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Preneed Cemetery Activities (Notes) (Cemetery)
 6 Months Ended
Jun. 30, 2014
Cemetery
  
Preneed Cemetery Activities
Preneed Cemetery Activities
 Preneed cemetery receivables, net and trust investments represent trust investments, including investment earnings, and customer receivables, net of unearned finance charges, for contracts sold in advance of when the property interment rights, merchandise, or services are needed. Our cemetery merchandise and service trusts are variable interest entities as defined in the Consolidation Topic of the ASC. In accordance with this guidance, we have determined that we are the primary beneficiary of these trusts, as we absorb a majority of the losses and returns associated with these trusts. The trust investments detailed in Notes 4 and 6 are also accounted for as variable interest entities. When we receive payments from the customer, we deposit the amount required by law into the trust and reclassify the corresponding amount from Deferred preneed cemetery revenues into Deferred preneed funeral and cemetery receipts held in trust. Amounts are withdrawn from the trusts when the contract obligations are performed. Cash flows from preneed cemetery contracts are presented as operating cash flows in our unaudited condensed consolidated statement of cash flows.
Preneed cemetery receivables, net and trust investments are reduced by the trust investment earnings (realized and unrealized) that we have been allowed to withdraw in certain states prior to maturity. These earnings are recorded in Deferred preneed cemetery revenues until the service is performed or the merchandise is delivered.
The table below sets forth certain investment-related activities associated with our preneed cemetery merchandise and service trusts:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Deposits
$
33,132

 
$
28,344

 
$
61,403

 
$
53,612

Withdrawals
28,221

 
33,458

 
62,569

 
63,339

Purchases of available-for-sale securities
111,565

 
190,675

 
210,323

 
296,397

Sales of available-for-sale securities
103,530

 
208,589

 
195,847

 
334,332

Realized gains from sales of available-for-sale securities
20,655

 
29,743

 
46,187

 
46,319

Realized losses from sales of available-for-sale securities
(3,826
)
 
(6,885
)
 
(6,125
)
 
(9,055
)

The components of Preneed cemetery receivables, net and trust investments in our unaudited condensed consolidated balance sheet at June 30, 2014 and December 31, 2013 are as follows:
 
June 30, 2014
 
December 31, 2013
 
(In thousands)
Trust investments, at fair value
$
1,603,107

 
$
1,553,719

Cash and cash equivalents
135,185

 
138,459

Assets associated with businesses held for sale
(81,479
)
 
(106,815
)
Insurance-backed fixed income securities
4

 
4

Trust investments
1,656,817

 
1,585,367

Receivables from customers
845,040

 
798,420

Unearned finance charges
(32,242
)
 
(30,042
)
 
2,469,615

 
2,353,745

Allowance for cancellation
(64,933
)
 
(55,922
)
Preneed cemetery receivables, net and trust investments
$
2,404,682

 
$
2,297,823


Our cemetery merchandise and service trust investments are recorded at fair value. The costs and fair values at June 30, 2014 and December 31, 2013 are detailed below. Cost reflects the investment (net of redemptions) of control holders in common trust funds, mutual funds, and private equity investments. Fair value represents the market value of the underlying securities held by the common trust funds, mutual funds at published values, and the estimated fair value of private equity investments.
 
June 30, 2014
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
 
 
 
(In thousands)
 
 
Fixed income securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury
2
 
$
113,114

 
$
2,775

 
$
(5,321
)
 
$
110,568

Canadian government
2
 
18,414

 
204

 
(130
)
 
18,488

Corporate
2
 
45,719

 
6,093

 
(496
)
 
51,316

Residential mortgage-backed
2
 
141

 
3

 
(2
)
 
142

Asset-backed

2
 
2,723

 
69

 
—

 
2,792

Equity securities:
 
 
 
 
 
 
 
 
 
Preferred stock
2
 
9,431

 
1,095

 
(31
)
 
10,495

Common stock:
 
 
 
 
 
 
 
 
 
United States
1
 
412,294

 
136,316

 
(6,014
)
 
542,596

Canada
1
 
13,280

 
4,868

 
(656
)
 
