MERCHANDISE TRUSTS

12 Months Ended

Dec. 31, 2013

MERCHANDISE TRUSTS

5. MERCHANDISE TRUSTS

At December 31, 2013 and December 31, 2012, the Company’s merchandise trusts consisted of the following types of assets:

• Money Market Funds that invest in low risk short term securities;

• Publicly traded mutual funds that invest in underlying debt securities;

• Publicly traded mutual funds that invest in underlying equity securities;

• Equity investments that are currently paying dividends or distributions. These investments include Real Estate Investment Trusts (“REIT’s”), Master Limited Partnerships and global equity securities;

• Fixed maturity debt securities issued by various corporate entities;

• Fixed maturity debt securities issued by the U.S. Government and U.S. Government agencies; and

• Fixed maturity debt securities issued by U.S. states and local government agencies.

All of these investments are classified as Available for Sale as defined by the Investments in Debt and Equity topic of the ASC. Accordingly, all of the assets are carried at fair value. All of these investments are considered to be either Level 1 or Level 2 assets as defined by the Fair Value Measurements and Disclosures topic of the ASC. See Note 15 for further details. There were no Level 3 assets.

The merchandise trusts are variable interest entities (VIE) for which the Company is the primary beneficiary. The assets held in the merchandise trusts are required to be used to purchase the merchandise to which they relate. If the value of these assets falls below the cost of purchasing such merchandise, the Company may be required to fund this shortfall.

The Company has included $8.3 million and $7.6 million of investments held in trust by the West Virginia Funeral Directors Association at December 31, 2013 and December 31, 2012, respectively, in its merchandise trust assets. As required by law, the Company deposits a portion of certain funeral merchandise sales in West Virginia into a trust that is held by the West Virginia Funeral Directors Association. These trusts are recorded at their account value, which approximates their fair value.

The cost and market value associated with the assets held in the merchandise trusts at December 31, 2013 and December 31, 2012 is presented below:

			Gross		Gross
			Unrealized		Unrealized			Fair
As of December 31, 2013	Cost		Gains		Losses			Value
	(in thousands)
Short-term investments	$	46,518	$	—	$	—		$	46,518
Fixed maturities:
U.S. Government and federal agency		—		—		—			—
U.S. State and local government agency		—		—		—			—
Corporate debt securities		9,105		162		(96	)		9,171
Other debt securities		7,336		—		(12	)		7,324
Total fixed maturities		16,441		162		(108	)		16,495
Mutual funds - debt securities		117,761		729		(7,157	)		111,333
Mutual funds - equity securities		144,249		16,610		(3,329	)		157,530
Equity securities		81,520		5,267		(1,092	)		85,695
Other invested assets		5,809		—		(86	)		5,723
Total managed investments	$	412,298	$	22,768	$	(11,772	)	$	423,294
West Virginia Trust Receivable		8,262		—		—			8,262
Total	$	420,560	$	22,768	$	(11,772	)	$	431,556
			Gross		Gross
			Unrealized		Unrealized			Fair
As of December 31, 2012	Cost		Gains		Losses			Value
	(in thousands)
Short-term investments	$	27,890	$	—	$	—		$	27,890
Fixed maturities:
U.S. Government and federal agency		—		—		—			—
U.S. State and local government agency		—		—		—			—
Corporate debt securities		8,590		165		(41	)		8,714
Other debt securities		4,320		—		(3	)		4,317
Total fixed maturities		12,910		165		(44	)		13,031
Mutual funds - debt securities		105,388		3,425		(892	)		107,921
Mutual funds - equity securities		145,538		6,229		(6,697	)		145,070
Equity securities		68,714		3,448		(4,755	)		67,407
Other invested assets		7,376		165		(444	)		7,097
Total managed investments	$	367,816	$	13,432	$	(12,832	)	$	368,416
West Virginia Trust Receivable		7,557		—		—			7,557
Total	$	375,373	$	13,432	$	(12,832	)	$	375,973

The contractual maturities of debt securities as of December 31, 2013 and December 31, 2012 are presented below:

	Less than		1 year through		6 years through		More than
As of December 31, 2013	1 year		5 years		10 years		10 years
	(in thousands)
U.S. Government and federal agency	$	—	$	—	$	—	$	—
U.S. State and local government agency		—		—		—		—
Corporate debt securities		—		4,332		4,839		—
Other debt securities		2,150		5,174		—		—
Total fixed maturities	$	2,150	$	9,506	$	4,839	$	—
	Less than		1 year through		6 years through		More than
As of December 31, 2012	1 year		5 years		10 years		10 years
	(in thousands)
U.S. Government and federal agency	$	—	$	—	$	—	$	—
U.S. State and local government agency		—		—		—		—
Corporate debt securities		—		3,861		4,853		—
Other debt securities		4,317		—		—		—
Total fixed maturities	$	4,317	$	3,861	$	4,853	$	—

An aging of unrealized losses on the Company’s investments in fixed maturities and equity securities at December 31, 2013 and December 31, 2012 is presented below:

	Less than 12 months				12 Months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
As of December 31, 2013	Value		Losses		Value		Losses		Value		Losses
	(in thousands)
Fixed maturities:
U.S. Government and federal agency	$	—	$	—	$	—	$	—	$	—	$	—
U.S. State and local government agency		—		—		—		—		—		—
Corporate debt securities		2,812		43		1,249		53		4,061		96
Other debt securities		5,329		8		995		4		6,324		12
Total fixed maturities		8,141		51		2,244		57		10,385		108
Mutual funds - debt securities		87,113		6,724		6,485		433		93,598		7,157
Mutual funds - equity securities		29,993		2,444		4,217		885		34,210		3,329
Equity securities		25,379		1,031		1,492		61		26,871		1,092
Other invested assets		2,266		86		—		—		2,266		86
Total	$	152,892	$	10,336	$	14,438	$	1,436	$	167,330	$	11,772

	Less than 12 months				12 Months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
As of December 31, 2012	Value		Losses		Value		Losses		Value		Losses
	(in thousands)
Fixed maturities:
U.S. Government and federal agency	$	—	$	—	$	—	$	—	$	—	$	—
U.S. State and local government agency		—		—		—		—		—		—
Corporate debt securities		2,140		20		297		21		2,437		41
Other debt securities		4,317		3		—		—		4,317		3
Total fixed maturities		6,457		23		297		21		6,754		44
Mutual funds - debt securities		6,388		463		4,198		429		10,586		892
Mutual funds - equity securities		48,255		5,500		19,655		1,197		67,910		6,697
Equity securities		17,932		1,527		15,538		3,228		33,470		4,755
Other invested assets		2,558		444		—		—		2,558		444
Total	$	81,590	$	7,957	$	39,688	$	4,875	$	121,278	$	12,832

A reconciliation of the Company’s merchandise trust activities for the years ended December 31, 2013 and December 31, 2012 is presented below:

Year ended December 31, 2013
Fair				Capital	Realized			Unrealized	Fair
Value at			Interest/	Gain	Gain/			Change in	Value at
12/31/2012	Contributions	Distributions	Dividends	Distributions	Loss	Taxes	Fees	Fair Value	12/31/2013
(in thousands)
$375,973	68,305	(55,891)	18,176	968	19,502	(2,986)	(2,887)	10,396	$431,556

Year ended December 31, 2012
Fair				Capital	Realized			Unrealized	Fair
Value at			Interest/	Gain	Gain/			Change in	Value at
12/31/2011	Contributions	Distributions	Dividends	Distributions	Loss	Taxes	Fees	Fair Value	12/31/2012
(in thousands)
$344,515	55,754	(52,618)	16,045	788	8,862	(3,486)	(2,424)	8,537	$375,973

The Company made net contributions into the trusts of approximately $12.4 million and $3.1 million during the years ended December 31, 2013 and 2012, respectively. During the year ended December 31, 2013, purchases and sales of securities available for sale included in trust investments were approximately $536.2 million and $540.9 million, respectively. During the year ended December 31, 2012, purchases and sales of securities available for sale included in trust investments were approximately $464.7 million and $461.0 million, respectively. Contributions include $10.3 million and $12.0 million of assets that were acquired through acquisitions during the years ended December 31, 2013 and 2012, respectively. Distributions include $5.8 million of assets that were divested as a result of the termination of an operating agreement during the year ended December 31, 2012.

Other-Than-Temporary Impairment of Trust Assets

In accordance with ASC 320-10-65-1, the Company assesses whether an impairment is other-than-temporary by performing each of the following:

Fixed Maturity Debt Securities

• The Company assesses whether it has the intent to sell any impaired debt security; or

• The Company assesses whether it is more likely than not it will be required to sell any impaired debt security before its anticipated recovery;

• If either of these conditions exists, the impairment is considered to be other than temporary;

• The Company assesses whether or not there is a credit loss on an impaired security. A credit loss is the excess of the amortized cost of the security over the present value of future expected cash flows. If there is a credit loss, the Company recognizes an other-than-temporary impairment in earnings in an amount equal to the credit loss. This amount becomes the new cost basis of the asset and will not be adjusted for subsequent changes in the fair value of the asset;

• The Company assesses the overall credit quality of each issue by evaluating its credit rating as reported by any credit rating agency. The Company also determines if there has been any downgrade in its creditworthiness as reported by such credit rating agency;

• The Company determines if there has been any suspension of interest payments or any announcements of any intention to do so;

• The Company evaluates the length of time until the principal becomes due and whether the ability to satisfy this payment has been impaired.

Equity Securities

• The Company compares the proportional decline in value to the overall sector decline as measured via certain specific indices;

• The Company determines whether there has been further periodic decline from prior periods or whether there has been a recovery in value.

For all securities

• The Company evaluates the severity of the impairment and length of time that a security has been in a loss position;

• The Company determines if there is any publicly available information that would cause the Company to believe that impairment is other than temporary in nature.

During the year ended December 31, 2013, the Company determined that there were 7 securities with an aggregate cost basis of approximately $2.6 million and an aggregate fair value of approximately $1.6 million, resulting in an impairment of $1.0 million, wherein such impairment was considered to be other-than-temporary. During the year ended December 31, 2012, the Company determined that there were 8 securities with an aggregate cost basis of approximately $2.0 million and an aggregate fair value of approximately $1.0 million, resulting in an impairment of $1.0 million, wherein such impairment was considered to be other-than-temporary. Accordingly, the Company adjusted the cost basis of these assets to their current value and offset this change against deferred revenue. This reduction in deferred revenue will be reflected in earnings in future periods as the underlying merchandise is delivered or the underlying service is performed.