(1)

Includes the purchase of Memorial Insurance Company of America on December 29, 2005.

(2)

Includes the purchase of Capital Reserve Life Insurance Company on December 17, 2007.

(3)

Includes the purchase of Southern Security Life Insurance Company on December 18, 2008.

Accident and Health

Products

Prior to the acquisition of Capital Investors in 1994, the Company did not actively market accident and health products. With the acquisition of Capital Investors, the Company acquired a block of accident and health policies that pay limited benefits to policyholders. The Company is currently offering a low-cost comprehensive diver’s and limited recreational accident policies. These policies provide worldwide coverage for medical expense reimbursement in the event of diving or certain recreational sports accidents.

Markets and Distribution

The Company currently markets its accident policies through web marketing.

 

6

---

 

 

The following table summarizes the accident and health insurance business for the five years ended December 31, 2008:

		2008				2007				2006				2005				2004
Accident and Health Policy/Cert. Count as of December 31			14,060				14,845				15,340				14,934				15,778
Premiums Collected (omitted 000)		$	232			$	257			$	274			$	285			$	308

Reinsurance

When a given policy exceeds the Company’s retention limits, the Company reinsures with other companies that portion of the individual life insurance and accident and health policies it has underwritten. The primary purpose of reinsurance is to enable an insurance company to write a policy in an amount larger than the risk it is willing to assume for itself. The Company remains obligated for amounts ceded in the event the reinsurers do not meet their obligations.

The Company’s policy is to retain no more than $75,000 of ordinary insurance per insured life. Excess risk is reinsured. The total amount of life insurance in force at December 31, 2008, reinsured by other companies, aggregated $115,702,000, representing approximately 4.7% of the Company’s life insurance in force on that date.

The Company currently cedes and assumes certain risks with various authorized unaffiliated reinsurers pursuant to reinsurance treaties, which are renewable annually. The premiums paid by the Company are based on a number of factors, primarily including the age of the insured and the risk ceded to the reinsurer.

On December 31, 2008, the Company entered into a Coinsurance Funds Withheld Reinsurance Agreement with Continental American Insurance Company (“Continental American”), a South Carolina domiciled insurance company, effective November 30, 2008. The Company ceded to Continental American 100% of a block of deferred annuities in the amount of $4,828,487 as of December 31, 2008 and retained the assets and recorded a funds held under coinsurance liability for the same amount. Continental American has agreed to pay the Company an initial ceding commission of $60,000 and a quarterly management fee of $16,500 per quarter to administer the policies. The Company will also receive a 90% experience refund for any profits from the business. The Company has the right to recapture the business on each January 1 subsequent to December 31, 2008, or any other date if mutually agreed and with at least 90 days’ prior written notice to Continental American.

Investments

The investments that support the Company’s life insurance and annuity obligations are determined by the Investment Committee of the Board of Directors of the various subsidiaries and ratified by the full Board of Directors of the respective subsidiaries. A significant portion of the investments must meet statutory requirements governing the nature and quality of permitted investments by insurance companies. The Company’s interest-sensitive type products, primarily annuities and interest-sensitive whole life, compete with other financial products such as bank certificates of deposit, brokerage sponsored money market funds as well as competing life insurance company products. Although it is not the Company’s policy to offer the highest yield in this economic climate, in order to offer what the Company considers to be a competitive yield, it maintains a diversified portfolio consisting of common stocks, preferred stocks, municipal bonds, investment and non-investment grade bonds, mortgage loans, real estate, short-term investments and other securities and investments.

See “Management’s Discussion and Analysis of Results of Operations and Financial Condition” and “Notes to Consolidated Financial Statements” for additional disclosure and discussion regarding investments.

Cemetery and Mortuary

Products

The Company has six wholly-owned cemeteries and eleven wholly owned mortuaries. The cemeteries are non-denominational. Through its cemetery and mortuary operations, the Company markets a variety of products and services both on a pre-need basis (prior to death) and an at-need basis (at the time of death). The products include grave spaces, interment vaults, mausoleum crypts and niches, markers, caskets, flowers and other related products. The services include professional services of funeral directors, opening and closing of graves, use of chapels and viewing rooms, and use of automobiles and clothing. The Company has a funeral chapel at each of its cemeteries, other than Holladay Memorial Park and Singing Hills Memorial Park, and has seven separate stand-alone mortuary facilities.

 

7

---

 

 

Markets and Distribution

The Company’s pre-need cemetery and mortuary sales are marketed to persons of all ages but are generally purchased by persons 45 years of age and older. The Company also markets its mortuary and cemetery products on an at-need basis. The Company is limited in its geographic distribution of these products to areas lying within an approximate 20-mile radius of its mortuaries and cemeteries. The Company’s at-need sales are similarly limited in geographic area.

The Company actively seeks to sell its cemetery and funeral products to customers on a pre-need basis. The Company employs cemetery sales representatives on a commission basis to sell these products. Many of these pre-need cemetery and mortuary sales representatives are also licensed insurance salesmen and sell funeral plan insurance. In many instances, the Company’s cemetery and mortuary facilities are the named beneficiary of the funeral plan policies.

The sales representatives of the Company’s cemetery and mortuary operations are commissioned and receive no salary. The sales commissions range from 4% to 25% for cemetery products and services and 10% to 100% of first year premiums for funeral plan insurance. Potential customers are located via telephone sales prospecting, responses to letters mailed by the sales representatives, newspaper inserts, referrals, contacts made at funeral services, and door-to-door canvassing. The Company trains its sales representatives and generates leads for them. If a customer comes to one of the Company’s cemeteries on an at-need basis, the sales representatives are compensated on a commission basis.

Mortgage Loans

Products

Beginning in 1993, the Company, through its wholly owned subsidiary, SecurityNational Mortgage Company (“SecurityNational Mortgage”) has been active in both the residential as well as commercial real estate markets. The Company has current approvals through HUD, Fannie Mae, Freddie Mac and other substantial secondary market investors, which enable it to originate a wide variety of residential mortgage loan products that are subsequently sold to investors. The Company uses internal funding sources as well as maintaining external warehouse lines of credit with unaffiliated financial institutions. The Company also originates residential construction loans.

