or non-renewed), if it complies with the Blackout
      period (i.e., not renewing at any period from 15 days before the
      assumption to 62 days after the assumption), and if the policy was written
      by Agent with an appointment for the Insurer. Citizens will also determine
      that the assumption will result in a reduction of its probable maximum
      loss in the account from which the policies are being assumed.



IF ONLY ONE INSURER IS PARTICIPATING IN THE TAKEOUT, THE FOLLOWING PROVISIONS
APPLY:

      GROUP A (THE ASSUMABLE POLICIES)

            Policies where the Agent is appointed for the Insurer. The policies
            identified in Group A are eligible for immediate assumption. Because
            the agent for these policyholders is already appointed for the
            takeout insurer, the provisions of Section 627.3517 do not apply and
            the policy can be immediately assumed under the same procedures that
            have governed Takeouts prior to the passage of Consumer Choice.

      GROUP B(THE SOLICITED POLICIES)

            Policies where the Agent is not appointed for the Insurer. These
            policies are not immediately eligible for assumption. Before a
            policy in Group B can be assumed, the Insurer must either seek and
            obtain an agreement from the Agent to be appointed for the Insurer
            (which confers on that policy the same status as those in Group A),
            or directly solicit the Policyholder to obtain permission to assume
            the policy with the understanding that the insured will not be able
            to retain his or her current Agent.

IF MORE THAN ONE INSURER IS PARTICIPATING IN THE SAME MONTHLY TAKEOUT, THE
FOLLOWING PROVISIONS APPLY:

      GROUP A (THE ASSUMABLE POLICIES)

            1.    Policies where the Agent is appointed and the policy was only
                  selected by that Insurer.)

            2.    Policies where both Insurers selected the policy and the Agent
                  has an appointment for one Insurer and not the other.

            3.    Policies where both Insurers selected the policy and the Agent
                  has an appointment for both Insurers. These policies will be
                  divided as equally as possible between the Insurers using the
                  following method:

                  o     Group the policies by Form Type
                  o     Group the policies by County
                  o     Divide based on Total Exposure or Total Premium.



      GROUP B (THE SOLICITED POLICIES)

            1.    Policies where the Agent is not appointed for the Insurer and
                  the policy was selected only by that Insurer.

            2.    Policies where both Insurers selected the policy and the Agent
                  is not appointed for either Insurer. These policies will be
                  divided as equally as possible between the Insurers using the
                  following method:

                  o     Group the Policies by Agent

                  o     Divide the Agents based on Total Exposure or Total
                        Premium.

THE FOLLOWING PROVISIONS APPLY REGARDLESS OF THE NUMBER OF INSURERS
PARTICIPATING IN A MONTHLY TAKEOUT:

30 DAYS BEFORE INITIAL ASSUMPTION

o     On the first day of the month preceding the Initial Assumption, Citizens
      will distribute to the Insurer(s) in the Takeout (1) an Exhibit A which
      contains its Assumable Policies and (2) a separate list of its Solicited
      Policies. After the Insurer(s) agrees to Exhibit A and the Solicited
      Policies list, the policies reflected on Exhibit A and the Solicited
      Policies will be tagged for the appropriate Insurer(s) and will not be
      included in any depopulation data file until the end of the tagged period.
      (See below).

INITIAL ASSUMPTION (EXHIBIT A POLICIES ONLY)

o     On the Initial Assumption date, all Exhibit A policies eligible for
      assumption will be assumed by the assigned Insurer. The policies will be
      set for non-renewal by Citizens, and the affected policyholders will be
      sent a Notice of Nonrenewal and Assumption in accordance with prior
      takeout procedures, along with a Certificate of Assumption from the
      Insurer. The Insurer will be provided a data file with information about
      all of the policies that were successfully assumed. Any policies not
      assumed (for whatever reason) will be released from tagging and will be
      included in any future Insurer requested data file.



60 DAYS BEFORE FINAL ASSUMPTION (SOLICITED POLICIES ONLY)

o     The Solicited Policies, those that cannot be immediately assumed, are
      subject to direct solicitation by the Insurer. Citizens will send, at its
      own expense, a letter to each policyholder of a Solicited Policy to
      explain the solicitation, the proposed Takeout and the Insured's rights
      under the Consumer Choice Statute. A copy of this letter must also be
      included in any Insurer's solicitation materials. If requested, Citizens
      will also provide information about the policy's renewal rate (subject to
      future rate filings/increases) for use in the Insurer's solicitation
      materials. The cost of the solicitation by the Insurer will be borne
      solely by the Insurer.

60 DAYS TO 15 DAYS BEFORE FINAL ASSUMPTION (SOLICITED POLICIES ONLY)

o     During the period that policies are tagged, the Insurers may solicit the
      agents or the policyholders assigned to them as Solicited Policies. Any
      Insurer solicitation of a policyholder must include:

      o     A cover letter explaining that they have been selected to receive an
            offer of coverage from a takeout insurer; that to accept the offer,
            they may not retain their current agent;

      o     A copy of the original letter from Citizens concerning the Takeout
            (referenced above);

      o     Marketing material from the Insurer which compares rates (if
            requested) and coverages;

      o     A postcard for the policyholder (named insured) to return within 20
            days to exercise the option to accept the Takeout.

15 DAYS BEFORE FINAL ASSUMPTION (SOLICITED POLICIES ONLY)

o     The Insurer must deliver to Citizens a listing of all policies for which
      acceptance of the Takeout has been received or where an Agent appointment
      for the Insurer has been arranged. These policies will be reflected on a
      supplementary Exhibit A to the Assumption Agreement.

o     At this time, all policies originally designated as Solicited Policies,
      but which were not in the acceptance file will be untagged and will be
      included in any Insurer requested data file.



