Security National Financial Corporation — FY 2014 Form 10-K
Reporting period: Year ended December 31, 2014; the filing was signed March 31, 2015. Although requested as 2014 Q4, this is an annual report; fourth-quarter figures are identified separately below. The company operates in life insurance, cemetery and mortuary services, and mortgage lending.
Financial results and position
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Total revenue | $226.9 million | $215.3 million | +5.4% |
| Earnings before tax | $12.5 million | $9.8 million | +27.1% |
| Net earnings | $7.8 million | $7.6 million | +2.2% |
| Diluted earnings per equivalent Class A share | $0.60 | $0.58 | +$0.02 |
| Operating cash flow | $31.0 million | $36.7 million | Down $5.6 million |
Net margin was approximately 3.4% and pretax margin approximately 5.5% in 2014. Total benefits and expenses were $214.5 million, or 94.5% of revenue, compared with $205.5 million, or 95.3%, in 2013.
- Fourth quarter: Revenue was $60.7 million and net earnings were $2.9 million, or $0.23 per share ($0.22 diluted). In Q4 2013, revenue was $48.6 million and net earnings were $1.5 million, or $0.12 per share ($0.11 diluted).
- Segment pretax earnings: Life insurance $8.5 million (up from $2.9 million); cemetery and mortuary $0.7 million (up from $0.2 million); mortgage $3.3 million (down from $6.7 million).
- Balance sheet at year-end: Assets were $671.1 million, liabilities $574.0 million, and stockholders’ equity $97.1 million. Cash and cash equivalents were $30.9 million; investments were $436.9 million.
- Debt and capitalization: Bank and other loans payable were $29.0 million, up from $18.3 million. The company reported total capitalization of $126.1 million, with equity representing 77.0%, down from 82.8% in 2013. Three revolving credit facilities had no amounts outstanding at year-end.
- Liquidity and cash flow: Operations generated $31.0 million of cash; investing activities used $44.7 million and financing activities provided $6.4 million. Cash declined $7.3 million during the year. Management said operating cash sources were adequate for expected obligations.
Material changes and notable items
- Net investment income rose 39.1% to $28.3 million, chiefly from short-term investments, mortgage loans and real estate. Insurance premiums increased 5.0% to $53.0 million.
- Mortgage fee income was nearly flat at $128.7 million, but mortgage segment pretax earnings fell 50% to $3.3 million. Management attributed the decline to lower secondary-market gains and weaker refinancing activity as mortgage rates rose. SecurityNational Mortgage originated and sold 10,794 loans totaling $2.04 billion, down from 11,484 loans totaling $2.15 billion in 2013.
- Selling, general and administrative expense increased 5.1% to $154.9 million. Personnel costs rose $6.6 million, while commission expense fell $6.1 million. Amortization of deferred acquisition costs and acquired business increased 33.0% to $6.9 million.
- The company acquired American Funeral Financial, a funeral-home factoring business, in June for approximately $15.0 million at closing, plus estimated earn-out consideration of $1.4 million. The acquisition added $2.4 million of goodwill. It also sold certain Paradise Sunset Chapel real estate for $1.5 million.
- Mortgage loan-loss provisions were $3.1 million, compared with $1.8 million in 2013. The mortgage investor indemnification reserve declined to $1.7 million from $5.5 million, reflecting $6.8 million of settlements and charge-offs, partly offset by provisions.
- The company completed a 1-for-10 reverse split of Class C stock and changed Class C voting and conversion terms: each Class C share has ten votes and converts into one Class A share. The filing says this was intended to address market misunderstanding of the prior conversion terms.
Outlook, risks and contingencies
- No numerical earnings or revenue guidance is provided. Management described continued focus on niche insurance products, cemetery and mortuary operations, and mortgage originations; it also noted that mortgage activity is sensitive to interest rates and refinancing demand.
- Key risks include interest-rate changes, mortality and morbidity experience, policy lapses, regulation, competition, reinsurance counterparty performance, real-estate conditions, and possible mortgage-loan repurchase or indemnification claims. Life insurance lapse rates rose to 7.0% from 5.7%.
- At year-end, $7.5 million of mortgage loans were more than 90 days delinquent, including $2.0 million in foreclosure. The company did not recognize interest on these delinquent loans. Mortgage investor claims were difficult to quantify; management considered the $1.7 million reserve adequate but acknowledged actual losses could differ.
- Lehman litigation: A December 2014 court order awarded SecurityNational Mortgage $3.9 million plus prejudgment interest, including $1.7 million through May 31, 2014. Offset and reserve-replenishment issues remained unresolved. In February 2015, the opposing parties sought an approximately $8.6 million offset and reserve replenishment; the company opposed the motion and filed its own partial-summary-judgment motion in March 2015. The outcome and ultimate recovery were not settled in the filing.
- Other unusual or material items include final 2014 settlements with Wells Fargo and Bank of America/Countrywide, paid from the mortgage loan-loss reserve; a February 2015 coinsurance agreement effective January 1, 2015 involving $15.0 million of assets; and $13.1 million drawn on a $27.5 million construction loan for a 282-unit multifamily project.
- The company reported that its insurance subsidiaries exceeded applicable risk-based-capital criteria, but dividends from those subsidiaries are subject to regulatory approval. The auditor gave an unqualified opinion on the financial statements; the auditor did not attest to internal control over financial reporting, and management reported its controls effective.
Investor verification priorities
- Review the mortgage segment’s sensitivity to rates, refinance volumes, secondary gains and origination profitability.
- Assess the adequacy of mortgage-loss reserves against delinquent loans, investor repurchase demands, and the unresolved Lehman offset and replenishment claims.
- Verify the composition and cash accessibility of investments and restricted assets, and reconcile reported liquidity with the $149.1 million of mortgage loans awaiting investor settlement.
- Evaluate the increase in debt, project funding needs and completion risk for the multifamily development, alongside unfunded residential construction commitments of $16.2 million.
- Check the American Funeral Financial acquisition’s subsequent contribution, receivable collections and earn-out exposure, and the effect of the post-year-end American Republic reinsurance agreement.
- Consider Class C stock’s ten-vote structure, related-party arrangements, and the regulatory limits on upstreaming insurance-subsidiary capital.