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Preneed Funeral Activities Level 1 (Notes)
 12 Months Ended
Dec. 31, 2016
Funeral [Member]  
Preneed Funeral Activities Text Block
Preneed Funeral Activities
Preneed funeral receivables, net and trust investments
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 funeral 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. 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 Amounts are withdrawn from the trusts after the contract obligations are performed.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 funeral contracts are presented as operating cash flows in our 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 our preneed funeral merchandise and service trusts for the years ended December 31:
 
2016
 
2015
 
2014
 
 
 
(In thousands)
 
 
Deposits
$
121,668

 
$
121,109

 
$
102,553

Withdrawals
$
157,549

 
$
160,135

 
$
131,352

Purchases of available-for-sale securities(1)
$
377,813

 
$
453,092

 
$
1,238,257

Sales of available-for-sale securities(1)
$
387,959

 
$
458,236

 
$
1,318,512


(1)
The higher level of activity in 2014 was the result of changing the legal structure of the trust investments.
The components of Preneed funeral receivables, net and trust investments in our Consolidated Balance Sheet at December 31 were as follows:
 
2016
 
2015
 
(In thousands)
Trust investments, at market
$
1,152,752

 
$
1,109,394

Cash and cash equivalents
122,517

 
134,642

Assets associated with businesses held for sale
—

 
(39
)
Insurance-backed fixed income securities
271,248

 
271,116

Trust investments
1,546,517

 
1,515,113

Receivables from customers
312,556

 
290,689

Unearned finance charge
(12,562
)
 
(11,235
)
 
1,846,511

 
1,794,567

Allowance for cancellation
(29,066
)
 
(34,270
)
Preneed funeral receivables, net and trust investments
$
1,817,445

 
$
1,760,297


The activity in Preneed funeral receivables, net and trust investments for the years ended December 31 was as follows:
 
2016
 
2015
 
2014
 
 
 
(In thousands)
 
 
Beginning balance — Preneed funeral receivables and trust investments
$
1,760,297

 
$
1,843,023

 
$
1,870,243

Net preneed contract sales
296,896

 
283,927

 
247,994

Cash receipts from customers, net of refunds
(246,436
)
 
(234,413
)
 
(211,830
)
Deposits to trust
121,668

 
121,109

 
102,553

Acquisitions (divestitures) of businesses, net
3,560

 
1,400

 
(19,203
)
Net undistributed investment earnings (losses) (1)
65,954

 
(38,510
)
 
22,480

Maturities and distributed earnings
(193,604
)
 
(200,635
)
 
(162,059
)
Change in cancellation allowance
5,295

 
2,787

 
7,644

Effect of foreign currency and other
3,815

 
(18,391
)
 
(14,799
)
Ending balance — Preneed funeral receivables and trust investments
$
1,817,445

 
$
1,760,297

 
$
1,843,023

(1)
Includes both realized and unrealized investment earnings.
The cost and market values associated with our funeral merchandise and service trust investments recorded at fair value at December 31, 2016 and 2015 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.
 
 
December 31, 2016
 
Fair Value Hierarchy Level
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
 
 
(In thousands)
 
 
Fixed income securities:
 
 

 
 

 
 

 
 

U.S. Treasury
2
$
75,245

 
$
317

 
$
(557
)
 
$
75,005

Canadian government
2
55,752

 
272

 
(42
)
 
55,982

Corporate
2
12,702

 
177

 
(92
)
 
12,787

Residential mortgage-backed
2
29

 
1

 
—

 
30

Asset-backed
2
58

 
—

 
(3
)
 
55

Equity securities:
 
 

 
 

 
 

 
 

Preferred stock
2
1,428

 
81

 
(39
)
 
1,470

Common stock:
 
 

 
 

 
 

 
 

United States
1
334,854

 
49,785

 
(11,525
)
 
373,114

Canada
1
11,853

 
2,592

 
(263
)
 
14,182

Other international
1
25,761

 
1,824

 
(3,167
)
 
24,418

Mutual funds:
 
 

 
 

 
 

 
 

Equity
1
313,132

 
7,780

 
(26,842
)
 
294,070

Fixed income
1
92,760

 
1,344

 
(7,368
)
 
86,736

Other
3
4,079

 
1,214

 
(17
)
 
5,276

Trust investments, at fair value
 
927,653

 
65,387

 
(49,915
)
 
943,125

Fixed income commingled funds

168,959

 
3,177

 
(1,167
)
 
170,969

Private equity

40,892

 
2,956

 
(5,190
)
 
38,658

Trust investments, at net asset value
 
209,851

 
6,133

 
(6,357
)
 
209,627

Trust investments, at market
 
$
1,137,504

 
$
71,520

 
$
(56,272
)
 
$
1,152,752

 
 
December 31, 2015
 
Fair Value Hierarchy Level
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
 
 
(In thousands)
 
 
Fixed income securities:
 
 

 
 

 
 

 
 

U.S. Treasury
2
$
64,140

 
$
89

 
$
(1,270
)
 
$
62,959

Canadian government
2
56,975

 
323

 
(55
)
 
57,243

Corporate
2
18,983

 
235

 
(284
)
 
