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Preneed Funeral Activities (Notes)
 9 Months Ended
Sep. 30, 2015
Funeral  
Preneed Funeral Activities
Preneed Funeral Activities
Preneed funeral receivables, net and trust investments represent trust investments, including investment earnings, and customer receivables, net of unearned finance charges, related to unperformed price-guaranteed preneed funeral contracts. Our merchandise and service trusts are variable interest entities as defined in the Consolidation accounting standard. In accordance with this standard, 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. Our trust investments detailed in Notes 5 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 funeral revenue into Deferred preneed receipts held in trust. Amounts are withdrawn from the trusts after the contract obligations are performed. Cash flows from preneed contracts are presented as operating cash flows in our unaudited condensed consolidated statement of cash flows.
 Preneed funeral 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 funeral revenue until the merchandise is delivered or the service is performed.
The table below sets forth certain investment-related activities associated with these preneed merchandise and service trusts:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Deposits
$
30,143

 
$
23,618

 
$
92,623

 
$
76,490

Withdrawals
$
36,310

 
$
27,718

 
$
123,499

 
$
103,410

Purchases of available-for-sale securities
$
100,663

 
$
238,860

 
$
281,298

 
$
379,650

Sales of available-for-sale securities
$
110,642

 
$
274,630

 
$
282,960

 
$
445,880

Realized gains from sales of available-for-sale securities
$
9,341

 
$
18,935

 
$
23,546

 
$
50,947

Realized losses from sales of available-for-sale securities
$
(8,982
)
 
$
(2,094
)
 
$
(17,554
)
 
$
(6,233
)


The components of Preneed funeral receivables, net and trust investments in our unaudited condensed consolidated balance sheet at September 30, 2015 and December 31, 2014 are as follows:
 
September 30, 2015
 
December 31, 2014
 
(In thousands)
Trust investments, at fair value
$
1,098,236

 
$
1,205,747

Cash and cash equivalents
130,161

 
162,229

Insurance-backed fixed income securities
269,744

 
260,899

Trust investments
1,498,141

 
1,628,875

Receivables from customers
286,463

 
262,700

Unearned finance charge
(10,996
)
 
(11,054
)
 
1,773,608

 
1,880,521

Allowance for cancellation
(39,164
)
 
(37,498
)
Preneed funeral receivables, net and trust investments
$
1,734,444

 
$
1,843,023


The costs and fair values associated with trust investments measured at fair value at September 30, 2015 and December 31, 2014 are detailed below. Cost reflects the investment (net of redemptions) of control holders in the trusts. Fair value represents the value of the underlying securities held by the trusts.
 
September 30, 2015
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
 
 
 
(In thousands)
 
 
Fixed income securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury
2
 
$
82,969

 
$
121

 
$
(1,248
)
 
$
81,842

Canadian government
2
 
75,703

 
556

 
(558
)
 
75,701

Corporate
2
 
21,521

 
364

 
(253
)
 
21,632

Residential mortgage-backed
2
 
1,449

 
37

 
(21
)
 
1,465

Asset-backed
2
 
5

 
—

 
—

 
5

Equity securities:
 
 
 
 
 
 
 
 
 
Preferred stock
2
 
1,939

 
22

 
(112
)
 
1,849

Common stock:
 
 
 
 
 
 
 
 
 
United States
1
 
351,048

 
18,956

 
(29,166
)
 
340,838

Canada
1
 
12,032

 
2,700

 
(1,069
)
 
13,663

Other international
1
 
36,612

 
1,403

 
(6,224
)
 
31,791

Mutual funds:
 
 
 
 
 
 
 
 
 
Equity
1
 
318,576

 
1,166

 
(41,814
)
 
277,928

Fixed income
1
 
221,425

 
434

 
(9,628
)
 
212,231

Private equity
3
 
34,994

 
4,450

 
(5,554
)
 
33,890

Other
3
 
4,427

 
989

 
(15
)
 
5,401

Trust investments
 
 
$
1,162,700

 
$
31,198

 
$
(95,662
)
 
$
1,098,236


 
December 31, 2014
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
 
 
 
(In thousands)
 
