MERCHANDISE TRUSTS

3 Months Ended

Mar. 31, 2022

Investments, Debt and Equity Securities [Abstract]

At March 31, 2022 and December 31, 2021, the Company’s merchandise trusts consisted of investments in debt and equity marketable securities and cash equivalents, both directly and through mutual and investment funds. All of these investments are carried at fair value. All of these investments are subject to the fair value hierarchy and considered either Level 1 or Level 2 assets pursuant to the three-level hierarchy described in Note 13 Fair Value of Financial Instruments. There were no Level 3 assets. When the Company receives a payment from a pre-need customer, the Company deposits the amount required by law into the merchandise trusts that may be subject to cancellation on demand by the pre-need customer. The Company’s merchandise trusts related to states in which pre-need customers may cancel contracts with the Company comprised 47.7% of the total merchandise trust as of March 31, 2022. The merchandise trusts are variable interest entities (“VIE”) of which the Company is deemed the primary beneficiary. The assets held in the merchandise trusts are required to be used to purchase the merchandise and provide the services to which they relate. If the value of these assets falls below the cost of purchasing such merchandise and providing such services, the Company may be required to fund this shortfall.

The Company included $9.9 million and $10.3 million of investments held in trust as required by law by the West Virginia Funeral Directors Association at March 31, 2022 and December 31, 2021, respectively, in its merchandise trust assets. These trusts are recognized at their account value, which approximates fair value.

A reconciliation of the Company’s merchandise trust activities for the three months ended March 31, 2022 and 2021 is presented below (in thousands):


	Three months ended March 31,
	2022			2021
Balance—beginning of period	$	567,853		$	516,284
Contributions		20,752			13,089
Distributions		(20,200	)		(14,801	)
Interest and dividends		13,783			9,594
Capital gain distributions		2,038			379
Realized gains and losses, net		1,587			223
Other than temporary impairment		—			(136	)
Taxes		(67	)		(247	)
Fees		(1,673	)		(805	)
Unrealized change in fair value		5,694			16,454
Total		589,767			540,034
Less: Assets held for sale		—			(15,411	)
Balance—end of period	$	589,767		$	524,623

During the three months ended March 31, 2022 and 2021, purchases of available for sale securities were approximately $19.4 million and $21.6 million, respectively. During the three months ended March 31, 2022 and 2021, sales, maturities and paydowns of available for sale securities were approximately $9.1 million and $4.9 million, respectively. Cash flows from pre-need contracts are presented as operating cash flows in the Company’s unaudited condensed consolidated statements of cash flows.

The cost and market value associated with the assets held in the merchandise trusts as of March 31, 2022 and December 31, 2021 were as follows (in thousands):


March 31, 2022	Fair Value Hierarchy Level	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Short-term investments	1	$	43,112	$	—	$	—		$	43,112
Fixed maturities:
U.S. governmental securities	2		1		—		—			1
Corporate debt securities	2		—		—		—			—
Other debt securities	2		—		—		—			—
Total fixed maturities			1		—		—			1
Mutual funds—debt securities	1		6,097		19		(303	)		5,813
Mutual funds—equity securities	1		1,022		213		—			1,235
Other investment funds(1)			479,490		31,690		(3,908	)		507,272
Equity securities	1		15,017		5,814		(2,170	)		18,661
Other invested assets	2		3,735		69		—			3,804
Total investments			548,474		37,805		(6,381	)		579,898
West Virginia Trust Receivable			9,997		—		(128	)		9,869
Total		$	558,471	$	37,805	$	(6,509	)	$	589,767

(1)

Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the balance sheet. This asset class is composed of fixed income funds and equity funds, which have redemption periods ranging from 1 to 30 days, and private credit funds, which have lockup periods of zero to fourteen years with three potential one year extensions at the discretion of the funds’ general partners. As of March 31, 2022, there were $139.7 million in unfunded investment commitments to the private credit funds, which are callable at any time. This asset class also includes $126.7 million of direct loans which are accounted for at amortized cost, net of unamortized origination fees, if any, and are categorized as Level 3 investments in the fair value hierarchy. The interest rates on these direct loans are consistent with market rates, and their amortized cost approximates fair value.


December 31, 2021	Fair Value Hierarchy Level	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Short-term investments	1	$	51,243	$	—	$	—		$	51,243
Fixed maturities:
U.S. governmental securities	2		1		—		—			1
Corporate debt securities	2		—		1		—			1
Other debt securities	2		—		—		—			—
Total fixed maturities			1		1		—			2
Mutual funds—debt securities	1		6,097		81		(15	)		6,163
Mutual funds—equity securities	1		1,021		245		—			1,266
Other investment funds(1)			457,447		26,008		(4,398	)		479,057
Equity securities	1		14,696		3,316		(2,051	)		15,961
Other invested assets	2		3,766		103		—			3,869
Total investments			534,271		29,754		(6,464	)		557,561
West Virginia Trust Receivable			9,992		300		—			10,292
Total		$	544,263	$	30,054	$	(6,464	)	$	567,853

(1)

Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the balance sheet. This asset class is composed of fixed income funds and equity funds, which have redemption periods ranging from 1 to 30 days, and private credit funds, which have lockup periods of zero to 15 years with three potential one year extensions at the discretion of the funds’ general partners. As of December 31, 2021, there were $112.4 million in unfunded investment commitments to the private credit funds, which are callable at any time. This asset class also includes $125.4 million of direct loans which are accounted for at amortized cost, net of unamortized origination fees, if any, and are categorized as Level 3 investments in the fair value hierarchy. The interest rates on these direct loans are consistent with market rates, and their amortized cost approximates fair value.

