What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-03-31 compared with 2020-03-30 · 197 added, 338 removed, 199 unchanged (73% of the section changed)

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The Company’s operations over the last several years generally reflect three trends or events which the Company expects to continue:

(i) increased attention to “niche” insurance products, such as the

Company’s funeral plan policies and traditional whole life products;

(i) increased attention to “niche” insurance products, such as the Company’s funeral plan policies and traditional whole life products;

(ii) emphasis on cemetery and mortuary business;

and (iii) capitalizing on relatively low interest rates by originating mortgage loans.

and (iii) capitalizing on an improving housing market by originating mortgage loans.

The Company has adjusted its operations and sales approach to respond to the changing economic circumstances resulting from the COVID-19 pandemic.

Insurance Operations

The following table shows the condensed financial results for the Company’s insurance operations for the years ended December 31, 2020 and 2019.

See Note 15 of the Notes to Consolidated Financial

See Note 15 of the Notes to Consolidated Financial Statements.

Years ended December 31

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Gains (losses) on investments and other assets

Other than temporary impairments

Intersegment revenue

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Intersegment revenues for the Company’s insurance operations were primarily interest income from the warehouse lines provided to its mortgage lending affiliates to fund loans held for sale.

Profitability in 2019 decreased due to the one-time gain of $22,252,000 on the sale of Dry Creek at East Village Apartments that was recognized in 2018, offset by increases in investment income, and increases in insurance premiums.

These increases

were partially offset by increases in benefits and expenses.

Profitability in 2020 increased due to a $13,201,000 increase in net investment income, a $11,160,000 increase in insurance premiums and other considerations, a $3,567,000 increase in intersegment revenue, a $1,950,000 increase in gains on investments and other assets primarily due to a decrease in impairment losses on commercial real estate, a $581,000 decrease in amortization of deferred policy acquisition costs, and a $453,000 decrease in interest expense.

This increase was partially offset by a $17,930,000 increase in death, surrenders and other policy benefits ($6,239,000 for COVID-19 related deaths), a $6,449,000 increase in selling, general and administrative expenses, and a $637,000 decrease in other revenues.

The Company acquired Kilpatrick Life Insurance Company (“Kilpatrick Life”) in December 2019.

See Note 15 to the condensed consolidated financial statements.

This acquisition is the primary reason for the increases in insurance premiums, net investment income, death, surrenders and other policy benefits, and selling, general and administrative expenses.

In response to the COVID-19 pandemic, the life insurance sales force has transitioned to virtual and tele sales processes and transitioned approximately 95% of office staff to work remotely.

Cemetery and Mortuary Operations

The following table shows the condensed financial results for the Company’s cemetery and mortuary operations for the years ended December 31, 2020 and 2019.

See Note 15 of the Notes to Consolidated

Financial Statements.

See Note 15 of the Notes to Consolidated Financial Statements.

Years ended December 31

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Earnings before income taxes

Included in net investment income was net rental income from residential and commercial properties purchased from Security National Life.

Memorial Estates purchased these properties from financing

provided by Security National Life.

The rental income was offset by property insurance, taxes, maintenance expenses and depreciation.

Memorial Estates recorded depreciation on these properties of $452,000 and $598,000 for the twelve months ended

December 31, 2019 and 2018, respectively.

Profitability in 2019 has decreased due to a one-time gain on the sale of assets of Deseret Mortuary recognized in 2018, offset by increases in cemetery and mortuary revenues for

Profitability in 2020 has increased due to a $2,133,000 increase in cemetery pre-need sales, a $1,566,000 increase in cemetery at-need sales, a $1,312,000 increase in mortuary at-need sales, and a $228,000 increase in net investment income.

This increase was partially offset by a $2,178,000 increase in selling, general and administrative expenses, a $693,000 decrease in gains on investments and other assets primarily attributable to a $621,000 decrease in gains on real estate sales and a $72,000 decrease in the fair value of equity securities classified as restricted assets and cemetery perpetual care trust investments due to the recent downturn of the economy caused by the COVID-19 pandemic, and a $374,000 increase in costs of goods sold.

As a result of the COVID-19 pandemic, the Company has seen a decrease in its average case size as funeral services have been limited.

The Company has transitioned its pre-need sales force to virtual selling and has done in home sales as local regulations permit.

Mortgage Operations

The Company’s wholly owned subsidiaries, SecurityNational Mortgage and EverLEND Mortgage Company, are mortgage lenders incorporated under the laws of the State of Utah and approved and regulated by

the Federal Housing Administration (FHA), a department of the U.S.

Department of Housing and Urban Development (HUD), which originate mortgage loans that qualify for government insurance in the event of default by the borrower, in addition to various

conventional mortgage loan products.

The Company’s wholly owned subsidiaries, SecurityNational Mortgage and EverLEND Mortgage Company, are mortgage lenders incorporated under the laws of the State of Utah and approved and regulated by the Federal Housing Administration (FHA), a department of the U.S.

Department of Housing and Urban Development (HUD), which originate mortgage loans that qualify for government insurance in the event of default by the borrower, in addition to various conventional mortgage loan products.

SecurityNational Mortgage and EverLEND Mortgage originate and refinance mortgage loans on a retail basis.

Mortgage loans originated or refinanced by the Company’s mortgage subsidiaries are funded through loan

purchase agreements with Security National Life and unaffiliated financial institutions.

The Company’s mortgage subsidiaries receive fees from borrowers that are involved in mortgage loan originations and refinancings, and secondary fees earned from third party investors that purchase

the mortgage loans originated by the mortgage subsidiaries.

Mortgage loans originated or refinanced by the Company’s mortgage subsidiaries are funded through loan purchase agreements with Security National Life, Kilpatrick Life and unaffiliated financial institutions.

The Company’s mortgage subsidiaries receive fees from borrowers that are involved in mortgage loan originations and refinancings, and secondary fees earned from third party investors that purchase the mortgage loans originated by the mortgage subsidiaries.

Mortgage loans originated by the mortgage subsidiaries are generally sold with mortgage servicing rights released to third-party investors or retained by SecurityNational Mortgage.

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These mortgage loans are serviced by either SecurityNational Mortgage or an approved third-party sub-servicer.

For the twelve months ended December 31, 2019 and 2018, SecurityNational Mortgage originated 10,885 loans ($2,534,399,000 total volume) and

10,252 loans ($2,150,933,000 total volume), respectively.

For the twelve months ended December 31, 2020 and 2019, SecurityNational Mortgage originated 21,206 loans ($5,472,503,000 total volume) and 10,885 loans ($2,534,399,000 total volume), respectively.

For the twelve months ended December 31, 2020 and 2019, EverLEND Mortgage originated 511 loans ($154,511,000 total volume) and 275 loans ($72,440,000 total volume), respectively.

During the COVID-19 pandemic, the demand for mortgage loans has increased.

The Company has seen most markets increase their demand for new homes and refinances on existing homes.

The Company has transitioned 90% of its processes to a remote work environment.

The following table shows the condensed financial results for the Company’s mortgage operations for the years ended 2020 and 2019.

See Note 15 of the Notes to

Consolidated Financial Statements.

See Note 15 of the Notes to Consolidated Financial Statements.

Years ended December 31

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Included in other revenues is service fee income.

The increase in revenues for the Company’s mortgage operations for the twelve months ended December 31, 2019 as compared to December 31, 2018 was due

to an increase in mortgage loan originations and refinancings, and subsequent sales into the secondary market.

The increase in revenues for the Company’s mortgage operations for the twelve months ended December 31, 2020 as compared to December 31, 2019 was due to an increase in mortgage loan originations and refinancings, and subsequent sales of mortgage loans into the secondary market.

Mortgage Loan Loss Settlements

Future loan losses can be extremely difficult to estimate.

However, management believes that the Company’s reserve methodology and its current practice of property preservation allow it to estimate

potential losses on loans sold.

However, management believes that the Company’s reserve methodology and its current practice of property preservation allow it to estimate potential losses on mortgage loans sold.

The estimated liability for indemnification losses is included in other liabilities and accrued expenses and, as of December 31, 2020 and 2019, the balances were $20,584,000 and $4,046,000, respectively.

