(3) INVESTMENTS

Total investments increased $90.6 million, or 69.7%, to $220.7 million as of December 31, 2013, compared with $130.1 million as of December 31, 2012. This increase reflected the $123.9 million increase in gross premiums written compared with 2012 and the $28.1 million in net proceeds from the Company’s November 2013 offering. The excess cash was invested primarily in the bond portfolio.

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. We account for our investment securities consistent with FASB issued guidance that requires our securities to 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 and are carried 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 and are carried 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 and are carried 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.”

The debt and equity securities that are available for sale and carried at fair value represent 97% of total investments as of December 31, 2013, compared with 94% as of December 31, 2012.

We did not hold any trading investment securities during 2013.

As of December 31, 2013 and 2012, our investments consisted primarily of corporate bonds held in various industries, municipal bonds and United States government bonds. As of December 31, 2013, 83% of our debt portfolio was in diverse industries and 17% is in United States government bonds. As of December 31, 2013, approximately 91% of our equity holdings were in equities related to diverse industries and 9% 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.

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. During 2013, in connection with the process, we have not charged any investment losses to operations. During 2012, in connection with the process, we have charged to operations $44,000 of investment losses.

As of December 31, 2013 and December 31, 2012, 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, 2013 and December 31, 2012, we have classified $7.2 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 2013 we reclassified $150,000 of our bond portfolio to available-for-sale from held-to-maturity. During 2012, 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 December 31, 2013 and 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 December 31, 2013 and 2012.

	December 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	$	27,209		12.33	%	$	27,392		21.06	%
Obligations of states and political subdivisions		52,064		23.59	%		3,939		3.03	%
Corporate		91,941		41.66	%		67,313		51.74	%
International		3,698		1.68	%		3,111		2.39	%
		174,912		79.26	%		101,755		78.22	%
Debt securities, at amortized cost:
United States government obligations and authorities		4,630		2.10	%		6,016		4.62	%
Corporate		2,475		1.12	%		1,203		0.92	%
International		109		0.05	%		140		0.11	%
		7,214		3.27	%		7,359		5.65	%
Total debt securities		182,126		82.53	%		109,114		83.87	%

Equity securities, at market:		38,584		17.47	%		20,982		16.13	%
Total investments	$	220,710		100.00	%	$	130,096		100.00	%

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

	Years Ended December 31,
	2013					2012
	Gains			Fair Value		Gains			Fair Value
	(Losses)			at Sale		(Losses)			at Sale
	(Dollars in Thousands)

Debt securities	$	1,690		$	41,256	$	1,783		$	50,950
Equity securities		2,858			12,052		1,403			6,709
Total realized gains		4,548			53,308		3,186			57,659

Debt securities		(1,001	)		43,239		(391	)		13,291
Equity securities		(666	)		3,564		(1,723	)		6,560
Total realized losses		(1,667	)		46,803		(2,114	)		19,851

Net realized gains on investments	$	2,881		$	100,111	$	1,072		$	77,510

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

			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
	(Dollars in Thousands)
December 31, 2013
Debt Securities - Available-For-Sale:
United States government obligations and authorities	$	27,422	$	186	$	399	$	27,209
Obligations of states and political subdivisions		51,883		303		122		52,064
Corporate		91,475		1,233		767		91,941
International		3,731		5		38		3,698
	$	174,511	$	1,727	$	1,326	$	174,912

Debt Securities - Held-To-Maturity:
United States government obligations and authorities	$	4,630	$	32	$	326	$	4,336
Corporate		2,475		22		17		2,480
International		109		-		1		108
	$	7,214	$	54	$	344	$	6,924

Equity securities - common stocks	$	29,423	$	9,436	$	275	$	38,584

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 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	$	399	$	391	$	8
Obligations of states and political subdivisions		122		122		-
Corporate		767		761		6
International		38		38		-
		1,326		1,312		14
Equity securities:
Common stocks		275		148		127

Total debt and equity securities	$	1,601	$	1,460	$	141

Below is a summary of debt securities at December 31, 2013 and 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.

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

Due in one year or less	$	5,161	$	5,181	$	2,925	$	2,944
Due after one through five years		113,027		113,561		49,826		51,523
Due after five through ten years		62,656		62,220		35,070		37,182
Due after ten years		881		874		16,659		17,660

Total	$	181,725	$	181,836	$	104,480	$	109,309

United States Treasury notes with a book value of $62,490 and $2,193,814, maturing in 2016 and 2022, respectively, were on deposit with the Florida OIR as of December 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 periods indicated.

	Years Ended December 31,
	2013		2012		2011
	(Dollars in Thousands)

Interest on debt securities	$	2,850	$	3,380	$	3,681
Dividends on equity securities		478		436		394
Interest on cash and cash equivalents		4		3		4

Total investment income	$	3,332	$	3,819	$	4,079

Net realized gains	$	2,881	$	1,072	$	2,725

Proceeds from sales, pay downs and maturities of debt securities and proceeds from sales of equity securities in 2013, 2012 and 2011 were approximately $106.1 million, $90.4 million and $108.3 million, respectively.

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

	Years Ended December 31,
	2013		2012			2011
	(Dollars in Thousands)
Net realized gains
Debt securities	$	689	$	1,392		$	2,974
Equity securities		2,192		(320	)		(249	)

Total	$	2,881	$	1,072		$	2,725

Net unrealized gains
Debt securities	$	401	$	4,634		$	2,345
Equity securities		9,161		1,887			(939	)

Total	$	9,562	$	6,521		$	1,406