Preneed Funeral Activities Level 1 (Notes) (Funeral [Member])
9 Months Ended
Sep. 30, 2011
Funeral [Member]
 
Preneed Funeral Activities Text Block
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 funeral merchandise and service trusts are variable interest entities as defined in the Consolidation Topic of the ASC. In accordance with this guidance, 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 cemetery trust investments detailed in Notes 5 and 6 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 revenues into Deferred preneed funeral and cemetery 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 Amounts are withdrawn from the trusts after the contract obligations are performed.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 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 revenues until the service is performed or the merchandise is delivered.
The table below sets forth certain investment-related activities associated with our preneed funeral merchandise and service trusts:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
 
(In thousands)
Deposits
$
18,960

 
$
18,771

 
$
55,189

 
$
61,294

Withdrawals
26,789

 
25,546

 
79,734

 
85,284

Purchases of available-for-sale securities
140,554

 
77,042

 
387,545

 
390,345

Sales of available-for-sale securities
114,476

 
86,754

 
448,988

 
401,253

Realized gains from sales of available-for-sale securities
11,353

 
5,963

 
49,618

 
26,461

Realized losses from sales of available-for-sale securities
(6,586
)
 
(8,360
)
 
(18,215
)
 
(42,017
)

The components of Preneed funeral receivables, net and trust investments in our unaudited condensed consolidated balance sheet at September 30, 2011 and December 31, 2010 are as follows:
 
September 30, 2011
 
December 31, 2010
 
(In thousands)
Trust investments, at market
$
875,770

 
$
875,043

Cash and cash equivalents
100,911

 
121,212

Insurance-backed fixed income securities
267,603

 
220,287

Trust investments
1,244,284

 
1,216,542

Receivables from customers
251,788

 
247,434

Unearned finance charge
(5,461
)
 
(5,620
)
 
1,490,611

 
1,458,356

Allowance for cancellation
(34,481
)
 
(33,799
)
Preneed funeral receivables and trust investments
$
1,456,130

 
$
1,424,557



The cost and market values associated with our funeral merchandise and service trust investments recorded at fair market value at September 30, 2011 and December 31, 2010 are detailed below. Cost reflects the investment (net of redemptions) of control holders in common trust funds, mutual funds, and private equity investments. Fair market value represents the value of the underlying securities held by the common trust funds, mutual funds at published values, and the estimated market value of private equity investments (including debt as well as the estimated fair value related to the contract holder’s equity in majority-owned real estate investments).
 
September 30, 2011
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Market
Value
 
 
 
(In thousands)
 
 
Fixed income securities:
 
 
 
 
 
 
 
U.S. Treasury
$
76,987

 
$
4,032

 
$
(336
)
 
$
80,683

Canadian government
113,763

 
628

 
(50
)
 
114,341

Corporate
51,128

 
1,353

 
(1,207
)
 
51,274

Residential mortgage-backed
3,388

 
77

 
(32
)
 
3,433

Asset-backed
127

 
6

 
—

 
133

Equity securities:
 
 
 
 
 
 
 
Preferred stock
2,344

 
19

 
(292
)
 
2,071

Common stock:
 
 
 
 
 
 
 
United States
267,707

 
28,059

 
(36,268
)
 
259,498

Canada
23,638

 
2,824

 
(1,354
)
 
25,108

Other international
19,481

 
460

 
(3,219
)
 
16,722

Mutual funds:
 
 
 
 
 
 
 
Equity
132,562

 
1,685

 
(23,543
)
 
110,704

Fixed income
195,093

 
6,298

 
(9,995
)
 
191,396

Private equity
36,800

 
1,408

 
(18,713
)
 
19,495

Other
518

 
394

 
—

 
912

Trust investments
$
923,536

 
$
47,243

 
$
(95,009
)
 
$
875,770


 
December 31, 2010
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Market
Value
 
 
 
(In thousands)
 
 
Fixed income securities:
 
 
 
 
 
 
 
U.S. Treasury
$
71,948

 
$
2,061

 
$
(334
)
 
$
73,675

Canadian government
121,137

 
1,004

 
(20
)
 
122,121

Corporate
33,627

 
2,751

 
(285
)
 
36,093

Residential mortgage-backed
5,310

 
135

 
(22
)
 
5,423

Asset-backed
2,984

 
97

 
(2
)
 
3,079

Equity securities:
 
