(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. 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 $11.6 million, or 8.9%, to $141.7 million as of March 31, 2013, compared with $130.1 million as of December 31, 2012.

The debt and equity securities that are available for sale and carried at fair value represent 95% of total investments as of March 31, 2013, compared with 94% as of December 31, 2012.

We did not hold any trading investment securities during the three months ended March 31, 2013.

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 ("S&P") and Moody's Investors Service, Inc. ("Moody's"), as well as information released via the general media channels. In connection with this process, we have not charged net realized losses to operations during the three months ended March 31, 2013.

As of March 31, 2013 and December 31, 2012, respectively, all of our securities are in good standing and not impaired as defined by FASB issued guidance.

As of March 31, 2013 and December 31, 2012, our investments consisted primarily of corporate bonds held in various industries, municipal bonds and United States government bonds. As of March 31, 2013, 74% of our debt portfolio was in diverse industries and 26% was in United States government bonds. As of March 31, 2013, approximately 89% of our equity holdings were in equities related to diverse industries and 11% were in mutual funds. As of December 31, 2012, 69% of our debt portfolio was in diverse industries and 31% is in United States government bonds. As of December 31, 2012, approximately 87% of our equity holdings were in equities related to diverse industries and 13% were in mutual funds.

As of March 31, 2013 and December 31, 2012, we have classified $6.9 million and $7.4 million, respectively, of our bond portfolio as held-to-maturity. We classify bonds as held-to-maturity to support securitization of credit requirements.

During the three months ended March 31, 2013 and 2012, respectively, we did not re-classify any of our bond portfolio between available-for-sale and held-to-maturity.

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 March 31, 2013 and December 31, 2012 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 March 31, 2013 and December 31, 2012.

	March 31, 2013					December 31, 2012
	Carrying		Percent			Carrying		Percent
	Amount		of Total			Amount		of Total
	(Dollars in Thousands)
Debt securities, at market:
United States government obligations and authorities	$	24,844		17.53	%	$	27,392		21.06	%
Obligations of states and political subdivisions		3,862		2.73	%		3,939		3.03	%
Corporate		75,800		53.49	%		67,313		51.74	%
International		3,258		2.30	%		3,111		2.39	%
		107,764		76.05	%		101,755		78.22	%
Debt securities, at amortized cost:
United States government obligations and authorities		4,737		3.34	%		6,016		4.62	%
Corporate		2,000		1.41	%		1,203		0.92	%
International		112		0.08	%		140		0.11	%
		6,849		4.83	%		7,359		5.65	%
Total debt securities		114,613		80.88	%		109,114		83.87	%

Equity securities, at market:		27,108		19.12	%		20,982		16.13	%
Total investments	$	141,721		100.00	%	$	130,096		100.00	%

The following table shows the realized gains (losses) for debt and equity securities for the three months ended March 31, 2013 and 2012.

	Three Months Ended March 31,
	2013					2012
	Gains			Fair Value		Gains			Fair Value
	(Losses)			at Sale		(Losses)			at Sale
	(Dollars in Thousands)

Debt securities	$	1,133		$	22,601	$	233		$	6,496
Equity securities		189			1,079		516			3,073
Total realized gains		1,322			23,680		749			9,569

Debt securities		(409	)		16,476		(206	)		5,042
Equity securities		(100	)		623		(553	)		1,666
Total realized losses		(509	)		17,099		(759	)		6,708

Net realized gains (losses) on investments	$	813		$	40,779	$	(10	)	$	16,277

During the three months ended March 31, 2013 the investment committee decided to shorten the duration of the bond portfolio by approximately one year to prepare for the eventuality of rising interest rates over the next several years. Interest rates and bond prices move inversely, so any rise in interest rates adversely impacts the value of our fixed income portfolio. This impact is magnified when the portfolio is positioned with a longer duration. This decision generated a majority of the approximately $0.8 million in realized gains and also explains the drop in investment income for the quarter measured against the same three month period last year.

A summary of the amortized cost, estimated fair value and gross unrealized gains and losses of debt and equity securities at March 31, 2013 and December 31, 2012 is as follows.