 
Fixed income securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury
2
 
$
85,775

 
$
468

 
$
(455
)
 
$
85,788

Canadian government
2
 
90,430

 
449

 
(874
)
 
90,005

Corporate
2
 
24,765

 
423

 
(126
)
 
25,062

Residential mortgage-backed
2
 
1,325

 
29

 
(12
)
 
1,342

Asset-backed
2
 
6

 
—

 
—

 
6

Equity securities:
 
 
 
 
 
 
 
 
 
Preferred stock
2
 
2,503

 
113

 
(113
)
 
2,503

Common stock:
 
 
 
 
 
 
 
 
 
United States
1
 
377,441

 
18,533

 
(7,405
)
 
388,569

Canada
1
 
14,708

 
4,292

 
(895
)
 
18,105

Other international
1
 
38,035

 
1,175

 
(1,560
)
 
37,650

Mutual funds:
 
 
 
 
 
 
 
 
 
Equity
1
 
308,548

 
3,332

 
(15,901
)
 
295,979

Fixed income
1
 
229,414

 
869

 
(3,576
)
 
226,707

Private equity
3
 
35,094

 
2,649

 
(9,418
)
 
28,325

Other
3
 
5,084

 
726

 
(104
)
 
5,706

Trust investments
 
 
$
1,213,128

 
$
33,058

 
$
(40,439
)
 
$
1,205,747


Where quoted prices are available in an active market, securities are classified as Level 1 investments pursuant to the fair value measurements hierarchy.
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, ratings, and tax-exempt status. These funds are classified as Level 2 investments pursuant to the fair value measurements hierarchy.
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 investments are valued based on reported net asset values. 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 fair value measurements hierarchy.
As of September 30, 2015, our unfunded commitment for our private equity and other investments was $45.2 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 trust investments measured at fair value with significant unobservable inputs (Level 3) is as follows:
 
Three Months Ended

September 30, 2015

September 30, 2014
 
Private Equity

Other

Private Equity

Other

(In thousands)
Fair value, beginning balance
$
34,366


$
7,111


$
27,339


$
4,476

Net unrealized gains (losses) included in Accumulated other comprehensive income(1)
1,859


(551
)

265


1,071

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

(4
)

(7
)

(4
)
Purchases
—

 
—

 
289

 
—

Contributions
—


—


4,998


121

Distributions
(2,328
)

(1,155
)

(2,949
)

—

Fair value, ending balance
$
33,890


$
5,401


$
29,935


$
5,664



 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
Private Equity
 
Other
 
Private Equity
 
Other
 
(In thousands)
Fair value, beginning balance
$
28,325

 
$
5,706

 
$
26,885

 
$
1,810

Net unrealized gains (losses) included in Accumulated other comprehensive income(1)
6,048

 
533

 
(1,370
)
 
3,927

Net realized losses included in Other income (expense), net (2)
(45
)
 
(17
)
 
(21
)
 
(5
)
Purchases
—

 
23

 
3,244

 
—

Sales
(36
)
 
—

 
—

 
—

Contributions
4,632

 
1,226

 
5,955

 
121

Distributions
(5,034
)
 
(2,070
)
 
(4,758
)
 
(189
)
Fair value, ending balance
$
33,890

 
$
5,401

 
$
29,935

 
$
5,664


______________________________________________
(1)
All unrealized gains (losses) recognized in Accumulated other comprehensive income for our 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 receipts held in trust. See Note 7 for further information related to our Deferred preneed receipts held in trust.
(2)
All net realized losses recognized in Other income (expense), net for our 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 receipts held in trust. See Note 7 for further information related to our Deferred preneed receipts held in trust.
Maturity dates of our fixed income securities range from 2015 to 2045. Maturities of fixed income securities, excluding mutual funds, at September 30, 2015 are estimated as follows:
 
Fair Value
 
(In thousands)
Due in one year or less
$
111,193

Due in one to five years
25,996

Due in five to ten years
29,213

Thereafter
14,243

 
$
180,645

 