FINAL ASSUMPTION (SOLICITED POLICIES ONLY)

o     On the first of the month, all policies on the supplementary Exhibit A
      eligible for assumption will be assumed by the assigned Insurer. The
      policies will be set for non-renewal by Citizens, and the affected
      policyholders will be sent a Notice of Nonrenewal and Assumption in
      accordance with prior takeout procedures, along with a Certificate of
      Assumption from the Insurer. The Insurer will receive a data file with
      information about all of the policies that were successfully assumed. Any
      policy not assumed (for whatever reason) will be untagged and will be
      included in any future Insurer requested data file.

EX-10.2

                                ESCROW AGREEMENT

      THIS ESCROW AGREEMENT, dated as of May 3, 2004 ("Escrow Agreement"), is by
and between CITIZENS PROPERTY INSURANCE CORPORATION, legislatively created
pursuant to Section 627.351(6), Florida Statutes, ("Depositor"); FEDERATED
NATIONAL INSURANCE COMPANY being a Florida licensed and authorized insurance
company ("Recipient"); and WELLS FARGO BANK, N.A., a National Banking
Association, as Escrow Agent hereunder ("Escrow Agent").

                                   BACKGROUND

      A. Depositor and Recipient have entered into an Assumption Agreement (the
"Underlying Agreement"), dated May _______, 2004, pursuant to which Agreement
Recipient will remove certain insurance policies from Depositor. The Underlying
Agreement provides that Depositor shall deposit certain monies, as calculated
and provided for in the Underlying Agreement, in a segregated escrow account to
be held by Escrow Agent for the purpose of paying Recipient a bonus for each
policy removed from Depositor by Recipient in accordance with the Underlying
Agreement and applicable Florida Statutes. A true and correct copy of the
Underlying Agreement is attached hereto and incorporated herein as Exhibit "A."

      B. Escrow Agent has agreed to accept, hold, and disburse the funds
deposited with it and the earnings thereon in accordance with the terms of the
Underlying Agreement and this Escrow Agreement.

      C. Depositor and Recipient have each appointed the Representatives (as
defined below) to represent them for all purposes in connection with the funds
to be deposited with Escrow Agent, the Underlying Agreement, and this Escrow
Agreement.

      D. In order to establish the escrow of funds and to effect the provisions
of the Underlying Agreement and applicable Florida Statutes, and specifically
section 627.3511, Florida Statutes, the parties hereto have entered into this
Escrow Agreement.

                             STATEMENT OF AGREEMENT

      NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, for
themselves, their successors and assigns, hereby agree as follows:


                                       1


            1. Definitions. In addition to terms otherwise defined herein the
following terms shall have the following meanings when used herein:

                  a. "Department" shall mean the Office of Insurance Regulation.

                  b. "Depositor Representative" shall mean the Chief Financial
Officer of the Depositor, or any other person designated in a writing signed by
the Executive Director of the Depositor and delivered to Escrow Agent and the
Recipient Representative in accordance with the notice provisions of this Escrow
Agreement, to act as its representative under this Escrow Agreement.

                  c. "Escrow Funds" shall mean the funds deposited by Depositor
with Escrow Agent pursuant to the Underlying Agreement and this Agreement,
together with any interest and other income thereon.

                  d. "Escrow Period" shall mean the period commencing on the
date hereof and ending on that date that Escrow Agent no longer holds any sums
in escrow pursuant to the Underlying Agreement.

                  e. "Joint Written Direction" shall mean a written direction
joined in by Depositor and Recipient as may be required by the Escrow Agreement.

                  f. "Written Direction" shall mean a written direction executed
by the Depositor Representative and directing Escrow Agent to disburse all or a
portion of the Escrow Funds or to take or refrain from taking an action pursuant
to the Underlying Agreement and this Escrow Agreement.

                  g. "Recipient Representative" shall mean Richard A. Widdicombe
or any other person designated in a writing signed by Recipient and delivered to
Escrow Agent and the Depositor Representative in accordance with the notice
provisions of this Escrow Agreement, to act as its representative under this
Escrow Agreement.

                  h. "Representatives" shall mean the Depositor Representative
and/or the Recipient Representative.

            2. Appointment of and Acceptance by Escrow Agent. Depositor,
Recipient and the Representatives hereby appoint Escrow Agent to serve as Escrow
Agent hereunder. Escrow Agent hereby accepts such appointment and, upon receipt
by wire transfer of Escrow Funds in accordance with paragraph 3. below, agrees
to hold, invest and disburse the Escrow Funds in accordance with the Underlying
Agreement and this Escrow Agreement.


                                       2


            3. Creation of Escrow Funds. Pursuant to the Underlying Agreement
(paragraph 3.C.), Depositor will transfer to Escrow Agent, subsequent to the
execution of this Escrow Agreement, the bonus amounts for Removed Policies in
accordance with the Underlying Agreement. The transfer of funds shall be by wire
transfer of immediately available funds, to the following account:

                   WELLS FARGO BANK, N.A.
                   ABA # 121000248
                   A/C # 0001038377
                   FFC: CITIZENS / ATLANTIC PREFERRED ESCROW
                   NOTIFY: BRIAN CLARK (904) 332-9671

            Simultaneously with the wire transfer of funds as above set forth
the Depositor shall give facsimile notice to the Escrow Agent and Recipient of
such transfer at the facsimile number set forth in paragraph 13.hereof.

