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Preneed Funeral Activities (Notes)
 9 Months Ended
Sep. 30, 2016
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. 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 4 and 5 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 Amounts are withdrawn from the trusts after the contract obligations are performed.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,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Deposits
$
30,611

 
$
30,143

 
$
91,828

 
$
92,623

Withdrawals
$
45,120

 
$
36,310

 
$
118,250

 
$
123,499

Purchases of available-for-sale securities
$
82,369

 
$
100,663

 
$
263,905

 
$
281,298

Sales of available-for-sale securities
$
93,387

 
$
110,642

 
$
269,641

 
$
282,960


The components of Preneed funeral receivables, net and trust investments in our unaudited condensed Consolidated Balance Sheet at September 30, 2016 and December 31, 2015 are as follows:
 
September 30, 2016
 
December 31, 2015
 
(In thousands)
Trust investments, at market
$
1,176,086

 
$
1,109,394

Cash and cash equivalents
112,662

 
134,642

Assets associated with business held for sale
(872
)
 
(39
)
Insurance-backed fixed income securities
272,088

 
271,116

Trust investments
1,559,964

 
1,515,113

Receivables from customers
314,185

 
290,689

Unearned finance charge
(12,893
)
 
(11,235
)
 
1,861,256

 
1,794,567

Allowance for cancellation
(36,484
)
 
(34,270
)
Preneed funeral receivables, net and trust investments
$
1,824,772

 
$
1,760,297


The costs and values associated with trust investments measured at market at September 30, 2016 and December 31, 2015 are detailed below. Cost reflects the investment (net of redemptions) of control holders in the trusts. Value represents the value of the underlying securities held by the trusts.

 
September 30, 2016
 
Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Value
 
 
 
 
 
(In thousands)
 
 
Fixed income securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury
2
 
$
78,289

 
$
1,108

 
$
(102
)
 
$
79,295

Canadian government
2
 
77,016

 
487

 
(363
)
 
77,140

Corporate
2
 
13,603

 
263

 
(54
)
 
13,812

Residential mortgage-backed
2
 
29

 
1

 
—

 
30

Asset-backed
2
 
58

 
—

 
—

 
58

Equity securities:
 
 
 
 
 
 
 
 
 
Preferred stock
2
 
1,436

 
116

 
(109
)
 
1,443

Common stock:
 
 
 
 
 
 
 
 
 
United States
1
 
339,717

 
47,031

 
(13,043
)
 
373,705

Canada
1
 
12,028

 
3,460

 
(633
)
 
14,855

Other international
1
 
27,457

 
2,688

 
(2,608
)
 
27,537

Mutual funds:
 
 
 
 
 
 
 
 
 
Equity
1
 
321,562

 
11,257

 
(21,066
)
 
311,753

Fixed income
1
 
99,951

 
2,292

 
(7,372
)
 
94,871

Other
3
 
4,257

 
1,234

 
(10
)
 
5,481

Trust investments, at fair value
 
 
975,403

 
69,937

 
(45,360
)
 
999,980

Fixed income commingled funds
 
 
134,394

 
7,066

 
—

 
141,460

Private equity
 
 
35,881

 
3,041

 
(4,276
)
 
34,646

Trust investments, at net asset value
 
 
170,275

 
10,107

 
(4,276
)
 
176,106

Trust investments, at market
 
 
$
1,145,678

 
$
80,044

 
$
(49,636
)
 
$
1,176,086

 
December 31, 2015
 
Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Value
 
 
 
 
 
(In thousands)
 
 
Fixed income securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury
2
 
$
82,417

 
$
107

 
$
(1,331
)
 
$
81,193

Canadian government
2
 
72,488

 
532

 
(655
)
 
72,365

Corporate
2
 
19,036

 
235

 
(284
)
 
18,987

Residential mortgage-backed
2
 
1,297

 
29

 
(22
)
 
