The first choice is the best answer.
First, the Houyhnhnms are a rational species. Secondly, we know this when one friend visits the home where Gulliver is staying. She explains that she has arrived so late because her husband just died and she needed to make burial arrangements. Despite the fact that he literally just died, she behaves cheerfully.
Therefore, the Houyhnhnms view death as an event of life and they do not get upset when one occurs.