Security National Capital, a subsidiary of SecurityNational Mortgage, originates commercial real estate loans both for internal investment as well as for sale to unaffiliated investors.

Markets and Distribution

The Company’s residential mortgage lending services are marketed primarily to mortgage originators. SecurityNational Mortgage maintains a retail origination presence in the Salt Lake City market in addition to 29 wholesale and retail branch offices located in Arizona, California, Florida, Hawaii, Indiana, Kansas, North Carolina, Oklahoma, Oregon, Texas, Utah and Washington, with sales representatives in these and other states.  See “Management’s Discussion and Analysis of Results of Operations and Financial Condition” and “Notes to Consolidated Financial Statements” for additional disclosure and discussion regarding mortgage loans.

Recent Acquisitions and Other Business Activities

Sale of Colonial Funeral Home

In June 2007, the Company completed the sale of the Colonial Funeral Home property to the Utopia Station Development Corp. (“Utopia Development”) for $730,242, net of selling costs of $44,758.  The Colonial Funeral Home ceased operations in July 2006 and has been inactive since that date.  The carrying amount on the Company's financial statements on June 20, 2007 was $148,777. As a result of the sale, including payment of selling expenses, the Company recognized a gain of $581,465.  The Company received an initial payment of $15,242, with the remaining amount due of $715,000 to be paid in a lump sum within a year from the date of sale.  The gain was included as a part of realized gains on investments and other assets in the Company's condensed consolidated statement for the year ended December 31, 2007. In September of 2008, the Company foreclosed on the Utopia Development loan. In October 2008, the Colonial property was sold to RTTTA, LLC for $650,000 in cash, less selling costs of $26,079. The reduction of the 2007 gain by $91,079 was recorded as a loss in 2008.

 

8

---

 

 

Acquisition of C & J Financial

On July 16, 2007, the Company completed a purchase transaction with C & J Financial, LLC, an Alabama limited liability company ("C & J Financial").  C & J Financial operates a factoring business with offices in Rainbow City, Alabama, with an emphasis on providing financing for funeral homes and mortuaries.  Under the terms of the Unit Purchase Agreement dated July 16, 2007, (the "Purchase Agreement") among the Company, C & J Financial, Henry Culp, Jr. ("Culp") and Culp Industries, Inc. ("Culp Industries"), the Company purchased all of the outstanding member units of C & J Financial for a purchase consideration of (i) $1,250,000 in cash, (ii) a promissory note from the Company to Culp in the amount of $381,500 plus interest at the rate of 5% per annum, payable over a period of 24 months in monthly payments of $16,737, including interest, until paid in full, and (iii) a quit claim deed from C & J Financial to Culp, conveying ownership of the building and surrounding property located in the Jester Commercial Park in Rainbow City, Alabama, where C & J Financial currently maintains its business offices.  At closing, Culp Industries entered into a lease agreement with C & J Financial to lease to C & J Financial approximately 5,000 square feet in the building located at the Jester Commercial Park.  The lease is for a term of three years for which C & J Financial, as tenant, is required to make monthly payments of $1,200, for a total lease payment of $43,200.

The Purchase Agreement additionally required Culp to deliver to the Company at closing a promissory note in the principal amount of $1,755,236 plus interest at the rate of 8.25% per annum from C & J Financial, as borrower, to Culp, as lender, with such note to be cancelled and marked "paid in full".  Moreover, the agreement provided for the possibility of adjustments.  If the total equity on the balance sheet of C & J Financial as of May 31, 2007, defined as total assets minus total liabilities, is greater than the amount of the equity on the balance sheet of C & J Financial as of the closing date, or July 16, 2007, Culp agrees to pay to the Company the difference between the total equity on the balance sheet as of May 31, 2007 and the total equity on the balance sheet as of July 16, 2007 by reducing the amount of the note by such difference in the amounts of the total equity on such balance sheets. The total equity on the balance sheet of C & J Financial as of July 16, 2007 was $47,000 less than the total equity on the balance sheet as of May 31, 2007, which resulted in a $47,000 reduction of the note.

At June 30, 2007, the total assets of C & J Financial were $3,197,000 and total liabilities were $3,526,000, which includes the Note to Culp in the amount of $1,755,000 that was cancelled at closing.  For the seven month period from November 1, 2006 to May 31, 2007, total revenues of C & J Financial were $775,000 and total expenses were $764,000, resulting in net income of $11,000.  For the fiscal year ended October 31, 2006, total revenues of C & J Financial were $1,397,000 and total expenses were $1,351,000, resulting in net income of $46,000.  For the fiscal year ended October 31, 2005, total revenues of C & J Financial were $1,137,000 and total expenses were $1,114,000, resulting in net income of $23,000.  The Company anticipates utilizing the employees and operations of C & J Financial to expand its fast funding operations, which provide financing for funeral homes and mortuaries.

Acquisition of Capital Reserve Life Insurance Company

On December 20, 2007, the Company, through its wholly owned subsidiary, Security National Life, completed a stock purchase transaction with Capital Reserve Life Insurance Company, a Missouri domiciled insurance company ("Capital Reserve"), and its shareholders to purchase all of the outstanding shares of common stock of Capital Reserve from its shareholders.  Under the terms of the stock purchase agreement, Security National Life Insurance Company paid the shareholders of Capital Reserve at closing purchase consideration equal to the capital and surplus of Capital Reserve as of September 30, 2007 in the amount of $1,271,327, plus the interest maintenance reserve in the amount of $30,667 and the asset valuation reserve in the amount of $212,393 as of September 30, 2007, plus $1,037,967, or a total of $2,521,687, less certain adjustments.

The adjustments to the purchase consideration consisted of $220,926 in losses related to a litigation matter involving Capital Reserve; $152,269, representing the difference between Capital Reserve's adjusted capital and surplus at closing and Capital Reserve's adjusted capital and surplus on September 30, 2007; and $185,902 being held in escrow, which is equal to the book value of a corporate bond held by Capital Reserve at closing.  The company issuing the bond filed for bankruptcy prior to the closing of the transaction and the amount in escrow will reimburse Security National Life for any losses from the bond.

