Investments

12 Months Ended

May 31, 2014

Investments

Investments

Note C – Investments

The Company held the following investments, by security type, that were classified as available-for-sale and carried at fair value at May 31, 2014:

	Amortized   Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
State and municipal securities	$	2,793,365		$	45,878		$	25,204		$	2,814,039
Equity securities		817,452			53,636			22,414			848,674
Derivatives		(27,084	)		(5,219	)		(89	)		(32,214	)
Mortgage Backed Securities		3,398,913			97,190			5,036			3,491,067
	$	6,982,646		$	191,485		$	52,565		$	7,121,566

The Company held the following investments, by security type, that have been classified as available-for-sale and carried at fair value at May 31, 2013: 

	Amortized   Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
State and municipal securities	$	1,760,341		$	5,293		$	36,627		$	1,729,007
Equity securities		474,311			52,190			21,979			504,522
Derivatives		(18,603	)		(31,442	)		(162	)		(49,883	)
Foreign Obligations		200,750			—			6,913			193,837
Mortgage Backed Securities		3,413,161			145,390			9,279			3,549,272
	$	5,829,960		$	171,431		$	74,636		$	5,926,755

There are no securities classified as held to maturity at May 31, 2014 or May 31, 2013.

Invested assets are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain of these invested assets and the level of uncertainty related to changes in the value of these assets, it is possible that changes in risks in the near term may significantly affect the amounts reported in the Consolidated Balance Sheets and Statements of Operations.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses the following fair value hierarchy in selecting inputs, with the highest priority given to Level 1, as these are the most transparent or reliable:

o Level 1 – Quoted prices for identical instruments in active markets.

o Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.

o Level 3 – Valuations derived from valuation techniques in which one or more significant inputs are unobservable.

Fair values are provided by the Company’s independent investment custodians that utilize third-party quotation services for the valuation of the fixed-income investment securities and money-market funds held. The Company’s investment custodians are large money-center banks. The Company’s equity investment is valued using quoted market prices.

The following section describes the valuation methodologies used to measure different financial instruments at fair value, including an indication of the level in the fair value hierarchy in which the instrument is generally classified.

Fixed Income Securities

Securities valued using Level 1 inputs include highly liquid government bonds for which quoted market prices are available. Securities using Level 2 inputs are valued using pricing for similar securities, recently executed transactions, cash flow models with yield curves and other pricing models utilizing observable inputs. Most fixed income securities are valued using Level 2 inputs. Level 2 includes corporate bonds, municipal bonds, asset-backed securities and mortgage pass-through securities.

Equity Securities

Level 1 includes publicly traded securities valued using quoted market prices.

Short-Term Investments

The valuation of securities that are actively traded or have quoted prices are classified as Level 1. These securities include money market funds and U.S. Treasury bills. Level 2 includes commercial paper, for which all significant inputs are observable.

Assets measured at fair value on a recurring basis are summarized below:

	May 31, 2014
		Fair Value Measurements Using
		Level 1		Level 2		Level 3		Assets At Fair Value
Assets:
Fixed income securities at fair value	$	—	$	6,305,106	$	—	$	6,305,106
Equity securities at fair value (includes derivatives)		816,460		—		—		816,460
Short-term investments at fair value		2,038,614		—		—		2,038,614
Total Assets	$	2,855,074	$	6,305,106	$	—	$	9,160,180

	May 31, 2013
		Fair Value Measurements Using
		Level 1		Level 2		Level 3		Assets At Fair Value
Assets:
Fixed income securities at fair value	$	—	$	5,472,116	$	—	$	5,472,116
Equity securities at fair value (includes derivatives)		454,639		—		—		454,639
Short-term investments at fair value		1,255,234		—		—		1,255,234
Total Assets	$	1,709,873	$	5,472,116	$	—	$	7,181,989

The Company had no assets or liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at either May 31, 2014 or at May 31, 2013.

At May 31, 2014, the Company’s insurance subsidiary had securities and short term investment with a fair value of $1,051,556 on deposit with the State insurance department to satisfy regulatory requirements. In connection with regulatory approval of the Company’s acquisition of its insurance subsidiary, certain restrictions were imposed on the ability of the Company to withdraw funds from FSC without prior approval of the state Insurance Commissioner.

Accordingly, investments and cash in the amount of $9,756,694 and $7,495,538 as of May 31, 2014 and 2013, respectively, are restricted to the use of FSC.

