Security National Financial Corporation — FY 2012 Form 10-K
Reporting period: Year ended December 31, 2012. This is an annual filing, not a standalone fourth-quarter report; fourth-quarter figures are identified separately below. The company operates life insurance, cemetery and mortuary, and mortgage lending businesses.
Financial performance and position
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Total revenue | $234.3 million | $159.6 million | +46.8% |
| Mortgage fee income | $150.6 million | $77.6 million | +94.0% |
| Net investment income | $23.3 million | $20.0 million | +16.2% |
| Pre-tax earnings | $21.4 million | $1.2 million | Improved |
| Net earnings | $16.7 million | $1.3 million | Improved |
| Diluted earnings per equivalent Class A share | $1.57 | $0.13 | Improved |
| Operating cash flow | $22.4 million | $6.9 million | Increased |
Total benefits and expenses were $212.9 million, or 90.9% of revenue, compared with 99.2% in 2011. Approximate pre-tax and net margins were 9.1% and 7.1%, respectively. Mortgage operations generated $16.5 million of pre-tax earnings, versus a $1.9 million loss; life insurance earned $4.6 million before tax, versus $2.7 million; cemetery and mortuary earned $0.2 million, versus $0.5 million.
Mortgage originations and sales totaled 13,392 loans and $2.452 billion in 2012, compared with 8,100 loans and $1.407 billion in 2011. The filing attributes mortgage growth primarily to increased market share and expanded retail operations. Insurance premiums declined 0.5% to $48.2 million, while cemetery and mortuary revenue increased 1.0% to $10.9 million.
Fourth quarter, unaudited: Revenue was $66.7 million, pre-tax earnings $7.9 million, net earnings $7.5 million, and diluted earnings per share $0.69. These quarterly amounts are not a separate quarterly filing.
At year-end, total assets were $597.2 million, up from $523.1 million; stockholders’ equity was $79.8 million, up from $61.2 million. Cash and cash equivalents were $38.9 million, compared with $17.1 million, and short-term investments were $40.9 million, compared with $6.9 million. Bank and other loans payable declined to $11.9 million from $25.0 million. Policyholder benefit liabilities were $443.4 million, compared with $388.5 million. The filing reports total capitalization of $91.7 million, with equity representing 87.0% versus 71.0% in 2011. Insurance subsidiaries exceeded applicable risk-based capital criteria.
Material changes, outlook and risks
- Acquired/reinsured business: Effective November 1, 2012, Security National Life assumed certain Mothe Life and DLE Life policy liabilities. The transaction involved $34.5 million of transferred assets, $39.2 million of statutory reserves, and a $4.7 million ceding commission. Management’s five-year policy count increased to 502,978, and the filing notes the coinsurance transaction in that figure.
- Mortgage outlook: Management anticipated 2013 mortgage volume of approximately $125 million to $240 million per month, described as comparable to the 2012 monthly range. This is management’s expectation, not a guarantee.
- Mortgage exposures: Investor repurchase, indemnification and related potential claims were substantially greater than $25 million at year-end; the company accrued $6.0 million. Management said excess losses could not be estimated and that a substantial adverse judgment beyond the mortgage subsidiary’s capacity to pay could require it to curtail or cease operations. The mortgage portfolio also included $11.7 million of loans over 90 days delinquent, including $6.0 million in foreclosure; no interest was recognized on these loans.
- Litigation: The company disputed Lehman-related claims, including a claim for more than $5 million, and sought approximately $4 million in affirmative relief. No losses under the disputed indemnification agreement were accrued at December 31, 2012. Motions for summary judgment were heard in February 2013; further proceedings were pending.
- Other mortgage arrangements: The Wells Fargo settlement requires deductions of 10 basis points on qualifying loan proceeds through March 31, 2017, and 50% of net proceeds from certain property sales. The 27 properties covered had a book value of $5.4 million; none had been sold as of year-end.
- Liquidity and rate sensitivity: Operating cash flow was positive, but mortgage settlements with third-party investors totaling $201.7 million were pending at year-end. Warehouse funding included lines of up to $75 million from Wells Fargo and $40 million from UBS. The filing estimates that a 100-basis-point increase in rates would reduce the fixed-income portfolio’s market value by $12.9 million; a 200-basis-point increase would reduce it by $23.2 million.
- Other risks and unusual items: Earnings growth was heavily driven by mortgage volume and secondary gains, while commissions rose to $83.8 million from $47.5 million and interest expense rose to $3.7 million from $2.0 million. The company recognized $1.2 million of investment impairments. The CEO died in September 2012; Scott M. Quist became chairman and CEO, and Garrett S. Sill became acting CFO in January 2013. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Whether 2012 mortgage origination growth and secondary gains are sustainable, and how the stated 2013 monthly volume outlook compares with subsequent results.
- The status and ultimate exposure from investor repurchase claims exceeding $25 million against a $6.0 million reserve, including any claims received after year-end.
- Developments and accounting consequences in the Lehman litigation, including whether any liability or recovery is recognized.
- The quality and recoverability of mortgage loans, foreclosed properties, and the $201.7 million of loans awaiting investor settlement.
- The effect of the Mothe Life/DLE Life assumption on policy liabilities, investment returns, capital, and statutory dividend capacity.
- Near-term debt maturities and availability of warehouse and revolving credit facilities; the filing reports $6.3 million of consolidated loan payments due within one year.