 

9

---

 

 

As the of December 31, 2006, Capital Reserve had 10,851 policies in force and approximately 30 agents.  For the year ended December 31, 2006, Capital Reserve had revenues of $5,663,000 and a net loss of $244,000.  As of December 31, 2006, the statutory assets and the capital and surplus of Capital Reserve were $24,084,000 and $1,960,000, respectively.

At the closing of the transaction, Security National Life and Capital Reserve entered into a reinsurance agreement to reinsure the majority of the in force business of Capital Reserve, as reinsurer, to the extent permitted by the Missouri Department of Insurance.  Under the terms of the reinsurance agreement, Security National Life  paid a ceding commission to Capital Reserve in the amount of $1,738,000.  In addition, following the payment of the ceding commission, Capital Reserve declared a dividend to Security National Life in the amount of $1,738,000.  The Missouri Insurance Department approved both the reinsurance agreement and the dividend payment.  The dividend payment was approved subject to Capital Reserve maintaining capital and surplus of at least $1,500,000.

As a result of the reinsurance agreement, certain insurance business and operations of Capital Reserve were transferred to Security National Life, including all policies in force as of the effective date thereof.  Any future business by Capital Reserve is covered by this reinsurance agreement.  Consequently, except for capital and surplus of $1,500,000, approximately $23,500,000 in assets and liabilities were transferred from Capital Reserve to Security National Life pursuant to the reinsurance agreement.  Following the closing of the transaction, Capital Reserve has continued to sell and service life insurance, annuity products, accident and health insurance, and funeral plan insurance.

Liquidation of Southern Security Life Insurance Company, formerly a Florida domiciled insurance company

On December 24, 2007, Southern Security Life Insurance Company, a Florida domiciled insurance company, was liquidated when Articles of Dissolution were filed with the Florida Division of Corporations.  Prior to the liquidation, Southern Security Life was a wholly owned subsidiary of Security National Life.  Southern Security Life was incorporated under Florida law in 1966 and was licensed and commenced business in 1969.  The industry segment of Southern Security Life was life, accident and health, and annuity business.  During 2006 approximately 40% of the premium income of Southern Security Life was from in force business in Florida.  In 1998, Security National Life purchased 57.4% of the outstanding shares of Southern Security Life.  During the period from January 21, 1999 to April 10, 2003, Security National Life purchased an additional 19.3% of the outstanding shares of Southern Security Life.  In January 2005, Security National Life Insurance Company purchased the remaining outstanding shares of Southern Security Life by means of a merger transaction, which resulted in Southern Security Life becoming a wholly owned subsidiary of Security National Life.

Southern Security Life was liquidated in accordance with the terms of the Agreement and Plan of Complete Liquidation, which the Board of Directors of Security National Life approved on December 12, 2005.  Under the terms of the agreement, Southern Security Life was liquidated into Security National Life in essentially the same manner as the liquidation described in Private Letter Ruling 9847027 in order to achieve the same tax treatment and consequences under Section 332 of the Internal Revenue Code of 1986, as amended, and other applicable provisions described in such letter ruling.  Pursuant to the Agreement and Plan of Complete Liquidation, all of the insurance business and operations of Southern Security Life, including $48,528,000 in assets and liabilities, were transferred to Security National Life on December 28, 2005, by means of a reinsurance agreement.  Southern Security Life’s remaining assets, including its capital and surplus, were transferred to Security National Life, effective as of December 29, 2006.

  Acquisition of Southern Security Life Insurance Company, a Mississippi Insurance Company

On December 18, 2008, Security National Financial Corporation, through its wholly owned subsidiary, Security National Life, completed a stock purchase transaction with Southern Security Life Insurance Company, a Mississippi domiciled insurance company ("Southern Security"), and its shareholders to purchase all of the outstanding shares of common stock of Southern Security from its shareholders.  Under the terms of the transaction as set forth in the Stock Purchase Agreement among Security National Life, Southern Security and the shareholders of Southern Security, Security National Life paid to the shareholders of Southern Security purchase consideration equal to $1,352,134, representing the capital and surplus, interest maintenance reserve, and asset valuation reserve of Southern Security as of September 1, 2008, the date that Security National Life assumed administrative control over Southern Security, plus $1,500,000, representing the ceding commission that had been paid on August 29, 2008, plus $75,883, representing an allowance for the actual losses experienced by Southern Security in the second quarter ended June 30, 2008, less certain adjustments.  Thus, the total purchase price before adjustments was $2,928,022.

 

10

---

 

 

As of December 31, 2007, Southern Security had 24,323 policies in force and approximately 393 agents.  For the year ended December 31, 2007, Southern Security had revenues of $4,231,000 and a net loss of $496,000.  As of December 31, 2007, the statutory assets and the capital and surplus of Southern Security were $24,402,000 and $758,000, respectively.  As of June 30, 2008, the statutory assets and the capital and surplus of Southern Security were $24,780,000 and $713,000, respectively.

As adjustments to the purchase consideration, the shareholders of Southern Security deposited at closing $175,000 of the purchase consideration into an interest bearing escrow account as the deposit amount (the "Deposit Amount"). This Deposit Amount is to be held for a period of six months from the closing date ("the Holdback Period") and used to pay the amount of any adjustments required under the terms of the Stock Purchase Agreement. At the end of the Holdback Period, the escrow agent agrees to transfer the remaining amounts of the Deposit Amount, following the payment of any adjustments, into a real estate deposit account to be held and distributed in accordance with the items of the escrow agreement. The shareholders additionally deposited at closing $268,500 of the purchase consideration into an interest bearing escrow account as the real estate deposit amount (the "Real Estate Deposit Amount").  This Real Estate Deposit Amount represents about 50% of the total outstanding balance on a  loan that Southern Security made to Wade Nowell Funeral Homes, Inc. in the form of a promissory note, which note is secured by a  funeral home property in Collins, Mississippi.  The Real Estate Deposit Amount will be increased by the amount of funds transferred from the Deposit Amount at the end of the Holdback Period.

