Business context and reporting period
Security National Financial Corporation filed this Form 10-K for the fiscal year ended December 31, 2022. The company operates life insurance, cemetery and mortuary, and mortgage businesses. Its mortgage operation originates residential loans for sale to investors, while its insurance and real-estate investments support long-duration policy obligations.
Key financial results
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total revenue | $389.7 million | $470.7 million | Down 17.2% |
| Earnings before income taxes | $34.4 million | $51.8 million | Down 33.6% |
| Net earnings | $25.7 million | $39.5 million | Down 35.0% |
| Diluted earnings per equivalent Class A share | $1.17 | $1.80 | Down 35.0% |
| Operating cash flow | $130.5 million | $144.6 million | Down $14.2 million |
| Cash and cash equivalents at year-end | $120.9 million | $131.4 million | Down $10.4 million |
| Bank and other loans payable | $161.7 million | $251.3 million | Down $89.6 million |
| Stockholders’ equity | $292.8 million | $299.8 million | Down $7.0 million |
Consolidated pretax margin was approximately 8.8%, compared with 11.0% in 2021. Benefits and expenses were 91.2% of revenue, versus 89.0%. No single consolidated gross-margin measure is presented as applicable to the company’s diverse segments.
Segment performance
- Life insurance: External revenue was $169.2 million, up 4%; pretax earnings were $14.2 million, down 5%. Premiums and other considerations increased 4.7% to $105.0 million, and net investment income rose 13.6% to $66.2 million.
- Cemetery and mortuary: Revenue was $28.9 million, up 6%; pretax earnings were $6.1 million, down 23%. Mortuary at-need sales increased, partly offset by lower cemetery pre-need sales and investment gains.
- Mortgage: Revenue was $191.5 million, down 32%; pretax earnings were $14.1 million, down 51%. Originations fell to 10,663 loans totaling $3.37 billion from 19,342 loans totaling $5.50 billion in 2021.
Material changes versus 2021
- Mortgage fee income decreased $89.9 million, chiefly reflecting lower secondary-market gains and loan origination fees amid higher mortgage rates and weaker refinancing activity.
- The October 2022 sale of servicing rights on loans with approximately $7.02 billion of unpaid principal generated a $34.1 million gain. Mortgage servicing rights on the balance sheet declined from $53.1 million to $3.0 million, and servicing portfolio unpaid principal fell from $7.06 billion to $360.0 million.
- Net investment income increased 13.6% to $66.2 million, while investment and other asset results shifted from $6.3 million of gains to $0.9 million of losses.
- Unrealized investment losses drove a $31.1 million after-tax other comprehensive loss; accumulated other comprehensive income moved from positive $18.1 million to negative $13.1 million. This contributed to lower equity despite positive net earnings.
- Fixed-maturity securities available for sale had $19.2 million of gross unrealized losses at year-end, which the filing primarily attributes to interest rates and inflation.
Liquidity, capital, risks and outlook
- Cash provided by operations was $130.5 million. Cash, cash equivalents and restricted cash totaled $133.5 million at year-end; restricted balances are not all freely available for general use. The company reported that expected cash flows were adequate for policyholder obligations, debt service and operating expenses.
- Total capitalization was $454.5 million; equity represented 64.4%, versus 54.4% in 2021, as debt declined. The company reported compliance with debt covenants and statutory risk-based capital criteria. Insurance-subsidiary dividends to the parent are subject to regulatory limits and approvals.
- Warehouse lines and other debt include near-term maturities; $65.6 million of bank and other loans were scheduled to mature in 2023. Mortgage warehouse facilities have cross-default provisions and financial covenants.
- Commitments to fund construction and land-development loans were approximately $231.3 million, of which $175.8 million had been funded. These loans generally carry fixed rates of 5.25%–8.50% and mature in six to eighteen months.
- Key exposures include mortgage-market contraction and loan-sale/repurchase claims, interest-rate and investment-value volatility, mortality and morbidity experience, insurance regulation, real-estate conditions, and estimation uncertainty in policy reserves, servicing rights and loan-loss allowances. The mortgage portfolio had $2.57 million of loans over 90 days delinquent; $1.28 million was in foreclosure proceedings.
- Management intends to continue focusing on niche insurance products, cemetery and mortuary operations, mortgage origination, and real-estate development based on assessed market demand. The filing provides no specific earnings or revenue guidance.
- Management reported higher-than-expected pandemic-era death rates; 2022 rates declined from 2021 and 2020 but remained above pre-pandemic levels. In a post-year-end disclosure, the company said it had no deposits or credit facilities with Silicon Valley Bank or Signature Bank, but held a $250,000 bond junior in priority to a debt investment of Silicon Valley Bank or its successors.
- The auditor issued an unqualified opinion on the financial statements. The auditor identified future policy benefits and amortization of deferred acquisition costs/value of acquired business as a critical audit matter. Management said disclosure controls and internal control over financial reporting were effective; auditor attestation of internal controls was not required.
Important facts for investors to verify
- How much of 2022 mortgage earnings and cash proceeds depended on the $34.1 million MSR-sale gain, and how the reduced servicing portfolio affects recurring fee income.
- Current mortgage origination volumes, secondary-market margins, warehouse-line availability, 2023 maturities and compliance with cross-default covenants.
- The adequacy of mortgage repurchase and indemnification reserves, given investor claims and changes in housing and credit conditions.
- The sensitivity of statutory capital, policy reserves and investment values to interest rates, mortality, lapses and the significant unrealized fixed-income losses.
- Funding needs and credit quality for the construction and land-development commitments, including the portion of commitments still unfunded.