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The following is a brief summary of the Company’s significant accounting policies and a review of the Company’s most critical accounting estimates.

See Note 1 of the Notes to Consolidated Financial

See Note 1 of the Notes to Consolidated Financial Statements.

Insurance Operations

In accordance with generally accepted accounting principles in the United States of America (“GAAP”), premiums and other considerations received for interest sensitive products are reflected as

increases in liabilities for policyholder account balances and not as revenues.

Revenues reported for these products consist of policy charges for the cost of insurance, administration charges, amortization of policy initiation fees and surrender

charges assessed against policyholder account balances.

In accordance with generally accepted accounting principles in the United States of America (“GAAP”), premiums and other considerations received for interest sensitive products are reflected as increases in liabilities for policyholder account balances and not as revenues.

Revenues reported for these products consist of policy charges for the cost of insurance, administration charges, amortization of policy initiation fees and surrender charges assessed against policyholder account balances.

Surrender benefits paid relating to these products are reflected as decreases in liabilities for policyholder account balances and not as expenses.

The Company receives investment income earned from the funds deposited into account balances, a portion of which is passed through to the policyholders in the form of interest credited.

credited to policyholder account balances and benefit claims in excess of policyholder account balances are reported as expenses in the consolidated financial statements.

Interest credited to policyholder account balances and benefit claims in excess of policyholder account balances are reported as expenses in the consolidated financial statements.

Premiums and other considerations received for traditional life insurance products are recognized as revenues when due.

Future policy benefits are recognized as expenses over the life of the policy

by means of the provision for future policy benefits.

The costs related to acquiring new business, including certain costs of issuing policies and other variable selling expenses (principally commissions), defined as

deferred policy acquisition costs, are capitalized and amortized into expense.

For nonparticipating traditional life products, these costs are amortized over the premium paying period of the related policies, in proportion to the ratio of annual

premium revenues to total anticipated premium revenues.

Such anticipated premium revenues are estimated using the same assumptions used for computing liabilities for future policy benefits and are generally “locked in” at the date the policies are

Future policy benefits are recognized as expenses over the life of the policy by means of the provision for future policy benefits.

The costs related to acquiring new business, including certain costs of issuing policies and other variable selling expenses (principally commissions), defined as deferred policy acquisition costs, are capitalized and amortized into expense.

For nonparticipating traditional life products, these costs are amortized over the premium paying period of

the related policies, in proportion to the ratio of annual premium revenues to total anticipated premium revenues.

Such anticipated premium revenues are estimated using the same assumptions used for computing liabilities for future policy benefits and are generally “locked in” at the date the policies are issued.

For interest sensitive products, these costs are amortized generally in proportion to expected gross profits from surrender charges and investment, mortality and expense margins.

This amortization is adjusted when the Company revises the

estimate of current or future gross profits or margins.

For example, deferred policy acquisition costs are amortized earlier than originally estimated when policy terminations are higher than originally estimated or when investments backing the

related policyholder liabilities are sold at a gain prior to their anticipated maturity.

This amortization is adjusted when the Company revises the estimate of current or future gross profits or margins.

For example, deferred policy acquisition costs are amortized earlier than originally estimated when policy terminations are higher than originally estimated or when investments backing the related policyholder liabilities are sold at a gain prior to their anticipated maturity.

Death and other policyholder benefits reflect exposure to mortality risk and fluctuate from year to year on the level of claims incurred under insurance retention limits.

The profitability of the

Company is primarily affected by fluctuations in mortality, other policyholder benefits, expense levels, interest spreads (i.e., the difference between interest earned on investments and interest credited to policyholders) and persistency.

Company has the ability to mitigate adverse experience through sound underwriting, asset and liability duration matching, sound actuarial practices, adjustments to credited interest rates, policyholder dividends and cost of insurance charges.

The profitability of the Company is primarily affected by fluctuations in mortality, other policyholder benefits, expense levels, interest spreads (i.e., the difference between interest earned on investments and interest credited to policyholders) and persistency.

The Company has the ability to mitigate adverse experience through sound underwriting, asset and liability duration matching, sound actuarial practices, adjustments to credited interest rates, policyholder dividends and cost of insurance charges.

Cemetery and Mortuary Operations

Pre-need sales of funeral services and caskets, including revenue and costs associated with the sales of pre-need funeral services and caskets, are deferred until the services are performed or the

caskets are delivered.

Pre-need sales of cemetery interment rights (cemetery burial property), including revenue and costs associated with the sales of pre-need cemetery interment rights, are recognized in accordance with

the retail land sales provisions of GAAP.

Pre-need sales of funeral services and caskets, including revenue and costs associated with the sales of pre-need funeral services and caskets, are deferred until the services are performed or the caskets are delivered.

Pre-need sales of cemetery interment rights (cemetery burial property), including revenue and costs associated with the sales of pre-need cemetery interment rights, are recognized in accordance with the retail land sales provisions of GAAP.

Under GAAP, recognition of revenue and associated costs from constructed cemetery property must be deferred until a minimum percentage of the sales price has been collected.

Revenues related to the pre-need

sale of unconstructed cemetery property will be deferred until such property is constructed and meets the criteria of GAAP, described above.

Pre-need sales of cemetery merchandise (primarily markers and vaults), including revenue and costs associated with the sales of pre-need cemetery merchandise, are deferred until the merchandise is

delivered, fulfilling the performance obligation.

Pre-need sales of cemetery services (primarily merchandise delivery and installation fees and burial opening and closing fees), including revenue and costs associated with the sales of pre-need

cemetery services, are deferred until the services are performed.

Prearranged funeral and pre-need cemetery customer obtaining costs, including costs incurred related to obtaining new pre-need cemetery and prearranged funeral business are accounted for under the

guidance of the provisions of GAAP.

Obtaining costs, which include only costs that vary with and are primarily related to the acquisition of new pre-need cemetery and prearranged funeral business, are deferred until the merchandise is delivered or

services are performed.

Revenues and costs for at‑need sales are recorded when a valid contract exists, the services are performed, collection is reasonably assured, and there are no significant company obligations

Revenues related to the pre-need sale of unconstructed cemetery property will be deferred until such property is constructed and meets the criteria of GAAP, described above.

Pre-need sales of cemetery merchandise (primarily markers and vaults), including revenue and costs associated with the sales of pre-need cemetery merchandise, are deferred until the merchandise is delivered, fulfilling the performance obligation.

Pre-need sales of cemetery services (primarily merchandise delivery and installation fees and burial opening and closing fees), including revenue and costs associated with the sales of pre-need cemetery services, are deferred until the services are performed.

Prearranged funeral and pre-need cemetery customer obtaining costs, including costs incurred related to obtaining new pre-need cemetery and prearranged funeral business are accounted for under the guidance of the provisions of GAAP.

Revenues and costs for at-need sales are recorded when a valid contract exists, the services are performed, collection is reasonably assured, and there are no significant company obligations remaining.

Mortgage Operations

Mortgage fee income consists of origination fees, processing fees, interest income and certain other income related to the origination and sale of mortgage loans.

The Company has elected to use fair

value accounting for all mortgage loans that are held for sale.

The Company has elected to use fair value accounting for all mortgage loans that are held for sale.

Accordingly, all revenues and costs are now recognized when the mortgage loan is funded and any changes in fair value are shown as a component of mortgage fee income.

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Loan purchase commitments generally specify a date 30 to 45 days after delivery upon which the underlying loans should be settled.

Depending on market conditions, these

commitment settlement dates can be extended at a cost to the Company.

It is the Company’s policy to cure any documentation problems regarding such loans at a minimal cost for up to a six-month time period and to pursue efforts to enforce loan purchase commitments from

third-party investors concerning the loans.

Depending on market conditions, these commitment settlement dates can be extended at a cost to the Company.

The Company believes that six months allows adequate time to remedy any documentation issues, to enforce purchase commitments, and to exhaust other alternatives.

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· Commit to secondary investors.