The shareholders have granted to Security National Life a security interest in the Real Estate Deposit Amount to secure payment of the promissory note also secured by the funeral home in Collins, Mississippi.  Beginning on September 1, 2009, the escrow agent agrees to release to the shareholders on a pro rata basis an amount equal to the principal reduction of the promissory note that has occurred during the preceding August 1 through July 31 period, until such time as the Real Estate Deposit Amount (including funds transferred from the Deposit Amount) and any accrued interest, have been paid to the shareholders.  However, no payments will be made to the shareholders from the Real Estate Deposit Amount if the note is in default.  In the event there is a default in the payment of the note, Security National Life has the right to receive payment from the Real Estate Deposit Amount for the amount of such default or to foreclose on the note pursuant to the terms thereunder and to receive payment from the Real Estate Deposit Amount in an amount equal to the full amount of any losses and expenses incurred by Security National Life as a result of such default and enforcement of its rights pursuant thereto.  The shareholders have the right to refinance the existing debt on the note.

As further adjustments, Southern Security transferred its interest in a certain trust, known as the Nowell Legacy Trust, to the shareholders at closing and the purchase consideration to be paid to the shareholders was reduced by $316,026, the admitted value of the trust as reflected in the financial statements of Southern Security on September 1, 2008, the date that Security National Life assumed administrative control over Southern Security under the terms of the Stock Purchase Agreement.  Finally, the purchase consideration was reduced by $84,081 for payments that Security National Life made in behalf of the shareholders for legal and accounting fees and other expenses, and by $163,715 at the instruction of the shareholders to pay off a promissory note with Ray-Nowell Funeral Home, Inc., which was secured by funeral home properties in Senatobia, Mississippi.

The Stock Purchase Agreement further provides that Security National Life and Southern Security each agree to enter into a reinsurance agreement contemporaneous with the execution of such Stock Purchase Agreement.  Under the terms of this reinsurance agreement, Security National Life is required to reinsure all of the in force and future insurance liabilities of Southern Security.   Security National Life will also assume complete administrative control of all of the then current and future insurance related business operations of Southern Security at such time as Security National Life notifies Southern Security in writing that it is capable of assuming administrative control over such insurance related business operations, provided Security National Life assumes administrative control no later than September 1, 2008. On September 1, 2008, Security National Life assumed said administrative control over the insurance related operations of Southern Security.

On August 29, 2008, in furtherance of the requirements of the Stock Purchase Agreement, Security National Life and Southern Security entered into a reinsurance agreement (the “Reinsurance Agreement”) to reinsure the majority of the in force business of Southern Security, as reinsurer, to the extent permitted by the Mississippi Department of Insurance.  Pursuant to the terms of the Reinsurance Agreement, Security National Life paid a ceding commission to Southern Security in the amount of $1,500,000.

 

11

---

 

 

As a result of the Reinsurance Agreement, certain insurance business and operations of Southern Security were transferred to Security National Life, including all policies in force as of the administrative control date.  Any future business by Southern Security would be covered by this Reinsurance Agreement.  As of September 1, 2008, when Security National Life assumed administrative control over the insurance related business operations of Southern Security, Southern Security transferred approximately $23,600,000 in assets and liabilities to Wachovia Bank, N.A. of St. Louis, Missouri, as custodian for Security National Life pursuant to the Reinsurance Agreement and the Custodial Agreement among Southern Security, Security National Life, and Wachovia Bank N.A.  Following the completion of the stock purchase transaction, Southern Security has continued to sell and service life insurance, annuity products, and funeral plan insurance.

Regulation

The Company’s insurance subsidiaries, Security National Life, Security National Life of Louisiana, Memorial Insurance Company of America (“Memorial Insurance Company”), Capital Reserve Life and Southern Security are subject to comprehensive regulation in the jurisdictions in which they do business under statutes and regulations administered by state insurance commissioners. Such regulation relates to, among other things, prior approval of the acquisition of a controlling interest in an insurance company; standards of solvency which must be met and maintained; licensing of insurers and their agents; nature of and limitations on investments; deposits of securities for the benefit of policyholders; approval of policy forms and premium rates; periodic examinations of the affairs of insurance companies; annual and other reports required to be filed on the financial condition of insurers or for other purposes; and requirements regarding aggregate reserves for life policies and annuity contracts, policy claims, unearned premiums, and other matters. The Company’s insurance subsidiaries are subject to this type of regulation in any state in which they are licensed to do business. Such regulation could involve additional costs, restrict operations or delay implementation of the Company’s business plans.

The Company is currently subject to regulation in Utah, Louisiana, Arkansas, Mississippi and Missouri under insurance holding company legislation, and other states where applicable. Generally, intercompany transfers of assets and dividend payments from insurance subsidiaries are subject to prior notice of approval from the state insurance department,  if they are deemed “extraordinary” under these statutes. The insurance subsidiaries are required, under state insurance laws, to file detailed annual reports with the supervisory agencies in each of the states in which they do business. Their business and accounts are also subject to examination by these agencies.

The Company’s cemetery and mortuary subsidiaries are subject to the Federal Trade Commission’s comprehensive funeral industry rules and to state regulations in the various states where such operations are domiciled. The morticians must be licensed by the respective state in which they provide their services. Similarly, the mortuaries and cemeteries are governed and licensed by state statutes and city ordinances in Utah, Arizona and California. Reports are required to be kept on file on a yearly basis which include financial information concerning the number of spaces sold and, where applicable, funds provided to the Endowment Care Trust Fund. Licenses are issued annually on the basis of such reports. The cemeteries maintain city or county licenses where they conduct business.

The Company’s mortgage loan subsidiary, SecurityNational Mortgage, is subject to the rules and regulations of the U.S. Department of Housing and Urban Development and to various state licensing acts and regulations. These regulations, among other things, specify minimum capital requirements, the procedures for the origination, the underwriting, the licensing of wholesale brokers, quality review audits and the amounts that can be charged to borrowers for all FHA and VA loans. Each year, the Company must have an audit by an independent registered public accounting firm to verify compliance under these regulations. In addition to the government regulations, the Company must meet loan requirements of various investors who purchase the loans.

