Security National Financial Corporation — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; comparisons are with 2017. The company operates life insurance, cemetery and mortuary, and mortgage businesses. Deloitte & Touche issued an unqualified opinion on the financial statements; it did not attest to internal control effectiveness.
Financial performance and position
- Revenue: $279.6 million, up 1.0% from $276.9 million.
- Profit: Pretax earnings were $26.2 million versus $7.5 million. Net earnings were $21.7 million versus $14.1 million; diluted earnings per equivalent Class A share were $1.25 versus $0.82. The 2017 result included a $9.0 million tax benefit related primarily to the Tax Act. 2018’s effective tax rate was 17.2%.
- Margins: Benefits and expenses were 90.6% of revenue, down from 97.3%. Net margin was approximately 7.8%, versus 5.1%.
- Cash flow: Operating activities provided $7.0 million, down from $44.3 million. Investing activities provided $63.3 million and financing activities provided $26.1 million. Cash and cash equivalents were $142.2 million at year-end, versus $45.3 million.
- Debt and capitalization: Bank and other loans payable totaled $187.5 million, up $30.1 million; $165.2 million was classified as due within one year. Stockholders’ equity was $171.8 million. Equity represented 47.8% of total capitalization, versus 48.5%.
- Liquidity and investments: Total assets were $1.051 billion and liabilities were $879.0 million. Total investments were $595.8 million. Insurance subsidiaries’ statutory capital and surplus was $56.2 million, and management reported that regulatory capital levels exceeded applicable criteria.
Material changes and segment results
- Life insurance: Segment pretax earnings increased to $30.1 million from $4.7 million. Premiums rose 7.8% to $75.9 million, and segment investment income increased. Results included a $22.252 million gain on the sale of Dry Creek at East Village apartments.
- Cemetery and mortuary: Segment pretax earnings increased to $3.9 million from $1.7 million. Revenue rose 23% to $16.4 million, including gains on asset sales.
- Mortgage: Segment revenue declined 23% to $125.5 million, and the segment recorded a $7.9 million pretax loss versus $1.1 million pretax income. SecurityNational Mortgage originations fell to 10,252 loans totaling $2.151 billion, from 12,877 loans totaling $2.534 billion. Management attributed the decline to fewer available homes, higher mortgage rates and reduced refinancing.
- Other notable changes: Consolidated mortgage fee income fell 24.5% to $116.2 million. Gains on investments and other assets improved by $26.9 million, primarily due to the Dry Creek sale and lower real-estate impairment losses. The company acquired factoring business Beta Capital for approximately $3.4 million in June 2018.
Outlook, risks and contingencies
- The filing gives no quantified earnings or revenue guidance. Management described continued emphasis on niche insurance products, cemetery and mortuary operations, and mortgage lending; real-estate development is to continue as market demand warrants.
- Mortgage warehouse covenants: SecurityNational Mortgage had received a Texas Capital Bank waiver after failing a covenant and anticipated it might fail the profitability covenant again in the first quarter of 2019, potentially triggering cross-default provisions with Wells Fargo. Management expected to seek further waivers and stated it believed cash and borrowing capacity could cover repayment if required.
- Mortgage claims and litigation: The company accrued $3.605 million for investor indemnification and repurchase-related claims. Lehman Holdings litigation involves approximately 136 Fannie Mae/Freddie Mac-related loans and a separate complaint concerning approximately 577 securitized loans; damages are unspecified. SecurityNational Mortgage denies liability and intends to defend itself.
- Credit quality: Mortgage loans held for investment more than 90 days delinquent totaled $3.639 million, including $1.727 million in foreclosure. The allowance for loan losses was $1.348 million. Management cautioned that actual investor claims or loan losses could exceed reserves.
- Commitments: Construction and land-development loan commitments totaled approximately $97.9 million, of which $72.9 million had been funded. Separately, unfunded residential construction and land-development commitments were reported at approximately $25.0 million. The Center53 construction loan had $30.8 million drawn against a facility of up to $40.7 million.
- Other risks include interest-rate and investment-value changes, mortality and persistency experience, regulation, real-estate conditions, and uncertainty in significant accounting estimates. Life-insurance dividends to the parent are subject to regulatory restrictions. No material loss was expected from the disclosed standby letters of credit.
Most important facts for investors to verify
- How much of 2018’s earnings improvement depends on the $22.252 million Dry Creek gain and other asset-sale gains, and what recurring earnings look like without them.
- The current status and outcome of warehouse-line covenant waivers, cross-default risk, and the large share of debt classified as current.
- Potential exposure and reserve adequacy for Lehman Holdings and other mortgage investor claims, noting that litigation damages are not quantified.
- Mortgage origination trends, segment profitability, loan-sale margins, and mortgage repurchase/indemnification losses.
- Cash-flow sustainability, asset-liability matching, and the effect of interest-rate changes on investments and insurance obligations.