Security National Financial Corporation — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited. The company operates life insurance, cemetery and mortuary, and mortgage businesses.
Financial performance and condition
| Metric | Q1 2024 | Q1 2023 / comparison |
|---|---|---|
| Total revenue | $81.2 million | $79.5 million; up 2.1% |
| Net earnings | $7.5 million | $1.2 million |
| Basic / diluted earnings per equivalent Class A share | $0.34 / $0.33 | $0.06 / $0.05 |
| Earnings before taxes | $9.6 million | $1.6 million |
| Benefits and expenses as a share of revenue | 88.2% | 98.0% |
| Net cash from operating activities | $25.1 million | Used $16.1 million |
Net earnings margin was approximately 9.2%, versus 1.6% a year earlier. The improvement reflected lower expenses and higher investment income, alongside gains on investments and other assets.
- Revenue mix: Insurance premiums and other considerations were $29.9 million, up 6.7%; net investment income was $19.9 million, up 12.2%; mortgage fee income was $21.8 million, down 16.0%; and mortuary and cemetery sales were $6.9 million, up 7.4%.
- Cash and liquidity: Cash and cash equivalents were $150.9 million at quarter-end, versus $126.9 million at December 31, 2023. Cash, cash equivalents, and restricted cash totaled $164.6 million. Restricted assets are not generally available for unrestricted corporate use.
- Debt and capital: Bank and other loans payable were $104.3 million, down from $105.6 million at year-end. Stockholders’ equity was $320.1 million, up from $312.9 million. Equity was 75.4% of the company’s stated total capitalization of equity plus bank and other loans.
- Assets and investments: Total assets were $1.447 billion. Total investments were $935.8 million. Fixed maturity securities had estimated fair value of $375.8 million versus amortized cost of $386.4 million; accumulated other comprehensive loss increased to $7.8 million from $6.9 million.
Changes versus the prior-year quarter
- Mortgage operations remained loss-making but improved: pretax loss was $2.0 million versus $3.9 million. Loan originations declined to 1,486 loans totaling $465.6 million, from 1,702 loans totaling $531.9 million.
- Mortgage fee income fell by $4.2 million, primarily because secondary gains on loan sales declined and fair-value changes on loans held for sale were less favorable.
- Life insurance pretax earnings rose to $8.5 million from $3.7 million; cemetery and mortuary pretax earnings rose to $3.1 million from $1.8 million.
- Investment gains and other asset gains increased to $1.7 million from $0.1 million, including approximately $1.5 million of unrealized gains on equity securities held at quarter-end and approximately $0.25 million of real estate gains.
- Operating cash flow improved to a $25.1 million inflow from a $16.1 million outflow, primarily due to increased proceeds from sales of mortgage loans held for sale. Investing activities provided $1.7 million, compared with $17.4 million; financing activities used $2.1 million, compared with $25.2 million.
Outlook, risks, contingencies, and unusual items
- Management outlook: No numerical earnings or revenue guidance is provided. Management describes its ongoing focus as niche insurance products, cemetery and mortuary operations, and mortgage origination. It states that internal and external funding sources are sufficient to continue the business model, while noting that economic and financial-market conditions may affect expected cash flows.
- Warehouse covenant issue: SecurityNational Mortgage was not in compliance with the net-income covenant on its warehouse lines as of March 31, 2024; the filing also reports noncompliance with an operating-cash-flow covenant for a standby letter of credit. The company had received or was seeking waivers. Approximately $7.0 million of advances were on a line without a waiver at filing; management said available cash and capacity on lines with waivers could support origination activities if repayment were required. The company was negotiating additional warehouse facilities.
- Other debt covenants: The company reported compliance with covenants on its other revolving credit lines and real-estate bank loans. One warehouse line matured May 26, 2024, and another November 30, 2024.
- Credit and investment exposure: About 98.1% of fixed maturity securities were investment grade. Mortgage loans had $16.2 million past due at March 31, including $3.4 million over 90 days past due; residential mortgage loans included $4.7 million classified as non-performing. The company reported that most unrealized fixed-income losses reflected interest-rate increases and that it did not intend, and was not more likely than not required, to sell affected securities before recovery.
- Commitments and claims: Construction and land-development loan commitments were approximately $146.6 million, of which $100.1 million had been funded. The company remains ultimately liable for reinsured amounts if reinsurers cannot pay. It reported ordinary-course legal actions but no material legal proceedings and no accrual for those claims.
- Subsequent events and accounting: A real-estate property sale in April 2024 generated an approximately $3.0 million gain; another property sale generated an approximately $39,000 loss. An April 15, 2024 share-repurchase agreement permits purchases of up to $1.0 million beginning no sooner than May 15, 2024. The company is implementing the long-duration insurance-contract accounting standard effective January 1, 2025; its financial impact was still being estimated.
- Controls: Management concluded disclosure controls were effective as of March 31, 2024 and reported no significant quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether warehouse-lender covenant waivers were finalized, and the status of the approximately $7.0 million unwaived advance and the May 2024 warehouse-line maturity.
- Whether mortgage volumes, secondary-market gains, and mortgage-segment profitability improve or remain pressured by interest rates and housing-market conditions.
- Trends in delinquent/non-performing mortgage loans, insurance-assignment past dues, credit-loss allowances, and construction-loan commitments and fundings.
- Whether reported investment gains are repeatable, and how interest rates affect fixed-income fair values, accumulated other comprehensive loss, and investment income.
- The eventual financial and capital impact of the insurance-contract accounting standard scheduled for adoption in 2025.