Income Taxes

The Company’s insurance subsidiaries, Security National Life, Security National Life of Louisiana, Memorial Insurance Company, Capital Reserve Life and Southern Security are taxed under the Life Insurance Company Tax Act of 1984. Under the act, life insurance companies are taxed at standard corporate rates on life insurance company taxable income. Life insurance company taxable income is gross income less general business deductions, reserves for future policyholder benefits (with modifications), and a small life insurance company deduction (up to 60% of life insurance company taxable income). The Company may be subject to the corporate Alternative Minimum Tax (AMT). The exposure to AMT is primarily a result of the small life insurance company deduction. Also, under the Tax Reform Act of 1986, distributions in excess of stockholders’ surplus account or a significant decrease in life reserves will result in taxable income.

 

12

---

 

 

Security National Life, Security National Life of Louisiana, Memorial Insurance Company, Capital Reserve Life and Southern Security may continue to receive the benefit of the small life insurance company deduction. In order to qualify for the small company deduction, the combined assets of the Company must be less than $500,000,000 and the taxable income of the life insurance companies must be less than $3,000,000. To the extent that the net income limitation is exceeded, then the small life insurance company deduction is phased out over the next $12,000,000 of life insurance company taxable income.

Since 1990 Security National Life, Security National Life of Louisiana, Memorial Insurance Company, Capital Reserve Life and Southern Security have computed their life insurance taxable income after establishing a provision representing a portion of the costs of acquisition of such life insurance business. The effect of the provision is that a certain percentage of the Company’s premium income is characterized as deferred expenses and recognized over a five to ten year period.

The Company’s non-life insurance company subsidiaries are taxed in general under the regular corporate tax provisions. For taxable years beginning January 1, 1987, the Company may be subject to the Corporate Alternative Minimum Tax and the proportionate disallowance rules for installment sales under the Tax Reform Act of 1986.

Competition

The life insurance industry is highly competitive. There are approximately 2,000 legal reserve life insurance companies in business in the United States. These insurance companies differentiate themselves through marketing techniques, product features, price and customer service. The Company’s insurance subsidiaries compete with a large number of insurance companies, many of which have greater financial resources, a longer business history, and more diversified line of insurance coverage than the Company. In addition, such companies generally have a larger sales force. Further, many of the companies with which the Company competes are mutual companies which may have a competitive advantage because all profits accrue to policyholders. Because the Company is small by industry standards and lacks broad diversification of risk, it may be more vulnerable to losses than larger, better-established companies. The Company believes that its policies and rates for the markets it serves are generally competitive.

The cemetery and mortuary industry is also highly competitive. In Salt Lake City, Phoenix and San Diego areas where the Company competes, there are a number of cemeteries and mortuaries which have longer business histories, more established positions in the community, and stronger financial positions than the Company. In addition, some of the cemeteries with which the Company must compete for sales are owned by municipalities and, as a result, can offer lower prices than can the Company. The Company bears the cost of a pre-need sales program that is not incurred by those competitors which do not have a pre-need sales force. The Company believes that its products and prices are generally competitive with those in the industry.

The mortgage loan industry is highly competitive with a number of mortgage companies and banks in the same geographic area in which the Company is operating. The mortgage market in general is sensitive to changes in interest rates and the refinancing market is particularly vulnerable to changes in interest rates.

Employees

As of December 31, 2008, the Company had ­619 full-time and 136 part-time employees.

 

 

13

---

 

Item 2. Properties

The following table sets forth the location of the Company’s office facilities and certain other information relating to these properties.

			Approximate
		Owned	Square
Location	Function	Leased	Footage
5300 South 360 West	Corporate Headquarters	Owned (1)	27,200
Salt Lake City, Utah
634 West Main Street	Insurance Operations	Owned	3,000
Blytheville, Arkansas
755 Rinehart Road	Mortgage Sales	Owned (2)	3,500
Lake Mary, Florida
3935 I-55 South, Frontage Road	Insurance Operations	Owned (3)	12,000
Jackson, Mississippi
175 Jester Parkway	Fast Funding Operations	Leased (4)	5,000
Rainbow City, Alabama
410 North 44th Street, Suite 190	Mortgage Sales	Leased (5)	1,800
Phoenix, Arizona
4634 Town Center Blvd., Suite 314	Mortgage Sales	Leased (6)	600
Eldorado Hills, California
12150 Tributary Point Dr., Suite 160	Mortgage Sales	Leased (7)	2,000
Gold River, California
16835 West Bernardo Drive, Suite 150	Mortgage Sales	Leased (8)	1,300
San Diego, California
27433 Tourney Road, Suites 130, 220	Mortgage Sales	Leased (9)	2,500
Santa Clarita, California
550 West Cienega, Suite H	Mortgage Sales	Leased (10)	2,600
San Dimas, California
2441 West SR 426, Suite 1051	Mortgage Sales	Leased (11)	900
Oviedo, Florida

 

 

14

---

 

Item 2. Properties (Continued)

			Approximate
		Owned	Square
Location	Function	Leased	Footage
8950 Dr. MLK St. N., Suite 103	Mortgage Sales	Leased (12)	3,500
St. Petersburg, Florida
970 No. Kalaheo, Suite A-102	Mortgage Sales	Leased (13)	1,800
Kailua, Hawaii
45 South Park Blvd., Suite 45	Mortgage Sales	Leased (14)	4,800
Greenwood, Indiana
6900 College Blvd., Suite 950	Mortgage Sales	Leased (15)	1,900
Overland Park, Kansas
2500 Regency Parkway	Mortgage Sales	Leased (16)	500
Cary, North Carolina
4045 NW 64th Street, Suite 500	Mortgage Sales	Leased (17)	3,500
Oklahoma City, Oklahoma
999 Southwest Disk Drive, Suite 104	Mortgage Sales	Leased (18)	2,600
Bend, Oregon
4800 SW Griffith Drive, Suite 250	Mortgage Sales	Leased (19)	2,700
Beaverton, Oregon
6805 Capital of Texas Highway, Suite 315	Mortgage Sales	Leased (20)	2,300
Austin, Texas
12750 Merit Drive, Suite 1212	Mortgage Sales	Leased (21)	2,600
Dallas, Texas
5353 W. Sam Houston Parkway N., Suite 170	Mortgage Sales	Leased (22)	5,400
Houston, Texas
613 Northwest Loop 410, Suite 685	Mortgage Sales	Leased (23)	2,300
San Antonio, Texas
6955 and 6975 South Union Park,	Mortgage Sales	Leased (24)	7,000
Suites 100 and 150
Midvale, Utah
5247 Greenpine Drive	Insurance Operations	Owned (25)	9,100
Murray, Utah
5251 Green Street, Suite 350	Mortgage Sales	Owned (26)	5,800
Salt Lake City, Utah
6740 South 1300 East, Suite 100	Mortgage Sales	Leased (27)	3,200
Salt Lake City, Utah