            4. Disbursements of Escrow Funds.

                  a. Written Direction. Escrow Agent shall disburse Escrow Funds
in accordance with a Written Direction of Depositor pursuant to paragraphs 4.D.,
E., F., G., and H. of the Underlying Agreement.

                  b. Authorization for Disbursement to Pay Claims. During the
Escrow Term the Escrow Agent shall, pursuant to section 627.3511, Florida
Statutes, disburse Escrow Funds to the Recipient for the payment of claims upon
receipt by the Escrow Agent of a Joint Written Direction.

                  c. Expiration of Escrow Period. Upon the expiration of the
Escrow Period, Escrow Agent shall distribute, in accordance with a Written
Direction of Depositor, as promptly as practicable, all previously undistributed
Escrow Funds.

            All disbursements of funds from the Escrow Funds shall be subject to
the claims of Escrow Agent and the Indemnified Parties (as defined below)
pursuant to paragraph 9. below.

            5. Disbursement Into, or Petition to Circuit Court. If, at any time,
there shall exist any dispute between the Escrow Agent, Depositor, Recipient or
the Representatives with respect to the holding or disposition of any portion of
the Escrow Funds or any other obligations of Escrow Agent hereunder, or if at
any time Escrow Agent is unable to determine, to Escrow Agent's sole
satisfaction, the proper disposition of any portion of the Escrow Funds or
Escrow Agent's proper actions with respect to its obligations hereunder, or if
the Representatives have not within thirty (30) days of the furnishing by Escrow
Agent of a notice of resignation pursuant to paragraph 7. hereof, appointed a
successor Escrow Agent to act hereunder, then Escrow Agent may, in its sole
discretion, take any or all of the following actions:


                                        3


                  a. suspend the performance of any of its obligations under
this Escrow Agreement until such dispute or uncertainty shall be resolved to the
sole satisfaction of Escrow Agent or until a successor Escrow Agent shall have
been appointed (as the case may be); provided however, that Escrow Agent shall
continue to invest the Escrow Funds in accordance with paragraph 6. hereof.
Should the period of suspended performance exceed fifteen (15) days the Escrow
Agent will immediately institute a petition pursuant to (b.) below, and
thereafter perform in accordance with the instructions of the Department;

                  b. petition the Circuit Court in and for Leon County, Florida,
for instructions with respect to such dispute or uncertainty;

                  c. pay into the Registry of the Circuit Court of Leon County,
Florida, all funds held by it as the Escrow Funds for holding and disposition in
accordance with the instructions of the Circuit Court of Leon County, Florida.

            Escrow Agent shall have no liability to Depositor, Recipient, their
respective shareholders or any other person with respect to any such suspension
of performance or disbursement to the Registry of the Circuit Court in
accordance with this provision, specifically including therein any liability or
claimed liability that may arise, or be alleged to have arisen, out of or as a
result of any delay in the disbursement of funds held in the Escrow Funds or any
delay in or with respect to any other action required or requested of Escrow
Agent.

            6. Investment of Funds. Escrow Agent pursuant to this Agreement, is
authorized to, and shall invest and reinvest the funds held in the Escrow Funds
pursuant to the investment requirements set forth below at the written direction
of the Recipient:

                  a. in direct obligations of the United States of America or
obligations the principal of and the interest on which are unconditionally
guaranteed by the United States of America;

                  b. in obligations with the Federal Farm Credit Banks;

                  c. in obligations of the Federal Home Loan Banks and its
district banks;


                                       4


                  d. in commercial paper of prime quality of the highest letter
and numerical rating as provided for by at least one nationally recognized
rating service;

                  e. in obligations of the Federal National Mortgage
Association;

                  f. in obligations of the Government National Mortgage
Association;

                  g. in any money market fund all of which is invested in the
foregoing investment categories, including any money market fund managed by
Escrow Agent and any of its affiliates.

            If Escrow Agent has not received written instructions from the
Recipient at any time that an investment decision must be made, Escrow Agent
shall invest the Escrow Funds, or such portion thereof as to which no written
instruction has been received, in investments described in clause (g) above.
Each of the foregoing investments shall be made in the name of Escrow Agent. No
investment shall be made in any instrument or security that has a maturity of
greater than twelve (12) months. The Escrow Agent will use its expertise and
best efforts to maintain the funds invested on a basis so as to provide the
greatest possible liquidity between July 1st and November 30th the "Liquidity
Period") of each year during the Escrow Period. The aforestated Liquidity Period
may be extended by a Joint Written Direction delivered to the Escrow Agent on or
before November 25th of any year during the Escrow Period. During the Liquidity
Period, Escrow Funds will be invested in investments described in clauses (a),
(d), and/or (g) above. Notwithstanding anything to the contrary contained
herein, Escrow Agent may, without notice to the Representatives, sell or
liquidate any of the foregoing investments at any time if the proceeds thereof
are required for any release of funds required hereunder, and Escrow Agent shall
not be liable or responsible for any loss, cost or penalty resulting from any
such sale or liquidation if such sale or liquidation is required to meet the
Escrow Agent's obligations pursuant to paragraph 4. above. With respect to any
funds received by Escrow Agent for deposit into the Escrow Funds after one
thirty o'clock (1:30) p.m., Jacksonville, Florida time, Escrow Agent shall not
be required to invest such funds or to effect such investment instruction until
the next day upon which banks in Jacksonville, Florida are open for business.

            The parties hereto acknowledge that Escrow Funds constituting
Takeout Bonuses may be delivered to the Escrow Agent pursuant to other Takeout
Agreements between the Depositor and other Recipients and Escrow Agreements
executed in accordance with Takeout Agreements between the Depositor and such
other Recipients. Should the Escrow Agent come into possession of such other
Escrow Funds the parties hereto acknowledge and authorize the Escrow Agent to
commingle and pool such other Escrow Funds with the Escrow Funds delivered
pursuant to this Agreement for the purposes of investment and reinvestment
pursuant to paragraph 6. hereof, conditioned on the fact that the investment
policy relating to such other Escrow Funds is the same as contained and set
forth in this Agreement.


