(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 $13.9 million, or 10.7%, to $144.0 million as of June 30, 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 June 30, 2013, compared with 94% as of December 31, 2012.

We did not hold any trading investment securities during the six months ended June 30, 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 June 30, 2013, whereas we charged $44,000 of net realized investment losses to operations during the three and six months ended June 30, 2012.

As of June 30, 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 June 30, 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 June 30, 2013, 72% of our debt portfolio was in diverse industries and 28% was in United States government bonds. As of June 30, 2013, approximately 87% of our equity holdings were in equities related to diverse industries and 13% 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 June 30, 2013 and December 31, 2012, we have classified $7.3 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 and six months ended June 30, 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 June 30, 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 June 30, 2013 and December 31, 2012.

	June 30, 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	$	26,094		18.12	%	$	27,392		21.06	%
Obligations of states and political subdivisions		3,434		2.38	%		3,939		3.03	%
Corporate		73,570		51.11	%		67,313		51.74	%
International		3,114		2.16	%		3,111		2.39	%
		106,212		73.77	%		101,755		78.22	%
Debt securities, at amortized cost:
United States government obligations and authorities		5,183		3.60	%		6,016		4.62	%
Corporate		2,002		1.39	%		1,203		0.92	%
International		80		0.06	%		140		0.11	%
		7,265		5.05	%		7,359		5.65	%
Total debt securities		113,477		78.82	%		109,114		83.87	%

Equity securities, at market:		30,507		21.18	%		20,982		16.13	%
Total investments	$	143,984		100.00	%	$	130,096		100.00	%

The following table shows the realized gains (losses) for debt and equity securities for the three months ended June 30, 2013 and 2012.

	Three Months Ended June 30,
	2013					2012
	Gains			Fair Value		Gains			Fair Value
	(Losses)			at Sale		(Losses)			at Sale
	(Dollars in Thousands)

Debt securities	$	260		$	8,134	$	315		$	11,548
Equity securities		973			3,365		144			1,015
Total realized gains		1,233			11,499		459			12,563

Debt securities		(91	)		6,555		(109	)		4,371
Equity securities		(255	)		955		(568	)		3,725
Total realized losses		(346	)		7,510		(677	)		8,096

Net realized gains (losses) on investments	$	887		$	19,009	$	(218	)	$	20,659

The following table shows the realized gains (losses) for debt and equity securities for the six months ended June 30, 2013 and 2012.

	Six Months Ended June 30,
	2013					2012
	Gains			Fair Value		Gains			Fair Value
	(Losses)			at Sale		(Losses)			at Sale
	(Dollars in Thousands)

Debt securities	$	1,393		$	30,735	$	548		$	18,044
Equity securities		1,162			4,444		660			4,088
Total realized gains		2,555			35,179		1,208			22,132

Debt securities		(500	)		23,031		(315	)		9,413
Equity securities		(355	)		1,578		(1,121	)		5,391
Total realized losses		(855	)		24,609		(1,436	)		14,804

Net realized gains (losses) on investments	$	1,700		$	59,788	$	(228	)	$	36,936

Net realized investment gains totaled $1.7 million for the six months ended June 30, 2013, compared with net realized losses of $0.2 million during the six months ended June 30, 2012. During the six months ended June 30, 2013, the investment committee decided to shorten the duration of the bond portfolio by approximately two years to prepare for the eventuality of rising interest rates over the next several years. This decision generated approximately $0.9 million in realized gains. Our equity asset managers make periodic sales from our equity portfolio; these sales generated approximately $0.8 million in realized gains.

A summary of the amortized cost, estimated fair value and gross unrealized gains and losses of debt and equity securities at June 30, 2013 and December 31, 2012 is as follows.

			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
	(Dollars in Thousands)
June 30, 2013
Debt Securities - Available-For-Sale:
United States government obligations and authorities	$	26,217	$	222	$	345	$	26,094
Obligations of states and political subdivisions		3,420		60		46		3,434
Corporate		73,131		1,338		899		73,570
International		3,166		3		55		3,114
	$	105,934	$	1,623	$	1,345	$	106,212

Debt Securities - Held-To-Maturity:
United States government obligations and authorities	$	5,183	$	74	$	279	$	4,978
Corporate		2,002		18		19		2,001
International		80		-		2		78
	$	7,265	$	92	$	300	$	7,057

Equity securities - common stocks	$	26,591	$	4,702	$	786	$	30,507

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 June 30, 2013.

	Unrealized Losses		Less than 12 months		12 months or longer
	(Dollars in Thousands)
Debt securities:
United States government obligations and authorities	$	345	$	345	$	-
Obligations of states and political subdivisions		46		46		-
Corporate		899		899		-
International		55		55		-
		1,345		1,345		-
Equity securities:
Common stocks		786		425		361

Total debt and equity securities	$	2,131	$	1,770	$	361

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 June 30, 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.

	June 30, 2013				December 31, 2012
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
	(Dollars in Thousands)

Due in one year or less	$	3,383	$	3,406	$	2,925	$	2,944
Due after one through five years		73,100		73,437		49,826		51,523
Due after five through ten years		35,985		35,670		35,070		37,182
Due after ten years		731		756		16,659		17,660

Total	$	113,199	$	113,269	$	104,480	$	109,309

United States Treasury notes with a book value of $62,992 and $2,194,465, maturing in 2016 and 2022, respectively, were on deposit with the Florida OIR as of June 30, 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 June 30, 2013 and 2012.

	Three Months Ended June 30,
	2013		2012
	(Dollars in Thousands)

Interest on debt securities	$	654	$	850
Dividends on equity securities		132		84
Interest on cash and cash equivalents		2		1

Total investment income	$	788	$	935

Net realized gains (losses)	$	887	$	(218	)

Proceeds from sales, pay downs and maturities of debt securities and proceeds from sales of equity securities during the three months ended June 30, 2013 and 2012, were approximately $20.2 million and $24.6 million, respectively.

The table below sets forth investment results for the six months ended June 30, 2013 and 2012.

	Six Months Ended June 30,
	2013		2012
	(Dollars in Thousands)

Interest on debt securities	$	1,369	$	1,724
Dividends on equity securities		211		166
Interest on cash and cash equivalents		2		6

Total investment income	$	1,582	$	1,896

Net realized gains (losses)	$	1,700	$	(228	)

Proceeds from sales, pay downs and maturities of debt securities and proceeds from sales of equity securities during the six months ended June 30, 2013 and 2012, were approximately $64.4 million and $42.8 million, respectively.

The table below sets forth a summary of net realized gains (losses) and unrealized investment gains during the three months ended June 30, 2013 and 2012.

	Three Months Ended June 30,
	2013		2012
	(Dollars in Thousands)
Net realized gains (losses)
Debt securities	$	169	$	206
Equity securities		718		(424	)

Total	$	887	$	(218	)

Net unrealized gains
Debt securities	$	277	$	3,991
Equity securities		3,917		436

Total	$	4,194	$	4,427

The table below sets forth a summary of net realized gains (losses) and unrealized investment gains during the six months ended June 30, 2013 and 2012.

	Six Months Ended June 30,
	2013		2012
	(Dollars in Thousands)
Net realized gains (losses)
Debt securities	$	893	$	233
Equity securities		807		(461	)

Total	$	1,700	$	(228	)

Net unrealized gains
Debt securities	$	277	$	3,991
Equity securities		3,917		436

Total	$	4,194	$	4,427