 
 
 
 
 
 
Preferred stock
2,835

 
296

 
(78
)
 
3,053

Common stock:
 
 
 
 
 
 
 
United States
268,650

 
63,301

 
(8,391
)
 
323,560

Canada
22,452

 
4,542

 
(798
)
 
26,196

Other international
21,611

 
2,240

 
(2,330
)
 
21,521

Mutual funds:
 
 
 
 
 
 
 
Equity
116,260

 
6,123

 
(18,289
)
 
104,094

Fixed income
134,181

 
6,316

 
(5,628
)
 
134,869

Private equity
27,864

 
1,395

 
(16,890
)
 
12,369

Other
8,833

 
615

 
(458
)
 
8,990

Trust investments
$
837,692

 
$
90,876

 
$
(53,525
)
 
$
875,043



Where quoted prices are available in an active market, securities held by the common trust funds and mutual funds are classified as Level 1 investments pursuant to the three-level valuation hierarchy as required by the FVM&D Topic of the ASC.
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 funds are classified as Level 2 investments pursuant to the three-level valuation hierarchy as required by the FVM&D Topic of the ASC.
The valuation of private equity and other alternative investments requires significant management judgment due to the absence of quoted market prices, inherent lack of liquidity, and the long-term nature of such assets. The fair value of these investments is estimated based on the market value of the underlying real estate and private equity investments. The underlying real estate value is determined using the most recent available appraisals. Private equity investments are valued using market appraisals or a discounted cash flow methodology, which is an income approach for fair value model, depending on the nature of the underlying assets. The appraisals assess value based on a combination of replacement cost, comparative sales analysis, and discounted cash flow analysis. These funds are classified as Level 3 investments pursuant to the three-level valuation hierarchy as required by the FVM&D Topic of the ASC.
As of September 30, 2011, our unfunded commitment for our private equity and other investments was $12.7 million which, if called, would be funded by the assets of the trusts. Our private equity and other 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, the nature of the investments in this category is that the 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.
Our investments classified as Level 1 securities include common stock and mutual funds. Level 2 securities include U.S. Treasury, Canadian government, corporate, mortgage-backed fixed income securities, and preferred stock equity securities. Our private equity and other alternative investments are classified as Level 3 securities.
The inputs into the fair value of our market-based funeral merchandise and service trust investments are categorized as follows:
 
Quoted Market
Prices in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs (Level 3)
 
Fair Market
Value
 
 
 
(In thousands)
 
 
Trust investments at September 30, 2011
$
603,428

 
$
251,935

 
$
20,407

 
$
875,770

Trust investments at December 31, 2010
$
610,240

 
$
243,444

 
$
21,359

 
$
875,043


The change in our market-based funeral merchandise and service trust investments with significant unobservable inputs (Level 3) is as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
Fair market value, beginning balance
$
29,031

 
$
19,707

 
$
21,359

 
$
12,052

Net unrealized (losses) gains included in Accumulated other comprehensive income(1)
(7,757
)
 
501

 
(1,001
)
 
(569
)
Net realized losses included in Other income, net(2)
(8
)
 
(43
)
 
(67
)
 
(66
)
Purchases
18

 
—

 
18

 
7,343

Sales
(7,970
)
 
(10
)
 
(8,156
)
 
(10
)
Contributions
7,615

 
255

 
9,397

 
1,691

Distributions and other
(522
)
 
(364
)
 
(1,143
)
 
(395
)
Fair market value, ending balance
$
20,407

 
$
20,046

 
$
20,407

 
$
20,046


                                                                               
(1)
All unrealized (losses) 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 funeral and cemetery receipts held in trust. See Note 7 for further information related to our Deferred preneed funeral and cemetery receipts held in trust.
(2)
All losses recognized in Other income, net for our funeral merchandise and service trust investments are attributable to our preneed customers and are offset by a corresponding reclassification in Other income, net to Deferred preneed funeral and cemetery receipts held in trust. See Note 7 for further information related to our Deferred preneed funeral and cemetery receipts held in trust.
Maturity dates of our fixed income securities range from 2011 to 2041. Maturities of fixed income securities at September 30, 2011 are estimated as follows:
 