                                       5


            7. Resignation and Removal of Escrow Agent. Escrow Agent may resign
from the performance of its duties hereunder at any time by giving thirty (30)
days prior written notice to the Representatives or may be removed, with or
without cause, by the Representatives, acting jointly by furnishing a Joint
Written Direction to Escrow Agent, at any time by the giving of thirty (30) days
prior written notice to Escrow Agent. Such resignation or removal shall take
effect upon the appointment of a successor Escrow Agent as provided hereinbelow.
Upon any such notice of resignation or removal, the Representatives jointly
shall appoint a successor Escrow Agent hereunder, which shall be a commercial
bank, trust company or other financial institution with a combined capital and
surplus in excess of $10,000,000. Upon the acceptance in writing of any
appointment as Escrow Agent hereunder by a successor Escrow Agent, such
successor Escrow Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties of the retiring Escrow Agent, and the
retiring Escrow Agent shall be discharged from its duties and obligations as
Escrow Agent under this Escrow Agreement, but shall not be discharged from any
liability for actions taken as Escrow Agent hereunder prior to such succession.
After any retiring Escrow Agent's resignation or removal, the provisions of this
Escrow Agreement shall inure to its benefit as to any actions taken or omitted
to be taken by it while it was Escrow Agent under this Escrow Agreement.

            8. Liability of Escrow Agent.

                  a. Escrow Agent shall have no liability or obligation with
respect to the Escrow Funds except for Escrow Agent's willful misconduct or
negligence. Escrow Agent's sole responsibility shall be for the safekeeping,
investment, and disbursement of the Escrow Funds in accordance with the terms of
this Escrow Agreement and the Underlying Agreement. Escrow Agent shall have no
implied duties or obligations and shall not be charged with knowledge or notice
of any fact or circumstance not specifically set forth herein. Escrow Agent may
rely upon any instrument, not only as to its due execution, validity and
effectiveness, but also as to the truth and accuracy of any information
contained therein, which Escrow Agent shall in good faith believe to be genuine,
to have been signed or presented by the person or parties purporting to sign the
same and to conform to the provisions of this Escrow Agreement. In no event
shall Escrow Agent be liable for incidental, indirect, special, consequential or
punitive damages. Escrow Agent shall not be obligated to take any legal action
or commence any proceeding in connection with the Escrow Funds, any account in
which Escrow Funds are deposited, this Escrow Agreement or the Underlying
Agreement, or to appear in, prosecute or defend any such legal action or
proceeding. Escrow Agent may consult legal counsel selected by it in the event
of any dispute or question as to the construction of any of the provisions
hereof or of any other agreement or of its duties hereunder, and shall incur no
liability and shall be fully indemnified from any liability whatsoever, except
as above set forth, in acting in accordance with the opinion or instruction of
such counsel. Depositor and Recipient, jointly and severally, shall promptly
pay, upon demand, the reasonable fees and expenses of any such counsel.


                                       6


                  b. The Escrow Agent shall comply with orders issued or process
entered by any court or the Department with respect to the Escrow Funds, without
determination by the Escrow Agent of the jurisdiction of the court or the
Department in the matter. If any portion of the Escrow Funds are at any time
attached, garnished or levied upon under any Order of court or the Department,
or in case the payment, assignment, transfer, conveyance or delivery of any such
property shall be stayed or enjoined by any court or Order or direction of the
Department, or in case any order, judgment or decree shall be made or entered by
any court or the Department affecting such property or any part thereof, then
and in any such event, the Escrow Agent is authorized, in its sole discretion,
to rely upon and comply with any such order, writ, judgment or decree after
giving three (3) days advance written notice to Depositor and Recipient which it
is advised by legal counsel selected by it is binding upon it without the need
for appeal or other action; and if the Escrow Agent complies with any such
order, writ, judgment or decree, it shall not be liable to any of the parties
hereto or to any other person or entity by reason of such compliance even though
such order, writ, judgment or decree may be subsequently reversed, modified,
annulled, set aside or vacated.