17,492

Other international
1
 
34,457

 
10,020

 
(528
)
 
43,949

Mutual funds:
 
 
 
 
 
 
 
 
 
Equity
1
 
383,466

 
61,948

 
(1,022
)
 
444,392

Fixed income
1
 
346,723

 
9,731

 
(24,212
)
 
332,242

Private equity
3
 
26,640

 
4,827

 
(3,910
)
 
27,557

Other
3
 
777

 
301

 
—

 
1,078

Trust investments
 
 
$
1,407,179

 
$
238,250

 
$
(42,322
)
 
$
1,603,107


 
December 31, 2013
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
 
 
 
(In thousands)
 
 
Fixed income securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury
2
 
$
113,621

 
$
1,714

 
$
(8,876
)
 
$
106,459

Canadian government
2
 
17,073

 
170

 
(261
)
 
16,982

Corporate
2
 
48,970

 
5,262

 
(646
)
 
53,586

Residential mortgage-backed
2
 
408

 
2

 
(2
)
 
408

Asset-backed
2
 
3,346

 
—

 
(13
)
 
3,333

Equity securities:
 
 
 
 
 
 
 
 
 
Preferred stock
2
 
16,708

 
1,106

 
(123
)
 
17,691

Common stock:
 
 
 
 
 
 
 
 
 
United States
1
 
425,246

 
147,258

 
(3,231
)
 
569,273

Canada
1
 
15,368

 
4,063

 
(935
)
 
18,496

Other international
1
 
44,184

 
10,079

 
(200
)
 
54,063

Mutual funds:
 
 
 
 
 
 
 
 
 
Equity
1
 
327,084

 
49,428

 
(1,704
)
 
374,808

Fixed income
1
 
338,944

 
5,236

 
(33,649
)
 
310,531

Private equity
3
 
28,625

 
3,372

 
(5,153
)
 
26,844

Other
3
 
1,078

 
200

 
(33
)
 
1,245

Trust investments
 
 
$
1,380,655

 
$
227,890

 
$
(54,826
)
 
$
1,553,719


Where quoted prices are available in an active market, securities held by the common trust funds and mutual funds are classified as Level 1 investments pursuant to the three-level valuation hierarchy as required by the FVM&D Topic of the ASC.
Where quoted market prices are not available for the specific security, fair values are estimated by using either quoted prices of securities with similar characteristics or an income approach fair value model with observable inputs that include a combination of interest rates, yield curves, credit risks, prepayment speeds, rating, and tax-exempt status. These funds are classified as Level 2 investments pursuant to the three-level valuation hierarchy as required by the FVM&D Topic of the ASC.
The valuation of private equity and other alternative investments requires management judgment due to the absence of quoted market prices, inherent lack of liquidity, and the long-term nature of such assets. The fair value of these investments is estimated based on the market value of the underlying real estate and private equity investments. The underlying real estate value is determined using the most recent available appraisals. Private equity instruments are valued based on reported net asset values discounted by 0% to 20% for risk and 0% to 10% for liquidity. A significant increase (decrease) in the discounts results in a directionally opposite change in the fair value of the instruments. Valuation policies and procedures are determined by our Trust Services department, which reports to our Chief Financial Officer.  Additionally, valuations are reviewed by the investment committee of the Board of Directors quarterly. These funds are classified as Level 3 investments pursuant to the three-level valuation hierarchy as required by the FVM&D Topic of the ASC.
As of June 30, 2014, our unfunded commitment for our private equity and other investments was $6.8 million which, if called, would be funded by the assets of the trusts. Our private equity and other investments include several funds that invest in limited partnerships, distressed debt, real estate, and mezzanine financing. These investments can never be redeemed by the funds. Instead, due to the nature of the investments in this category distributions are received through the liquidation of the underlying assets of the funds. We estimate that the underlying assets will be liquidated over the next 2 to 10 years.
The change in our market-based cemetery merchandise and service trust investments with significant unobservable inputs (Level 3) is as follows:
 