			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
	(Dollars in Thousands)
March 31, 2013
Debt Securities - Available-For-Sale:
United States government obligations
and authorities	$	24,352	$	502	$	10	$	24,844
Obligations of states and political
subdivisions		3,664		199		1		3,862
Corporate		73,216		2,622		38		75,800
International		3,258		25		25		3,258
	$	104,490	$	3,348	$	74	$	107,764

Debt Securities - Held-To-Maturity:
United States government obligations
and authorities	$	4,737	$	124	$	-	$	4,861
Corporate		2,000		37		-		2,037
International		112		-		1		111
	$	6,849	$	161	$	1	$	7,009

Equity securities - common stocks	$	22,676	$	4,953	$	521	$	27,108

December 31, 2012
Debt Securities - Available-For-Sale:
United States government obligations
and authorities	$	26,825	$	632	$	65	$	27,392
Obligations of states and political
subdivisions		3,738		202		1		3,939
Corporate		63,553		3,794		34		67,313
International		3,005		107		1		3,111
	$	97,121	$	4,735	$	101	$	101,755

Debt Securities - Held-To-Maturity:
United States government obligations
and authorities	$	6,016	$	149	$	12	$	6,153
Corporate		1,203		61		2		1,262
International		140		-		1		139
	$	7,359	$	210	$	15	$	7,554

Equity securities - common stocks	$	19,095	$	2,505	$	618	$	20,982

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, 2013.

	Unrealized Losses		Less than 12 months		12 months or longer
	(Dollars in Thousands)
Debt securities:
United States government obligations
and authorities	$	10	$	10	$	-
Obligations of states and political subdivisions		1		1		-
Corporate		38		38		-
International		25		25		-
		74		74		-
Equity securities:
Common stocks		521		254		267

Total debt and equity securities	$	595	$	328	$	267

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, 2012.

	Unrealized Losses		Less than 12 months		12 months or longer
	(Dollars in Thousands)
Debt securities:
United States government obligations
and authorities	$	65	$	65	$	-
Obligations of states and political subdivisions		1		1		-
Corporate		34		34		-
International		1		1		-
		101		101		-
Equity securities:
Common stocks		618		430		188

Total debt and equity securities	$	719	$	531	$	188

Below is a summary of debt securities at March 31, 2013 and December 31, 2012, 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, 2013				December 31, 2012
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
	(Dollars in Thousands)

Due in one year or less	$	2,264	$	2,295	$	2,925	$	2,944
Due after one through five years		70,955		72,528		49,826		51,523
Due after five through ten years		37,384		39,122		35,070		37,182
Due after ten years		736		828		16,659		17,660

Total	$	111,339	$	114,773	$	104,480	$	109,309

United States Treasury notes with a book value of $63,238 and $2,179,368, maturing in 2016 and 2022, respectively, were on deposit with the Florida OIR as of March 31, 2013, as required by law for FNIC, and are included with other investments held until maturity.

United States Treasury notes with a book value of $63,481 and $2,193,300, maturing in 2016 and 2022, respectively, were on deposit with the Florida OIR as of December 31, 2012, as required by law for FNIC, and are included with other investments held until maturity.

The table below sets forth investment results for the three months ended March 31, 2013 and 2012.

	Three Months Ended March 31,
	2013		2012
	(Dollars in Thousands)

Interest on debt securities	$	714	$	878
Dividends on equity securities		80		82
Interest on cash and cash equivalents		-		1

Total investment income	$	794	$	961

Net realized gains (losses)	$	813	$	(10	)

Proceeds from sales, pay downs and maturities of debt securities and proceeds from sales of equity securities during the three months ended March 31, 2013 and 2012, were approximately $44.2 million and $18.3 million, respectively.

The table below sets forth a summary of net realized and unrealized investment gains during the three months ended March 31, 2013 and 2012.

	Three Months Ended March 31,
	2013		2012
	(Dollars in Thousands)
Net realized gains
Debt securities	$	724	$	27
Equity securities		89		(37	)

Total	$	813	$	(10	)

Net unrealized gains
Debt securities	$	3,275	$	2,365
Equity securities		4,431		924

Total	$	7,706	$	3,289