(5) Investments

FASB issued guidance addresses accounting and reporting for (a) investments in equity securities that have readily determinable fair values and (b) all investments in debt securities. FASB issued guidance requires that these securities be classified into one of three categories: (i) held-to-maturity, (ii) trading securities or (iii) available-for-sale.

Investments classified as held-to-maturity include debt securities wherein the Company's intent and ability are to hold the investment until maturity. The accounting treatment for held-to-maturity investments is to carry them at amortized cost without consideration to unrealized gains or losses. Investments classified as trading securities include debt and equity securities bought and held primarily for sale in the near term. The accounting treatment for trading securities is to carry them at fair value with unrealized holding gains and losses included in current period operations. Investments classified as available-for-sale include debt and equity securities that are not classified as held-to-maturity or as trading security investments. The accounting treatment for available-for-sale securities is to carry them at fair value with unrealized holding gains and losses excluded from earnings and reported as a separate component of shareholders' equity, namely “Other Comprehensive Income”.

Total investments increased $6.1 million, or 5.0%, to $128.6 million as of September 30, 2011, compared with $122.5 million as of December 31, 2010.

The debt and equity securities that are available-for-sale and carried at fair value represent 94% and 95% of total investments as of September 30, 2011 and of December 31, 2010, respectively.

We did not hold any trading investment securities during the nine months ended September 30, 2011.

The FASB-issued guidance also addresses the determination as to when an investment is considered impaired, whether that impairment is other-than-temporary, and the measurement of an impairment loss. The Company's policy for the valuation of temporarily impaired securities is to determine impairment based on the analysis of the following factors.

·	rating downgrade or other credit event (e.g., failure to pay interest when due);

·	length of time and the extent to which the fair value has been less than amortized cost;

·	financial condition and near term prospects of the issuer, including any specific events which may influence the operations of the issuer such as changes in technology or discontinuance of a business segment;

·	prospects for the issuer's industry segment;

·	intent and ability of the Company to retain the investment for a period of time sufficient to allow for anticipated recovery in market value;

·	historical volatility of the fair value of the security.

Pursuant to FASB-issued guidance, the Company records the unrealized losses, net of estimated income taxes, that are associated with that part of our portfolio classified as available-for-sale through the shareholders' equity account titled “Other Comprehensive Income”. Management periodically reviews the individual investments that comprise our portfolio in order to determine whether a decline in fair value below our cost either is other-than temporarily or permanently impaired. Factors used in such consideration include, but are not limited to, the extent and length of time over which the market value has been less than cost, the financial condition and near-term prospects of the issuer and our ability and intent to keep the investment for a period sufficient to allow for an anticipated recovery in market value.

In reaching a conclusion that a security is either other-than-temporarily or permanently impaired we consider such factors as the timeliness and completeness of expected dividends, principal and interest payments, ratings from nationally recognized statistical rating organizations such as Standard and Poor's and Moody's Investors Service, Inc. (“Moody's”), as well as information released via the general media channels. During the nine months ended September 30, 2011, in connection with this process, we have not charged any net realized investment loss to operations.

As of September 30, 2011 and December 31, 2010, respectively, all of our securities are in good standing and not impaired as defined by FASB-issued guidance.

The investments held as of September 30, 2011 and December 31, 2010, were comprised mainly of corporate bonds held in various industries and municipal and United States government bonds. As of September 30, 2011, 63% of the debt portfolio is in diverse industries and 37% is in United States government bonds. As of September 30, 2011, approximately 82% of the equity holdings are in equities related to diverse industries and 18% are in mutual funds.

As of September 30, 2011, 52% of the investment portfolio is in corporate bonds, 3% is in obligations of states and political subdivisions, and 32% is in United States government bonds. Approximately 9% of the common stock holdings are related to foreign entities.

As of September 30, 2011 and December 31, 2010, we have classified $7.2 million and $6.2 million, respectively, of our bond portfolio as held-to-maturity. We only classify bonds as held-to-maturity to support securitization of credit requirements. Fully funded trust agreements used for such purposes totaled $4.6 million as of September 30, 2011 and December 31, 2010.

During the nine months ended September 30, 2011, we did not re-classify any of our bond portfolio between available-for-sale and held-to-maturity.