Three Months Ended
 
June 30, 2014
 
June 30, 2013
 
Private Equity
 
Other
 
Private Equity
 
Other
 
(in thousands)
Fair value, beginning balance
$
27,519

 
$
1,253

 
$
25,957

 
$
1,035

Net unrealized gains included in Accumulated other comprehensive income(1)
123


28


1,830


389

Net realized losses included in Other income (expense), net(2)
(7
)
 
—

 
(6
)
 
(1
)
Contributions
526

 
—

 
1,673

 
—

Distributions and other
(604
)
 
(203
)
 
(2,827
)
 
(165
)
Fair value, ending balance
$
27,557

 
$
1,078

 
$
26,627

 
$
1,258



 
Six Months Ended
 
June 30, 2014
 
June 30, 2013
 
Private Equity
 
Other
 
Private Equity
 
Other
 
(in thousands)
Fair value, beginning balance
$
26,844

 
$
1,245

 
$
17,687

 
$
450

Net unrealized gains included in Accumulated other comprehensive income(1)
1,610

 
37

 
13,230

 
976

Net realized losses included in Other income (expense), net(2)
(15
)
 
(1
)
 
(13
)
 
(3
)
Contributions
1,025

 
—

 
2,335

 
—

Distributions and other
(1,907
)
 
(203
)
 
(6,612
)
 
(165
)
Fair value, ending balance
$
27,557

 
$
1,078

 
$
26,627

 
$
1,258


                                                                             
(1)
All unrealized gains recognized in Accumulated other comprehensive income for our cemetery merchandise and service trust investments are attributable to our preneed customers and are offset by a corresponding reclassification in Accumulated other comprehensive income to Deferred preneed funeral and cemetery receipts held in trust. See Note 7 for further information related to our Deferred preneed funeral and cemetery receipts held in trust.
(2)
All losses recognized in Other income (expense), net for our cemetery merchandise and service trust investments are attributable to our preneed customers and are offset by a corresponding reclassification in Other income (expense), net to Deferred preneed funeral and cemetery receipts held in trust. See Note 7 for further information related to our Deferred preneed funeral and cemetery receipts held in trust.
Maturity dates of our fixed income securities range from 2014 to 2043. Maturities of fixed income securities, excluding mutual funds, at June 30, 2014 are estimated as follows:
 
Fair Value
 
(In thousands)
Due in one year or less
$
11,669

Due in one to five years
81,495

Due in five to ten years
40,319

Thereafter
49,823

 
$
183,306


Earnings from all our cemetery merchandise and service trust investments are recognized in current cemetery revenues when a service is performed or merchandise is delivered. Fees charged by our wholly-owned registered investment advisor are also included in current revenues. In addition, we are entitled to retain, in certain jurisdictions, a portion of collected customer payments when a customer cancels a preneed contract; these amounts are also recognized in current revenues in the period in which they are earned. Recognized trust fund income (realized and unrealized) related to these trust investments were $12.4 million and $9.7 million for the three months ended June 30, 2014 and 2013, respectively. Recognized trust fund income (realized and unrealized) related to these trust investments were $24.0 million and $18.9 million for the six months ended June 30, 2014 and 2013, respectively.
We assess our trust investments for other-than-temporary declines in fair value on a quarterly basis. Impairment charges resulting from this assessment are recognized as investment losses in Other income (expense), net and a decrease to Preneed cemetery receivables, net and trust investments. These investment losses, if any, are offset by the corresponding reclassification in Other income (expense), net, which reduces Deferred preneed cemetery receipts held in trust. See Note 7 for further information related to our Deferred preneed cemetery receipts held in trust. For the three months ended June 30, 2014 and 2013, we recorded a $0.2 million and a $0.9 million impairment charge, respectively, for other-than-temporary declines in fair value related to unrealized losses on certain investments. For the six months ended June 30, 2014 and 2013, we recorded a $0.5 million and a $1.3 million impairment charge, respectively, for other-than-temporary declines in fair value related to unrealized losses on certain investments.
We have determined that the remaining unrealized losses in our cemetery merchandise and service trust investments are considered temporary in nature, as the unrealized losses were due to temporary fluctuations in interest rates and equity prices. The investments are diversified across multiple industry segments using a balanced allocation strategy to minimize long-term risk. We believe that none of the remaining securities are other-than-temporarily impaired based on our analysis of the investments. Our analysis included a review of the portfolio holdings and discussions with the individual money managers as to the sector exposures, credit ratings, and the severity and duration of the unrealized losses. Our cemetery merchandise and service trust investment unrealized losses, their associated fair values and the duration of unrealized losses as of June 30, 2014 are shown in the following tables:
 