 

 

15

---

 

Item 2. Properties (Continued)

			Approximate
		Owned	Square
Location	Function	Leased	Footage
970 East Murray-Holladay Rd.,	Mortgage Sales	Leased (28)	6,400
Suite 603
Salt Lake City, Utah
474 West 800 North, Suite 102	Mortgage Sales	Leased (29)	2,000
Orem, Utah
1173 South 250 West, Suite 107B	Mortgage Sales	Leased (30)	200
St. George, Utah
1244 North Main Street, Suite 203	Mortgage Sales	Leased (31)	1,200
Tooele, Utah
3500-188th Street, S.W. Suite 275	Mortgage Sales	Leased (32)	1,000
Lynnwood, Washington
501 7th Street North, Suite 10	Insurance Operations	Leased (33)	1,200
Columbus, Mississippi

(1)

The Company leases an additional 3,000 square feet of the facility to unrelated third parties for approximately $47,500 per year, under leases expiring at various dates after 2008.

(2)

The Company leases an additional 9,100 square feet of the facility to unrelated third parties for approximately $196,200 per year, under leases expiring at various dates after 2008.

(3)

The building is located on 104 undeveloped acres.

(4)

The Company leases this facility for $14,400 per year. The lease expires in July 2010.

(5)

The Company leases this facility for $42,500 per year. The lease expires in October 2009

(6)

The Company leases this facility for $28,000 per year. The lease expires in July 2009

(7)

The Company leases this facility for $49,900 per year. The lease expires in June 2009

(8)

The Company leases this facility for $64,700 per year. The lease expires in December 2011.

	(9)	The Company leases this facility for $106,300 per year. The lease expires in February 2012.
	(10)	The Company leases this facility for $30,200 per year. The lease expires in February 2011.
	(11)	The Company leases this facility for $16,700 per year. The lease expires in June 2009.
	(12)	The Company leases this facility for $67,000 per year. The lease expires in March 2011.
	(13)	The Company leases this facility for $43,000 per year. The lease expires in February 2011.
	(14)	The Company leases this facility for $68,700 per year, but subleases approximately half for $30,000 per year. The lease expires in April 2012.
	(15)	The Company leases this facility for $39,100 per year. The lease expires in January 2010.
	(16)	The Company leases this facility for $30,000 per year. The lease expires in March 2009.
	(17)	The Company leases this facility for $49,700 per year. The lease expires in March 2010.
	(18)	The Company leases this facility for $40,900 per year. The lease expires in January 2012.
	(19)	The Company leases this facility for $45,600 per year. The lease expires in May 2009.
	(20)	The Company leases this facility for $48,900 per year. The lease expires in September 2011.
	(21)	The Company leases this facility for $43,100 per year. The lease expires in January 2009.
	(22)	The Company leases this facility for $64,300 per year. The lease expires in April 2013.
	(23)	The Company leases this facility for $47,500 per year. The lease expires in October 2012.
	(24)	The Company leases these facilities for $167,900 per year. The leases expire November 2011 and June 2010.
	(25)	The Company leases an additional 126,000 square feet of the facility to unrelated third parties for approximately $969,000 per year, under leases expiring at various dates after December 2008.
	(26)	The Company leases an additional 25,000 square feet of the facility to unrelated third parties for approximately $470,700 per year, under leases expiring at various dates after December 2008.

 

 

16

---

 

 

Item 2. Properties (Continued)

(27)

The Company leases this facility for $70,900 per year. The lease expires in August 2012

(28)

The Company leases this facility for $79,500 per year, with a month-to-month lease.

(29)

The Company leases this facility for $43,400 per year.  The lease expires in February 2010

(30)

The Company leases this facility for $6,600 per year.  With a month-to-month lease.

(31)

The Company leases this facility for $26,400 per year.  The lease expires in October 2010.

(32)

The Company leases this facility for $18,100 per year.  The lease expires in June 2010.

(33)

The Company leases this facility for $7,100 per year. The lease expires in June 2009.

The Company believes the office facilities it occupies are in good operating condition and adequate for current operations, and has no plans to build or acquire additional office facilities. The Company believes its office facilities are adequate for handling its business in the foreseeable future. As leases expire the Company will either renew or find comparable leases or acquire additional office space.

The following table summarizes the location and acreage of the six Company owned cemeteries, each of which includes one or more mausoleums:

				Net Saleable Acreage
Name of Cemetery	Location	Date Acquired	Developed Acreage (1)	Total Acreage (1)	Acres Sold as Cemetery Spaces (2)	Total Available Acreage (1)
Memorial Estates, Inc.
Lakeview Cemetery	1640 East Lakeview Drive Bountiful, Utah	1973	7	40	6	34
Mountain View Cemetery	3115 East 7800 South Salt Lake City, Utah	1973	15	54	14	40
Redwood Cemetery (4)	6500 South Redwood Road West Jordan, Utah	1973	27	78	28	50
Cottonwood Mortuary, Inc.
Deseret Memorial Inc. Lake Hills Cemetery (3)	10055 South State Street Sandy, Utah	1991	9	41	4	37
Holladay Memorial Park (3)(4)	4900 South Memory Lane Holladay, Utah	1991	5	14	4	10
California Memorial Estates
Singing Hills Memorial Park (5)	2800 Dehesa Road El Cajon, California	1995	8	35	4	31

(1)

The acreage represents estimates of acres that are based upon survey reports, title reports, appraisal reports or the Company’s inspection of the cemeteries.