Once purchase commitments have expired and other alternatives to remedy are exhausted, which could be earlier than the six-month time period, the loans are repurchased

and transferred to mortgage loans held for investment at the lower of cost or fair value and the previously recorded sales revenue that was to be received from a third-party investor is written off against the loan loss reserve.

Any loan that later

becomes delinquent is evaluated by the Company at that time and any impairment is adjusted accordingly.

Once purchase commitments have expired and other alternatives to remedy are exhausted, which could be earlier than the six-month time period, the loans are repurchased and transferred to mortgage loans held for investment at the lower of cost or fair value and the previously recorded sales revenue that was to be received from a third-party investor is written off against the loan loss reserve.

Any loan that later becomes delinquent is evaluated by the Company at that time and any impairment is adjusted accordingly.

Determining lower of cost or market .

Cost for loans held for sale is equal to the amount paid to the warehouse bank and the amount originally funded by the Company.

Market value, while often

difficult to determine, is based on the following guidelines:

Market value, while often difficult to determine, is based on the following guidelines:

· For loans that are committed, the Company uses the commitment price.

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· For loans that are non-committed where there is no market but there is a similar product, the Company uses the market value for the similar product.

For loans that are non-committed where no active market exists, the Company determines that the unpaid principal balance best approximates the market value, after considering the fair value of the underlying

real estate collateral, estimated future cash flows, and loan interest rate.

The appraised value of the real estate underlying the original mortgage loan adds significance to the Company’s determination of fair value because, if the loan becomes delinquent, the Company has

sufficient value to collect the unpaid principal balance or the carrying value of the loan, thus minimizing credit risk.

· For loans that are non-committed where no active market exists, the Company determines that the unpaid principal balance best approximates the market value, after considering the fair value of the underlying real estate collateral, estimated future cash flows, and loan interest rate.

The appraised value of the real estate underlying the original mortgage loan adds significance to the Company’s determination of fair value because, if the loan becomes delinquent, the Company has sufficient value to collect the unpaid principal balance or the carrying value of the loan, thus minimizing credit risk.

The majority of loans originated are sold to third-party investors.

The amounts expected to be sold to investors are shown on the consolidated balance sheets as loans

held for sale.

The amounts expected to be sold to investors are shown on the consolidated balance sheets as loans held for sale.

Use of Significant Accounting Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts and disclosures.

It is reasonably possible that

actual experience could differ from the estimates and assumptions utilized which could have a material impact on the financial statements.

It is reasonably possible that actual experience could differ from the estimates and assumptions utilized which could have a material impact on the financial statements.

The following is a summary of our significant accounting estimates, and critical issues that impact them:

Loan Commitments

The Company estimates the fair value of a mortgage loan commitment based on the change in estimated fair value of the underlying mortgage loan, quoted mortgage backed security (“MBS”) prices,

estimates of the fair value of mortgage servicing rights, and an estimate of the probability that the mortgage loan will fund within the terms of the commitment net of estimated commission expense.

The change in fair

value of the underlying mortgage loan is measured from the date the mortgage loan commitment is issued and is shown net of related expenses.

Following issuance, the value of a loan commitment can be either positive or negative depending upon the

change in value of the underlying mortgage loans.

The Company estimates the fair value of a mortgage loan commitment based on the change in estimated fair value of the underlying mortgage loan, quoted mortgage backed security (“MBS”) prices, estimates of the fair value of mortgage servicing rights, and an estimate of the probability that the mortgage loan will fund within the terms of the commitment net of estimated commission expense.

The change in fair value of the underlying mortgage loan is measured from the date the mortgage loan commitment is issued and is shown net of related expenses.

Following issuance, the value of a loan commitment can be either positive or negative depending upon the change in value of the underlying mortgage loans.

Fallout rates and other factors from the Company’s recent historical data are used to estimate the quantity and value of mortgage loans that will fund within the terms of the commitments.

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Amortization of deferred policy acquisition costs for interest sensitive products is dependent upon estimates of current and future gross profits or margins on this business.

Key assumptions used

include the following:

yield on investments supporting the liabilities, amount of interest or dividends credited to the policies, amount of policy fees and charges, amount of expenses necessary to maintain the policies, amount of death and surrender

benefits, and the length of time the policies will stay in force.

For nonparticipating traditional life products, these costs are amortized over the premium paying period of the related policies in proportion to the ratio of annual premium revenues to total

anticipated premium revenues.

Key assumptions used include the following:

For nonparticipating traditional life products, these costs are amortized over the premium paying period of the related policies in proportion to the ratio of annual premium revenues to total anticipated premium revenues.

Such anticipated premium revenues are estimated using the same assumption used for computing liabilities for future policy benefits and are generally “locked in” at the date the policies are issued.

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Value of business acquired is the present value of estimated future profits of the acquired business and is amortized similar to deferred acquisition costs.

The critical issues explained for deferred

acquisition costs would also apply for value of business acquired.

Mortgage Loans Foreclosed to Real Estate Held for Investment

The critical issues explained for deferred acquisition costs would also apply for value of business acquired.

Mortgage Loans Foreclosed to Real Estate Held for Investment or Sale

These properties are recorded at the lower of cost or fair value upon foreclosure.

The Company believes that in an orderly market, fair value approximates the replacement cost of a home and the

rental income provides a cash flow stream for investment analysis.

The Company believes the highest and best use of the properties are as income producing assets since it is the Company’s intent to hold the properties as rental properties, matching

the income from the investment in rental properties with the funds required for estimated future policy benefits.

The Company believes that in an orderly market, fair value approximates the replacement cost of a home and the rental income provides a cash flow stream for investment analysis.

The Company believes the highest and best use of the properties are as income producing assets since it is the Company’s intent to hold the properties as rental properties, matching the income from the investment in rental properties with the funds required for estimated future policy benefits.

Accordingly, the fair value determination is generally weighted more heavily toward the rental analysis.

The fair value is also

estimated by obtaining an independent appraisal, which typically considers area comparables and property condition.

The fair value is also estimated by obtaining an independent appraisal, which typically considers area comparables and property condition.

Future Policy Benefits

Reserves for future policy benefits for traditional life insurance products requires the use of many assumptions, including the duration of the policies, mortality experience, expenses, investment

yield, lapse rates, surrender rates, and dividend crediting rates.

Reserves for future policy benefits for traditional life insurance products requires the use of many assumptions, including the duration of the policies, mortality experience, expenses, investment yield, lapse rates, surrender rates, and dividend crediting rates.

These assumptions are made based upon historical experience, industry standards and a best estimate of future results and, for traditional life products, include a provision for adverse deviation.

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Unearned Revenue

The universal life products the Company sells have significant policy initiation fees (front-end load) that are deferred and amortized into revenues over the estimated expected gross profits from

surrender charges and investment, mortality and expense margins.

The universal life products the Company sells have significant policy initiation fees (front-end load) that are deferred and amortized into revenues over the estimated expected gross profits from surrender charges and investment, mortality and expense margins.

The same issues that impact deferred acquisition costs would apply to unearned revenue.

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The Company, through its cemetery and mortuary operations, provides a guaranteed funeral arrangement wherein a prospective customer can receive future goods and services at guaranteed prices.

accomplish this, the Company, through its life insurance operations, sells to the customer an increasing benefit life insurance policy that is assigned to the mortuaries.

If, at the time of need, the policyholder or potential mortuary customer

utilizes one of the Company’s facilities, the guaranteed funeral arrangement contract that has been assigned will provide the funeral goods and services at the contracted price.

The increasing life insurance policy will cover the difference between

the original contract prices and current prices.

To accomplish this, the Company, through its life insurance operations, sells to the customer an increasing benefit life insurance policy that is assigned to the mortuaries.

If, at the time of need, the policyholder or potential mortuary customer utilizes one of the Company’s facilities, the guaranteed funeral arrangement contract that has been assigned will provide the funeral goods and services at the contracted price.

The increasing life insurance policy will cover the difference between the original contract prices and current prices.

Risks may arise if the difference cannot be fully met by the life insurance policy.

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Mortgage Service Rights (“MSR”) arise from contractual agreements between the Company and third-party investors (or their agents) when mortgage loans are sold.