                                       7


            9. Indemnification of Escrow Agent. From and at all times after the
date of this Escrow Agreement, Depositor and Recipient, jointly and severally,
shall, to the fullest extent permitted by law and to the extent provided herein,
indemnify and hold harmless Escrow Agent and each director, officer, employee,
attorney, agent and affiliate of Escrow Agent (collectively, the "Indemnified
Parties") against any and all actions, claims (whether or not valid), losses,
damages, liabilities, costs and expenses of any kind or nature whatsoever
(including without limitation reasonable attorneys' fees, costs and expenses)
incurred by or asserted against any of the Indemnified Parties from and after
the date hereof, whether direct, indirect or consequential, as a result of or
arising from or in any way relating to any claim, demand, suit, action or
proceeding (including any inquiry or investigation) by any person, including
without limitation Depositor or Recipient, whether threatened or initiated,
asserting a claim for any legal or equitable remedy against any person under any
statute or regulation, including, but not limited to, any federal or state
securities laws, or under any common law or equitable cause or otherwise,
arising from or in connection with the negotiation, preparation, execution,
performance or failure of performance of this Escrow Agreement or any
transactions contemplated herein, whether or not any such Indemnified Party is a
party to any such action, proceeding, suit or the target of any such inquiry or
investigation; provided, however, that no Indemnified Party shall have the right
to be indemnified hereunder for any liability finally determined by a court of
competent jurisdiction, subject to no further appeal, to have resulted solely
from the negligence or willful misconduct of such Indemnified Party. If any such
action or claim shall be brought or asserted against any Indemnified Party, such
Indemnified Party shall promptly notify Depositor and Recipient in writing, and
Depositor and Recipient shall assume the defense thereof, including the
employment of counsel and the payment of all expenses. Such Indemnified Party
shall, in its sole discretion, have the right to employ separate counsel (who
may be selected by such Indemnified Party in its sole discretion) in any such
action and to participate in the defense thereof, and the fees and expenses of
such counsel shall be paid by such Indemnified Party, except that Depositor
and/or Recipient shall be required to pay such fees and expenses if (a)
Depositor and/or Recipient agree to pay such fees and expenses, or (b) Depositor
and/or Recipient shall fail to assume the defense of such action or proceeding
or shall fail, in the reasonable discretion of such Indemnified Party, to employ
counsel satisfactory to the Indemnified Party in any such action or proceeding,
or (c) Depositor and/or Recipient is the plaintiff in any such action or
proceeding or (d) the named parties to any such action or proceeding (including
any impleaded parties) include both Indemnified Party and Recipient and/or
Depositor, and Indemnified Party shall have been advised by counsel that there
may be one or more legal defenses available to it which are different from or
additional to those available to Recipient or Depositor. Depositor and Recipient
shall be jointly and severally liable to pay fees and expenses of counsel
pursuant to the preceding sentence, except that any obligation to pay under
clause (a) shall apply only to the party so agreeing. All such fees and expenses
payable by Recipient and/or Depositor pursuant to the foregoing sentence shall
be paid from time to time as incurred, both in advance of and after the final
disposition of such action or claim. All of the foregoing losses, damages, costs
and expenses of the Indemnified Parties shall be payable by Depositor and
Recipient, jointly and severally, to the extent of the Escrow Funds upon demand
by such Indemnified Party. Upon exhaustion of the Escrow Funds, the
indemnification obligations of Depositor and Recipient hereunder shall be borne
equally by Depositor and Recipient. The obligations of Depositor and Recipient
under this paragraph 9. shall survive any termination of this Escrow Agreement
and the resignation or removal of Escrow Agent.


                                       8


            The parties agree that neither the payment by Depositor or Recipient
of any claim by Escrow Agent for indemnification hereunder nor the disbursement
of any amounts to Escrow Agent from the Escrow Funds in respect of a claim by
Escrow Agent for indemnification shall impair, limit, modify, or affect, as
between Depositor and Recipient, the respective rights and obligations of
Depositor, on the one hand, and Recipient, on the other hand, under the
Underlying Agreement.

            10. Fees and Expenses of Escrow Agent. Depositor and Recipient shall
compensate Escrow Agent for its services hereunder in accordance with Exhibit B
attached hereto.

            Recipient, Depositor and the Representatives hereby grant to Escrow
Agent a security interest in and lien upon the Escrow Funds and all funds
therein to secure all obligations pursuant to paragraph 10. hereof, to Escrow
Agent, and Escrow Agent shall have the right to offset the amount of any
compensation or reimbursement due against the Escrow Funds. If for any reason
funds in the Escrow Funds are insufficient to cover such compensation and
reimbursement, Depositor and Recipient shall promptly pay such amounts to Escrow
Agent upon receipt of an itemized invoice.

            11. Representations and Warranties; Legal Opinions.

                  a. Depositor makes the following representations and
warranties to Escrow Agent:

                        (i) Depositor is a legislatively created corporation
created pursuant to Section 627.351(6), Florida Statutes, and duly organized,
validly existing, and in good standing under the laws of the State of Florida,
and has full power and authority to execute and deliver this Escrow Agreement
and to perform its obligations hereunder;

                        (ii) This Escrow Agreement has been duly approved by all
necessary action of Depositor, has been executed by duly authorized officers of
Depositor, and constitutes a valid and binding agreement of Depositor,
enforceable in accordance with its terms.

                        (iii) The execution, delivery, and performance by
Depositor of this Escrow Agreement is in accordance with the Underlying
Agreement and will not violate, conflict with, or cause a default under the
Second Amended Plan of Operation of Depositor, any applicable law or regulation,
any court order or administrative ruling or decree to which Depositor is a party
or any of its property is subject, or any agreement, contract, indenture, or
other binding arrangement, including without limitation the Underlying
Agreement, to which Depositor is a party or any of its property is subject.


                                       9


                        (iv) The Executive Director has full power and authority
to execute, deliver, and perform this Escrow Agreement, and to designate the
Chief Financial Officer of Depositor as its Depositor Representative with full
power to execute and deliver any Written Direction of Depositor or Joint Written
Direction, to amend, modify or waive any provision of this Agreement and to take
any and all other actions as the Depositor Representative under this Agreement,
all without further consent or direction from, or notice to, Depositor or any
other party.

                        (v) No party other than the parties hereto, their heirs,
successors or assigns have, or shall have, any lien, claim or security interest
in the Escrow Funds or any part thereof. The successor or assignee of any party
hereto shall be bound by the obligations of the Underlying Agreement and this
Escrow Agreement. No financing statement under the Uniform Commercial Code is on
file in any jurisdiction claiming a security interest in or describing (whether
specifically or generally) the Escrow Funds or any part thereof.

                        (vi) All of the representations and warranties of
Depositor contained herein are true and complete as of the date hereof and will
be true and complete at the time of any disbursement from the Escrow Funds.

                  b. Recipient makes the following representations and
warranties to Escrow Agent:

                        (i) Recipient is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Florida, and has
full power and authority to execute and deliver this Escrow Agreement and to
perform its obligations hereunder;

                        (ii) This Escrow Agreement has been duly approved by all
necessary corporate action of Recipient, including any necessary shareholder
approval, has been executed by duly authorized officers of Recipient, and
constitutes a valid and binding agreement of Recipient, enforceable in
accordance with its terms.