1,304

Asset-backed
2
 
5

 
—

 
—

 
5

Equity securities:
 
 
 
 
 
 
 
 
 
Preferred stock
2
 
1,949

 
41

 
(158
)
 
1,832

Common stock:
 
 
 
 
 
 
 
 
 
United States
1
 
344,116

 
30,885

 
(19,149
)
 
355,852

Canada
1
 
11,930

 
2,652

 
(1,077
)
 
13,505

Other international
1
 
32,156

 
2,636

 
(3,907
)
 
30,885

Mutual funds:
 
 
 
 
 
 
 
 
 
Equity
1
 
323,884

 
1,263

 
(43,975
)
 
281,172

Fixed income
1
 
155,717

 
154

 
(13,092
)
 
142,779

Other
3
 
3,703

 
1,069

 
—

 
4,772

Trust investments, at fair value
 
 
1,048,698

 
39,603

 
(83,650
)
 
1,004,651

Fixed income commingled funds
 
 
69,148

 
—

 
(442
)
 
68,706

Private equity
 
 
38,724

 
3,780

 
(6,467
)
 
36,037

Trust investments, at net asset value
 
 
107,872

 
3,780

 
(6,909
)
 
104,743

Trust investments, at market
 
 
$
1,156,570

 
$
43,383

 
$
(90,559
)
 
$
1,109,394


Valuation policies and procedures are determined by our Trust Services department, which reports to our Chief Financial Officer.  Additionally, valuations are reviewed quarterly by the Investment Committee of the Board of Directors.
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 other investments requires management judgment due to the absence of quoted market prices, inherent lack of liquidity, and the long-term nature of such assets. These funds are classified as Level 3 investments pursuant to the fair value measurements hierarchy.
Fixed income commingled funds and private equity investments are measured at net asset value. Fixed income commingled funds are redeemable for net asset value with two weeks' notice. Our private equity 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. As of September 30, 2016, our unfunded commitment for our private equity investments was $35.8 million which, if called, would be funded by the assets of the trusts.
The change in our trust investments measured at fair value with significant unobservable inputs (Level 3) is as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
(In thousands)
 
 
Fair value, beginning balance
$
5,353

 
$
5,081

 
$
4,772

 
$
4,891

Net unrealized gains (losses) included in Accumulated other comprehensive income(1)
106

 
(376
)
 
680

 
(209
)
Purchases
36

 
—

 
61

 
22

Sales
(14
)
 
(1
)
 
(32
)
 
—

Fair value, ending balance
$
5,481

 
$
4,704

 
$
5,481

 
$
4,704


______________________________________________
(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 6 for further information related to our Deferred preneed receipts held in trust.
Maturity dates of our fixed income securities range from 2016 to 2041. Maturities of fixed income securities, excluding mutual funds, at September 30, 2016 are estimated as follows:
 
Fair Value
 
(In thousands)
Due in one year or less
$
106,871

Due in one to five years
22,777

Due in five to ten years
32,538

Thereafter
8,149

 
$
170,335

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 $13.0 million and $12.7 million for the three months ended September 30, 2016 and 2015, respectively. Recognized trust fund income (realized and unrealized) related to these trust investments was $37.1 million and $41.1 million for the nine months ended September 30, 2016 and 2015, 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 6 for further information related to our Deferred preneed receipts held in trust.
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 values, and the duration of unrealized losses as of September 30, 2016 and December 31, 2015, respectively, are shown in the following tables:
 
September 30, 2016
 
In Loss Position
Less Than 12 Months
 
In Loss Position
Greater Than 12 Months
 
Total
 
Value
 
Unrealized
Losses
 
Value
 
Unrealized
Losses
 
Value
 
Unrealized
Losses
 
 
 
 
 
(In thousands)
 
 
 
 
Fixed income securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
7,926

 
$
(45
)
 
$
4,366

 
$
(57
)
 
$
12,292

 
$
(102
)
Canadian government
2,989

 
(107
)
 