Under these contracts, the Company is

obligated to retain and provide loan servicing functions on the loans sold, in exchange for fees and other remuneration.

Under these contracts, the Company is obligated to retain and provide loan servicing functions on the loans sold, in exchange for fees and other remuneration.

The servicing functions typically performed include, among other responsibilities, collecting and remitting loan payments;

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counseling delinquent mortgagors;

and supervising the acquisition of real estate owned

and property dispositions.

and supervising the acquisition of real estate owned and property dispositions.

The Company initially accounts for MSRs at fair value and subsequently accounts for them using the amortization method.

MSR amortization is determined by amortizing the MSR balance in proportion to, and over the period of

the estimated future net servicing income of the underlying financial assets.

MSR amortization is determined by amortizing the MSR balance in proportion to, and over the period of the estimated future net servicing income of the underlying financial assets.

The Company periodically assesses MSRs accounted for using the amortization method for impairment.

Mortgage Allowance for Loan Losses and Loan Loss Reserve

The Company provides for losses on its mortgage loans held for investment through an allowance for loan losses (a contra-asset account) and through the mortgage loan loss reserve (a liability

The Company provides for losses on its mortgage loans held for investment through an allowance for loan losses (a contra-asset account) and through the mortgage loan loss reserve (a liability account).

The allowance for loan losses is an allowance for losses on the Company’s mortgage loans held for investment.

The allowance is comprised of two components.

The first component is an allowance for collectively evaluated impairment that is

based upon the Company’s historical experience in collecting similar receivables.

The first component is an allowance for collectively evaluated impairment that is based upon the Company’s historical experience in collecting similar receivables.

The second component is based upon individual evaluation of loans that are determined to be impaired.

Upon determining impairment, the Company establishes an individual impairment allowance based upon an assessment of the fair value of the underlying collateral.

In addition, when a mortgage loan is

past due more than 90 days, the Company does not accrue any interest income.

In addition, when a mortgage loan is past due more than 90 days, the Company does not accrue any interest income.

When a loan becomes delinquent, the Company proceeds to foreclose on the real estate and all expenses for foreclosure are expensed as incurred.

Once foreclosed, an

adjustment for the lower of cost or fair value is made, if necessary, and the amount is classified as real estate held for investment.

Once foreclosed, an adjustment for the lower of cost or fair value is made, if necessary, and the amount is classified as real estate held for investment.

The Company will rent the properties until it is deemed desirable to sell them.

The mortgage loan loss reserve is an estimate of probable losses at the balance sheet date that the Company will realize in the future on mortgage loans sold to third-party investors.

The Company may

be required to reimburse third-party investors for costs associated with early payoff of loans within the first six months of such loans and to repurchase loans where there is a default in any of the first four monthly payments to the investors or,

in lieu of repurchase, to pay a negotiated fee to the investors.

The Company may be required to reimburse third-party investors for costs associated with early payoff of loans within six months of origination of such loans and to repurchase loans where there is a default in any of the first four monthly payments to the investors or, in lieu

of repurchase, to pay a negotiated fee to the investors.

The Company’s estimates are based upon historical loss experience and the best estimate of the probable loan loss liabilities.

Upon completion of a transfer that satisfies the conditions to be accounted for as a sale, the Company initially measures at fair value

liabilities incurred in a sale r elating to any guarantee or recourse provisions in the event of defects in the representations and warranties made at loan sale.

The Company accrues a monthly allowance for indemnification losses to investors

based on total production.

Upon completion of a transfer that satisfies the conditions to be accounted for as a sale, the Company initially measures at fair value liabilities incurred in a sale relating to any guarantee or recourse provisions in the event of defects in the representations and warranties made at loan sale.

The Company accrues a monthly allowance for indemnification losses to investors based on total production.

This estimate is based on the Company’s historical experience and is included as a component of mortgage fee income.

Subsequent updates to the recorded liability from changes in assumptions are recorded in selling, general

and administrative expenses.

Subsequent updates to the recorded liability from changes in assumptions are recorded in selling, general and administrative expenses.

The estimated liability for indemnification losses is included in other liabilities and accrued expenses.

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Deferred tax assets and liabilities require various estimates and judgments and may be affected favorably or unfavorably by various internal and external factors.

These estimates and

judgments occur in the calculation of certain deferred tax assets and liabilities that arise from temporary differences in the recognition of revenues and expenses for tax and financial reporting purposes and in estimating the ultimate amount of

deferred tax assets recoverable in future periods.

Factors affecting the deferred tax assets and liabilities include, but are not limited to, changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations,

and changes to overall levels of pre-tax earnings.

Changes in these estimates, judgments or factors may result in an increase or decrease to the Company’s deferred tax assets and liabilities with a related increase or decrease in the Company’s

provision for income taxes.

These estimates and judgments occur in the calculation of certain deferred tax assets and liabilities that arise from temporary differences in the recognition of revenues and expenses for tax and financial reporting purposes and in estimating the ultimate amount of deferred tax assets recoverable in future periods.

Factors affecting the deferred tax assets and liabilities include, but are not limited to, changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations, and changes to overall levels of pre-tax earnings.

Changes in these estimates, judgments or factors may result in an increase or decrease to the Company’s deferred tax assets and liabilities with a related increase or decrease in the Company’s provision for income taxes.

Results of Consolidated Operations

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Total revenues increased by $198,402,000, or 70.1%, to $481,463,000 for 2020 from $283,061,000 for the fiscal year 2019.

Contributing to this increase in total revenues was a $15,490,000 increase in

mortgage fee income, a $5,932,000 increase in insurance premiums and other considerations, a $3,106,000 increase in net investment income, a $1,570,000 increase in net cemetery and mortuary sales, and a $257,000 increase in other revenues.

increase in total revenues was offset by a $23,213,000 decrease in gains on investments and other assets.

Contributing to this increase in total revenues was a $166,957,000 increase in mortgage fee income, a $13,310,000 increase in net investment income, a $11,160,000 increase in insurance premiums and other considerations, a $5,011,000 increase in net cemetery and mortuary sales, a $1,198,000 increase in gains on investments and other assets, and a $1,137,000 increase in other revenues.

This increase in total revenues was offset by a $371,000 increase in other than temporary impairments.

Insurance premiums and other considerations increased by $11,160,000, or 13.6%, to $93,021,000 for 2020, from $81,861,000 for the comparable period in 2019.

This increase

was primarily due to an increase in renewal premiums due to the growth of the Company in recent years, particularly in whole life products, which resulted in more premium paying business in force.

This increase was primarily due to $10,452,000 from the acquisition of Kilpatrick Life in December 2019.

See Note 20 to the consolidated financial statements.

This increase was also due to an increase in renewal premiums due to the growth of the Company in recent years, particularly in whole life products, which resulted in more premium paying business in force.

Net investment income increased by $13,310,000, or 30.9%, to $56,330,000 for 2020, from $43,019,000 for the comparable period in 2019.

This increase was primarily attributable to a $1,315,000 increase

in insurance assignment income, a $625,000 decrease in investment expenses, a $560,000 increase in interest income from cash and cash equivalents, a $408,000 increase in rental income from real estate held for investment, a $331,000 increase in fixed

maturity securities income, a $145,000 increase in policy loan income, and a $76,000 increase in equity securities income.

This increase was partially offset by a $311,000 decrease in interest from mortgage loans held for investment and a $43,000

decrease in income from other investments.

This increase was primarily attributable to a $7,268,000 increase in mortgage loan interest ($4,048,000 due to interest on residential construction loans and $1,763,000 due to the acquisition of Kilpatrick Life), a $3,162,000 increase in rental income from real estate held for investment ($1,711,000 due to the acquisition of Kilpatrick Life and $1,651,000 due to Center53 building 1 now at 96% occupancy), a $1,861,000 increase in fixed maturity securities income ($2,233,000 due to the acquisition of Kilpatrick Life), a $1,752,000 increase in insurance assignment income, a $470,000 increase in policy loan income ($489,000 due to the acquisition of Kilpatrick Life), and a $333,000 increase in equity securities income ($44,000 due to the acquisition of Kilpatrick Life).

