10-Q: Security National Financial Reports Q3 Earnings Decline

Security National Financial Corporation reported a significant 29.8% drop in net earnings for the nine months ended September 30, 2025, despite a modest revenue increase.

Summary

• Total revenues increased by 2.5% to $261.6 million for the nine months ended September 30, 2025, compared to $255.3 million in the prior year.
• Net earnings decreased by 29.8% to $18.7 million for the nine months ended September 30, 2025, from $26.6 million in the comparable period of 2024.
• Basic net earnings per Class A Equivalent common share fell to $0.75 from $1.09 year-over-year.
• The Life Insurance segment's net earnings decreased by 27.1% to $16.1 million, primarily due to increased selling, general and administrative expenses, higher amortization of deferred policy acquisition costs, and increased death benefits.
• The Cemetery and Mortuary segment's net earnings decreased by 10.1% to $5.4 million, impacted by higher personnel expenses, decreased net investment income, and lower gains on investments.
• The Mortgage Operations segment's net loss widened by 94% to $(2.8) million, driven by a decrease in the fair value of loans held for sale, increased commissions, and higher other expenses, partially offset by increased secondary gains.
• Total assets grew by 4.9% to $1.56 billion as of September 30, 2025, from $1.49 billion at December 31, 2024.
• Total stockholders' equity increased by 7.85% to $365.4 million as of September 30, 2025.
• Net cash provided by operating activities decreased by 21.1% to $27.6 million for the nine months ended September 30, 2025.
• The company was not in compliance with the adjusted tangible net worth covenant of Western Alliance Bank's warehouse line of credit as of September 30, 2025, but is seeking waivers.

Sentiment

Score: 4

Explanation: The overall sentiment is negative due to a substantial decline in net earnings across all segments, a significant increase in the mortgage segment's loss, and a decrease in operating cash flow. The non-compliance with a debt covenant, despite efforts to secure waivers, adds to the concern. While revenues saw a slight increase and assets grew, profitability and operational efficiency appear to be under pressure.

Positives

• Total revenues increased by 2.5% for the nine-month period, reaching $261.6 million.
• Net investment income increased by $4.1 million, or 7.4%, for the nine-month period.
• Gains on investments and other assets increased by $1.06 million, or 40.2%, for the nine-month period.
• The Life Insurance segment saw a 3.55% increase in total segment revenues.
• The Mortgage Operations segment experienced a $6.13 million increase in secondary gains from mortgage loans sold to third-party investors.
• Total assets increased by 4.91% to $1.56 billion, and stockholders' equity grew by 7.85% to $365.4 million.
• The adoption of ASU 2018-12 is expected to increase total stockholders' equity by approximately $4 million to $6 million as of January 1, 2024.
• Life insurance subsidiaries remain in compliance with risk-based capital guidelines established by statutory regulators.

Negatives

• Net earnings decreased significantly by 29.8% to $18.7 million for the nine-month period.
• Net earnings per Class A Equivalent common share (basic) decreased from $1.09 to $0.75.
• The Life Insurance segment's net earnings decreased by 27.1% due to higher expenses and death benefits.
• The Cemetery and Mortuary segment's net earnings decreased by 10.1%, with declines in net investment income and pre-need/at-need cemetery sales.
• The Mortgage Operations segment's net loss widened by 94% to $(2.75) million, primarily due to a $3.45 million decrease in the fair value of loans held for sale and increased commissions.
• Cash and cash equivalents decreased by 28.57% from December 31, 2024, to September 30, 2025.
• Net cash provided by operating activities decreased by 21.1% year-over-year.
• Amortization of deferred policy and pre-need acquisition costs and value of business acquired increased by 40.9%.

Risks

• The company's mortgage subsidiary, SecurityNational Mortgage, was not in compliance with the adjusted tangible net worth covenant of Western Alliance Bank's warehouse line of credit as of September 30, 2025, requiring waivers.
• Future loan losses can be extremely difficult to estimate, and actual claims or adverse development of loss reserves could exceed estimates, requiring additional reserves.
• The preparation of financial statements involves significant estimates and assumptions that are inherently uncertain and subject to significant adjustments in future periods.
• The ultimate percentage of loan commitments that will be exercised fluctuates, complicating price risk management in mortgage operations.
• The company is exposed to price risk due to potential changes in interest rates on the values of loan commitments.
• The lapse rate for life insurance increased in 2024 to 7.0% from 4.4% in 2023, and the 2025 rate is approximately the same as 2024, indicating higher policy terminations.
• A portion of the company's bond investments (1.6% as of September 30, 2025) are in non-investment grade categories (NAIC 3-6).