Fair Market Value
 
(In thousands)
Due in one year or less
$
136,116

Due in one to five years
51,838

Due in five to ten years
38,398

Thereafter
23,512

 
$
249,864


Earnings from all our funeral merchandise and service trust investments are recognized in funeral revenues when a service is performed or merchandise is delivered. 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 revenues. Recognized earnings (realized and unrealized) related to these trust investments were $10.2 million and $6.7 million for the three months ended September 30, 2011 and 2010, respectively. Recognized earnings (realized and unrealized) related to these trust investments were $28.9 million and $22.5 million for the nine months ended September 30, 2011 and 2010, 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, 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, net, which reduces Deferred preneed funeral receipts held in trust. See Note 7 for further information related to our Deferred preneed funeral receipts held in trust. For the three months ended September 30, 2011 and 2010, we recorded a $17.5 million and a $1.1 million impairment charge for other-than-temporary declines in fair value related to unrealized losses on certain investments, respectively. For the nine months ended September 30, 2011 and 2010, we recorded a $20.8 million and a $7.3 million impairment charge for other-than-temporary declines in fair value related to unrealized losses on certain investments, respectively.
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 market values, and the duration of unrealized losses as of September 30, 2011 and December 31, 2010, respectively, are shown in the following tables:
 
September 30, 2011
 
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
$
8,064

 
$
(80
)
 
$
9,021

 
$
(256
)
 
$
17,085

 
$
(336
)
Canadian government
9,536

 
(48
)
 
105

 
(2
)
 
9,641

 
(50
)
Corporate
20,897

 
(1,171
)
 
979

 
(36
)
 
21,876

 
(1,207
)
Residential mortgage-backed
369

 
(2
)
 
391

 
(30
)
 
760

 
(32
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
1,645

 
(292
)
 
—

 
—

 
1,645

 
(292
)
Common stock:
 
 
 
 
 
 
 
 
 
 
 
United States
122,765

 
(31,623
)
 
17,031

 
(4,645
)
 
139,796

 
(36,268
)
Canada
8,374

 
(1,005
)
 
620

 
(349
)
 
8,994

 
(1,354
)
Other international
9,966

 
(1,867
)
 
2,897

 
(1,352
)
 
12,863

 
(3,219
)
Mutual funds:
 
 
 
 
 
 
 
 
 
 
 
Equity
53,310

 
(10,834
)
 
45,439

 
(12,709
)
 
98,749

 
(23,543
)
Fixed income
26,896

 
(3,029
)
 
8,746

 
(6,966
)
 
35,642

 
(9,995
)
Private equity
1,360

 
(1,502
)
 
12,640

 
(17,211
)
 
14,000

 
(18,713
)
Total temporarily impaired securities
$
263,182

 
$
(51,453
)
 
$
97,869

 
$
(43,556
)
 
$
361,051

 
$
(95,009
)

 
December 31, 2010
 
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
$
10,433

 
$
(316
)
 
$
393

 
$
(18
)
 
$
10,826

 
$
(334
)
Canadian government
1,632

 
(2
)
 
668

 
(18
)
 
2,300

 
(20
)
Corporate
5,619

 
(285
)
 
—

 
—

 
5,619

 
(285
)
Residential mortgage-backed
836

 
(9
)
 
263

 
(13
)
 
1,099

 
(22
)
Asset-backed
225

 
(1
)
 
53

 
(1
)
 
278

 
(2
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
1,045

 
(78
)
 
—

 
—

 
1,045

 
(78
)
Common stock:
 
 
 
 
 
 
 
 
 
 
 
United States
41,491

 
(3,019
)
 
24,919

 
(5,372
)
 
66,410

 
(8,391
)
Canada
4,493

 
(324
)
 
1,361

 
(474
)
 
5,854

 
(798
)
Other international
5,251

 
(862
)
 
3,446

 
(1,468
)
 
8,697

 
(2,330
)
Mutual funds:
 
 
 
 
 
 
 
 
 
 
 
Equity
3,778

 
(110
)
 
61,844

 
(18,179
)
 
65,622

 
(18,289
)
Fixed income
9,630

 
(156
)
 
8,818

 
(5,472
)
 
18,448

 
(5,628
)
Private equity
214

 
(71
)
 
6,715

 
(16,819
)
 
6,929

 
(16,890
)
Other
8

 
(2
)
 
309

 
(456
)
 
317

 
(458
)
Total temporarily impaired securities
$
84,655

 
$
(5,235
)
 
$
108,789

 
$
(48,290
)
 
$
193,444

 
$
(53,525
)