This increase was partially offset by a $1,398,000 decrease in interest on cash and cash equivalents ($118,000 increase due to the acquisition of Kilpatrick Life), a $79,000 increase in investment expenses ($502,000 due to the acquisition of Kilpatrick Life), and a $59,000 decrease in income from other investments ($25,000 increase due to the acquisition of Kilpatrick Life).

Net mortuary and cemetery sales increased by $5,011,000, or 32.8%, to $20,307,000 for 2020, from $15,296,000 for the comparable period in 2019.

This increase was primarily due to a $1,019,000

increase in at-need sales in the mortuary operations and a $915,000 increase in at-need sales in the cemetery operations.

This increase was partially offset by a $364,000 decrease in pre-need sales in the cemetery operations.

Gains on investments and other assets decreased by $23,213,000, or 97.0%, to $728,000 in gains for 2019, from $23,941,000 in gains for the comparable period in 2018.

This decrease in gains on

investments and other assets was primarily attributable to the $22,252,000 gain that was realized on the sale of Dry Creek at East Village Apartments in the first quarter of 2018 and an impairment loss of $2,769,000 recognized in 2019 on a commercial

real estate property held for investment.

The Company elected to conduct a review of the property’s value after it received an unsolicited offer to buy and also obtained an independent appraisal from an outside commercial real estate valuation firm.

This decrease was also the result of a $1,556,000 gain that was realized on the sale of assets of Deseret Mortuary in the second quarter of 2018.

This decrease was partially offset by a $2,570,000 increase in gains on equity securities mostly

attributable to increases in the fair value of these securities.

Due to the adoption of Accounting Standards Update (“ASU”) 2016-01 on January 1, 2018, these changes in fair value are now recognized in earnings instead of other comprehensive income.

This decrease was also partially offset by a $443,000 increase in gains on fixed maturity securities and a $351,000 increase in gains on other assets.

This increase was primarily due to a $2,133,000 increase in cemetery pre-need sales, a $1,566,000 increase in cemetery at-need sales, and a $1,312,000 increase in mortuary at-need sales.

Gains on investments and other assets increased by $1,197,000, or 164.4%, to $1,926,000 for 2020, from $728,000 for the comparable period in 2019.

This increase in gains on investments and other assets was primarily due to a $1,268,000 increase in gains on other assets ($341,000 due to the acquisition of Kilpatrick Life) mostly attributable to a decrease in impairment losses on commercial real estate.

This increase in gains on investments and other assets was also due to a $71,000 increase in gains on fixed maturity securities ($137,000 due to the acquisition of Kilpatrick Life).

This decrease in gains on investments and other assets was partially offset by a $142,000 decrease in gains on equity securities ($549,000 increase due to the acquisition of Kilpatrick Life).

Mortgage fee income increased by $166,957,000, or 126.5%, to $298,933,000 for 2020, from $131,976,000 for the comparable period in 2019.

This increase was primarily due to

$13,165,000 increase in secondary gains on loans sold to third-party investors from increased lending volumes, a $2,054,000 increase in other loan fees and interest income, a $505,000 decrease in the provision for loan loss reserve, and a net

increase of $66,000 in the fair value of loans held for sale and loan commitments.

This increase was primarily due to a $138,177,000 increase in secondary gains from mortgage loans sold to third-party investors into the secondary market, a $18,421,000 increase in loan fees and interest income, and a $14,653,000 increase in the fair value of loans held for sale and loan commitments.

This increase in mortgage fee income was partially offset by a $4,294,000 increase in the provision for loan loss reserve.

Other revenues increased by $1,137,000, or 11.2%, to $11,317,000 for 2020 from $10,180,000 for the comparable period in 2019.

This increase was primarily due to a $630,000 increase in experience refunds

on reinsurance due to the coinsurance agreement with Kilpatrick Life Insurance Company (“Kilpatrick”) prior to the acquisition of Kilpatrick by the Company.

This increase was partially offset by a $349,000 decrease in mortgage loan servicing fee

This increase was primarily attributable to an increase in servicing fee revenue.

Total benefits and expenses were $410,013,000, or 85.2% of total revenues for 2020, as compared to $269,117,000, or 95.1% of total revenues for the comparable period in 2019.

Death benefits, surrenders and other policy benefits, and future policy benefits increased by an aggregate of $4,963,000, or 7.8%, to $68,480,000 for 2019, from $63,517,000 for the comparable period

This increase was primarily the result of a $5,292,000 increase in death benefits and a $434,000 increase in surrenders and other policy benefits.

This increase was partially offset by a $763,000 decrease in future policy benefits.

Amortization of deferred policy and pre-need acquisition costs and value of business acquired increased by $3,003,000, or 25.8%, to $14,634,000 for 2019, from $11,631,000 for the comparable period in

This increase was primarily due to an increase in the average outstanding balance of deferred policy and pre-need acquisition costs.

Death benefits, surrenders and other policy benefits, and future policy benefits increased by an aggregate of $17,930,000, or 26.2%, to $86,410,000 for 2020, from $68,480,000 for the comparable period in 2019.

This increase was primarily the result of a $17,449,000 increase in death benefits ($8,324,000 due to the acquisition of Kilpatrick Life and $6,239,000 for COVID-19 related deaths) and a $481,000 increase in surrender and other policy benefits ($918,000 due to the acquisition of Kilpatrick Life).

Amortization of deferred policy and pre-need acquisition costs and value of business acquired decreased by $327,000, or 2.2%, to $14,307,000 for 2020, from $14,634,000 for the comparable period in 2019.

This decrease was primarily due to improved persistency in the payment of premiums in the traditional life business.

($125,000 increase due to the acquisition of Kilpatrick Life).

Selling, general and administrative expenses increased by $121,727,000, or 69.3%, to $297,464,000 for 2020, from $175,737,000 for the comparable period in 2019.

This increase was primarily due to a

$6,472,000 increase in commission expenses due to an increase in mortgage loan originations, a $3,908,000 increase in other expenses, and a $182,000 increase in advertising expenses.

This increase was partially offset by a $3,148,000 decrease in

personnel expenses due to the efforts of the Mortgage segment to reduce costs and restructure internal processes, a $550,000 decrease in rent and rent related expenses, a $156,000 decrease in depreciation on property and equipment, and a $145,000

decrease in costs related to funding mortgage loans.

This increase was primarily the result of a $67,663,000 increase in commissions, a $20,769,000 increase in personnel expenses, a $16,506,000 increase in the provision for loan loss reserve, a $12,408,000 increase in other expenses, a $3,599,000 increase in costs related to funding mortgage loans, a $596,000 increase in advertising expenses, and a $367,000 increase in depreciation on property and equipment.

This increase was partially offset by a $182,000 decrease in rent and rent related expenses.

Most of these increases are attributable to the mortgage segment due to the increase in mortgage loan originations and refinancings, most notably $66,600,000 in commissions, $15,140,000 in personnel expenses, $11,192,000 in other expenses, and $554,838 in advertising expenses.

Also, these increases are attributable to the acquisition of Kilpatrick Life, most notably $2,027,000 in personnel expenses, $1,329,000 in other expenses, and $1,047,000 in commissions.

Interest expense increased by $1,192,000, or 16.1%, to $8,579,000 for 2020, from $7,387,000 for the comparable period in 2019.

This increase was primarily due to a $373,000 increase in interest expense

on mortgage warehouse lines and a $163,000 increase in interest expense on bank loans for real estate held for investment.

This increase was partially offset by a decrease of $105,000 in interest on funds withheld reinsurance.

This increase was primarily due to an increase of $1,735,000 in interest expense on mortgage warehouse lines for loans held for sale.

This increase was partially offset by a $598,000 decrease in interest expense on bank loans collateralized by real estate held for investment.

Cost of goods and services sold of the cemeteries and mortuaries increased by $374,000, or 13.0%, to $3,252,000 for 2020, from $2,878,000 for the comparable period in 2019.

This increase was

primarily due to a $292,000 increase in costs related to cemetery at-need sales, a $268,000 increase in costs related to mortuary at-need sales, and a $159,000 increase in costs related to cemetery pre-need sales.

