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Preneed Cemetery Activities (Notes) (Cemetery)
 9 Months Ended
Sep. 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 Amounts are withdrawn from the trusts when the contract obligations are performed.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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Deposits
$
34,018

 
$
27,407

 
$
95,421

 
$
81,019

Withdrawals
33,669

 
26,542

 
96,238

 
89,881

Purchases of available-for-sale securities
247,853

 
98,803

 
458,176

 
395,200

Sales of available-for-sale securities
285,411

 
73,171

 
481,258

 
407,503

Realized gains from sales of available-for-sale securities
40,635

 
19,965

 
86,822

 
66,284

Realized losses from sales of available-for-sale securities
(4,439
)
 
(3,454
)
 
(10,564
)
 
(12,509
)

The components of Preneed cemetery receivables, net and trust investments in our unaudited condensed consolidated balance sheet at September 30, 2014 and December 31, 2013 are as follows:
 
September 30, 2014
 
December 31, 2013
 
(In thousands)
Trust investments, at fair value
$
1,478,069

 
$
1,532,875

Cash and cash equivalents
127,576

 
138,459

Assets associated with businesses held for sale
(28,179
)
 
(106,815
)
Insurance-backed fixed income securities
13

 
4

Trust investments
1,577,479

 
1,564,523

Receivables from customers
856,330

 
798,365

Unearned finance charges
(32,277
)
 
(29,604
)
 
2,401,532

 
2,333,284

Allowance for cancellation
(64,140
)
 
(55,922
)
Preneed cemetery receivables, net and trust investments
$
2,337,392

 
$
2,277,362


Our cemetery merchandise and service trust investments are recorded at fair value. The costs and fair values at September 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.
 
September 30, 2014
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
 
 
 
(In thousands)
 
 
Fixed income securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury
2
 
$
101,400

 
$
1,617

 
$
(2
)
 
$
103,015

Canadian government
2
 
17,719

 
217

 
(157
)
 
17,779

Corporate
2
 
41,849

 
5,010

 
(167
)
 
46,692

Residential mortgage-backed
2
 
132

 
3

 
(2
)
 
133

Asset-backed
2
 
169

 
13

 
—

 
182

Equity securities:
 
 
 
 
 
 
 
 
 
Preferred stock
2
 
9,938

 
522

 
—

 
10,460

Common stock:
 
 
 
 
 
 
 
 
 
United States
1
 
372,178

 
112,471

 
—

 
484,649

Canada
1
 
13,207

 
5,712

 
(377
)
 
18,542

Other international
1
 
32,440

 
8,528

 
—

 
40,968

Mutual funds:
 
 
 
 
 
 
 
 
 
Equity
1
 
372,803

 
42,998

 
—

 
415,801

Fixed income
1
 
301,458

 
7,195

 
(656
)
 
307,997

Private equity
3
 
30,240

 
4,647

 
(4,050
)
 
30,837

Other
3
 
818

 
196

 
—

 
1,014

Trust investments
 
 
$
1,294,351

 
$
189,129

 
$
(5,411
)
 
$
1,478,069


 
December 31, 2013
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
 
 
 
(In thousands)
 
 
Fixed income securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury
2
 
$
112,112

 
$
1,714

 
$
(8,876
)
 
$
104,950

Canadian government
2
 
17,073

 
170

 
(261
)
 
16,982

Corporate
2
 
48,363

 
5,262

 
(646
)
 
52,979

Residential mortgage-backed
2
 
402

 
2

 
(2
)
 
402

Asset-backed
2
 
3,299

 
—

 
(13
)
 
3,286

Equity securities:
 
 
 
 
 
 
 
 
 
Preferred stock
2
 
16,458

 
1,106

 
(123
)
 
17,441

Common stock:
 
 
 
 
 
 
 
 
 
United States
1
 
417,335

 
147,258

 
(3,231
)
 
561,362

Canada
1
 
15,337

 
4,063

 
(935
)
 
18,465

Other international
1
 
43,417

 
10,079

 
(200
)
 
53,296

Mutual funds:
 
 
 
 
 
 
 
 
 
Equity
1
 
321,770

 
49,428

 
(1,704
)
 
369,494

Fixed income
1
 
334,542

 
5,236

 
(33,649
)
 
306,129

Private equity
3
 
28,625

 
3,372

 
(5,153
)
 
26,844

Other
3
 
1,078

 
200

 
(33
)
 
1,245

Trust investments
 
 
$
1,359,811

 
$
227,890

 
$
(54,826
)
 
$
1,532,875


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 September 30, 2014, our unfunded commitment for our private equity and other investments was $27.7 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
 
September 30, 2014
 
September 30, 2013
 
Private Equity
 
Other
 
Private Equity
 
Other
 
(In thousands)
Fair value, beginning balance
$
27,557

 
$
1,078

 
$
26,627

 
$
1,258

Net unrealized gains (losses) included in Accumulated other comprehensive income(1)
1,056


(186
)

2,015


277

Net realized losses included in Other (expense) income, net(2)
(8
)
 
(5
)
 