18,934

Residential mortgage-backed
2
1,299

 
29

 
(22
)
 
1,306

Asset-backed
2
5

 
—

 
—

 
5

Equity securities:
 
 

 
 

 
 

 
 

Preferred stock
2
1,951

 
41

 
(158
)
 
1,834

Common stock:
 
 

 
 

 
 

 
 

United States
1
344,544

 
30,885

 
(19,149
)
 
356,280

Canada
1
11,882

 
2,651

 
(1,077
)
 
13,456

Other international
1
32,193

 
2,636

 
(3,907
)
 
30,922

Mutual funds:
 
 

 
 

 
 

 
 

Equity
1
324,231

 
1,263

 
(43,975
)
 
281,519

Fixed income
1
155,893

 
154

 
(13,092
)
 
142,955

Other
3
3,687

 
1,069

 
—

 
4,756

Trust investments, at fair value
 
1,015,783

 
39,375

 
(82,989
)
 
972,169

Fixed income commingled funds
 
102,063

 
228

 
(1,103
)
 
101,188

Private equity

38,724

 
3,780

 
(6,467
)
 
36,037

Trust investments, at net asset value
 
140,787

 
4,008

 
(7,570
)
 
137,225

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, rating, and tax-exempt status. These securities 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 securities 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 December 31, 2016, our unfunded commitment for our private equity and other investments was $31.8 million which, if called, would be funded by the assets of the trusts.
The change in our market-based funeral merchandise and service trust investments with significant unobservable inputs (Level 3) is as follows for the years ended December 31:
 
 
2016
 
2015
 
2014
 
 
(In thousands)
Fair value, beginning balance at January 1
 
$
4,756

 
$
4,891

 
$
801

Net unrealized gains (losses) included in Accumulated other comprehensive income(1)
 
478

 
(167
)
 
876

Purchases
 
89

 
32

 
3,214

Sales
 
(47
)
 
—

 
—

Fair value, ending balance at December 31
 
$
5,276

 
$
4,756

 
$
4,891

(1)
All unrealized gains recognized in Accumulated other comprehensive income for our funeral 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 2017 to 2041. Maturities of fixed income securities at December 31, 2016 are estimated as follows:
 
Fair Value
 
(In thousands)
Due in one year or less
$
76,744

Due in one to five years
27,298

Due in five to ten years
31,374

Thereafter
8,443

 
$
143,859


Earnings from all our funeral merchandise and service trust investments are recognized in funeral 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 the period in which they are earned. 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. Recognized earnings (realized and unrealized) related to our funeral merchandise and service trust investments were $49.9 million, $52.9 million, and $62.8 million for the years ended December 31, 2016, 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 (expense) income, 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 funeral 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 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 funeral merchandise and service trust investment unrealized losses, their associated fair values, and the duration of unrealized losses for the years ended December 31, 2016 and 2015, are shown in the following tables.
 
December 31, 2016
 
In Loss Position
Less Than 12 Months
 
In Loss Position
Greater Than 12 Months
 
Total
 
Fair
Market
Value
 
Unrealized
Losses
 
Fair
Market
Value
 
Unrealized
Losses
 
Fair
Market
Value
 
Unrealized
Losses
 
 
 
 
 
(In thousands)
 
 
 
 
Fixed income securities:
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury
$
25,996

 
$
(557
)
 
$
—

 
$
—

 
$
25,996

 
$
(557
)
Canadian government
2,847

 
(30
)
 
191

 
(12
)
 
3,038

 
(42
)
Corporate
1,710

 
(15
)
 
3,560

 
(77
)
 
5,270

 
(92
)
Asset-backed
—

 
—

 
55

 
(3
)
 
55

 
(3
)
Equity securities:
 

 
 

 
 

 
 

 


 


Preferred stock
125

 
(17
)
 
98

 
(22
)
 
223

 
(39
)
Common stock:
 

 
 

 
 

 
 

 


 


United States
87,059

 
(8,149
)
 
14,939

 
(3,376
)
 
101,998

 
(11,525
)
Canada
2,832

 
(254
)
 
482

 
(9
)
 
3,314

 
(263
)
Other international
5,390

 
(1,301
)
 
7,368

 
(1,866
)
 
12,758

 
(3,167
)
Mutual funds:
 

 
 

 
 

 
 

 


 


Equity
108,109

 
(5,080
)
 
127,273

 
(21,762
)
 
235,382

 
(26,842
)
Fixed income
34,120

 
(817
)
 
31,654

 
(6,551
)
 
65,774

 
(7,368
)
Other
26

 
(2
)
 
1,160

 
(15
)
 
1,186

 
(17
)
Trust investments, at fair value
268,214

 
(16,222
)
 
186,780

 
(33,693
)
 
454,994

 
(49,915
)
Fixed income commingled funds
75,041

 
(687
)
 
17,656

 
(480
)
 
92,697

 
(1,167
)
Private equity
693

 
(481
)
 
22,812

 
(4,709
)
 
23,505

 
(5,190
)
Trust investments, at net asset value
75,734

 
(1,168
)
 
40,468

 
(5,189
)
 