Income tax expense decreased by $1,444,000, or 32.1%, to $3,050,000 for 2019, from $4,494,00 for the comparable period in 2018.

This decrease was primarily due to a decrease in earnings before

income taxes for 2019 compared to 2018.

This increase was primarily due to an $176,000 increase in mortuary at-need sales, a $126,000 increase in cemetery at-need sales, and a $72,000 increase in cemetery pre-need sales.

Income tax expense increased by $12,803,000, or 412.4%, to $15,854,000 for 2020, from $3,050,00 for the comparable period in 2019.

This increase was primarily due to an increase in earnings before income taxes for 2020 compared to 2019.

The following is a description of the most significant risks facing the Company and how it mitigates those risks:

Legal and Regulatory Risks .

Changes in the legal or regulatory environment in which the Company operates may create additional expenses and risks not anticipated by the Company in developing

and pricing its products.

Regulatory initiatives designed to reduce insurer profits, new legal theories or insurance company insolvencies through guaranty fund assessments may create costs for the insurer beyond those recorded in the consolidated

financial statements.

Changes in the legal or regulatory environment in which the Company operates may create additional expenses and risks not anticipated by the Company in developing and pricing its products.

In addition, changes in tax law with respect to mortgage interest deductions or other public policy or legislative changes may affect the Company’s mortgage sales.

Also, the Company may be subject to further regulations in the

cemetery and mortuary business.

The Company mitigates these risks by offering a wide range of products and by diversifying its operations, thus reducing its exposure to any single product or jurisdiction, and also by employing underwriting practices

that identify and minimize the adverse impact of such risks.

Also, the Company may be subject to further regulations in the cemetery and mortuary business.

Mortgage Industry Risks .

Developments in the mortgage industry and credit markets can adversely affect the Company’s ability to sell its mortgage loans to investors, which can impact the

Company’s financial results by requiring it to assume the risk of holding and servicing any unsold loans.

The mortgage loan loss reserve is an estimate of probable losses at the balance sheet date that the Company could realize in the future on mortgage loans sold to third-party

first four monthly payments to the investors or, in lieu of repurchase, to pay a negotiated fee to the investors.

Developments in the mortgage industry and credit markets can adversely affect the Company’s ability to sell its mortgage loans to investors, which can impact the Company’s financial results by requiring it to assume the risk of holding and servicing any unsold loans.

The mortgage loan loss reserve is an estimate of probable losses at the balance sheet date that the Company could realize in the future on mortgage loans sold to third-party investors.

The Company’s mortgage subsidiaries may be required to reimburse third-party investors for costs associated with early payoff of loans within the first six months of such loans and to repurchase loans where there is a default in any of the first four monthly payments to the investors or, in lieu of repurchase, to pay a negotiated fee to the investors.

The Company’s estimates are based upon historical loss experience and the best estimate of the probable loan loss liabilities.

Upon completion of a transfer that satisfies the conditions to be accounted for as a sale, the Company initially measures at fair value liabilities incurred in a sale r elating

to any guarantee or recourse provisions.

The initial reserve for loan losses in years ended December 31, 2019 and 2018 were $643,000 and $1,148,000, respectively, and the charge has been included in mortgage fee income.

The estimated liability for

indemnification losses is included in other liabilities and accrued expenses and, as of December 31, 2019 and 2018, the balances were $4,046,000 and $3,605,000, respectively.

The Company believes the loan loss reserve represent probable loan losses

incurred as of December 31, 2019.

During the twelve months ended December 31, 2020 and 2019 the Company increased its loan loss reserve by $4,938,000 and $643,000, respectively, for loan originations, and the charge has been included in mortgage fee income.

During the twelve months ended December 31, 2020 and 2019 the Company increased its loan loss reserve by an additional $16,506,000 and $-0-, respectively, to account for changes in estimates specific to settlements of loan losses.

The Company believes the loan loss reserve represent probable loan losses incurred as of December 31, 2020.

There is a risk, however, that future loan losses may exceed the loan loss reserve.

At various times third-party investors have asserted that SecurityNational Mortgage sold mortgage loans that allegedly contained borrower misrepresentations or experienced early payment defaults, or

that were otherwise allegedly defective or not in compliance with loan purchase agreements involving SecurityNational Mortgage.

As a result of these claims, third-party investors have made demands at times that SecurityNational Mortgage repurchase

certain alleged defective mortgage loans that were sold to such investors or indemnify them against any losses related to such loans.

The total amount of potential claims by third-party investors is difficult to determine.

The Company has reserved and accrued $4,046,000 as of December 31, 2019 to settle all such investor related

The Company believes that the reserve for mortgage loan losses, which includes provisions for probable losses and indemnification on loans held for sale, is reasonable based on available information.

Moreover, the Company has successfully

negotiated acceptable settlement terms with other third-party investors that asserted claims for mortgage loan losses against SecurityNational Mortgage.

SecurityNational Mortgage disagrees with the repurchase demands and notices of potential claims from third-party investors.

Furthermore, SecurityNational Mortgage believes there is potential to

resolve the alleged claims by the third-party investors on acceptable terms.

If SecurityNational Mortgage is unable to resolve such claims on acceptable terms, legal action may ensue.

In the event of legal action by any third-party investor,

SecurityNational Mortgage believes it has significant defenses to any such action and intends to vigorously defend itself against such action.

As of December 31, 2020, the Company’s mortgage loans held for investment portfolio consisted of $10,282,000 in mortgage loans with delinquencies more than 90 days.

Of this amount, $1,651,000 of the

loans were in foreclosure proceedings.

Of this amount, $2,464,000 of the loans were in foreclosure proceedings.

The Company has not received or recognized any interest income on the $10,282,000 in mortgage loans with delinquencies more than 90 days.

During the twelve months ended December 31, 2019, the Company increased

its allowance for loan losses by $105,000 and during the twelve months ended December 31, 2018, the Company decreased its allowance for loan losses by $415,000, which was charged to bad debt expense and included in selling, general and administrative

expenses for the period.

The allowances for loan losses as of December 31, 2019 and 2018 were $1,453,000 and $1,348,000, respectively.

During the twelve months ended December 31, 2020 and 2019, the Company increased its allowance for loan losses by $552,000 and by $105,000, respectively, which was charged to bad debt expense and included in selling, general and administrative expenses for the period.

The allowances for loan losses on the Company’s held for investment portfolio as of December 31, 2020 and 2019 were $2,005,000 and $1,453,000, respectively.

Interest Rate Risk .

The risk that interest rates will change, which may cause a decrease in the value of the Company’s investments or impair the ability of the Company to market its mortgage

and cemetery and mortuary products.

The risk that interest rates will change, which may cause a decrease in the value of the Company’s investments or impair the ability of the Company to market its mortgage and cemetery and mortuary products.

This change in rates may cause certain interest-sensitive products to become uncompetitive or may cause disintermediation.

The Company mitigates this risk by charging fees for non-conformance with certain policy

provisions, by offering products that transfer this risk to the purchaser, and by attempting to match the maturity schedule of its assets with the expected payouts of its liabilities.

To the extent that liabilities come due more quickly than assets

mature, the Company might have to borrow funds or sell assets prior to maturity and potentially recognize a loss on the sale.

The Company mitigates this risk by charging fees for non-conformance with certain policy provisions, by offering products that transfer this risk to the purchaser, and by attempting to match the maturity schedule of its assets with the expected payouts of its liabilities.

To the extent that liabilities come due more quickly than assets mature, the Company might have to borrow funds or sell assets prior to maturity and potentially recognize a loss on the sale.

Mortality and Morbidity Risks .

The risk that the Company’s actuarial assumptions may differ from actual mortality and morbidity experiences may cause the Company’s products to be underpriced,

may cause the Company to liquidate insurance or other claims earlier than anticipated, and other potentially adverse consequences to the business.

The Company minimizes this risk through sound underwriting practices, asset and liability duration

matching, and sound actuarial practices.

Since December 31, 2019, the outbreak of the novel strain of coronavirus, specifically identified as "COVID-19", has resulted in governments worldwide enacting emergency measures to combat the spread

of the virus.