The contractual maturities of debt securities as of March 31, 2022 and December 31, 2021 were as follows (in thousands):


March 31, 2022	Less than 1 year		1 year through 5 years		6 years through 10 years		More than 10 years
U.S. governmental securities	$	—	$	1	$	—	$	—
Corporate debt securities		—		—		—		—
Other debt securities		—		—		—		—
Total fixed maturities	$	—	$	1	$	—	$	—


December 31, 2021	Less than 1 year		1 year through 5 years		6 years through 10 years		More than 10 years
U.S. governmental securities	$	—	$	1	$	—	$	—
Corporate debt securities		—		1		—		—
Other debt securities		—		—		—		—
Total fixed maturities	$	—	$	2	$	—	$	—

Temporary Declines in Fair Value

The Company evaluates declines in fair value below cost for each asset held in the merchandise trusts on a quarterly basis.

An aging of unrealized losses on the Company’s investments in debt and equity securities within the merchandise trusts as of March 31, 2022 and December 31, 2021 is presented below (in thousands):


	Less than 12 months				12 months or more				Total
March 31, 2022	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Fixed maturities:
U.S. governmental securities	$	—	$	—	$	—	$	—	$	—	$	—
Corporate debt securities		—		—		—		—		—		—
Other debt securities		—		—		—		—		—		—
Total fixed maturities		—		—		—		—		—		—
Mutual funds—debt securities		5,359		303		2		—		5,361		303
Mutual funds—equity securities		1		—		—		—		1		—
Other investment funds		47,530		3,908		—		—		47,530		3,908
Equity securities		463		165		1,891		2,005		2,354		2,170
Total	$	53,353	$	4,376	$	1,893	$	2,005	$	55,246	$	6,381


	Less than 12 months				12 months or more				Total
December 31, 2021	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Fixed maturities:
U.S. governmental securities	$	—	$	—	$	297	$	—	$	297	$	—
Corporate debt securities		—		—		620		—		620		—
Other debt securities		—		—		—		—		—		—
Total fixed maturities		—		—		917		—		917		—
Mutual funds—debt securities		890		15		—		—		890		15
Mutual funds—equity securities		—		—		—		—		—		—
Other investment funds		42,645		4,398		—		—		42,645		4,398
Equity securities		3,108		2,050		1		1		3,109		2,051
Total	$	46,643	$	6,463	$	918	$	1	$	47,561	$	6,464

For all securities in an unrealized loss position, the Company evaluated the severity of the impairment and length of time that a security has been in a loss position and concluded the decline in fair value below the asset’s cost was temporary in nature. In addition, the Company is not aware of any circumstances that would prevent the future market value recovery for these securities.

Other-Than-Temporary Impairment of Trust Assets

The Company assesses its merchandise trust assets for other-than-temporary declines in fair value on a quarterly basis. During the three months ended March 31, 2022, the Company determined, based on its review, that there were no other than temporary impairments to the investment portfolio in the merchandise trusts. During the three months ended March 31, 2021, the Company determined, based on its review, that there were 6 securities with an aggregate costs basis of approximately $0.3 million and an aggregate fair value of approximately $0.2 million, resulting in an impairment of $0.1 million, with such impairment considered to be other than temporary due to credit indicators. Accordingly, the Company adjusted the cost basis of these assets to their current value and offset these changes against deferred merchandise trust revenue. These adjustments to deferred revenue will be reflected within the Company’s unaudited condensed consolidated statements of operations in future periods as the underlying merchandise is delivered or the underlying service is performed.

Impairment of Direct Loans

On a quarterly basis, the merchandise trusts evaluate the carrying value of each direct loan for impairment. A direct loan is considered impaired when, based on current information and events, it is determined that the trusts will not be able to collect the amounts due according to the loan contract, including scheduled interest payments. This evaluation is generally based on delinquency information, an assessment of the borrower’s financial condition and the adequacy of collateral, if any. The trusts would generally place direct loans on nonaccrual status when the full and timely collection of interest or principal becomes uncertain and they are 90 days past due for interest or principal, unless the direct loan is both well-secured and in the process of collection. When placed on nonaccrual, the trusts would reverse any accrued unpaid interest receivable against interest income and amortization of any net deferred fees is suspended. Generally, the trusts would return a direct loan to accrual status when all delinquent interest and principal become current under the terms of the credit agreement and collectability of remaining principal and interest is no longer doubtful. In certain circumstances, the trusts may place a direct loan on nonaccrual status but conclude it is not impaired. The trusts may retain independent third-party valuations on such nonaccrual positions to support impairment decisions.

When the trusts identify a direct loan as impaired, they measure the impairment based on the present value of expected future cash flows, discounted at the receivable’s effective interest rate, or the estimated fair value of the collateral, less estimated costs to sell. If it is determined that the value of an impaired receivable is less than the recorded investment, the trusts would recognize impairment with a charge to deferred revenue. When the value of the impaired loan is calculated by discounting expected cash flows, interest income would be recognized using the loan’s effective interest rate over the remaining life of the loan.

The trusts individually develop the allowance for credit losses for any identified impaired loans. In developing the allowance for credit losses, the trusts consider, among other things, the following credit quality indicators:

•

business characteristics and financial conditions of obligors;

•

current economic conditions and trends;

•

actual charge-off experience;

•

current delinquency levels;

•

value of underlying collateral and guarantees;

•

regulatory environment; and

•

any other relevant factors predicting investment recovery.

There were no such impairments during the three months ended March 31, 2022 and 2021.