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Preneed Funeral Activities (Notes)
 3 Months Ended
Mar. 31, 2017
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 Amounts are withdrawn from the trusts after the contract obligations are performed.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
 
March 31,
 
2017
 
2016
 
(In thousands)
Deposits
$
34,976

 
$
27,708

Withdrawals
$
42,123

 
$
35,170

Purchases of available-for-sale securities
$
90,952

 
$
109,522

Sales of available-for-sale securities
$
89,412

 
$
99,493


The components of Preneed funeral receivables, net and trust investments in our unaudited condensed Consolidated Balance Sheet at March 31, 2017 and December 31, 2016 are as follows:
 
March 31, 2017
 
December 31, 2016
 
(In thousands)
Trust investments, at market
$
1,199,453

 
$
1,152,752

Cash and cash equivalents
115,914

 
122,517

Insurance-backed fixed income securities
270,348

 
271,248

Trust investments
1,585,715

 
1,546,517

Receivables from customers
319,456

 
312,556

Unearned finance charge
(13,233
)
 
(12,562
)
 
1,891,938

 
1,846,511

Allowance for cancellation
(29,283
)
 
(29,066
)
Preneed funeral receivables, net and trust investments
$
1,862,655

 
$
1,817,445


The costs and values associated with trust investments measured at market at March 31, 2017 and December 31, 2016 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.

 
March 31, 2017
 
Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Value
 
 
 
 
 
(In thousands)
 
 
Fixed income securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury
2
 
$
72,835

 
$
405

 
$
(372
)
 
$
72,868

Canadian government
2
 
53,740

 
254

 
(59
)
 
53,935

Corporate
2
 
11,874

 
193

 
(71
)
 
11,996

Residential mortgage-backed
2
 
172

 
17

 
—

 
189

Asset-backed
2
 
52

 
—

 
(1
)
 
51

Equity securities:
 
 
 
 
 
 
 
 
 
Preferred stock
2
 
1,425

 
112

 
(54
)
 
1,483

Common stock:
 
 
 
 
 
 
 
 
 
United States
1
 
332,089

 
62,224

 
(5,017
)
 
389,296

Canada
1
 
11,593

 
2,966

 
(441
)
 
14,118

Other international
1
 
23,513

 
2,212

 
(2,439
)
 
23,286

Mutual funds:
 
 
 
 
 
 
 
 
 
Equity
1
 
320,086

 
15,302

 
(12,428
)
 
322,960

Fixed income
1
 
94,756

 
1,332

 
(6,782
)
 
89,306

Other
3
 
4,017

 
1,448

 
(30
)
 
5,435

Trust investments, at fair value
 
 
926,152

 
86,465

 
(27,694
)
 
984,923

Fixed income commingled funds
 
 
174,432

 
4,608

 
(1,131
)
 
177,909

Private equity
 
 
36,430

 
3,150

 
(2,959
)
 
36,621

Trust investments, at net asset value
 
 
210,862

 
7,758

 
(4,090
)
 
214,530

Trust investments, at market
 
 
$
1,137,014

 
$
94,223

 
$
(31,784
)
 
$
1,199,453

 
December 31, 2016
 
Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
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


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 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 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 March 31, 2017, our unfunded commitment for our private equity investments was $44.0 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
 
March 31,
 
2017
 
2016
 
(In thousands)
Fair value, beginning balance
$
5,276

 
$
4,756

Net unrealized gains included in Accumulated other comprehensive income(1)
221

 
55

Distributions and other
(62
)
 
—

Fair value, ending balance
$
5,435

 
$
4,811



(1)
All net unrealized gains 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 2017 to 2041. Maturities of fixed income securities, excluding mutual funds, at March 31, 2017 are estimated as follows:
 
Fair Value
 
(In thousands)
Due in one year or less
$
71,410

Due in one to five years
26,461

Due in five to ten years
33,537

Thereafter
7,631

 
$
139,039

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 $14.3 million and $12.0 million for the three months ended March 31, 2017 and 2016, 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 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, 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 March 31, 2017 and December 31, 2016, respectively, are shown in the following tables:
 
March 31, 2017
 
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
$
24,169

 
$
(372
)
 
$
—

 
$
—

 
$
24,169

 
$
(372
)
Canadian government
4,011

 
(45
)
 
173

 
(14
)
 
4,184

 
(59
)
Corporate
1,383

 
(15
)
 
2,564

 
(56
)
 
3,947

 
(71
)
 Asset-backed
—

 
—

 
51

 
(1
)
 
51

 
(1
)
Equity securities:
 
 
 
 
 
 
 
 

 

Preferred stock
112

 
(29
)
 
95

 
(25
)
 
207

 
(54
)
Common stock:
 
 
 
 
 
 
 
 

 

United States
58,091

 
(5,017
)
 
13,858

 
—

 
71,949

 
(5,017
)
Canada
3,353

 
(430
)
 
124

 
(11
)
 
3,477

 
(441
)
Other international
3,846

 
(357
)
 
7,567

 
(2,082
)
 
11,413

 
(2,439
)
Mutual funds:
 
 
 
 
 
 
 
 

 

Equity
25,972

 
(1,954
)
 
132,756

 
(10,474
)
 
158,728

 
(12,428
)
Fixed income
26,910

 
(447
)
 
30,967

 
(6,335
)
 
57,877

 
(6,782
)
Other
—

 
—

 
1,400

 
(30
)
 
1,400

 
(30
)
Trust investments, at fair value
147,847

 
(8,666
)
 
189,555

 
(19,028
)
 
337,402

 
(27,694
)
Fixed income commingled funds
72,487

 
(467
)
 
18,383

 
(664
)
 
90,870

 
(1,131
)
Private equity
28

 
(17
)
 
20,373

 
(2,942
)
 
20,401

 
(2,959
)
Trust investments, at net asset value
72,515

 
(484
)
 
38,756

 
(3,606
)
 
111,271

 
(4,090
)
Total temporarily impaired securities
$
220,362

 
$
(9,150
)
 
$
228,311

 
$
(22,634
)
 
$
448,673

 
$
(31,784
)
 
December 31, 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
$
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
)
Residential mortgage-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
)