MERCHANDISE TRUSTS

3 Months Ended

Mar. 31, 2020

Investments Debt And Equity Securities [Abstract]

7.	MERCHANDISE TRUSTS

At March 31, 2020 and December 31, 2019, 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 14 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 comprises 52.6% of the total merchandise trust as of March 31, 2020. 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 $8.6 million and $9.7 million of investments held in trust as required by law by the West Virginia Funeral Directors Association at March 31, 2020 and December 31, 2019, 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, 2020 and 2019 is presented below (in thousands):

	Three months ended March 31,
	2020			2019
Balance—beginning of period	$	517,192		$	488,248
Contributions		10,697			13,883
Distributions		(14,029	)		(13,639	)
Interest and dividends		5,704			7,325
Capital gain distributions		68			99
Realized gains and losses, net		218			(281	)
Other than temporary impairment		—			(2,314	)
Taxes		118			4
Fees		(3,022	)		(873	)
Unrealized change in fair value		(59,181	)		22,613
Total		457,765			515,065
Less: Assets held for sale		(20,127	)		—
Balance—end of period	$	437,638		$	515,065

During the three months ended March 31, 2020 and 2019, purchases of available for sale securities were approximately $13.2 million and $21.3 million, respectively. During the three months ended March 31, 2020 and 2019, sales, maturities and paydowns of available for sale securities were approximately $11.1 million and $9.1 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, 2020 and December 31, 2019 were as follows (in thousands):

March 31, 2020	Fair Value Hierarchy Level	Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
Short-term investments	1	$	120,171		$	—		$	—		$	120,171
Fixed maturities:
U.S. governmental securities	2		474			23			(82	)		415
Corporate debt securities	2		6,293			4			(234	)		6,063
Total fixed maturities			6,767			27			(316	)		6,478
Mutual funds—debt securities	1		30,138			160			(2,464	)		27,834
Mutual funds—equity securities	1		46,279			1,577			(25,236	)		22,620
Other investment funds⁽¹⁾			235,150			10,916			(15,626	)		230,440
Equity securities	1		56,668			1,001			(20,331	)		37,338
Other invested assets	2		4,387			—			(94	)		4,293
Total investments			499,560			13,681			(64,067	)		449,174
West Virginia Trust Receivable			9,506			—			(915	)		8,591
Total		$	509,066		$	13,681		$	(64,982	)	$	457,765
Less: Assets held for sale			(21,778	)		(425	)		2,076			(20,127	)
Total		$	487,288		$	13,256		$	(62,906	)	$	437,638

⁽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 one to six years with three potential one year extensions at the discretion of the funds’ general partners. As of March 31, 2020, there were $49.3 million in unfunded investment commitments to the private credit funds, which are callable at any time.

December 31, 2019	Fair Value Hierarchy Level	Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
Short-term investments	1	$	144,610		$	—		$	—		$	144,610
Fixed maturities:
U.S. governmental securities	2		456			6			(65	)		397
Corporate debt securities	2		783			14			(133	)		664
Total fixed maturities			1,239			20			(198	)		1,061
Mutual funds—debt securities	1		67,801			1,857			(6	)		69,652
Mutual funds—equity securities	1		46,609			1,744			—			48,353
Other investment funds⁽¹⁾			213,024			6,366			(2,953	)		216,437
Equity securities	1		24,386			1,327			(4	)		25,709
Other invested assets	2		8,360			32			—			8,392
Total investments			506,029			11,346			(3,161	)		514,214
West Virginia Trust Receivable			9,651			—			—			9,651
Total		$	515,680		$	11,346		$	(3,161	)	$	523,865
Less: Assets held for sale			(6,369	)		(304	)		—			(6,673	)
Total		$	509,311		$	11,042		$	(3,161	)	$	517,192

⁽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 one to six years with three potential one year extensions at the discretion of the funds’ general partners. As of December 31, 2019, there were $57.3 million in unfunded investment commitments to the private credit funds, which are callable at any time.

The contractual maturities of debt securities as of March 31, 2020 and December 31, 2019 were as follows (in thousands):

March 31, 2020	Less than 1 year		1 year through 5 years		6 years through 10 years		More than 10 years
U.S. governmental securities	$	112	$	81	$	208	$	13
Corporate debt securities		87		3,970		2,007		—
Total fixed maturities	$	199	$	4,051	$	2,215	$	13

December 31, 2019	Less than 1 year		1 year through 5 years		6 years through 10 years		More than 10 years
U.S. governmental securities	$	112	$	78	$	193	$	13
Corporate debt securities		101		546		16		—
Total fixed maturities	$	213	$	624	$	209	$	13

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, 2020 and December 31, 2019 is presented below (in thousands):

	Less than 12 months				12 months or more				Total
March 31, 2020	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Fixed maturities:
U.S. governmental securities	$	—	$	—	$	302	$	82	$	302	$	82
Corporate debt securities		5,847		110		457		124		6,304		234
Total fixed maturities		5,847		110		759		206		6,606		316
Mutual funds—debt securities		19,756		2,064		—		400		19,756		2,464
Mutual funds—equity securities		18,857		23,880		—		1,356		18,857		25,236
Other investment funds		59,261		15,626		—		—		59,261		15,626
Equity securities		24,853		20,331		—		—		24,853		20,331
Other invested assets		—		—		905		94		905		94
Total	$	128,574	$	62,011	$	1,664	$	2,056	$	130,238	$	64,067

	Less than 12 months				12 months or more				Total
December 31, 2019	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Fixed maturities:
U.S. governmental securities	$	90	$	1	$	397	$	64	$	487	$	65
Corporate debt securities		198		29		424		104		622		133
Total fixed maturities		288		30		821		168		1,109		198
Mutual funds—debt securities		241		6		—		—		241		6
Mutual funds—equity securities		—		—		—		—		—		—
Other investment funds		54,782		2,953		—		—		54,782		2,953
Equity securities		3		4		—		—		3		4
Other invested assets		—		—		—		—		—		—
Total	$	55,314	$	2,993	$	821	$	168	$	56,135	$	3,161

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, 2020, the Company determined, based on its review, that there were no other than temporary impairments to the investment portfolio in the merchandise trusts. It is reasonably possible that continued declines could change the Company’s conclusion regarding whether or not merchandise trust assets are other-than-temporary impaired. During the three months ended March 31, 2019, the Company determined, based on its review, that there were 89 securities with an aggregate cost basis of approximately $91.9 million and an aggregate fair value of approximately $89.6 million, resulting in an impairment of $2.3 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.