During the first quarter of the nine months ended September 30, 2010, we re-classified $3.1 million of amortized cost to held-to-maturity from available-for-sale to fund trust agreements.

As of September 30, 2011 and December 31, 2010, Federated National maintained fully funded trust agreements that totaled $4.6 million in favor of two of its reinsurers.

(A) Debt and Equity Securities

The following table summarizes, by type, our investments as of September 30, 2011 and December 31, 2010.

	September 30, 2011					December 31, 2010
	Carrying Amount		Percent of Total			Carrying Amount		Percent of Total
	(Dollars in Thousands)
Debt securities, at market:
United States government obligations and authorities	$	35,050		27.25	%	$	28,196		23.02	%
Obligations of states and political subdivisions		3,336		2.59	%		2,963		2.42	%
Corporate		65,361		50.82	%		65,808		53.73	%
International		589		0.46	%		1,383		1.13	%
		104,336		81.12	%		98,350		80.30	%
Debt securities, at amortized cost:
Corporate		920		0.72	%		818		0.67	%
United States government obligations and authorities		6,303		4.90	%		5,380		4.39	%
		7,223		5.62	%		6,198		5.06	%
Total debt securities		111,559		86.74	%		104,548		85.36	%

Equity securities, at market:		17,064		13.26	%		17,937		14.64	%
Total investments	$	128,623		100.00	%	$	122,485		100.00	%

The following table shows the realized gains (losses) for debt and equity securities for the three months ended September 30, 2011 and 2010.

	Three Months Ended September 30,
	2011					2010
	Gains (Losses)			Fair Value at Sale		Gains (Losses)			Fair Value at Sale
	(Dollars in Thousands)

Debt securities	$	620		$	10,177	$	2,201		$	25,432
Equity securities		273			1,502		194			2,579
Total realized gains		893			11,679		2,395			28,011

Debt securities		(10	)		213		(19	)		318
Equity securities		(170	)		492		(512	)		2,258
Total realized losses		(180	)		705		(531	)		2,576

Net realized gains on investments	$	713		$	12,384	$	1,864		$	30,587

The following table shows the realized gains (losses) for debt and equity securities for the nine months ended September 30, 2011 and 2010.

	Nine Months Ended September 30,
	2011					2010
	Gains (Losses)			Fair Value at Sale		Gains (Losses)			Fair Value at Sale
	(Dollars in Thousands)

Debt securities	$	1,045		$	39,630	$	4,068		$	81,704
Equity securities		1,010			5,751		2,856			20,626
Total realized gains		2,055			45,381		6,924			102,330

Debt securities		(442	)		14,046		(59	)		2,884
Equity securities		(561	)		3,019		(1,177	)		6,139
Total realized losses		(1,003	)		17,065		(1,236	)		9,023

Net realized gains on investments	$	1,052		$	62,446	$	5,688		$	111,353

A summary of the amortized cost, estimated fair value and gross unrealized gains and losses of debt and equity securities at September 30, 2011 and December 31, 2010 is as follows.

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(Dollars in Thousands)
September 30, 2011
Debt Securities - Available-For-Sale:
United States government obligations and authorities	$	32,914	$	2,137	$	1	$	35,050
Obligations of states and political subdivisions		2,915		421		-		3,336
Corporate		64,042		1,816		497		65,361
International		588		1		-		589
	$	100,459	$	4,375	$	498	$	104,336

Debt Securities - Held-To-Maturity:
United States government obligations and authorities	$	6,303	$	274	$	-	$	6,577
Corporate		920		29		1		948
	$	7,223	$	303	$	1	$	7,525

Equity securities - common stocks	$	20,246	$	682	$	3,865	$	17,063

December 31, 2010
Debt Securities - Available-For-Sale:
United States government obligations and authorities	$	28,389	$	191	$	384	$	28,196
Obligations of states and political subdivisions		2,920		49		6		2,963
Corporate		65,540		850		581		65,809
International		1,358		25		1		1,382
	$	98,207	$	1,115	$	972	$	98,350

Debt Securities - Held-To-Maturity:
United States government obligations and authorities	$	5,381	$	212	$	20	$	5,573
Corporate		818		1		3		816
	$	6,199	$	213	$	23	$	6,389

Equity securities - common stocks	$	17,245	$	1,425	$	733	$	17,937

The table below reflects our unrealized investment losses by investment class, aged for length of time in a continuous unrealized loss position as of September 30, 2011.

