(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. 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.”

Total investments increased $98.5 million, or 44.6%, to $319.2 million as of September 30, 2014, compared with $220.7 million as of December 31, 2013. The change is due primarily to our homeowners’ gross written premium, which increased by $99.5 million, or 63.6%, to $255.9 million for the nine months ended September 30, 2014, compared with $156.4 million for the nine months ended September 30, 2013. The increased homeowners’ gross written premium generated additional cash available for investment, of which approximately $59.0 million was transferred to the investment accounts during the nine months ended September 30, 2014.

The debt and equity securities that are available-for-sale and carried at fair value represent 98% of total investments as of September 30, 2014 and December 31, 2013.

We did not hold any trading investment securities during the nine months ended September 30, 2014.

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 the nine months ended September 30, 2014 and 2013, respectively, in connection with the process, we have not charged operations with investment losses.

As of September 30, 2014 and December 31, 2013, respectively, all of our securities are in good standing and not impaired as defined by FASB issued guidance.

As of September 30, 2014 and December 31, 2013, our investments consisted primarily of corporate bonds held in various industries, municipal bonds and United States government bonds. As of September 30, 2014, 79% of our debt portfolio was in diverse industries and 21% was in United States government bonds. As of September 30, 2014, approximately 87% of our equity holdings were in equities related to diverse industries and 13% were in mutual funds. As of December 31, 2013, 83% of our debt portfolio was in diverse industries and 17% was 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 September 30, 2014 and December 31, 2013, we have classified $7.4 million and $7.2 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 nine months ended September 30, 2014, we did not re-classify any of our bond portfolio between available-for-sale and held-to-maturity. During the nine months ended September 30, 2013, we re-classified $0.1 million 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 September 30, 2014 and December 31, 2013.

	September 30, 2014					December 31, 2013
	Carrying Amount		Percent of Total			Carrying Amount		Percent of Total
	(Dollars in Thousands)
Debt securities, at market:
United States government obligations and authorities	$	55,643		17.43	%	$	27,209		12.33	%
Obligations of states and political subdivisions		91,641		28.71	%		52,064		23.59	%
Corporate		117,150		36.70	%		91,941		41.66	%
International		10,953		3.43	%		3,698		1.68	%
		275,387		86.27	%		174,912		79.26	%
Debt securities, at amortized cost:
United States government obligations and authorities		4,433		1.39	%		4,630		2.10	%
Corporate		2,673		0.84	%		2,475		1.12	%
International		246		0.08	%		109		0.05	%
		7,352		2.31	%		7,214		3.27	%
Total debt securities		282,739		88.58	%		182,126		82.53	%

Equity securities, at market:		36,463		11.42	%		38,584		17.47	%
Total investments	$	319,202		100.00	%	$	220,710		100.00	%

The following table shows the realized gains (losses) for debt and equity securities for the three months ended September 30, 2014 and 2013.

	Three Months Ended September 30,
	2014					2013
	Gains (Losses)			Fair Value at Sale		Gains (Losses)			Fair Value at Sale
	(Dollars in Thousands)

Debt securities	$	241		$	16,413	$	202		$	6,183
Equity securities		453			1,642		1,274			5,619
Total realized gains		694			18,055		1,476			11,802

Debt securities		(20	)		1,627		(421	)		14,462
Equity securities		(15	)		118		(275	)		1,471
Total realized losses		(35	)		1,745		(696	)		15,933

Net realized gains on investments	$	659		$	19,800	$	780		$	27,735

Net realized investment gains totaled $0.7 million for the three months ended September 30, 2014, compared with $0.8 million during the three months ended September 30, 2013. During the three months ended September 30, 2014, the investment committee directed new invested dollars to the fixed income portfolio.

The following table shows the realized gains (losses) for debt and equity securities for the nine months ended September 30, 2014 and 2013.

	Nine Months Ended September 30,
	2014					2013
	Gains (Losses)			Fair Value at Sale		Gains (Losses)			Fair Value at Sale
	(Dollars in Thousands)

Debt securities	$	533		$	38,657	$	1,595		$	36,918
Equity securities		4,013			12,595		2,437			10,063
Total realized gains		4,546			51,252		4,032			46,981

Debt securities		(118	)		8,333		(922	)		37,493
Equity securities		(381	)		1,639		(630	)		3,049
Total realized losses		(499	)		9,972		(1,552	)		40,542

Net realized gains on investments	$	4,047		$	61,224	$	2,480		$	87,523

Net realized investment gains totaled $4.0 million for the nine months ended September 30, 2014, compared with $2.5 million during the nine months ended September 30, 2013. During the nine months ended September 30, 2014, the investment committee decided to increase the fixed income asset allocation by directing new invested dollars and reducing our exposure to equities.