June 30, 2014
 
In Loss Position
Less Than 12 Months
 
In Loss Position
Greater Than 12 Months
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
 
 
 
 
(In thousands)
 
 
 
 
Fixed income securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
10,545

 
$
(297
)
 
$
56,621

 
$
(5,024
)
 
$
67,166

 
$
(5,321
)
Canadian government
9,798

 
(59
)
 
2,688

 
(71
)
 
12,486

 
(130
)
Corporate
10,069

 
(316
)
 
3,532

 
(180
)
 
13,601

 
(496
)
      Residential mortgage-backed
16

 
—

 
46

 
(2
)
 
62

 
(2
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
1,469

 
(31
)
 
—

 
—

 
1,469

 
(31
)
Common stock:
 
 
 
 
 
 
 
 
 
 
 
United States
69,634

 
(5,750
)
 
4,315

 
(264
)
 
73,949

 
(6,014
)
Canada
940

 
(79
)
 
2,146

 
(577
)
 
3,086

 
(656
)
Other international
5,763

 
(493
)
 
765

 
(35
)
 
6,528

 
(528
)
Mutual funds:
 
 
 
 
 
 
 
 
 
 
 
Equity
15,779

 
(109
)
 
14,532

 
(913
)
 
30,311

 
(1,022
)
Fixed income
15,194

 
(189
)
 
125,779

 
(24,023
)
 
140,973

 
(24,212
)
Private equity
—

 
—

 
5,257

 
(3,910
)
 
5,257

 
(3,910
)
Total temporarily impaired securities
$
139,207

 
$
(7,323
)
 
$
215,681

 
$
(34,999
)
 
$
354,888

 
$
(42,322
)


 
December 31, 2013
 
In Loss Position
Less Than 12 Months
 
In Loss Position
Greater Than 12 Months
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
 
 
 
 
(In thousands)
 
 
 
 
Fixed income securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
45,120

 
$
(6,040
)
 
$
25,043

 
$
(2,836
)
 
$
70,163

 
$
(8,876
)
Canadian government
9,424

 
(120
)
 
3,066

 
(141
)
 
12,490

 
(261
)
Corporate
15,050

 
(424
)
 
3,073

 
(222
)
 
18,123

 
(646
)
Residential mortgage-backed
145

 
(2
)
 
2

 
—

 
147

 
(2
)
Asset-backed
3,257

 
(13
)
 
—

 
—

 
3,257

 
(13
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
5,604

 
(123
)
 
—

 
—

 
5,604

 
(123
)
Common stock:
 
 
 
 
 
 
 
 
 
 
 
United States
46,317

 
(2,648
)
 
3,489

 
(583
)
 
49,806

 
(3,231
)
Canada
1,569

 
(502
)
 
1,935

 
(433
)
 
3,504

 
(935
)
Other international
4,344

 
(124
)
 
702

 
(76
)
 
5,046

 
(200
)
Mutual funds:
 
 
 
 
 
 
 
 
 
 
 
Equity
3,858

 
(54
)
 
14,477

 
(1,650
)
 
18,335

 
(1,704
)
Fixed income
134,669

 
(5,527
)
 
64,009

 
(28,122
)
 
198,678

 
(33,649
)
Private equity
—

 
—

 
6,589

 
(5,153
)
 
6,589

 
(5,153
)
Other
—

 
—

 
282

 
(33
)
 
282

 
(33
)
Total temporarily impaired securities
$
269,357

 
$
(15,577
)
 
$
122,667

 
$
(39,249
)
 
$
392,024

 
$
(54,826
)