                        (iii) The execution, delivery, and performance by
Recipient of this Escrow Agreement is in accordance with the Underlying
Agreement and will not violate, conflict with, or cause a default under the
articles of incorporation or bylaws of Recipient, any applicable law or
regulation, any court order or administrative ruling or decree to which
Recipient is a party or any of its property is subject, or any agreement,
contract, indenture, or other binding arrangement, including without limitation
the Underlying Agreement, to which Recipient is a party or any of its property
is subject.


                                       10


                        (iv) Richard Widdicombe has been duly appointed to act
as the representative of Recipient hereunder and has full power and authority to
execute, deliver, and perform this Escrow Agreement, to execute and deliver any
Joint Written Direction, to amend, modify or waive any provision of this
Agreement and to take any and all other actions as the Recipient Representative
under this Agreement, all without further consent or direction from, or notice
to, Recipient or any other party.

                        (v) No party other than the parties hereto, their heirs,
successors or assigns have, or shall have, any lien, claim or security interest
in the Escrow Funds or any part thereof. The successor or assignee of any party
hereto shall be bound by the obligations of the Underlying Agreement and this
Escrow Agreement. No financing statement under the Uniform Commercial Code is on
file in any jurisdiction claiming a security interest in or describing (whether
specifically or generally) the Escrow Funds or any part thereof.

            12. Consent to Jurisdiction and Venue. In the event that any party
hereto commences a lawsuit or other proceeding relating to or arising from this
Agreement, the parties hereto agree that the Circuit Court in and for Leon
County, Florida shall have the sole and exclusive jurisdiction over any such
proceeding.

            13. Notice. All notices and other communications hereunder shall be
in writing and shall be deemed to have been validly served, given or delivered
five (5) days after deposit in the United States mails, by certified mail with
return receipt requested and postage prepaid, when delivered personally, one (1)
day after delivery to any overnight courier, or when transmitted by facsimile
transmission facilities, and addressed to the party to be notified as follows:

If to Depositor at:             CITIZENS PROPERTY INSURANCE CORPORATION
                                101 NORTH MONROE STREET, SUITE 1000
                                TALLAHASSEE, FL  32301
                                ATTENTION: ROBERT L. RICKER, EXECUTIVE DIRECTOR
                                FACSIMILE NUMBER: (850) 513-3900

                                       11


If to the Escrow Agent at:      WELLS FARGO BANK, N.A.,
                                AS ESCROW AGENT
                                CORPORATE TRUST GROUP
                                7077 BONNEVAL ROAD, SUITE 400
                                JACKSONVILLE, FLORIDA 32216
                                ATTENTION: BRIAN CLARK
                                FACSIMILE NUMBER: (904) 332-9673

If to Recipient at:             FEDERATED NATIONAL INSURANCE COMPANY
                                P.O. BOX 407193
                                FORT LAUDERDALE, FLORIDA  33340
                                ATTENTION: RICHARD WIDDICOMBE
                                FACSIMILE NUMBER:  (954) 316-9201

or to such other address as each party may designate for itself by like notice.

            14. Amendment or Waiver. This Escrow Agreement may be changed,
waived, discharged or terminated only by a Joint Written Direction signed by the
Representatives and Escrow Agent. No delay or omission by any party in
exercising any right with respect hereto shall operate as a waiver. A waiver on
any one occasion shall not be construed as a bar to, or waiver of, any right or
remedy on any future occasion.

            15. Severability. To the extent any provision of this Escrow
Agreement is prohibited by or invalid under applicable law, such provision shall
be ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Escrow Agreement.

            16. Governing Law. This Escrow Agreement shall be construed and
interpreted in accordance with the laws of the State of Florida.

            17. Entire Agreement. This Escrow Agreement constitutes the entire
agreement between the parties relating to the holding, investment and
disbursement of the Escrow Funds and sets forth in their entirety the
obligations and duties of Escrow Agent with respect to the Escrow Funds.

            18. Binding Effect. All of the terms of this Escrow Agreement, as
amended from time to time, shall be binding upon, inure to the benefit of and be
enforceable by the respective heirs, successors and assigns of Depositor,
Recipient, the Representatives and Escrow Agent.

            19. Execution in Counterparts. This Escrow Agreement and any Joint
Written Direction may be executed in two or more counterparts, which when so
executed shall constitute one and the same agreement or direction.

                                       12

            20. Termination. Upon the first to occur of the disbursement of all
amounts in the Escrow Funds, pursuant to Written Directions or the disbursement
of all amounts in the Escrow Funds, pursuant to paragraph 4 . hereof, this
Escrow Agreement shall terminate and Escrow Agent shall have no further
obligation or liability whatsoever with respect to this Escrow Agreement or the
Escrow Funds.

            21. Dealings. The Escrow Agent and any stockholder, director,
officer or employee of the Escrow Agent may buy, sell, and deal in any of the
securities of the Depositor or Recipient and become pecuniarily interested in
any transaction in which the Depositor or Recipient may be interested, and
contract and lend money to the Depositor or Recipient and otherwise act as fully
and freely as though it were not the Escrow Agent under this Agreement. Nothing
herein shall preclude the Escrow Agent from acting in any other capacity for the
Depositor or Recipient or for any other entity.

            22. Attorneys' Fees and Costs. In any litigation concerning the
breach or enforcement of this Escrow Agreement the prevailing party in such
litigation shall be entitled to recover reasonable attorneys' fees and costs
including therein, such fees and costs incurred in any appellate proceeding.

            IN WITNESS WHEREOF, the parties hereto have caused this Escrow
Agreement to be executed under seal as of the date first above written.