These measures, which include the implementation of travel bans, self-imposed quarantine periods and social distancing, have caused material disruption to businesses globally resulting in an economic slowdown.

Global equity markets

have experienced significant volatility and weakness.

Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions.

The duration and impact of the COVID-19 outbreak is

unknown at this time, as is the efficacy of the government and central bank interventions.

It is not possible to reliably estimate the length and severity of these developments and the impact on the financial results and condition of the Company

and its operating subsidiaries in future periods.

Further, these uncertainties have the potential to negatively affect the risk of credit default for the issuers of the Company’s debt securities and individual borrowers with mortgage loans held

by the Company.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial

statements and accompanying notes.

The risk that the Company’s actuarial assumptions may differ from actual mortality and morbidity experiences may cause the Company’s products to be underpriced, may cause the Company to liquidate

insurance or other claims earlier than anticipated, and other potentially adverse consequences to the business.

The Company minimizes this risk through sound underwriting practices, asset and liability duration matching, and sound actuarial practices.

During 2020, the outbreak of COVID-19 had spread worldwide and was declared a global pandemic by the World Health Organization on March 11, 2020.

COVID-19 poses a threat to the health and economic well-being of the Company’s employees, customers, and vendors.

The Company is closely monitoring developments relating to the COVID-19 pandemic and assessing its impact on the Company’s business.

The COVID-19 pandemic has had and continues to have a major impact on the global economy and financial markets.

Governments and businesses have taken numerous measures to try to contain the virus, which include the implementation of travel bans, self-imposed quarantine periods, and social distancing.

These measures have disrupted and will continue to disrupt businesses globally.

Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize the economic conditions.

Like most businesses, COVID-19 has impacted the Company.

However, the Company cannot, with any certainty predict the severity or duration with which COVID-19 will impact the Company’s business, financial condition, results of operations, and cash flows.

To the extent the COVID-19 pandemic adversely affects the Company’s business, financial condition, and results of operations, it may also have the effect of heightening many of the other risks described in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

These uncertainties have the potential to negatively affect the risk of credit default for the issuers of the Company’s fixed maturity debt securities and individual borrowers with mortgage loans held by the Company.

The Company has implemented risk management, business continuity plans and has taken preventive measures and other precautions, such as business travel restrictions and remote work arrangements.

Such measures and precautions have enabled the Company to continue to conduct business.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.

Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant changes in the near term are those used in determining the value of derivative assets and liabilities;

those used in determining

deferred acquisition costs and the value of business acquired;

those used in determining deferred acquisition costs and the value of business acquired;

those used in determining the value of mortgage loans foreclosed to real estate held for investment;

those used in determining the liability for future policy benefits and unearned

those used in determining the liability for future policy benefits and unearned revenue;

those used in determining the estimated future costs for pre-need sales;

1 unchanged sentence

those used in determining allowances for loan losses for mortgage loans held for investment;

used in determining loan loss reserve;

those used in determining loan loss reserve;

and those used in determining deferred tax assets and liabilities.

1 unchanged sentence

Liquidity and Capital Resources

The Company’s life insurance subsidiaries and cemetery and mortuary subsidiaries realize cash flow from premiums, contract payments and sales on personal services rendered for cemetery and mortuary

business, from interest and dividends on invested assets, and from the proceeds from the maturity of held to maturity investments or sale of other investments.

The mortgage subsidiaries realize cash flow from fees generated by originating and

refinancing mortgage loans and fees on mortgage loans held for sale that are sold to investors.

The Company considers these sources of cash flow to be adequate to fund future policyholder and cemetery and mortuary liabilities, which generally are

long-term, and adequate to pay current policyholder claims, annuity payments, expenses related to the issuance of new policies, the maintenance of existing policies, debt service, and to meet current operating expenses.

During the twelve months ended December 31, 2019, the Company's operations used cash of $75,602,000.

The Company’s life insurance subsidiaries and cemetery and mortuary subsidiaries realize cash flow from premiums, contract payments and sales on personal services rendered for cemetery and mortuary business, from interest and dividends on invested assets, and from the proceeds from the maturity of held to maturity investments or sale of other investments.

The mortgage subsidiaries realize cash flow from fees generated by originating and refinancing mortgage loans and fees on mortgage loans held for sale that are sold to investors.

The Company considers these sources of cash flow to be adequate to fund future policyholder and cemetery and mortuary liabilities, which generally are long-term, and adequate to pay current policyholder claims, annuity payments, expenses related to the issuance of new policies, the maintenance of existing policies, debt service, and to meet current operating expenses.

It should be noted that current conditions in the financial markets and economy caused by the COVID-19 pandemic may affect the cash flows of the Company.

During the twelve months ended December 31, 2020 and 2019, the Company's operations used cash of $129,627,000 and $75,602,000, respectively.

This increase was primarily due to originations of mortgage loans held for sale.

During the twelve

months ended December 31, 2018, the Company’s operations provided cash of $7,009,000.

This was primarily due to an increase in cash collected on loans held for sale.

The Company’s liability for future policy benefits is expected to be paid out over the long-term due to the Company’s market niche of selling funeral plans.

Funeral plans are small face value life

insurance that will pay the costs and expenses incurred at the time of a person’s death.

Funeral plans are small face value life insurance that will pay the costs and expenses incurred at the time of a person’s death.

A person generally will keep these policies in force and will not surrender them prior to a person’s death.

Because of the long-term nature of these liabilities,

the Company is able to hold to maturity its bonds, real estate and mortgage loans thus reducing the risk of liquidating these long-term investments as a result of any sudden changes in market values.

Because of the long-term nature of these liabilities, the Company is able to hold to maturity its bonds, real estate and mortgage loans thus reducing the risk of liquidating these long-term investments as a result of any sudden changes in market values.

The Company attempts to match the duration of invested assets with its policyholder and cemetery and mortuary liabilities.

The Company may sell investments other than those held to maturity in the

portfolio to help in this timing.

The Company may sell investments other than those held to maturity in the portfolio to help in this timing.

The Company purchases short-term investments on a temporary basis to meet the expectations of short-term requirements of the Company’s products.

The Company’s investment philosophy is intended to provide a rate of

return, which will persist during the expected duration of policyholder and cemetery and mortuary liabilities regardless of future interest rate movements.

selling the loans to investors in accordance with the requirements and laws governing the life insurance subsidiaries.

Bonds owned by the insurance subsidiaries amounted to $355,613,000 (at estimated fair value) and $231,976,000 (at amortized cost)

as of December 31, 2019 and 2018, respectively.

The Company’s investment philosophy is intended to provide a rate of return, which will persist during the expected duration of policyholder and cemetery and mortuary liabilities regardless of future interest rate movements.

The Company’s investment policy is also to invest predominantly in fixed maturity securities, real estate, mortgage loans, and warehousing of mortgage loans held for sale on a short-term basis before selling the loans to investors in accordance with the requirements and laws governing the life insurance subsidiaries.

Bonds owned by the insurance subsidiaries amounted to $294,384,000 (at estimated fair value) and $355,613,000 (at estimated fair value) as of December 31, 2020 and 2019, respectively.

This represents 38.0% and 45.5% of the total investments as of December 31, 2020, and 2019, respectively.

Generally, all bonds owned by the life insurance subsidiaries are rated by the National

Association of Insurance Commissioners.

Generally, all bonds owned by the life insurance subsidiaries are rated by the National Association of Insurance Commissioners.

Under this rating system, there are six categories used for rating bonds.

At December 31, 2019, 2.2% (or $7,633,000) and at December 31, 2018, 3.6% (or $8,413,000) of the Company’s total bond investments were

invested in bonds in rating categories three through six, which are considered non‑investment grade.

On December 31, 2019, the Company changed the classification of its bonds to available for sale from held to maturity.

As a result, bonds available for sale are carried at estimated fair value

instead of amortized cost.

See Note 2 of the Notes to Consolidated Financial Statements for additional disclosures regarding the change in classification.

See Note 2 of the Notes to Consolidated Financial Statements for the schedule of the maturity of fixed maturity securities and for the schedule of principal payments for mortgage

loans held for investment.

