(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 $2.3 million, or 1.8%, to $131.8 million as of March 31, 2012, compared with $129.5 million as of December 31, 2011.

The debt and equity securities that are available-for-sale and carried at fair value represent 95% and 94% of total investments as of March 31, 2012 and of December 31, 2011, respectively.

We did not hold any trading investment securities during the three months ended March 31, 2012.

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 ("S&P") and Moody's Investors Service, Inc. ("Moody's"), as well as information released via the general media channels. During the three months ended March 31, 2012, in connection with this process, we have charged approximately $44,000 of net realized investment losses to operations.

As of March 31, 2012 and December 31, 2011, respectively, all of our securities are in good standing and not impaired as defined by FASB issued guidance, except as noted above.

As of March 31, 2012 and December 31, 2011, our investments consisted primarily of corporate bonds held in various industries, municipal bonds and United States government bonds. As of March 31, 2012, 65% of our debt portfolio was in diverse industries and 35% is in United States government bonds. As of March 31, 2012, approximately 82% of our equity holdings were in equities related to diverse industries and 18% were in mutual funds. 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 March 31, 2012 and December 31, 2011, we have classified $7.2 million and $7.1 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 March 31, 2012 and December 31, 2011.

During the three months ended March 31, 2012 and 2011, respectively, we did not re-classify any of our bond portfolio between available-for-sale and held-to-maturity.

(A) Debt and Equity Securities

The following table summarizes, by type, our investments as of March 31, 2012 and December 31, 2011.

	March 31, 2012					December 31, 2011
	Carrying		Percent			Carrying		Percent
	Amount		of Total			Amount		of Total
	(Dollars in Thousands)
Debt securities, at market:
United States government obligations and authorities	$	32,639		24.75	%	$	37,217		28.75	%
Obligations of states and political subdivisions		2,288		1.74	%		2,303		1.77	%
Corporate		68,935		52.28	%		63,268		48.87	%
International		2,422		1.84	%		1,523		1.18	%
		106,284		80.61	%		104,311		80.57	%
Debt securities, at amortized cost:
Corporate		1,062		0.81	%		962		0.74	%
United States government obligations and authorities		6,109		4.63	%		6,166		4.76	%
		7,171		5.44	%		7,128		5.50	%
Total debt securities		113,455		86.05	%		111,439		86.07	%

Equity securities, at market:		18,394		13.95	%		18,028		13.93	%
Total investments	$	131,849		100.00	%	$	129,467		100.00	%

The following table shows the realized gains (losses) for debt and equity securities for the three months ended March 31, 2012 and 2011.

	Three Months Ended March 31,
	2012					2011
	Gains			Fair Value		Gains			Fair Value
	(Losses)			at Sale		(Losses)			at Sale
	(Dollars in Thousands)

Debt securities	$	233		$	6,496	$	225		$	66,680
Equity securities		516			3,073		319			8,305
Total realized gains		749			9,569		544			74,985

Debt securities		(206	)		5,042		(432	)		18,086
Equity securities		(553	)		1,666		(215	)		3,510
Total realized losses		(759	)		6,708		(647	)		21,596

Net realized losses on investments	$	(10	)	$	16,277	$	(103	)	$	96,581

A summary of the amortized cost, estimated fair value and gross unrealized gains and losses of debt and equity securities at March 31, 2012 and December 31, 2011 is as follows.

			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
	(Dollars in Thousands)
March 31, 2012
Debt Securities - Available-For-Sale:
United States government obligations and authorities	$	32,367	$	662	$	390	$	32,639
Obligations of states and political subdivisions		2,164		129		5		2,288
Corporate		66,965		2,215		245		68,935
International		2,423		15		16		2,422
	$	103,919	$	3,021	$	656	$	106,284

Debt Securities - Held-To-Maturity:
United States government obligations and authorities	$	6,109	$	190	$	1	$	6,298
Corporate		1,062		39		1		1,100
	$	7,171	$	229	$	2	$	7,398

Equity securities - common stocks	$	17,470	$	1,862	$	938	$	18,394

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

The table below reflects our unrealized investment losses by investment class, aged for length of time in a continuous unrealized loss position as of March 31, 2012.

	Unrealized (Losses)			Less than 12 months			12 months or longer
	(Dollars in Thousands)
Debt securities:
United States government obligations and authorities	$	(390	)	$	(390	)	$	-
Obligations of states and political subdivisions		(5	)		(5	)		-
Corporate		(245	)		(226	)		(19	)
International		(16	)		(16	)		-
		(656	)		(637	)		(19	)
Equity securities:
Common stocks		(938	)		(515	)		(423	)

Total debt and equity securities	$	(1,594	)	$	(1,152	)	$	(442	)

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, 2011.

	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 March 31, 2012 and December 31, 2011, 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.

	March 31, 2012				December 31, 2011
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
	(Dollars in Thousands)

Due in one year or less	$	10,327	$	10,454	$	8,284	$	8,376
Due after one through five years		48,920		50,180		47,294		48,314
Due after five through ten years		37,209		38,473		36,525		37,448
Due after ten years		14,634		14,575		16,991		17,588

Total	$	111,090	$	113,682	$	109,094	$	111,726

United States Treasury notes with a book value of $2,002,728 and $64,202, maturing in 2012 and 2016, respectively, were on deposit with the Florida OIR as of March 31, 2012, 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 March 31, 2012 and 2011.

	Three Months Ended March 31,
	2012			2011
	(Dollars in Thousands)

Interest on debt securities	$	878		$	899
Dividends on equity securities		82			70
Interest on cash and cash equivalents		1			1

Total investment income	$	961		$	970

Net realized losses	$	(10	)	$	(103	)

Proceeds from sales, pay downs and maturities of debt securities and proceeds from sales of equity securities during the three months ended March 31, 2012 and 2011, were approximately $18.3 million and $41.5 million, respectively.

The table below sets forth a summary of net realized and unrealized investment gains (losses) during the three months ended March 31, 2012 and 2011.

	Three Months Ended March 31,
	2012			2011
	(Dollars in Thousands)
Net realized gains (losses)
Debt securities	$	27		$	(207	)
Equity securities		(37	)		104

Total	$	(10	)	$	(103	)

Net unrealized gains (losses)
Debt securities	$	2,365		$	(120	)
Equity securities		924			1,541

Total	$	3,289		$	1,421