—

 
—

Contributions
5,379

 
127

 
21

 
—

Distributions and other
(3,147
)
 
—

 
(1,248
)
 
(205
)
Fair value, ending balance
$
30,837

 
$
1,014

 
$
27,415

 
$
1,330



 
Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
Private Equity
 
Other
 
Private Equity
 
Other
 
(In thousands)
Fair value, beginning balance
$
26,844

 
$
1,245

 
$
17,687

 
$
450

Net unrealized gains (losses) included in Accumulated other comprehensive income(1)
2,666

 
(149
)
 
15,245

 
1,253

Net realized losses included in Other (expense) income, net(2)
(23
)
 
(6
)
 
(13
)
 
(3
)
Contributions
6,404

 
127

 
2,356

 
—

Distributions and other
(5,054
)
 
(203
)
 
(7,860
)
 
(370
)
Fair value, ending balance
$
30,837

 
$
1,014

 
$
27,415

 
$
1,330


                                                                             
(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 (expense) income, net for our cemetery merchandise and service trust investments are attributable to our preneed customers and are offset by a corresponding reclassification in Other (expense) income, 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 September 30, 2014 are estimated as follows:
 
Fair Value
 
(In thousands)
Due in one year or less
$
9,700

Due in one to five years
75,924

Due in five to ten years
34,330

Thereafter
47,847

 
$
167,801


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 was $12.2 million and $9.2 million for the three months ended September 30, 2014 and 2013, respectively. Recognized trust fund income (realized and unrealized) related to these trust investments was $36.2 million and $28.1 million for the nine months ended September 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 (expense) income, 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 (expense) income, 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 September 30, 2014 and 2013, we recorded a $59.3 million and a $0.2 million impairment charge, respectively, for other-than-temporary declines in fair value related to unrealized losses on certain investments. For the nine months ended September 30, 2014 and 2013, we recorded a $59.8 million and a $1.5 million impairment charge, respectively, for other-than-temporary declines in fair value related to unrealized losses on certain investments. The third quarter 2014 impairment charges were recorded in anticipation of a strategic change in the management of our trust assets requiring the liquidation of a majority of our US trust assets subsequent to quarter end. This change does not impact our asset allocation, but does change the underlying legal structure housing the assets. These impairment charges reflect the unrealized loss positions on these liquidated assets as of September 30, 2014.
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 September 30, 2014 are shown in the following tables:
 
September 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
$
18,019

 
$
(2
)
 
$
—

 
$
—

 
$
18,019

 
$
(2
)
Canadian government
4,848

 
(79
)
 
2,573

 
(78
)
 
7,421

 
(157
)
Corporate
12,875

 
(167
)
 
—

 
—

 
12,875

 
(167
)
Residential mortgage-backed
—

 
—

 
45

 
(2
)
 
45

 
(2
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Common stock:
 
 
 
 
 
 
 
 
 
 
 
Canada
1,450

 
(318
)
 
1,281

 
(59
)
 
2,731

 
(377
)
Mutual funds:
 
 
 
 
 
 
 
 
 
 
 
Fixed income
103,587

 
(656
)
 
—

 
—

 
103,587

 
(656
)
Private equity
—

 
—

 
8,682

 
(4,050
)
 
8,682

 
(4,050
)
Total temporarily impaired securities
$
140,779

 
$
(1,222
)
 
$
12,581

 
$
(4,189
)
 
$
153,360

 
$
(5,411
)


 
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
$
44,543

 
$
(6,040
)
 
$
24,668

 
$
(2,836
)
 
$
69,211

 
$
(8,876
)
Canadian government
9,424

 
(120
)
 
3,066

 
(141
)
 
12,490

 
(261
)
Corporate
14,908

 
(424
)
 
3,055

 
(222
)
 
17,963

 
(646
)
Residential mortgage-backed
143

 
(2
)
 
—

 
—

 
143

 
(2
)
Asset-backed
3,215

 
(13
)
 
—

 
—

 
3,215

 
(13
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
5,532

 
(123
)
 
—

 
—

 
5,532

 
(123
)
Common stock:
 
 
 
 
 
 
 
 
 
 
 
United States
45,730

 
(2,648
)
 
3,447

 
(583
)
 
49,177

 
(3,231
)
Canada
1,562

 
(502
)
 
1,935

 
(433
)
 
3,497

 
(935
)
Other international
4,288

 
(124
)
 
692

 
(76
)
 
4,980

 
(200
)
Mutual funds:
 
 
 
 
 
 
 
 
 
 
 
Equity
3,809

 
(54
)
 
14,260

 
(1,650
)
 
18,069

 
(1,704
)
Fixed income
132,945

 
(5,527
)
 
63,050

 
(28,122
)
 
195,995

 
(33,649
)
Private equity
—

 
—

 
6,589

 
(5,153
)
 
6,589

 
(5,153
)
Other
—

 
—

 
283

 
(33
)
 
283

 
(33
)
Total temporarily impaired securities
$
266,099

 
$
(15,577
)
 
$
121,045

 
$
(39,249
)
 
$
387,144

 
$
(54,826
)