(3) INVESTMENTS

Total investments increased $110.1 million, or 49.9%, to $330.8 million as of December 31, 2014, compared with $220.7 million as of December 31, 2013. This increase reflected the $133.8 million increase in gross premiums written compared with 2013 and the $43.4 million in net proceeds from the Company’s August 2014 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 98% of total investments as of December 31, 2014, compared with 97% as of December 31, 2013.

We did not hold any trading investment securities during 2014.

As of December 31, 2014 and 2013, our investments consisted primarily of corporate bonds held in various industries, municipal bonds and United States government bonds. As of December 31, 2014, 77% of our debt portfolio was in diverse industries and 23% is in United States government bonds. As of December 31, 2014, approximately 88% of our equity holdings were in equities related to diverse industries and 12% were in mutual funds. 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.

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 2014 and 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, 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 December 31, 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 2014, we did not re-classify any of our bond portfolio between available-for-sale and held-to-maturity. During 2013 we reclassified $150,000 of our bond portfolio to available-for-sale from held-to-maturity.

Two reinsurers require FNIC to maintain securities with a fair market value of $4.9 million. As of December 31, 2014 and 2013, FNIC maintained fully funded trust agreements that totaled $4.9 million in favor of the reinsurers. In addition, as of December 31, 2014 and 2013, $1.0 million is held in a fully funded trust account in favor of another reinsurer under a prior program.

(a) DEBT AND EQUITY SECURITIES

The following table summarizes, by type, our investments as of December 31, 2014 and 2013.

	December 31, 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	$	62,323		18.84	%	$	27,209		12.33	%
Obligations of states and political subdivisions		91,614		27.70	%		52,064		23.59	%
Corporate		119,024		35.99	%		91,941		41.66	%
International		11,138		3.37	%		3,698		1.68	%
		284,099		85.90	%		174,912		79.26	%
Debt securities, at amortized cost:
United States government obligations and authorities		4,490		1.36	%		4,630		2.10	%
Corporate		2,681		0.81	%		2,475		1.12	%
International		246		0.07	%		109		0.05	%
		7,417		2.24	%		7,214		3.27	%
Total debt securities		291,516		88.14	%		182,126		82.53	%

Equity securities, at market:		39,247		11.86	%		38,584		17.47	%
Total investments	$	330,763		100.00	%	$	220,710		100.00	%

The following table shows the realized gains (losses) for debt and equity securities for the years ended December 31, 2014 and 2013.

	Years Ended December 31,
	2014					2013
	Gains (Losses)			Fair Value at Sale		Gains (Losses)			Fair Value at Sale
	(Dollars in Thousands)

Debt securities	$	725		$	54,154	$	1,690		$	41,256
Equity securities		4,489			14,104		2,858			12,052
Total realized gains		5,214			68,258		4,548			53,308

Debt securities		(147	)	$	11,013		(1,001	)		43,239
Equity securities		(641	)		2,236		(666	)		3,564
Total realized losses		(788	)		13,249		(1,667	)		46,803

Net realized gains on investments	$	4,426		$	81,507	$	2,881		$	100,111

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(Dollars in Thousands)
December 31, 2014
Debt Securities - Available-For-Sale:
United States government obligations and authorities	$	61,376	$	1,022	$	75	$	62,323
Obligations of states and political subdivisions		90,728		956		70		91,614
Corporate		117,778		1,578		332		119,024
International		11,139		53		54		11,138
	$	281,021	$	3,609	$	531	$	284,099

Debt Securities - Held-To-Maturity:
United States government obligations and authorities	$	4,490	$	41	$	225	$	4,306
Corporate		2,681		31		5		2,707
International		246		1		1		246
	$	7,417	$	73	$	231	$	7,259

Equity securities - common stocks	$	29,908	$	9,836	$	497	$	39,247

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 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	$	75	$	22	$	53
Obligations of states and political subdivisions		70		66		4
Corporate		332		260		72
International		54		54		-
		531		402		129
Equity securities:
Common stocks		497		461		36

Total debt and equity securities	$	1,028	$	863	$	165

Below is a summary of debt securities at December 31, 2014 and 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.

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

Due in one year or less	$	16,777	$	16,797	$	5,161	$	5,181
Due after one through five years		173,236		174,273		113,027		113,561
Due after five through ten years		98,404		100,259		62,656		62,220
Due after ten years		26		33		881		874

Total	$	288,443	$	291,362	$	181,725	$	181,836

United States Treasury notes with a book value of $61,465 and $2,208,588, maturing in 2016 and 2022, respectively, were on deposit with the Florida OIR as of December 31, 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 periods indicated.

	Years Ended December 31,
	2014		2013		2012
	(Dollars in Thousands)

Interest on debt securities	$	4,775	$	2,850	$	3,380
Dividends on equity securities		553		478		436
Interest on cash and cash equivalents		57		4		3

Total investment income	$	5,385	$	3,332	$	3,819

Net realized gains	$	4,426	$	2,881	$	1,072

Proceeds from sales, pay downs and maturities of debt securities and proceeds from sales of equity securities in 2014, 2013 and 2012 were approximately $87.2 million, $106.2 million and $90.4 million, respectively.

A summary of net realized investment gains follows.

	Twelve Months Ended December 31,
	2014		2013		2012
	(Dollars in Thousands)
Net realized gains
Debt securities	$	578	$	689	$	1,392
Equity securities		3,848		2,192		(320	)

Total	$	4,426	$	2,881	$	1,072

A summary of net unrealized investment gains follows.

	December 31, 2014		December 31, 2013
	(Dollars in Thousands)
Net unrealized gains
Debt securities	$	3,078	$	401
Equity securities		9,339		9,161

Total	$	12,417	$	9,562