	Unrealized (Losses)			Less than 12 months			12 months or longer
	(Dollars in Thousands)
Debt securities:
United States government obligations and authorities	$	(1	)	$	(1	)	$	-
Obligations of states and political subdivisions		-			-			-
Corporate		(497	)		(497	)		-
International		-			-			-
		(498	)		(498	)		-
Equity securities:
Common stocks		(3,865	)		(3,236	)		(629	)

Total debt and equity securities	$	(4,363	)	$	(3,734	)	$	(629	)

The table below reflects our unrealized investment losses by investment class, aged for length of time in a continuous unrealized loss position as of December 31, 2010.

	Unrealized (Losses)			Less than 12 months			12 months or longer
	(Dollars in Thousands)
Debt securities:
United States government obligations and authorities	$	(384	)	$	(384	)	$	-
Obligations of states and political subdivisions		(6	)		(6	)		-
Corporate		(581	)		(581	)		-
International		(1	)		(1	)		-
		(972	)		(972	)		-
Equity securities:
Common stocks		(733	)		(435	)		(298	)

Total debt and equity securities	$	(1,705	)	$	(1,407	)	$	(298	)

Below is a summary of debt securities at September 30, 2011 and December 31, 2010, by contractual or expected maturity periods. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	September 30, 2011				December 31, 2010
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(Dollars in Thousands)

Due in one year or less	$	9,492	$	9,609	$	13,231	$	13,268
Due after one through five years		48,186		49,023		49,982		50,360
Due after five through ten years		37,098		38,293		30,066		29,971
Due after ten years		12,907		14,937		11,127		11,140

Total	$	107,683	$	111,862	$	104,406	$	104,739

United States Treasury notes with a book value of $2,006,316 and $64,672, maturing in 2012 and 2016, respectively, were on deposit with the Florida OIR as of September 30, 2011, as required by law for Federated National, and are included with other investments held until maturity.

The table below sets forth investment results for the three months ended September 30, 2011 and 2010.

	Three Months Ended September 30,
	2011		2010
	(Dollars in Thousands)

Interest on debt securities	$	950	$	739
Dividends on equity securities		80		180
Interest on cash and cash equivalents		1		6

Total investment income	$	1,031	$	925

Net realized gains	$	713	$	1,864

Proceeds from sales, paydowns and maturities of debt securities and proceeds from sales of equity securities during the three months ended September 30, 2011 and 2010, were approximately $15.0 million and $30.7 million, respectively.

The table below sets forth investment results for the nine months ended September 30, 2011 and 2010.

	Nine Months Ended September 30,
	2011		2010
	(Dollars in Thousands)

Interest on debt securities	$	2,805	$	2,510
Dividends on equity securities		246		350
Interest on cash and cash equivalents		3		11

Total investment income	$	3,054	$	2,871

Net realized gains	$	1,052	$	5,688

Proceeds from sales, paydowns and maturities of debt securities and proceeds from sales of equity securities during the nine months ended September 30, 2011 and 2010, were approximately $70.6 million and $111.8 million, respectively.

The table below sets forth a summary of net realized investment gains during the three months ended September 30, 2011 and 2010.

	Three Months Ended September 30,
	2011		2010
	(Dollars in Thousands)

Debt securities	$	610	$	2,182
Equity securities		103		(318	)

Total net realized gains	$	713	$	1,864

The table below sets forth a summary of net realized investment gains during the nine months ended September 30, 2011 and 2010.

	Nine Months Ended September 30,
	2011		2010
	(Dollars in Thousands)

Debt securities	$	603	$	4,009
Equity securities		449		1,679

Total net realized gains	$	1,052	$	5,688

The table below sets forth a summary of net unrealized investment gains during the three months ended September 30, 2011 and 2010.

	Period Ending
	September 30, 2011			December 31, 2010
	(Dollars in Thousands)

Debt securities	$	3,877		$	143
Equity securities		(3,183	)		692

Total net unrealized gains	$	694		$	835