116,202

 
(6,357
)
Total temporarily impaired securities
$
343,948

 
$
(17,390
)
 
$
227,248

 
$
(38,882
)
 
$
571,196

 
$
(56,272
)
 
December 31, 2015
 
In Loss Position
Less Than 12 Months
 
In Loss Position
Greater Than 12 Months
 
Total
 
Fair
Market
Value
 
Unrealized
Losses
 
Fair
Market
Value
 
Unrealized
Losses
 
Fair
Market
Value
 
Unrealized
Losses
 
 
 
 
 
(In thousands)
 
 
 
 
Fixed income securities:
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury
$
36,113

 
$
(1,268
)
 
$
141

 
$
(2
)
 
$
36,254

 
$
(1,270
)
Canadian government
209

 
(7
)
 
971

 
(48
)
 
1,180

 
(55
)
Corporate
4,618

 
(156
)
 
3,880

 
(128
)
 
8,498

 
(284
)
Residential mortgage-backed
378

 
(6
)
 
132

 
(16
)
 
510

 
(22
)
Equity securities:
 

 
 

 
 

 
 

 
 

 
 

Preferred stock
449

 
(60
)
 
42

 
(98
)
 
491

 
(158
)
Common stock:
 

 
 

 
 

 
 

 
 

 
 

United States
128,925

 
(16,448
)
 
14,537

 
(2,701
)
 
143,462

 
(19,149
)
Canada
1,941

 
(355
)
 
1,051

 
(722
)
 
2,992

 
(1,077
)
Other international
9,473

 
(1,638
)
 
6,154

 
(2,269
)
 
15,627

 
(3,907
)
Mutual funds:
 

 
 

 
 

 
 

 
 

 
 

Equity
186,016

 
(23,385
)
 
79,892

 
(20,590
)
 
265,908

 
(43,975
)
Fixed income
109,154

 
(5,052
)
 
27,061

 
(8,040
)
 
136,215

 
(13,092
)
Trust investments, at fair value
477,276

 
(48,375
)
 
133,861

 
(34,614
)
 
611,137

 
(82,989
)
Fixed income commingled funds
70,964

 
(457
)
 
15,243

 
(646
)
 
86,207

 
(1,103
)
Private equity
—

 
—

 
18,714

 
(6,467
)
 
18,714

 
(6,467
)
Trust investments, at net asset value
70,964

 
(457
)
 
33,957

 
(7,113
)
 
104,921

 
(7,570
)
Total temporarily impaired securities
$
548,240

 
$
(48,832
)
 
$
167,818

 
$
(41,727
)
 
$
716,058

 
$
(90,559
)


Deferred preneed funeral revenue
At December 31, 2016 and 2015, Deferred preneed funeral revenue, net of allowance for cancellation, represents future funeral revenue, including distributed trust investment earnings associated with unperformed trust-funded preneed funeral contracts that are not held in trust accounts. Deferred preneed funeral revenue is recognized in current funeral revenue when merchandise is delivered or the service is performed. Future funeral revenue and net trust investment earnings that are held in trust accounts are included in Deferred preneed receipts held in trust.
The following table summarizes the activity in Deferred preneed funeral revenue for the years ended December 31:
 
2016
 
2015
 
2014
 
(In thousands)
Beginning balance — Deferred preneed funeral revenue
$
557,897

 
$
540,164

 
$
551,948

Net preneed contract sales
251,134

 
232,628

 
198,195

Acquisitions (divestitures) of businesses, net
2,170

 
(2,895
)
 
(21,639
)
Net investment earnings (losses) (1)
66,656

 
(37,208
)
 
24,256

Recognized deferred preneed revenue
(277,248
)
 
(276,359
)
 
(258,534
)
Change in cancellation allowance
8,411

 
11,675

 
21,272

Change in deferred preneed receipts held in trust
(28,506
)
 
90,351

 
26,131

Effect of foreign currency and other
766

 
(459
)
 
(1,465
)
Ending balance — Deferred preneed funeral revenue
$
581,280

 
$
557,897

 
$
540,164

(1)
Includes both realized and unrealized investment earnings.
Insurance-funded preneed contracts
Not included in our Consolidated Balance Sheet are insurance-funded preneed contracts that will be funded by life insurance or annuity contracts issued by third party insurers. Where permitted by state or provincial law, customers may arrange their preneed contract by purchasing a life insurance or annuity policy from third-party insurance companies, for which we earn a commission as general sales agent for the insurance company. These general agency commissions (GA revenue) are based on a percentage per contract sold and are recognized as funeral revenue when the insurance purchase transaction between the customer and third-party insurance provider is completed. GA revenue recognized in 2016, 2015, and 2014 was $135.8 million, $137.0 million, and $123.0 million, respectively. Direct selling costs incurred pursuant to the sale of insurance-funded preneed contracts are expensed as incurred. The policy amount of the insurance contract between the customer and the third-party insurance company generally equals the amount of the preneed contract. We do not reflect the unfulfilled insurance-funded preneed contract amounts in our Consolidated Balance Sheet. The proceeds of the life insurance policies or annuity contracts will be reflected in funeral revenue as we perform these funerals.