(3) 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. The guidance requires that these securities be classified into one of three categories: Held-to-maturity, Trading, or Available-for-sale securities.

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 the 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 $7.0 million, or 5.7%, to $129.5 million as of December 31, 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% of total investments as of December 31, 2011, compared with 95% as of December 31, 2010.

We did not hold any trading investment securities during 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 (eg., 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, as well as information released via the general media channels. During 2011, in connection with this process, we charged to operations $0.8 million of investment losses. During 2010, in connection with this process, we have not charged any net realized investment loss to operations.

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

As of December 31, 2011 and 2010, our investments consisted primarily of corporate bonds held in various industries, municipal bonds and United States government bonds. As of December 31, 2011, 61% of our debt portfolio was in diverse industries and 39% is in United States government bonds. As of December 31, 2011, approximately 83% of our equity holdings were in equities related to diverse industries and 17% were in mutual funds. As of December 31, 2010, 72% of our debt portfolio was in diverse industries and 28% was in United States government bonds. As of December 31, 2010, approximately 77% of our equity holdings were in equities related to diverse industries and 23% were in mutual funds.

As of December 31, 2011 and December 31, 2010, we have classified $7.1 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.

During 2011, we did not re-classify any of our bond portfolio between available-for-sale and held-to-maturity.

During 2010, we re-classified $3.1 million of amortized cost to held-to-maturity from available-for-sale to fund trust agreements.

During April 2006, American Vehicle finalized a $15.0 million irrevocable letter of credit in conjunction with the 100% Quota Share Reinsurance Agreement with Republic Underwriters Insurance Company (“Republic”) which was terminated in April 2007. During 2010, the letter of credit in favor of Republic was replaced by a fully funded trust agreement. As of December 31, 2011 and 2010 respectively, the amount held in trust was $1.0 million.

(a) DEBT AND EQUITY SECURITIES

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

	December 31, 2011					December 31, 2010
	Carrying		Percent			Carrying		Percent
	Amount		of Total			Amount		of Total
	(Dollars in Thousands)
Debt securities, at market:
United States government obligations and authorities	$	37,217		28.75	%	$	28,196		23.02	%
Obligations of states and political subdivisions		2,303		1.77	%		2,963		2.42	%
Corporate		63,268		48.87	%		65,808		53.73	%
International		1,523		1.18	%		1,383		1.13	%
		104,311		80.57	%		98,350		80.30	%
Debt securities, at amortized cost:
Corporate		962		0.74	%		818		0.67	%
United States government obligations and authorities		6,166		4.76	%		5,380		4.39	%
		7,128		5.50	%		6,198		5.06	%
Total debt securities		111,439		86.07	%		104,548		85.36	%

Equity securities, at market:		18,028		13.93	%		17,937		14.64	%
Total investments	$	129,467		100.00	%	$	122,485		100.00	%

The following table shows the realized gains (losses) for debt and equity securities for the years ended December 31, 2011 and 2010.

	Years Ended December 31,
	2011					2010
	Gains			Fair Value		Gains			Fair Value
	(Losses)			at Sale		(Losses)			at Sale
	(Dollars in Thousands)

Debt securities	$	3,569		$	66,680	$	4,484		$	98,318
Equity securities		1,240			8,305		4,228			27,898
Total realized gains		4,809			74,985		8,712			126,216

Debt securities		(595	)		18,086		(209	)		12,295
Equity securities		(1,489	)		3,510		(1,726	)		8,715
Total realized losses		(2,084	)		21,596		(1,935	)		21,010

Net realized gains on investments	$	2,725		$	96,581	$	6,777		$	147,226

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(Dollars in Thousands)
December 31, 2011
Debt Securities - Available-For-Sale:
United States government obligations and authorities	$	36,558	$	686	$	27	$	37,217
Obligations of states and political subdivisions		2,165		138		-		2,303
Corporate		61,724		1,934		390		63,268
International		1,519		9		5		1,523
	$	101,966	$	2,767	$	422	$	104,311

Debt Securities - Held-To-Maturity:
United States government obligations and authorities	$	6,166	$	249	$	-	$	6,415
Corporate		962		39		1		1,000
	$	7,128	$	288	$	1	$	7,415

Equity securities - common stocks	$	18,966	$	1,057	$	1,995	$	18,028

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 an unrealized loss position.

	Unrealized (Losses)			Less than 12 months			12 months or longer
	(Dollars in Thousands)
Debt securities:
United States government obligations and authorities	$	(27	)	$	(27	)	$	-
Obligations of states and political subdivisions		-			-			-
Corporate		(390	)		(390	)		-
International		(4	)		(4	)		-
		(421	)		(421	)		-
Equity securities:
Common stocks		(1,996	)		(1,620	)		(376	)

Total debt and equity securities	$	(2,417	)	$	(2,041	)	$	(376	)

Below is a summary of debt securities at December 31, 2011 and 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.

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

Due in one year or less	$	8,284	$	8,376	$	13,231	$	13,268
Due after one through five years		47,294		48,314		49,982		50,360
Due after five through ten years		36,525		37,448		30,066		29,971
Due after ten years		16,991		17,588		11,127		11,140

Total	$	109,094	$	111,726	$	104,406	$	104,739

United States Treasury notes with a book value of $2,004,527 and $64,438, maturing in 2012 and 2016, respectively, were on deposit with the Florida OIR as of December 31, 2011, as required by law for Federated National, and are included with other investments held until maturity.

United States Treasury notes with a book value of $1,036,000 and $1,041,000, both maturing in 2012, were on deposit with the Florida OIR as of December 31, 2010, as required by law for American Vehicle and Federated National respectively, and are included with other investments held until maturity.

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

	Years Ended December 31,
	2011		2010		2009
	(Dollars in Thousands)

Interest on debt securities	$	3,682	$	3,224	$	2,718
Dividends on equity securities		394		491		466
Interest on cash and cash equivalents		3		11		213

Total investment income	$	4,079	$	3,726	$	3,397

Net realized gains	$	2,725	$	6,777	$	1,117

Proceeds from sales, pay downs and maturities of debt securities and proceeds from sales of equity securities in 2011, 2010 and 2009 were approximately $108.3 million, $149.0 million and $59.2 million, respectively.

A summary of net realized investment gains and increases in net unrealized gains follows.

	Years Ended December 31,
	2011			2010		2009
	(Dollars in Thousands)
Net realized gains (losses)
Debt securities	$	2,974		$	4,275	$	(340	)
Equity securities		(249	)		2,502		1,457

Total	$	2,725		$	6,777	$	1,117

Net unrealized gains (losses)
Debt securities	$	2,345		$	143	$	2,122
Equity securities		(939	)		692		1,128

Total	$	1,406		$	835	$	3,250