Future Outlook

The company expects to continue its strategies of increased attention to niche insurance products, increased emphasis on the cemetery and mortuary business, and capitalizing on an improving housing market by originating mortgage loans. The adoption of ASU No. 2018-12 is expected to increase total stockholders' equity by $4 million to $6 million as of January 1, 2024, with an estimated $3 million to $4 million net earnings impact for 2024 due to decreased DAC amortization. The recently enacted One Big Beautiful Bill Act (OBBBA) is not expected to have a material impact on the estimated effective tax rate in 2025. The company continues to negotiate other warehouse lines of credit with lenders.

Management Comments

• Management believes the amounts provided in estimates are fairly stated in all material respects, despite inherent variability.
• Management expects the new accounting guidance (ASU 2018-12) will not impact capital and surplus or net income under statutory accounting practices, cash flows on policies, or the underlying economics of the business.
• Management expects that the One Big Beautiful Bill Act (OBBBA) will not have a material impact on the estimated effective tax rate in 2025.
• Management believes the sources of cash flow are adequate to fund future policyholder and cemetery/mortuary liabilities, pay current claims, expenses, and meet debt service and operating expenses.
• Management has performed an analysis of its funding capacities and determined there are sufficient funds to continue its current business model, despite non-compliance with a debt covenant.

Industry Context

The mortgage segment's performance reflects broader industry trends, with higher than anticipated mortgage rates negatively affecting loan originations, particularly refinances. While overall loan volume increased, the number of loans originated decreased, indicating larger average loan sizes or a shift in market dynamics. The life insurance industry continues to face challenges with rising death benefits and policy acquisition costs, while the cemetery and mortuary sector shows mixed results with some sales declines. The company's investment strategy, heavily weighted towards fixed maturity securities, real estate, and mortgage loans, aligns with typical insurance company asset-liability matching, but also exposes it to interest rate and real estate market fluctuations.

Comparison to Industry Standards

• NA

Legal Proceedings

• The company is a defendant in various legal actions arising from the normal conduct of business, but believes none will have a material effect on its financial position or results of operations.

Related Party Transactions

• The company has a 50% ownership interest in three Variable Interest Entities (VIEs): HHH Real Estate LLC, SN Oquirrh LLC, and SN Towns LLC, which hold and develop single-family lots for residential construction. These are accounted for under the equity method.

Stakeholder Impact

• Shareholders: Negative impact due to significant decline in net earnings and earnings per share, potentially affecting stock valuation and future dividends. Stock repurchase program may offer some support.
• Employees: Personnel expenses increased in the life insurance and cemetery/mortuary segments, indicating continued investment in staff or rising compensation costs.
• Customers (Life Insurance): Policyholders may be affected by changes in lapse rates, though the company aims to match investment durations with long-term liabilities.
• Creditors: Non-compliance with a debt covenant for a warehouse line of credit could raise concerns, although the company states it has sufficient cash to repay outstanding advances and is seeking waivers.
• Regulatory Authorities: The company's life insurance subsidiaries are in compliance with risk-based capital guidelines, and the company is preparing for new accounting standard adoptions.

Next Steps

• The company will adopt ASU No. 2018-12 for its annual reporting period ending December 31, 2025, with restatement of 2024 financial statements.
• The company will adopt ASU No. 2023-09 for its annual reporting period beginning January 1, 2025.
• The company will adopt ASU No. 2024-03 for its annual reporting period ending December 31, 2027.
• SecurityNational Mortgage is in the process of receiving waivers for non-compliance with a debt covenant.
• The company continues to negotiate other warehouse lines of credit with other lenders.
• The company will continue to evaluate the impact of the One Big Beautiful Bill Act (OBBBA) on its estimated annual effective tax rate and cash tax position.

Key Dates

Recommendation

The significant decline in net earnings across all operating segments, particularly the widening loss in the mortgage division, signals fundamental operational challenges. The substantial drop in EPS and operating cash flow, coupled with non-compliance on a debt covenant, indicates deteriorating financial health. While the company is addressing the covenant issue and has some revenue growth, the overall trend in profitability is concerning. Investors should consider selling to mitigate further downside risk until a clear path to improved profitability and operational stability is demonstrated.

Keywords

Life Insurance, Mortgage Lending, Cemetery, Mortuary, Financial Services, SEC Filing, Earnings Report, Investment Income, Mortgage Loans, Real Estate, Debt Covenants, Stock Repurchase