A summary of the amortized cost, estimated fair value and gross unrealized gains and losses of debt and equity securities at September 30, 2014 and December 31, 2013 is as follows.

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(Dollars in Thousands)
September 30, 2014
Debt Securities - Available-For-Sale:
United States government obligations and authorities	$	55,371	$	469	$	197	$	55,643
Obligations of states and political subdivisions		90,597		1,091		47		91,641
Corporate		115,833		1,613		296		117,150
International		10,909		57		13		10,953
	$	272,710	$	3,230	$	553	$	275,387

Debt Securities - Held-To-Maturity:
United States government obligations and authorities	$	4,433	$	31	$	243	$	4,221
Corporate		2,673		33		2		2,704
International		246		1		1		246
	$	7,352	$	65	$	246	$	7,171

Equity securities - common stocks	$	29,220	$	7,886	$	643	$	36,463

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

The table below reflects our unrealized investment losses by investment class, aged for length of time in a continuous unrealized loss position as of September 30, 2014.

	Unrealized Losses		Less than 12 months		12 months or longer
	(Dollars in Thousands)
Debt securities:
United States government obligations and authorities	$	197	$	89	$	108
Obligations of states and political subdivisions		47		39		8
Corporate		296		188		108
International		13		13		-
		553		329		224
Equity securities:
Common stocks		643		614		29

Total debt and equity securities	$	1,196	$	943	$	253

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, 2013.

	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 September 30, 2014 and December 31, 2013, 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.

	September 30, 2014				December 31, 2013
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
	(Dollars in Thousands)

Due in one year or less	$	13,702	$	13,734	$	5,161	$	5,181
Due after one through five years		176,615		177,950		113,027		113,561
Due after five through ten years		89,719		90,841		62,656		62,220
Due after ten years		26		33		881		874

Total	$	280,062	$	282,558	$	181,725	$	181,836

United States Treasury notes with a book value of $61,727 and $2,220,344, maturing in 2016 and 2022, respectively, were on deposit with the Florida OIR as of September 30, 2014, as required by law for FNIC, and are included with other investments held until maturity.

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.

The table below sets forth investment results for the three months ended September 30, 2014 and 2013.

	Three Months Ended September 30,
	2014		2013
	(Dollars in Thousands)

Interest on debt securities	$	1,328	$	691
Dividends on equity securities		121		108
Interest on cash and cash equivalents		1		1

Total investment income	$	1,450	$	800

Net realized gains	$	659	$	780

Proceeds from sales, pay downs and maturities of debt securities and proceeds from sales of equity securities during the three months ended September 30, 2014 and 2013, were approximately $21.8 million and $28.7 million, respectively.

The table below sets forth investment results for the nine months ended September 30, 2014 and 2013.

	Nine Months Ended September 30,
	2014		2013
	(Dollars in Thousands)

Interest on debt securities	$	3,432	$	2,059
Dividends on equity securities		324		320
Interest on cash and cash equivalents		2		3

Total investment income	$	3,758	$	2,382

Net realized gains	$	4,047	$	2,480

Proceeds from sales, pay downs and maturities of debt securities and proceeds from sales of equity securities during the nine months ended September 30, 2014 and 2013, were approximately $65.9 million and $93.1 million, respectively.

The table below sets forth a summary of net realized investment gains (losses) during the three months ended September 30, 2014 and 2013.

	Three Months Ended September 30,
	2014		2013
	(Dollars in Thousands)
Net realized gains (losses)
Debt securities	$	221	$	(219	)
Equity securities		438		999

Total	$	659	$	780

The table below sets forth a summary of net realized investment gains during the nine months ended September 30, 2014 and 2013.

	Nine Months Ended September 30,
	2014		2013
	(Dollars in Thousands)
Net realized gains
Debt securities	$	415	$	673
Equity securities		3,632		1,807

Total	$	4,047	$	2,480

The table below sets forth a summary of net unrealized investment gains as of September 30, 2014 and December 31, 2013.

	Unrealized Gains
	September 30, 2014		December 31, 2013
	(Dollars in Thousands)
Net unrealized gains
Debt securities	$	2,677	$	401
Equity securities		7,243		9,161

Total	$	9,920	$	9,562