Earnings from all our merchandise and service trust investments are recognized in revenue when merchandise is delivered or a service is performed. Fees charged by our wholly-owned registered investment advisor are also included in current revenue. 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 revenue in the period in which they are earned. Recognized trust fund income (realized and unrealized) related to these trust investments was $12.7 million and $15.1 million for the three months ended September 30, 2015 and 2014, respectively. Recognized trust fund income (realized and unrealized) related to these trust investments was $41.1 million and $47.6 million for the nine months ended September 30, 2015 and 2014, 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 funeral 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 receipts held in trust. See Note 7 for further information related to our Deferred preneed receipts held in trust. For the three months ended September 30, 2015 and 2014, we recorded a $1.4 million and a $41.2 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, 2015 and 2014, we recorded a $2.9 million and a $41.6 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 during the fourth quarter of 2014. This change did not impact our asset allocation, but did 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 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 merchandise and service trust investment unrealized losses, their associated fair values, and the duration of unrealized losses as of September 30, 2015 and December 31, 2014, respectively, are shown in the following tables:
 
September 30, 2015
 
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
$
42,465

 
$
(1,209
)
 
$
4,419

 
$
(39
)
 
$
46,884

 
$
(1,248
)
Canadian government
1,433

 
(5
)
 
12,058

 
(553
)
 
13,491

 
(558
)
Corporate
5,611

 
(152
)
 
2,666

 
(101
)
 
8,277

 
(253
)
Residential mortgage-backed
262


(5
)

224


(16
)

486


(21
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
534

 
(112
)
 
—

 
—

 
534

 
(112
)
Common stock:
 
 
 
 
 
 
 
 
 
 
 
United States
188,385

 
(29,166
)
 
—

 
—

 
188,385

 
(29,166
)
Canada
3,428

 
(692
)
 
545

 
(377
)
 
3,973

 
(1,069
)
Other international
17,715

 
(6,034
)
 
606

 
(190
)
 
18,321

 
(6,224
)
Mutual funds:
 
 
 
 
 
 
 
 
 
 
 
Equity
257,015

 
(38,133
)
 
13,346

 
(3,681
)
 
270,361

 
(41,814
)
Fixed income
177,919

 
(9,038
)
 
12,059

 
(590
)
 
189,978

 
(9,628
)
Private equity
—

 
—

 
17,031

 
(5,554
)
 
17,031

 
(5,554
)
Other
—

 
—

 
442

 
(15
)
 
442

 
(15
)
Total temporarily impaired securities
$
694,767

 
$
(84,546
)
 
$
63,396

 
$
(11,116
)
 
$
758,163

 
$
(95,662
)

 
December 31, 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
$
32,243

 
$
(412
)
 
$
4,978

 
$
(43
)
 
$
37,221

 
$
(455
)
Canadian government
2,894

 
(52
)
 
14,904

 
(822
)
 
17,798

 
(874
)
Corporate
4,988

 
(56
)
 
2,420

 
(70
)
 
7,408

 
(126
)
Residential mortgage-backed
217

 
(10
)
 
106

 
(2
)
 
323

 
(12
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
26

 
(113
)
 
—

 
—

 
26

 
(113
)
Common stock:
 
 
 
 
 
 
 
 
 
 
 
United States
126,527

 
(7,403
)
 
438

 
(2
)
 
126,965

 
(7,405
)
Canada
1,752

 
(379
)
 
1,085

 
(516
)
 
2,837

 
(895
)
Other international
19,593

 
(1,557
)
 
2

 
(3
)
 
19,595

 
(1,560
)
Mutual funds:
 
 
 
 
 
 
 
 
 
 
 
Equity
233,827

 
(13,219
)
 
23,717

 
(2,682
)
 
257,544

 
(15,901
)
Fixed income
112,160

 
(3,128
)
 
11,452

 
(448
)
 
123,612

 
(3,576
)
Private equity
203

 
(461
)
 
13,870

 
(8,957
)
 
14,073

 
(9,418
)
Other
5

 
(11
)
 
464

 
(93
)
 
469

 
(104
)
Total temporarily impaired securities
$
534,435

 
$
(26,801
)
 
$
73,436

 
$
(13,638
)
 
$
607,871

 
$
(40,439
)