                                       13


                                    DEPOSITOR:

                                    CITIZENS PROPERTY INSURANCE CORPORATION

                                    By:
                                          --------------------------------------
                                          ROBERT L. RICKER
                                          Executive Director

                                    RECIPIENT:

                                    FEDERATED NATIONAL INSURANCE COMPANY

                                    By:
                                          --------------------------------------
                                          RICHARD A. WIDDICOMBE
                                          Chief Executive Officer

                                    DEPOSITOR REPRESENTATIVE:

                                    By:
                                          --------------------------------------
                                          JESSICA BUSS
                                          Chief Financial Officer

                                    RECIPIENT REPRESENTATIVE:

                                    By:
                                          --------------------------------------
                                          RICHARD A. WIDDICOMBE
                                          Chief Executive Officer

                                    ESCROW AGENT:

                                    WELLS FARGO BANK, N.A.

                                    By:
                                          --------------------------------------
                                          BRIAN P. CLARK
                                          Vice President


                                       14


                                    EXHIBIT B


                          FEES PAYABLE TO ESCROW AGENT

      Pursuant to paragraph 10. of the Escrow Agreement, Wells Fargo, N.A.
("Escrow Agent") shall be compensated at an annual fee of $1,500.00 (the "Fee")
which Fee shall compensate Escrow Agent for all services to be performed by the
Escrow Agent under this Escrow Agreement for the following 12 month period.

      The Fee shall be payable to the Escrow Agent on an annual basis from the
Escrow Funds commencing the first day the Funds are deposited. At the end of the
Escrow Period, or if the Escrow Agent is terminated or resigns, the Escrow Agent
shall include in the final distribution of Escrow Funds an amount, if any, equal
to the unearned portion of Fees paid to the Escrow Agent out of Escrow Funds at
the beginning of the 12 month period. The amount of unearned Fees to be
reimbursed will be calculated by comparing 1) the number of days from the end of
the Escrow Period or 2) the date the Escrow Agent is terminated or resigns to
the end of the 12 month period covered by the last annual payment of Fees
divided by 365. The obligation of the Escrow Agent to reimburse unearned Fees
under this Exhibit B shall survive any termination of this Escrow Agreement.

EX-10.3

                              EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the "Agreement"), made and entered into as of the
8th day of June, 2004, by and between:

      (i)   JAMES GORDON JENNINGS III, an individual of Plantation, Florida (the
            "Employee") and

      (ii)  21ST CENTURY HOLDING COMPANY, a Florida corporation with offices and
            place of business in Plantation, Florida (the "Company").

                              PRELIMINARY STATEMENT

WHEREAS, the Company is engaged in the insurance business and desires to employ
Employee and to secure for the Company the benefit of Employee's experience,
efforts and abilities in connection with the business of the Company, all as
provided herein; and

WHEREAS, the Company has and will continue to expend substantial resources in
connection with the aforementioned endeavors; and

WHEREAS, the Company desires to engage Employee as Chief Financial Officer of
the Company to perform accounting and management functions and other services in
connection with the business of the Company, and

NOW, THEREFORE, in consideration of the premises and mutual covenants herein
contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:

1. Employment. Effective as of May ___, 2004, the Company employs Employee, and
Employee hereby accepts employment by Company, and agrees to serve the Company,
upon the terms and conditions set forth in this Agreement.

2. Term of Employment. The Employee shall be employed for a period of four (4)
year(s) from the date set forth in Paragraph 1 herein (the period of employment
may be referred to as the "Term of Employment").

3. Duties of Employee. So long as employed hereunder, Employee agrees to devote
Employee's full business time and energy to the business and affairs of the
Company, to perform Employee's duties hereunder effectively, diligently and to
the best of Employee's ability and to use Employee's best efforts, skill and
abilities to promote the Company's interests. Employee's duties shall include,
but are not limited to, sales and management functions for the Company, as well
as providing any other services as may be determined by the Company from time to
time in the Company's reasonable discretion.

4. Compensation. For all services to be rendered by Employee to the Company
during the Term of Employment, the Company agrees to compensate Employee and
Employee agrees to accept from Employer, the following compensation:

      (a) Base Salary. The Company agrees to pay Employee an annual salary of
      ONE HUNDRED THIRTY-SEVEN THOUSAND DOLLARS ($137,000.00) per year payable
      biweekly, in the following amount:

            TWENTY-SIX HUNDRED THIRTY-FOUR DOLLARS and 62/100 ($2,634.62)

      (b) Upon the execution of this Agreement, Employee shall receive 20,000
      stock options pursuant to the 2002 Stock Option Plan of 21st Century
      Holding Company.

      (c) Medical Insurance. In addition to the Employee's salary and bonus, as
      set forth above, and so long as Employee is employed by the Company, the
      Company agrees to provide and pay the premium cost for medical insurance
      coverage for the Employee commensurate with the coverage provided by the
      Company for other similarly situated employees.

5. Termination. Employee's employment with the Company may be terminated by the
Company if any of the following shall occur:


                                       1


      (a) Employee shall be discharged for "good cause" which shall mean that:

            (i) there has been continued gross neglect on the part of the
            Employee in the performance of Employee's duties under this
            Agreement with notice and an opportunity to cure: or

            (ii) Employee shall have committed a material breach of any term or
            condition of this Agreement; or

            (iii) Employee is convicted of a felony or of any crime involving
            moral turpitude which is committed by Employee during the term of
            this Agreement.

            (iv) Employee continued to neglect Employee Handbook Policies and
            Procedures.

      If Employee's employment with the Company shall be terminated as provided
in this Section 5, the Employee shall be entitled to Employee's base weekly
salary (as provided in Section 4(a) above) prorated only through the date of the
termination of employment.

