Security National Financial Corporation — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; comparisons are with FY2022. This is an annual report, not a standalone fourth-quarter earnings report. The filing was signed March 29, 2024. The independent auditor issued an unqualified opinion on the financial statements; the auditor did not attest to internal control effectiveness.
Business context
The company operates three segments: life insurance, cemetery and mortuary, and mortgage lending. Its strategy emphasizes niche insurance products, cemetery and mortuary growth, and mortgage origination. It also develops and invests in commercial and residential real estate.
Financial performance
| Metric | FY2023 | FY2022 |
|---|---|---|
| Total revenue | $318.5 million | $389.7 million |
| Earnings before tax | $16.3 million | $34.4 million |
| Net earnings | $14.5 million | $25.7 million |
| Diluted earnings per equivalent Class A share | $0.64 | $1.12 |
| Cash provided by operating activities | $53.9 million | $130.5 million |
| Interest expense | $4.9 million | $7.8 million |
- Net margin was approximately 4.6%, down from 6.6%. Benefits and expenses were 94.9% of revenue, compared with 91.2%.
- At year-end, total assets were $1.431 billion, cash and cash equivalents were $126.9 million, total investments were $936.8 million, and total liabilities were $1.118 billion.
- Bank and other loans payable declined to $105.6 million from $161.7 million. Stockholders’ equity rose to $312.9 million from $292.8 million; equity was 74.8% of total capitalization, versus 64.4%.
- Fixed-maturity securities had estimated fair value of $381.5 million. The company reported $6.2 million of combined cash, restricted cash and trust investments in its cash-flow reconciliation beyond balance-sheet cash, for total cash and restricted cash equivalents of $139.9 million.
Material changes and segment results
- Mortgage: Pretax loss was $17.4 million, versus pretax earnings of $14.1 million. Mortgage revenue fell 47% to $101.4 million. Originations declined to 7,185 loans totaling $2.173 billion from 10,663 loans totaling $3.374 billion. Secondary gains fell to $68.4 million from $153.7 million. Management attributed pressure to higher mortgage rates and lower origination activity.
- Life insurance: Pretax earnings increased 78% to $25.3 million. Segment revenue rose 9% to $185.2 million, supported by higher premiums and investment income. Life insurance premiums and other considerations were $114.7 million, up 9%; insurance in force was reported at $3.553 billion.
- Cemetery and mortuary: Pretax earnings rose 39% to $8.4 million on revenue of $31.9 million, up 10%. Pre-need cemetery sales increased, while at-need cemetery and mortuary sales declined.
- Consolidated revenue fell 18.3%, primarily because mortgage fee income declined $75.4 million and other revenue declined $15.2 million. FY2022 included a $34.1 million gain from the sale of mortgage servicing rights (MSRs) in October 2022; servicing fee revenue was also lower in 2023.
- Insurance premiums, net investment income, and net cemetery and mortuary sales increased. Investment gains improved to $1.8 million from an $0.9 million loss, partly reflecting higher fair values of equity securities.
Liquidity, debt, risks and outlook
- Operating cash flow decreased to $53.9 million, mainly because proceeds from loan sales were lower. Financing activities used $62.0 million; year-end cash and cash equivalents increased to $126.9 million from $120.9 million.
- SecurityNational Mortgage was not in compliance with net-income covenants on warehouse credit lines and an operating-cash-flow covenant for a standby letter of credit at December 31, 2023. Waivers had been received or were being pursued. The company disclosed approximately $7.7 million of advances on a line without a waiver and stated it had sufficient cash and borrowing capacity to continue originations. It was negotiating additional warehouse lines.
- Insurance subsidiaries reported statutory capital and surplus of $107.4 million, up from $94.3 million, and were compliant with regulatory risk-based capital criteria. Insurance-subsidiary dividends are restricted and may require regulatory approval.
- Mortgage credit risks include repurchase or indemnification claims on sold loans and deterioration in held-for-investment loans. The allowance for credit losses on mortgage loans held for investment was $3.8 million, compared with $2.0 million. The filing reports $6.149 million of mortgage loans delinquent more than 90 days and $2.263 million in foreclosure; the detailed aging table presents different delinquency categories.
- Commitments to fund construction and land-development loans totaled approximately $147.0 million, of which $105.0 million had been funded. The company described contractual rates generally between 5.25% and 8.50%, with maturities of six to eighteen months.
- Other key exposures include interest-rate and investment-value fluctuations, mortality and persistency experience, regulatory changes, real-estate conditions, and reliance on reinsurers. One reinsurer represented 94.0% of ceded life insurance in force. Management states that the company monitors these risks and seeks to match asset and liability durations.
- The filing provides no numerical earnings or revenue guidance. Management expects to continue its stated segment strategies and real-estate development based on market demand. Center53’s first phase was 93% leased and its second phase 100% leased; future phases are planned. No cash dividends are anticipated in the foreseeable future; the company issued a 5% stock dividend for 2023.
Important facts for investors to verify
- Progress and terms of covenant waivers, the remaining warehouse facilities, and mortgage funding capacity—particularly around the disclosed $7.7 million advance and facility maturities.
- Mortgage segment recovery prospects, origination volumes, secondary gain trends, and any further effects from the MSR sale and servicing portfolio changes.
- Reconciliation of the $6.149 million disclosure for loans over 90 days delinquent with the detailed loan-aging table and foreclosure amounts; monitor the $3.8 million credit-loss allowance and future charge-offs.
- Funding needs and risk controls for the $147.0 million construction and land-development commitments, including the unfunded portion and collateral values.
- Investment portfolio sensitivity to rates, credit quality, real-estate valuations, and the concentration of ceded life insurance risk with one reinsurer.
- Implementation and financial effects of the long-duration insurance accounting standard scheduled for adoption in 2025; management had not yet quantified the impact.