(2)

Includes spaces sold for cash and installment contract sales.

(3)

As of December 31, 2008, there were mortgages of approximately $1,227,000 collateralized by the property and facilities at Deseret Mortuary, Cottonwood Mortuary, Holladay Memorial Park, and Lakehills Cemetery.

(4)

These cemeteries include two granite mausoleums.

(5)

As of December 31, 2008, there was a mortgage of approximately $58,000, collateralized by the property

 

17

---

 

Item 2. Properties (Continued)

The following table summarizes the location, square footage and the number of viewing rooms and chapels of the eleven Company owned mortuaries:

Name of		Date	Viewing		Square
Mortuary	Location	Acquired	Room(s)	Chapel(s)	Footage
Memorial Mortuary	5850 South 900 East
	Murray, Utah	1973	3	1	20,000
Memorial Estates, Inc.:
Redwood Mortuary(3)	6500 South Redwood Rd.
	West Jordan, Utah	1973	2	1	10,000
Mountain View Mortuary(3)	3115 East 7800 South
	Salt Lake City, Utah	1973	2	1	16,000
Lakeview Mortuary(3)	1640 East Lakeview Dr.
	Bountiful, Utah	1973	0	1	5,500
Paradise Chapel     Funeral Home	3934 East Indian
	School Road
	Phoenix, Arizona	1989	2	1	9,800
Deseret Memorial, Inc.:
Deseret Mortuary(1)	36 East 700 South
	Salt Lake City, Utah	1991	2	2	36,300
Lakehills Mortuary(3)	10055 South State St.
	Sandy, Utah	1991	2	1	18,000
Cottonwood Mortuary(1)(3)	4670 South Highland Dr.
	Holladay, Utah	1991	2	1	14,500
Greer-Wilson Funeral Home	5921 West Thomas Road
	Phoenix, Arizona	1995	2	2	25,000
Adobe Funeral Home(4)	218 North Central
	Avondale, Arizona	1995	1	1	1,850
Crystal Rose Funeral Home(2)	9155 W. VanBuren
	Tolleson, Arizona	1997	0	1	9,000

 

(1)

As of December 31, 2008, there were mortgages of approximately $1,227,000, collateralized by the property and facilities at Deseret Mortuary, Cottonwood Mortuary, Holladay Memorial Park and Lakehills Cemetery.

	(2)	As of December 31, 2008, there was a mortgage of approximately $86,000, collateralized by the property and facilities of Crystal Rose Funeral Home.
	(3)	These funeral homes also provide burial niches at their respective locations.
	(4)	As of December 31, 2008, there was a mortgage of approximately $107,000, collateralized by the property and facilities of Adobe Chapel Funeral Home.

          

 

18

---

 

 

Item 3. Legal Proceedings

On March 5, 2007, the Company received a proposed consent order from the Florida Office of Insurance Regulation concerning the New Success Life Program, the higher education product previously marketed and sold by Southern Security Life and now marketed and sold by Security National Life. The proposed order states that as a result of an investigation the Florida Office of Insurance Regulation has determined that Southern Security Life violated Florida law (i) by knowingly making statements, sales presentations, omissions or comparisons that misrepresented the benefits, advantages, or terms of the New Success Life Program, and (ii) by knowingly making advertisements, announcements, or statements containing representations that were untrue or misleading.

The proposed order would require Security National Life and Southern Security Life to immediately cease and desist from making any false or misleading representations to Florida consumers suggesting that the New Success Life Program would accumulate enough value to pay for college expenses in full. The proposed order would also require Security National Life and Southern Security Life to agree to no longer market or sell the New Success Life Program in the State of Florida. In addition, Security National Life and Southern Security Life would be required to send a written notice to Florida consumers who purchased the New Success Life Program on or after January 1, 1998 stating that the higher education program is a whole life insurance product, with a term and annuity rider, and not a college trust fund, savings plan, or other program, and it may not necessarily pay college expenses in full from the accumulated value.

Moreover, the written notice is to provide an opportunity for the Florida consumers who purchased the New Success Life Program on or after January 1, 1998 to cancel their policy and be given a full refund, including all premiums paid, together with interest at the agreed upon rate in the original contract. If each of the Florida consumers who purchased the New Success Life Program after January 1, 1998 was to cancel his or her policy and receive a refund, the cost to the Company to refund all premiums paid, including interest, would be approximately $8,200,000.

The proposed consent order would also require Security National Life and Southern Security Life to issue refunds including interest to the eleven policyholders whose affidavits were taken in connection with the administrative complaint that the Florida Office of the Insurance Regulation had previously filed against Franz Wallace, the former National Sales Director of Southern Security Life. Security National Life and Southern Security Life would additionally be required to issue refunds, including interest, to any Florida policyholder in the New Success Life Program who had filed a complaint with the Florida Department of Financial Services or whose coverage had lapsed. Furthermore, Security National Life and Southern Security Life would be required to notify the state insurance department in each state in which the New Success Life Program is marketed of the order and any complaint that Southern Security Life received relating to the New Success Life Program from policyholders in that state. Finally, Security National Life and Southern Security Life would be required to pay the Florida Office of Insurance Regulation a penalty of $100,000 and administrative costs of $5,000.

The Company disputes the terms of the proposed consent order. The Company is not aware of specific concerns that the Florida Office of Insurance Regulation has with the New Success Life Program because it has received no specific administrative complaint from the Florida Office nor is it aware of any recent market conduct  examination that the Florida Office has conducted relative to the program. The Company intends to vigorously oppose the proposed consent order. The Company has engaged in discussions with the Florida Office of Insurance Regulation in an effort to settle the dispute concerning the proposed order.  If the Company is unable to reach a satisfactory resolution with the Florida Office with respect to the terms of the proposed consent order and the Florida Office of Insurance Regulation issues a similar order, the Company intends to take action necessary to protect its rights and interests, including requesting a hearing before an administrative law judge to oppose the order.