6. Resignation. If the Employee voluntarily resigns his employment with the
Company with less than 2 weeks advanced notice, the Employee's compensation
shall be reduced one day for each day the advanced notice is less than two
weeks. Also, the Employee agrees to reimburse the Company, if necessary to
comply with this provision.

7. Non-Solicitation of Company Employees Agreement. Employee agrees that for the
period that Employee is employed by the Company and for a period of two (2)
years if Employee resigns or is terminated from the Company, Employee will not,
for any reason, solicit or hire, whether for himself or on behalf of another
company, any of the Company's current employees. Employees of the Company will
be considered "current" for the period of their employment with the Company and
for a period of six (6) months after their resignation or termination from the
Company.

8. Confidentiality Agreement. The Employee recognizes, acknowledges and agrees
that the documents, lists, files, records, data and other information developed
and acquired by the Company, including all information developed and acquired by
the Employee in the course of Employee's employment with the Company as it may
exist from time to time, are considered confidential, and include, but are not
limited to, all information relating to the Company's projects, proposed
projects or applications (the "Confidential Information").

      (a) Prohibited Acts. The Employee understands and agrees that all such
      Confidential Information is to be preserved and protected, is not to be
      disclosed or made available, directly or indirectly, to third persons for
      purposes unrelated to the objectives of the Company, without prior
      authorization of an executive officer of the Company, and is not to be
      used, directly or indirectly, for any purpose unrelated to the objectives
      of the Company without prior written authorization of an executive officer
      of the Company.

      (b) Continuing Obligations. The Employee understands and agrees that
      Employee's obligations under this Agreement, specifically including the
      obligations to preserve and protect and not to disclose (or make available
      to third persons) or use for purposes unrelated to the objectives of the
      Company, without prior written authorization of an executive officer of
      the Company, Confidential Information, continue indefinitely and do not,
      under any circumstances or for any reason (specifically including wrongful
      discharge), cease upon termination of employment; and that, in the event
      of termination of the Employee's employment for any reason (specifically
      including wrongful discharge), such Confidential Information shall remain
      the sole property of the Company and shall be left in its entirety in the
      undisputed possession and control of the Company after such termination.

9. Enforcement of Covenants. In addition to all other remedies available at law
or in equity, the covenants contained in Sections 7 and 8 hereof shall be
enforceable by decree of specific performance and/or injunctive relief and shall
be construed as separate covenants covering competition in the geographical
territory set forth, and if any court shall finally determine that the
restraints provided for therein are too broad as to the area, activity or time
covered, then the area, activity or time covered, as the case may be, may be
reduced by such court to whatever extent the court deems reasonable and such
covenants shall be enforced as to such reduced area, activity or time.


                                       2


10. Notices. All notices, demands and other communications which may or are
required to be given to or made by either party to the other in connection with
this Agreement shall be in writing, shall be given by hand delivery or by United
States Certified or Registered mail, return receipt requested, postage prepaid,
and shall be deemed to have been given or made when received by the addressee,
addressed to the respective parties as follows:

         If to Employee:         GORDON JENNINGS
                                     6050 SW 6 Street
                                     Plantation, FL 33317

         If to Company:          21ST CENTURY HOLDING COMPANY
                                      4161 N.W. 5th Street
                                      Plantation, Florida 33317
                                      Attn: Edward J. Lawson


                                       3


11. Miscellaneous:

            (a) This Agreement has been executed in and shall be governed and
construed in accordance with the laws of the State of Florida.

            (b) Unless otherwise provided herein, all rights, powers, and
privileges conferred hereunder upon the parties shall be cumulative and not
restrictive of those given by law.

            (c) No failure of any party hereto to exercise any power given such
party hereunder or to insist upon strict compliance by the other party with its
obligations hereunder, and no customary practice of the parties at variance with
the terms hereof, shall constitute a waiver of a party's right to demand exact
compliance with the terms hereof.

            (d) Time is of the essence in complying with the terms, conditions
and provisions of this Agreement.

            (e) This Agreement contains the entire agreement of the parties
hereto pertaining to the subject matter hereof, and no representation,
inducements, promises or agreements between the parties not contained herein
shall be of any force or effect.

            (f) This Agreement is binding upon and shall inure to the benefit of
the Company, its successors and assigns and the Employee and his respective
heirs, personal representatives, successors and assigns.

            (g) Any amendment to this Agreement shall not be binding upon the
parties to this Agreement unless such amendment is in writing and due executed
by all the parties hereto.

            (h) In the event any litigation or controversy arises out of or in
connection with this Agreement between the parties hereto, the prevailing party
in such litigation or controversy shall be entitled to recover from the other
party or parties all reasonable attorney's fees, expenses and suit costs,
including those associated with any appellate or post-judgment collection
proceeding.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the day, month and year first above written.


                                       /s/ James Gordon Jennings III
                                       -----------------------------------------
                                       JAMES GORDON JENNINGS III
                                       (the "Employee")

                                       21ST CENTURY HOLDING COMPANY
                                       a Florida corporation

                                       By: /s/ Edward J. Lawson
                                          --------------------------------------
                                       Name: Edward J. Lawson
                                             -----------------------------------
                                       Title: President
                                             -----------------------------------
                                       (the "Company")


                                       4

EX-32.2

21^st Century Holding Company

EXHIBIT 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT

In connection with the Quarterly Report on Form 10-Q of 21^st Century Holding Company for the quarter ended June 30, 2004 as filed with the Securities and Exchange Commission (the “Report”), I, James G. Jennings, III, Chief Financial Officer of 21^st Century Holding Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of 21st Century Holding Company.

By: /s/ James G. Jennings, III James G. Jennings, III, Chief Financial Officer

36