Executive Summary / Key Takeaways

• Security National Financial Corporation operates a diversified, capital-intensive business model across life insurance, death care, and mortgage segments, strategically positioning itself in regional and niche markets against larger, more scaled competitors.
• Q1 2025 saw a significant decrease in net earnings, primarily driven by lumpy investment income (real estate and unrealized stock losses) and increased bad debt reserves due to the CECL accounting standard, rather than broad operational weakness.
• Despite the earnings dip, operational performance remained strong, with the Life and Death Care segments achieving solid quarterly rankings and the Mortgage segment significantly outperforming the national market in volume growth.
• The company is making deliberate strategic investments in personnel, technology, and real estate development, viewed by management as necessary expenditures to build future capabilities, expand margins, and drive long-term growth.
• Key factors for investors to monitor include the realization of returns from strategic investments, the impact of market volatility on investment income, the implementation of the new LDTI accounting standard for life insurance reserves, and the company's ability to leverage technology to enhance efficiency and competitiveness against digitally advanced rivals.

A Multi-Segment Foundation in Capital-Intensive Markets

Security National Financial Corporation traces its roots back to 1965 with the organization of Security National Life Insurance Company. Over decades, the company has evolved into a diversified financial services entity operating across three distinct, yet interconnected, segments: life insurance, death care (cemetery and mortuary services), and mortgage banking. This multi-segment structure positions SNFCA in markets characterized by their capital-intensive nature and the need for specialized expertise.

The life insurance segment focuses on niche products, particularly burial-related policies like funeral plans, which offer small face values (up to $30,000) to cover end-of-life costs. This is viewed as a less competitive niche compared to broader life insurance markets. The segment also offers traditional whole life and interest-sensitive products, distributed through a commissioned independent sales force across 40 states. The death care segment provides at-need and pre-need cemetery and mortuary services through locations in Utah, New Mexico, and California. Revenue is derived from merchandise and service sales, with specific recognition criteria for pre-need sales based on payment milestones and delivery/service performance. The mortgage segment, primarily operating through SecurityNational Mortgage Company, originates and refinances residential loans (conforming, FHA, and conventional) on a retail basis across numerous states. This segment shifted strategically from a wholesale to a retail-focused model starting around 2011, emphasizing purchase transactions over refinances for greater sustainability.

Operating in these sectors means SNFCA competes with a diverse set of players, ranging from large, national financial institutions to regional specialists and increasingly, technology-focused disruptors. In life insurance, giants like MetLife (MET) command significant market share (5-7% globally), offering broad product suites and leveraging vast scale for cost efficiencies (15-20% lower operating costs per policy). SNFCA, with an estimated 0.5-1% share in its relevant niches, competes through regional agent relationships, which can foster higher customer loyalty (15-20% higher loyalty translating to potentially 10% better recurring revenue). However, SNFCA's smaller scale contributes to higher operating costs (10-15% higher) compared to larger insurers.

The death care market is dominated by Service Corporation International (SCI), holding a substantial 15-20% national share. SCI benefits from a nationwide network and scale advantages (10-15% lower costs per service). SNFCA's death care operations are more regionally concentrated (estimated 1-2% share), offering bundled services and customization flexibility (10-15% greater flexibility). While SNFCA's regional focus can lead to faster service delivery (15% faster in its markets), SCI's digital platforms are noted as being significantly faster in processing pre-need sales (30% faster), reducing customer acquisition costs.

In the mortgage space, SNFCA's retail origination model (estimated 0.5-1% national share) competes with large banks and tech-driven lenders like Rocket Companies (RKT), which holds a 5-10% share and leverages digital platforms for significantly faster loan processing (40% faster, potentially reducing costs by 15%). SNFCA's strength lies in its regional expertise and direct consumer relationships, sometimes offering lower upfront costs in specific areas. However, it lags in digital processing speed compared to RKT. Indirect competitors across segments include fintech platforms and online insurers like Lemonade (LMND), which offer lower-cost digital alternatives (50% lower operating costs per policy), posing a risk of market share erosion (5-10%) for SNFCA, particularly impacting margins.

Barriers to entry, such as high regulatory hurdles and significant capital requirements (e.g., over $100 million in reserves for life insurance), favor established players like SNFCA, helping to protect its existing market position against new entrants.

Strategic Investments and Operational Strength Amidst Headwinds

Security National's strategy is centered on enhancing its niche positions, deepening its presence in death care, and capitalizing on the housing market. This strategy is supported by deliberate investments aimed at driving long-term growth and profitability, even as the company navigates external market volatility and the impact of new accounting standards.

The first quarter of 2025 highlighted the inherent lumpiness of certain revenue streams and the impact of accounting changes. Total revenues saw a modest increase of $1.55 million, or 1.9%, compared to Q1 2024, reaching $82.74 million. This was primarily driven by a strong 13.6% increase in mortgage fee income ($24.81 million vs. $21.83 million), fueled by a $2.22 million increase in secondary gains from loan sales and a $942,000 increase in the fair value of loans held for sale. Net mortuary and cemetery sales also contributed positively, increasing by 5.1% to $7.30 million.

However, net earnings for the quarter decreased significantly by approximately 42%, or $3.1 million, falling to $4.34 million from $7.47 million in Q1 2024. Pre-tax earnings saw a similar 41% decrease, down $4.05 million to $5.57 million. Management attributed roughly 75% of this pre-tax decline (approximately $3 million) to decreases in both realized and unrealized investment income. This included about $1.7 million (56% of the investment income decline) from decreased construction profits and gains on residential lot sales, reflecting fewer home closings in Q1 2025 compared to the prior year, despite builders having more homes in process. Another $1.25 million (42% of the investment income decline) was due to recognized but unrealized stock market losses.