13,170

 
(256
)
 
16,159

 
(363
)
Corporate
1,743

 
(18
)
 
3,073

 
(36
)
 
4,816

 
(54
)
Equity securities:
 
 
 
 
 
 
 
 

 

Preferred stock
—

 
—

 
150

 
(109
)
 
150

 
(109
)
Common stock:
 
 
 
 
 
 
 
 

 

United States
77,947

 
(9,198
)
 
25,271

 
(3,845
)
 
103,218

 
(13,043
)
Canada
—

 
—

 
3,211

 
(633
)
 
3,211

 
(633
)
Other international
6,419

 
(989
)
 
6,259

 
(1,619
)
 
12,678

 
(2,608
)
Mutual funds:
 
 
 
 
 
 
 
 

 

Equity
22,807

 
(1,207
)
 
147,218

 
(19,859
)
 
170,025

 
(21,066
)
Fixed income
9,105

 
(342
)
 
32,980

 
(7,030
)
 
42,085

 
(7,372
)
Other
27

 
(2
)
 
1,161

 
(8
)
 
1,188

 
(10
)
Trust investments, at fair value
128,963

 
(11,908
)
 
236,859

 
(33,452
)
 
365,822

 
(45,360
)
Private equity
873

 
(459
)
 
19,368

 
(3,817
)
 
20,241

 
(4,276
)
Trust investments, at net asset value
873

 
(459
)
 
19,368

 
(3,817
)
 
20,241

 
(4,276
)
Total temporarily impaired securities
$
129,836

 
$
(12,367
)
 
$
256,227

 
$
(37,269
)
 
$
386,063

 
$
(49,636
)
 
December 31, 2015
 
In Loss Position
Less Than 12 Months
 
In Loss Position
Greater Than 12 Months
 
Total
 
Value
 
Unrealized
Losses
 
Value
 
Unrealized
Losses
 
Value
 
Unrealized
Losses
 
 
 
 
 
(In thousands)
 
 
 
 
Fixed income securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
37,008

 
$
(1,273
)
 
$
4,687

 
$
(58
)
 
$
41,695

 
$
(1,331
)
Canadian government
2,336

 
(17
)
 
11,535

 
(638
)
 
13,871

 
(655
)
Corporate
4,644

 
(156
)
 
4,025

 
(128
)
 
8,669

 
(284
)
Residential mortgage-backed
377

 
(6
)
 
133

 
(16
)
 
510

 
(22
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
448

 
(60
)
 
42

 
(98
)
 
490

 
(158
)
Common stock:
 
 
 
 
 
 
 
 
 
 
 
United States
128,725

 
(16,448
)
 
14,531

 
(2,701
)
 
143,256

 
(19,149
)
Canada
1,956

 
(355
)
 
1,097

 
(722
)
 
3,053

 
(1,077
)
Other international
9,458

 
(1,638
)
 
6,151

 
(2,269
)
 
15,609

 
(3,907
)
Mutual funds:
 
 
 
 
 
 
 
 
 
 
 
Equity
185,726

 
(23,385
)
 
79,855

 
(20,590
)
 
265,581

 
(43,975
)
Fixed income
108,984

 
(5,052
)
 
27,048

 
(8,040
)
 
136,032

 
(13,092
)
Trust investments, at fair value
479,662

 
(48,390
)
 
149,104

 
(35,260
)
 
628,766

 
(83,650
)
Fixed income commingled funds
68,578

 
(442
)
 
—

 
—

 
68,578

 
(442
)
Private equity
—

 
—

 
18,713

 
(6,467
)
 
18,713

 
(6,467
)
Trust investments, at net asset value
68,578

 
(442
)
 
18,713

 
(6,467
)
 
87,291

 
(6,909
)
Total temporarily impaired securities
$
548,240

 
$
(48,832
)
 
$
167,817

 
$
(41,727
)
 
$
716,057

 
$
(90,559
)