SECURITY NATIONAL FINANCIAL CORP annual report, FY2021

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Security National Financial Corporation — FY2021 Form 10-K

Reporting period: Fiscal year ended December 31, 2021; this is an annual filing, not a standalone fourth-quarter report. The company operates life insurance, cemetery and mortuary, and mortgage businesses. Amounts below are U.S. dollars.

Financial performance

  • Revenue: $470.7 million, down 2.2% from $481.5 million in 2020. Mortgage fee income fell $35.5 million to $263.4 million, partly offset by higher insurance premiums, investment income, cemetery and mortuary sales, and other revenue.
  • Profit: Earnings before tax were $51.8 million versus $71.5 million; net earnings were $39.5 million versus $55.6 million. Basic and diluted earnings per Class A-equivalent share were $1.96 and $1.89, respectively, compared with $2.81 and $2.74.
  • Margins: Benefits and expenses were 89.0% of revenue versus 85.2% in 2020. Net margin was approximately 8.4%, compared with 11.5%.
  • Segment earnings before tax: Life insurance $15.0 million, up 26%; cemetery and mortuary $7.9 million, up 80%; mortgage $28.9 million, down 48%.
  • Cash flow: Operating activities provided $144.6 million, versus $129.6 million used in 2020. Investing activities used $63.6 million and financing activities used $55.1 million. Cash and cash equivalents were $131.4 million at year-end; cash, cash equivalents and restricted cash totaled $141.4 million.
  • Debt and capitalization: Bank and other loans payable were $251.3 million, down $46.5 million year over year. Stockholders’ equity was $299.8 million; equity was 54.4% of total capitalization, up from 47.0%. The company reported compliance with debt covenants at year-end.
  • Assets and insurance obligations: Total assets were $1.548 billion and total liabilities $1.248 billion. Future policy benefits and unpaid claims were $863.3 million. Total investments were $823.6 million; mortgage loans held for investment were $277.3 million.
  • Mortgage operations: SecurityNational Mortgage originated 19,342 loans totaling $5.503 billion in 2021, versus 21,206 loans totaling $5.473 billion in 2020. Loans held for sale were $302.8 million at year-end, versus $422.8 million.

Material changes and notable items

  • Mortgage-segment earnings fell as fair-value results on loans held for sale and loan commitments weakened and personnel costs rose. Rising mortgage rates during 2021 followed the unusually low rates of 2020 and early 2021.
  • Insurance premiums increased 7.8%, including growth in first-year premiums from pre-need insurance sales. Death benefits and other policy benefits rose; management attributed $2.3 million of additional death claims to COVID-19-related deaths.
  • Cemetery and mortuary revenue rose 18.2%, supported by higher pre-need cemetery sales and at-need activity.
  • The mortgage loan indemnification reserve declined to $2.4 million from $20.6 million, primarily after $20.3 million of net charge-offs. The prior-year reserve included an additional $16.5 million provision for settlement estimates.
  • The company acquired Rivera Funerals, Cremations and Memorial Gardens and Holbrook Mortuary in December 2021 for stated net purchase prices of approximately $10.7 million and $3.1 million. It sold Memorial Insurance Company of America in August and ceased EverLEND Mortgage operations, merging them into SecurityNational Mortgage in December.
  • Center53 phase two began partial occupancy in October 2021; the remaining space was leased with occupancy planned for April 2022. The broader real-estate development program had initial development costs exceeding $100 million, primarily related to Center53.

Outlook, risks and contingencies

  • Outlook: Management provided no specific numerical earnings or revenue guidance. It expects to continue emphasizing niche life products, cemetery and mortuary operations, mortgage origination, acquisitions, and real-estate development, subject to market demand.
  • Key risks: Mortgage profitability is sensitive to interest rates, refinancing activity, loan-sale execution, and investor repurchase or indemnification claims. Insurance results depend on mortality, persistency, investment returns, and the spread between investment yields and policyholder crediting rates. Other risks include regulation, competition, real-estate conditions, and COVID-19 uncertainty.
  • Liquidity and commitments: Construction and land-development loan commitments were approximately $329.9 million, of which about $179.7 million had been funded. Warehouse lines totaling several hundred million dollars had 2022 maturities; the company reported covenant compliance at December 31, 2021. Insurance-subsidiary dividends are subject to regulatory limits and, in some cases, approval.
  • Market sensitivity: Management estimated that a 100-basis-point increase in interest rates would reduce the fair value of its approximately $536.6 million fixed-income portfolio by $18.4 million; a 100-basis-point decrease would increase it by $16.3 million.
  • Legal matter: SecurityNational Mortgage settled all Lehman Brothers-related loan claims in February 2021. The settlement was reserved for at year-end 2020 and paid in the first quarter of 2021. Management said other ordinary-course legal actions were not expected to materially affect results.
  • Accounting and audit: Deloitte issued an unqualified opinion on the financial statements and identified future policy benefits and deferred policy acquisition cost assumptions as a critical audit matter. Management concluded internal controls were effective; the auditor did not attest to internal control effectiveness.

Investor verification priorities

  1. Review the mortgage segment’s earnings sensitivity to rate movements, changes in loan fair values, production levels, and servicing economics.
  2. Assess whether the $2.4 million mortgage indemnification reserve adequately reflects remaining repurchase and settlement exposure, and reconcile reserve reductions to claim activity.
  3. Check the funding, collateral, maturity, and refinancing status of 2022 warehouse lines and the approximately $150.2 million of unfunded construction and land-development commitments.
  4. Evaluate assumptions underlying future policy benefit reserves, mortality experience, COVID-related claims, and deferred acquisition costs.
  5. Review valuation assumptions and cash-flow performance for mortgage servicing rights, whose carrying value was $53.1 million and estimated fair value $68.8 million.
  6. Confirm acquisition integration, Center53 leasing and development costs, and the effect of interest rates and real-estate market conditions on investment assets.