Furthermore, approximately $900,000 of the pre-tax decrease was linked to an increase in bad debt reserve expense resulting from the adoption of the CECL accounting standard in Q1 2024. Management views CECL as a formulaic calculation influenced by external factors, potentially impacting allowances based on conditions outside the company's direct control.

Despite the net income decrease, management emphasized strong operational performance across segments. The Life Insurance segment achieved its second-best first quarter in the last five years, while the Death Care segment recorded its third-best first quarter in the same period, notably encompassing the pandemic years. The Life segment has been actively improving premium margins through disciplined pricing and product refinement, achieving approximately a 14% margin improvement compared to Q1 2024, although the full financial effect will take several years to materialize. The Death Care segment increased families served by 4% and saw a 3% rise in interment volumes, driven partly by growth in cremation services.

The Mortgage segment demonstrated significant operational strength, increasing origination volume by 11% in Q1 2025 ($517.89 million) compared to Q1 2024 ($465.61 million), a performance management believes is a significant outperformance relative to the nationwide market (up only 2% according to MBA data). On a sequential basis (Q4 2024 to Q1 2025), SNFCA's volume decreased 10%, also outperforming the national decrease of 22%. This strong performance is attributed to successful recruiting strategies implemented in 2023 and 2024. The segment was notably profitable and cash flow positive in March 2025.

Strategic investments in personnel contributed to a roughly 11.7% ($2.2 million) increase in personnel costs in Q1 2025. These are described as deliberate hirings of high-quality individuals across sales, fulfillment, IT, and HR, aimed at augmenting capabilities to achieve growth goals and expected to yield future returns. The company also continues to invest strategically in real estate, including residential subdivision developments (245 lots developed, 1034 to be developed as of March 31, 2025) and commercial properties, to match investment durations with liabilities and generate income. A recent example is the completion of a residential development loan in Payson, Utah, which generated nearly $4 million in profit-split income and over $3.2 million in interest and fees, demonstrating enhanced lending capabilities.

Balance Sheet Strength and Capital Allocation

SNFCA maintains a solid balance sheet to support its operations and strategic initiatives. Total assets stood at $1.52 billion as of March 31, 2025, up from $1.49 billion at December 31, 2024. Total investments increased to $998 million from $966 million over the same period, predominantly in fixed maturity securities ($371 million), mortgage loans held for investment ($319 million), and real estate held for investment ($203 million). The company attempts to match the duration of invested assets with its long-term policyholder and death care liabilities. As of March 31, 2025, 35.5% of total investments were in bonds, with a small portion (1.8%, $6.47 million) in non-investment grade categories.

Total capitalization (stockholders equity plus bank and other loans payable) increased by $23.56 million to $469.32 million as of March 31, 2025, driven by a $7.71 million increase in stockholders equity and a $16.08 million increase in debt. The company remains in compliance with all debt covenants on its warehouse lines of credit and bank loans, and management has determined that sufficient funding capacity exists to continue its business model.

Consistent with its capital-intensive operations and focus on growth, SNFCA has a long-standing policy of not paying cash dividends and does not anticipate doing so in the foreseeable future. This is rooted in the need to retain capital to fund growth across its segments, particularly in the life insurance business where regulatory capital requirements (including the upcoming LDTI standard) necessitate significant capital levels. Management believes deploying capital into growth opportunities and investments offering attractive yields represents a better use of funds than distributing cash to shareholders.

Outlook and Key Considerations

Management expresses cautious optimism for the remainder of 2025, anticipating that strategic investments in people, technology, and service innovation, combined with cost discipline, will enhance the company's competitive position and drive performance gains. Key strategic priorities include talent development (especially in death care sales), technology investment (digital tools for efficiency and customer experience), expense management, and sales accountability.

A significant upcoming event is the adoption of the ASU 2018-12 (LDTI) accounting standard for life insurance reserves in December 2025. This change will drastically alter how these reserves are calculated and reported, requiring significant internal resources for implementation. The company expects to report a range of the financial impact with its third-quarter earnings and the final details in the 2026 Form 10-K.

While operational momentum is strong, investors should remain mindful of potential risks. Market volatility continues to pose a risk to investment income and can impact mortgage origination volumes and margins, particularly as interest rates fluctuate. The formulaic nature of the CECL standard means bad debt allowances could be influenced by external economic perceptions. Credit concentrations in the mortgage portfolio, while monitored through LTV and performance analysis, remain sensitive to regional economic conditions. The company also faces risks related to its captive insurance group's reserve estimates and ongoing legal proceedings, although management does not anticipate a material adverse effect from current actions.

Conclusion

Security National Financial Corporation's Q1 2025 results, marked by a decrease in net earnings, underscore the sensitivity of its financial performance to volatile investment income and the impact of accounting changes like CECL. However, a deeper look reveals underlying operational strength across its core Life Insurance, Death Care, and Mortgage segments, with notable achievements in premium margin expansion, service volumes, and mortgage origination outperformance relative to the market.

The company's narrative is one of a multi-segment entity making deliberate strategic investments in personnel and operational capabilities to build a foundation for future growth. While smaller in scale than some national competitors, SNFCA leverages its regional presence and niche focus. The long-term investment thesis hinges on the successful execution of these strategic initiatives, the realization of returns from capital deployed in investments and development projects, and the ability to adapt to evolving market dynamics and regulatory requirements, including the significant changes anticipated from the LDTI standard. Investors should weigh the near-term earnings volatility against the potential for enhanced long-term profitability driven by the company's strategic focus and operational execution.