At May 31, 2014, the Company’s insurance subsidiary had cash, securities and short term investments held as collateral for their bonding program in the amount of $2,065,432.

Principal repayments on U.S. government agency mortgage-backed securities held by the Company as of May 31, 2014 are estimated as follows:

	Amortized   Cost		Fair Market Value
Due in one year or less	$	863,666	$	887,464
Due after one year through five years		1,277,857		1,323,043
Due after five years through ten years		903,255		925,697
Due after ten years		354,135		354,863
	$	3,398,913	$	3,491,067

Estimated repayments are forecast based on varying prepayment speeds for each particular security held assuming that interest rates remain constant. Expected repayments will differ from actual repayments because borrowers of the underlying mortgages have a right to prepay obligations.

An analysis of net investment income follows:

	2014		2013
Bonds – fixed maturities	$	102,480	$	85,761
Mortgage-backed securities		97,135		117,696
Equity investments		14,569		15,929
Short-term investments		103		88
Other investment income		50,398		20,175
Total investment income		264,685		239,649
Investment expense		38,493		9,276
Net investment income	$	226,192	$	230,373

The unrealized appreciation (depreciation) of investments were as follows:

	2014			2013
Bonds-fixed maturities	$	58,921		$	(58,185	)
Mortgage-backed securities		(43,958	)		(47,164	)
Equity securities		27,161			33,776
Increase (decrease) in unrealized appreciation	$	42,124		$	(71,573	)

Gains and losses are calculated based on sales proceeds received less the cost of the security sold, which is determined by specific identification for each investment. The gross gains and gross losses realized on available-for-sale securities were as follows:

	Gross Proceeds		Gross Realized Gains		Gross Realized Losses
2014
Bonds-fixed maturities	$	1,158,222	$	—	$	(57,091	)
Mortgage-backed securities		382,804		533		(9,404	)
Equity securities		509,560		21,567		(5,155	)
Derivatives (equity securities)		91,403		29,710		(25,366	)
Total	$	2,141,989	$	51,810	$	(97,016	)
2013
Bonds-fixed maturities	$	1,487,611	$	22,940	$	(7,512	)
Mortgage-backed securities		28,581		—		(1,627	)
Equity securities		381,580		14,833		(5,054	)
Derivatives (equity securities)		72,967		27,695		(8,036	)
Total	$	1,970,739	$	65,468	$	(22,229	)

The following table summarizes the gross unrealized losses and fair value on investment securities aggregated by major investment category and length of time that individual securities have been in a continuous loss position at May 31, 2014 and May 31, 2013.

	Less than 12 Months				12 Months or More				Total
	Cost (a)		Unrealized Losses		Cost (a)		Unrealized Losses		Fair Value		Unrealized Losses
2014
Equity securities	$	278,689	$	13,171	$	37,209	$	9,243	$	293,484	$	22,414
Bonds- Fixed Maturities		413,440		6,075		759,956		19,129		1,148,191		25,204
Mortgage-backed securities		313,082		1,951		319,102		3,085		627,148		5,036
Total	$	1,005,211	$	21,197	$	1,116,267	$	31,457	$	2,068,823	$	52,654
2013
Equity securities	$	71,398	$	1,665	$	89,751	$	20,314	$	139,171	$	21,979
Bonds- Fixed Maturities		856,467		20,752		836,301		22,788		1,649,229		43,540
Mortgage-backed securities		488,878		5,440		142,854		3,838		622,454		9,278
Total	$	1,416,743	$	27,857	$	1,068,906	$	46,940	$	2,410,854	$	74,797

(a) For bonds-fixed maturities and mortgage-backed securities, represents amortized costs.

As of May 31, 2014, the Company held ten mortgage-backed securities with gross unrealized losses of $5,036, seven of which have been in a continuous loss position for more than 12 months. These securities consist of fixed-rate securities issued by Government National Mortgage Association (GNMA) that are sensitive to movements in market interest rates.

As of May 31, 2014, the Company held nine fixed maturity bonds with gross unrealized losses of $25,204, five of which has been in a continuous loss position for more than 12 months.

As of May 31, 2014, the Company held six equity security investments with gross unrealized losses of $22,414, one of which has been in a continuous floss position for more than 12 months. These securities consist of common stock whose fair value is sensitive to movements in market interest rates.