At December 31, 2020, 4.2% (or $12,418,000) and at December 31, 2019, 2.2% (or $7,633,000) of the Company’s total bond investments were invested in bonds in rating categories three through six, which are considered non-investment grade.

See Note 2 of the Notes to Consolidated Financial Statements for the schedule of the maturity of fixed maturity securities available for sale and for the schedule of principal payments for mortgage loans held for investment.

See Note 7 of the Notes to Consolidated Financial Statements for a description of the Company’s sources of liquidity.

If market conditions were to cause interest rates to change, the fair value of the Company’s fixed income portfolio, which includes bonds, preferred stocks and mortgage

loans held for investment, could change by the following amounts based on the respective basis point swing (the change in the fair values were calculated using a modeling technique):

Change in Fair Value (in thousands)

The Company is subject to risk-based capital guidelines established by statutory regulators requiring minimum capital levels based on the perceived risk of assets, liabilities, disintermediation, and

business risk.

If market conditions were to cause interest rates to change, the fair value of the Company’s fixed income portfolio (of approximately $544,001,000), which includes bonds, preferred stocks and mortgage loans held for investment, could change by the following amounts based on the respective basis point swing (the change in the fair values were calculated using a modeling technique):

Change in Fair Value

(in thousands)

The Company is subject to risk-based capital guidelines established by statutory regulators requiring minimum capital levels based on the perceived risk of assets, liabilities, disintermediation, and business risk.

At December 31, 2020 and 2019, the capital levels of the life insurance subsidiaries exceeded the regulatory criteria.

The Company’s total capitalization of stockholders’ equity, and bank loans and other loans payable was $414,283,000 as of December 31, 2019, as compared

to $359,172,000 as of December 31, 2018.

The Company’s total capitalization of stockholders’ equity, and bank loans and other loans payable was $561,811,000 as of December 31, 2020, as compared to $414,283,000 as of December 31, 2019.

Stockholders’ equity as a percent of total capitalization was 47.0% and 47.5% as of December 31, 2020 and December 31, 2019, respectively.

Bank loans and other loans

payable increased by $30,051,000 for the twelve months ended December 31, 2019 as compared to December 31, 2018, thus limiting the increase in the stockholders’ equity percentage.

Bank loans and other loans payable increased by $80,252,000 for the twelve months ended December 31, 2020 as compared to December 31, 2019, thus limiting the increase in the stockholders’ equity percentage.

Lapse rates measure the amount of insurance terminated during a particular period.

The Company’s lapse rate for life insurance was 5.9% in 2020 as compared to a rate of 9.8% for 2019.

At December 31, 2019, the combined statutory capital and surplus of the Company’s life insurance subsidiaries was $74,140,000.

The life insurance subsidiaries cannot pay a dividend to its parent

company without the approval of state insurance regulatory authorities.

The combined statutory capital and surplus of the Company’s life insurance subsidiaries was $78,493,000 and $74,140,000 as of December 31, 2020 and 2019, respectively.

The life insurance subsidiaries cannot pay a dividend to its parent company without the approval of state insurance regulatory authorities.

Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements to encourage companies to provide prospective information about their businesses without

fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in such

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements to encourage companies to provide prospective information about their businesses without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in such statements.

The Company desires to take advantage of the “safe harbor” provisions of the act.

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However, actual results and needs of the Company may vary materially from forward-looking statements and projections made from time to time by the Company on the basis of management’s then-current expectations.

The business in which the Company is

engaged involves changing and competitive markets, which may involve a high degree of risk, and there can be no assurance that forward-looking statements and projections will prove accurate.

Factors that may cause the Company’s actual results to differ materially from those contemplated or projected, forecast, estimated or budgeted in such forward looking statements include among others,

the following possibilities:

The business in which the Company is engaged involves changing and competitive markets, which may involve a high degree of risk, and there can be no assurance that forward-looking statements and projections will prove accurate.

(i) heightened competition, including the intensification of price competition, the entry of new competitors, and the introduction of new products by new and existing competitors;

(ii) adverse state and federal

legislation or regulation, including decreases in rates, limitations on premium levels, increases in minimum capital and reserve requirements, benefit mandates and tax treatment of insurance products;

(iii) fluctuations in interest rates causing a

reduction of investment income or increase in interest expense and in the market value of interest rate sensitive investment;

(ii) adverse state and federal legislation or regulation, including decreases in rates, limitations on premium levels, increases in minimum capital and reserve requirements, benefit mandates and tax treatment of insurance products;

(iii) fluctuations in interest rates causing a reduction of investment income or increase in interest expense and in the market value of interest rate sensitive investment;

(iv) failure to obtain new customers, retain existing customers or reductions in policies in force by existing customers;

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(vi) loss or retirement of key executives or employees;

(vii) increases in

medical costs;

(vii) increases in medical costs;

(viii) changes in the Company’s liquidity due to changes in asset and liability matching;

(ix) restrictions on insurance underwriting based on genetic testing and other criteria;

(x) adverse changes in the ratings obtained by

independent rating agencies;

(x) adverse changes in the ratings obtained by independent rating agencies;

(xi) failure to maintain adequate reinsurance;

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(xiii) adverse trends in mortality and morbidity;

(xiv) deterioration of real

estate markets;

(xiv) deterioration of real estate markets;

and (xv) lawsuits in the ordinary course of business.

Off-Balance Sheet Agreements

At December 31, 2019, the Company was contingently liable under a standby letter of credit aggregating $625,405, to be used as collateral to cover any contingency related to additional risk

assessments pertaining to the Company's captive insurance program.

The Company does not expect any material losses to result from the issuance of the standby letter of credit because claims are not expected to exceed premiums paid.

The total of the Company’s unfunded residential construction loan and land development loan commitments as of December 31, 2019, was approximately $33,036,000.

In 2016, the Company, through its wholly-owned subsidiary 5300 Development, LLC, entered into a Construction Loan Agreement with a bank.

Under the terms of this Agreement, the Company agrees to pay

the bank the current outstanding principal up to $40,740,000 plus interest.

These funds are being used for the construction of phase 1 of the Company’s new Center53 corporate campus development in Salt Lake City, Utah.

As of December 31, 2019, the

Company has used $33,913,000 of these funds.

The Company has entered into commitments to fund construction and land development loans and has also provided financing for land acquisition and development.

As of December 31, 2020, the Company’s commitments were approximately $185,751,000 for these loans, of which $115,898,000 had been funded.

The Company advances funds once the work has been completed and an independent inspection is made.

The maximum loan commitment ranges between 50% and 80% of appraised value.

The Company receives fees and interest for these loans and the interest rate is generally fixed 5.50% to 8.00% per annum.

Maturities generally range between six and eighteen months.

Contractual Obligations

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$ 300,015,527

$ 741,043,157

$ 1,141,036,303

(1) Amounts represent the present value of future policy benefits, net of estimated future premiums.

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In conjunction with the Company’s casualty insurance program, limited equity interests are held in a captive insurance entity.

This program permits the Company to self-insure a portion of losses, to

gain access to a wide array of safety-related services, to pool insurance risks and resources in order to obtain more competitive pricing for administration and reinsurance and to limit its risk of loss in any particular year.

The maximum exposure to

loss related to the Company’s involvement with this entity is limited to approximately $625,405, which is collateralized under a standby letter of credit issued on the insurance entity’s behalf.

See Note 10, “Reinsurance, Commitments and

Contingencies,” for additional discussion of commitments associated with the insurance program.

This program permits the Company to self-insure a portion of losses, to gain access to a wide array of safety-related services, to pool insurance risks and resources in order to obtain more competitive pricing for administration and reinsurance and to limit its risk of loss in any particular year.

The maximum exposure to loss related to the Company’s involvement with this entity is limited to approximately $348,183, which is collateralized under a standby letter of credit issued on the insurance entity’s behalf.

See Note 10, “Reinsurance, Commitments and Contingencies,” for additional discussion of commitments associated with the insurance program.

The Company does not expect any material losses to result from the issuance of the standby letter of credit because claims are not expected to exceed premiums paid.

Quantitative and Qualitative Disclosures about Market Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis