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Preneed Cemetery Activities (Notes)
 9 Months Ended
Sep. 30, 2016
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 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. The trust investments detailed in Notes 3 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 cemetery revenue into Deferred preneed 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 Amounts are withdrawn from the trusts when the contract obligations are performed.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 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
$
41,133

 
$
40,327

 
$
120,398

 
$
116,581

Withdrawals
$
39,108

 
$
33,260

 
$
105,471

 
$
115,930

Purchases of available-for-sale securities
$
119,699

 
$
165,025

 
$
490,752

 
$
389,219

Sales of available-for-sale securities
$
123,063

 
$
150,804

 
$
471,162

 
$
389,747


The components of Preneed cemetery 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
$
1,449,883

 
$
1,343,916

Cash and cash equivalents
115,922

 
118,583

Trust investments
1,565,805

 
1,462,499

Receivables from customers
1,009,525

 
958,503

Unearned finance charges
(34,460
)
 
(31,332
)
 
2,540,870

 
2,389,670

Allowance for cancellation
(74,669
)
 
(71,503
)
Preneed cemetery receivables, net and trust investments
$
2,466,201

 
$
2,318,167


The costs and values associated with the 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 market 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
 
$
69,841

 
$
2,301

 
$
—

 
$
72,142

Canadian government
2
 
33,751

 
511

 
(54
)
 
34,208

Corporate
2
 
2,547

 
20

 
(40
)
 
2,527

Asset-backed
2
 
170

 
21

 
—

 
191

Equity securities:
 
 
 
 
 
 
 
 
 
Common stock:
 
 
 
 
 
 
 
 
 
United States
1
 
540,836

 
72,329

 
(22,978
)
 
590,187

Canada
1
 
8,662

 
4,800

 
(145
)
 
13,317

Other international
1
 
44,166

 
4,443

 
(4,128
)
 
44,481

Mutual funds:
 
 
 
 
 
 
 
 
 
Equity
1
 
353,122

 
12,682

 
(21,193
)
 
344,611

Fixed income
1
 
97,339

 
2,107

 
(10,677
)
 
88,769

Other
3
 
160

 
—

 
(126
)
 
34

Trust investments, at fair value
 
 
1,150,594

 
99,214

 
(59,341
)
 
1,190,467

Fixed income commingled funds
 
 
214,718

 
10,084

 
—

 
224,802

Private equity
 
 
32,074

 
4,622

 
(2,082
)
 
34,614

Trust investments, at net asset value
 
 
246,792

 
14,706

 
(2,082
)
 
259,416

Trust investments, at market
 
 
$
1,397,386

 
$
113,920

 
$
(61,423
)
 
$
1,449,883

 
December 31, 2015
 
Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Value
 
 
 
 
 
(In thousands)
 
 
Fixed income securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury
2
 
$
69,746

 
$
25

 
$
(1,437
)
 
$
68,334

Canadian government
2
 
24,648

 
183

 
(169
)
 
24,662

Corporate
2
 
5,112

 
26

 
(118
)
 
5,020

Residential mortgage-backed
2
 
129

 
3

 
(3
)
 
129

Asset-backed
2
 
170

 
15

 
—

 
185

Equity securities:
 
 
 
 
 
 
 
 
 
Common stock:
 
 
 
 
 
 
 
 
 
United States
1
 
532,026

 
44,181

 
(32,037
)
 
544,170

Canada
1
 
8,984

 
3,858

 
(891
)
 
11,951

Other international
1
 
50,053

 
4,207

 
(5,799
)
 
48,461

Mutual funds:
 
 
 
 
 
 
 
 
 
Equity
1
 
356,798

 
1,620

 
(49,642
)
 
308,776

Fixed income
1
 
203,983

 
92

 
(18,526
)
 
185,549

Other
3
 
1,381

 
122

 
—

 
1,503

Trust investments, at fair value
 
 
1,253,030

 
54,332

 
(108,622
)
 
1,198,740

Fixed income commingled funds
 
 
108,883

 
—

 
(570
)
 
108,313

Private equity
 
 
35,411

 
5,954

 
(4,502
)
 
36,863

Trust investments, at net asset value
 
 
144,294

 
5,954

 
(5,072
)
 
145,176

Trust investments, at market
 
 
$
1,397,324

 
$
60,286

 
$
(113,694
)
 
$
1,343,916


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 held by the trusts 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 $36.9 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
$
1,319

 
$
1,576

 
$
1,503

 
$
203

Net unrealized gains (losses) included in Accumulated other comprehensive income(1)
10

 
(83
)
 
(174
)
 
(84
)
Purchases
—

 
—

 
—

 
1,348

Sales
(1,295
)
 
(26
)
 
(1,295
)
 
—

Fair value, ending balance
$
34

 
$
1,467

 
$
34

 
$
1,467

________________________________________
(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
$
32,187

Due in one to five years
26,897

Due in five to ten years
35,498

Thereafter
14,486

 
$
109,068


Earnings from all our merchandise and service trust investments are recognized in current 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 $11.2 million and $10.7 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 $31.5 million and $34.9 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 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 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:
 
 
 
 
 
 
 
 
 
 
 
Canadian government
$
6

 
$
—

 
$
1,259

 
$
(54
)
 
$
1,265

 
$
(54
)
Corporate
866

 
(11
)
 
776

 
(29
)
 
1,642

 
(40
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Common stock:
 
 
 
 
 
 
 
 
 
 
 
United States
130,167

 
(14,779
)
 
40,411

 
(8,199
)
 
170,578

 
(22,978
)
Canada
—

 
—

 
747

 
(145
)
 
747

 
(145
)
Other international
12,357

 
(1,839
)
 
8,629

 
(2,289
)
 
20,986

 
(4,128
)
Mutual funds:
 
 
 
 
 
 
 
 
 
 
 
Equity
10,414

 
(452
)
 
165,722

 
(20,741
)
 
176,136

 
(21,193
)
Fixed income
12,430

 
(171
)
 
44,609

 
(10,506
)
 
57,039

 
(10,677
)
Other
34

 
(126
)
 
—

 
—

 
34

 
(126
)
Trust investments, at fair value
166,274

 
(17,378
)
 
262,153

 
(41,963
)
 
428,427

 
(59,341
)
Private equity
36

 
(1
)
 
13,466

 
(2,081
)
 
13,502

 
(2,082
)
Trust investments, at net asset value
36

 
(1
)
 
13,466

 
(2,081
)
 
13,502

 
(2,082
)
Total temporarily impaired securities
$
166,310

 
$
(17,379
)
 
$
275,619

 
$
(44,044
)
 
$
441,929

 
$
(61,423
)
 
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
$
52,533

 
$
(1,435
)
 
$
21

 
$
(2
)
 
$
52,554

 
$
(1,437
)
Canadian government
16,039

 
(105
)
 
841

 
(64
)
 
16,880

 
(169
)
Corporate
1,754

 
(22
)
 
2,347

 
(96
)
 
4,101

 
(118
)
Residential mortgage-backed
42

 
(1
)
 
18

 
(2
)
 
60

 
(3
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Common stock:
 
 
 
 
 
 
 
 
 
 
 
United States
198,843

 
(26,038
)
 
21,355

 
(5,999
)
 
220,198

 
(32,037
)
Canada
470

 
(6
)
 
1,430

 
(885
)
 
1,900

 
(891
)
Other international
15,567

 
(2,507
)
 
9,412

 
(3,292
)
 
24,979

 
(5,799
)
Mutual funds:
 
 
 
 
 
 
 
 
 
 
 
Equity
207,349

 
(25,991
)
 
86,720

 
(23,651
)
 
294,069

 
(49,642
)
Fixed income
139,749

 
(6,322
)
 
44,550

 
(12,204
)
 
184,299

 
(18,526
)
Trust investments, at fair value
632,346

 
(62,427
)
 
166,694

 
(46,195
)
 
799,040

 
(108,622
)
Fixed income commingled funds
108,347

 
(570
)
 
—

 
—

 
108,347

 
(570
)
Private equity
—

 
—

 
9,526

 
(4,502
)
 
9,526

 
(4,502
)
Trust investments, at net asset value
108,347

 
(570
)
 
9,526

 
(4,502
)
 
117,873

 
(5,072
)
Total temporarily impaired securities
$
740,693

 
$
(62,997
)
 
$
176,220

 
$
(50,697
)
 
$
916,913

 
$
(113,694
)