Except for the proposed consent order from the Florida Office of Insurance Regulation, the Company is not a party to any material proceedings outside the ordinary course of business or to any other legal proceedings, which if adversely determined, would have a material adverse effect on its financial condition or results of operation.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of the Company’s shareholders during the quarter ended December 31, 2008.

 

19

---

 

PART II

Item 5. Market for the Registrant’s Common Stock and Related Security Holder Matters

The Company’s Class A Common Stock trades on the Nasdaq National Market under the symbol “SNFCA.”  Prior to August 13, 1987, there was no active public market for the Class A and Class C Common Stock. As of March 27, 2009, the closing sales price of the Class A Common Stock was $1.90 per share. The following were the high and low market closing sales prices for the Class A Common Stock by quarter as reported by Nasdaq since January 1, 2007:

Period (Calendar Year)			Price Range (1)
			High	Low
	2007
		First Quarter	$5.40	$4.22
		Second Quarter	5.90	4.49
		Third Quarter	5.44	3.71
		Fourth Quarter	4.27	2.95
	2008
		First Quarter	$4.41	$3.00
		Second Quarter	4.22	2.89
		Third Quarter	3.92	2.14
		Fourth Quarter	2.42	1.42
	2009
		First Quarter (through March 27, 2009)	$2.23	$1.25

(1) Sales prices have been adjusted retroactively for the effect of annual stock dividends.

The Class C Common Stock is not actively traded, although there are occasional transactions in such stock by brokerage firms. (See Note 13 to the Consolidated Financial Statements.)

The Company has never paid a cash dividend on its Class A or Class C Common Stock. The Company currently anticipates that all of its earnings will be retained for use in the operation and expansion of its business and does not intend to pay any cash dividends on its Class A or Class C Common Stock in the foreseeable future. Any future determination as to cash dividends will depend upon the earnings and financial position of the Company and such other factors as the Board of Directors may deem appropriate. A 5% stock dividend on Class A and Class C Common Stock has been paid each year from 1990 through 2008.

 

20

---

 

 

The graph below compares the cumulative total stockholder return of the Company’s Class A common stock with the cumulative total return on the Standard & Poor’s 500 Stock Index and the Standard & Poor’s Insurance Index for the period from December 31, 2003 through December 31, 2008.  The graph assumes that the value of the investment in the Company’s Class A common stock and in each of the indexes was 100 at December 31, 2003 and that all dividends were reinvested.

The comparisons in the graph below are based on historical data and are not intended to forecast the possible future performance of the Company’s Class A common stock.

	12/31/03	12/31/04	12/31/05	12/31/06	12/31/07	12/31/08
SNFC	100	44	54	81	63	28
S & P 500	100	109	112	128	127	84
S & P Insurance	100	106	119	131	120	49

 

The graph set forth above is required by the Securities and Exchange Commission and shall not be deemed to be incorporated by reference by any general statement incorporating by reference this Form 10-K into any filing under the Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed soliciting material or filed under such acts.

As of December 31, 2008, there were 4,199 record holders of Class A Common Stock and 124 record holders of Class C Common Stock.

 

 

21

---

 

 

Item 6. Selected Financial Data - The Company and Subsidiaries (Consolidated)

The following selected financial data is for each of the five years ended December 31, 2008, are derived from the audited consolidated financial statements. The data as of December 31, 2008 and 2007, and for the three years ended December 31, 2008, should be read in conjunction with the consolidated financial statements, related notes and other financial information.

Consolidated Statement of Earnings Data:

		Year Ended December 31,
		2008(1)				2007(2)				2006(3)				2005				2004(4)
Revenue
Premiums		$	35,981,000			$	32,263,000			$	30,776,000			$	27,170,000			$	25,979,000
Net investment income			28,104,000				31,956,000				23,246,000				19,387,000				15,939,000
Net mortuary and cemetery sales			12,726,000				13,189,000				12,123,000				10,839,000				11,661,000
Realized (losses) gains on investments			(1,734,000	)			1,008,000				891,000				74,000				74,000
Mortgage fee income			143,412,000				130,472,000				85,113,000				71,859,000				62,690,000
Other			1,015,000				860,000				381,000				621,000				855,000
Total revenue			219,504,000				209,748,000				152,530,000				129,950,000				117,198,000
Expenses
Policyholder benefits			32,904,000				29,742,000				27,319,000				24,477,000				23,362,000
Amortization of deferred policy acquisition costs			6,010,000				5,571,000				4,125,000				3,031,000				4,602,000
Selling, general and administrative expenses			169,973,000				155,504,000				105,728,000				90,690,000				82,097,000
Interest expense			7,449,000				13,271,000				6,141,000				4,921,000				2,174,000
Cost of goods and services of the mortuaries and cemeteries			2,437,000				2,537,000				2,322,000				2,103,000				2,304,000
Total benefits and expenses			218,773,000				206,625,000				145,635,000				125,222,000				114,539,000
Income before income tax expense			731,000				3,123,000				6,895,000				4,728,000				2,659,000
Income tax expense			(156,000	)			(858,000	)			(1,771,000	)			(1,240,000	)			(652,000	)
Minority interest in (income) loss of subsidiary			--				--				--				--				115,000
Net earnings		$	575,000			$	2,265,000			$	5,124,000			$	3,488,000			$	2,122,000
Net earnings per common share (5)		$	0.07			$	0.28			$	0.66			$	0.45			$	0.28
Weighted average outstanding common shares (5)			8,160,000				8,011,000				7,808,000				7,734,000				7,704,000
Net earnings per common share-assuming dilution (5)		$	0.07			$	0.28			$	0.64			$	0.45			$	0.27
Weighted average outstanding common shares-assuming dilution (5)			8,160,000				8,200,000				7,975,000				7,768,000				7,943,000

 

 

22

---

 

 

Item 6. Selected Financial Data - The Company and Subsidiaries (Consolidated) (Continued)

Balance Sheet Data: