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Note 13 - Revenue from Contracts with Customers
 3 Months Ended
Mar. 31, 2023
Notes to Financial Statements  
Revenue from Contract with Customer [Text Block]

NOTE 13 REVENUE FROM CONTRACTS WITH CUSTOMERS

 

Revenue from contracts with customers relates to the Extended Warranty and Kingsway Search Xcelerator segments and includes: vehicle service agreement fees, guaranteed asset protection products ("GAP") commissions, maintenance support service fees, warranty product commissions, homebuilder warranty service fees, homebuilder warranty commissions and business services consulting revenue.  Revenue is based on terms of various agreements with credit unions, consumers, businesses and homebuilders. Customers either pay in full at the inception of a warranty contract, commission product sale, or when consulting services are billed, or on terms subject to the Company’s customary credit reviews.

 

The following table disaggregates revenues from contracts with customers by revenue type:

 

(in thousands)

  

Three months ended March 31,

 
   

2023

  

2022

 
          

Vehicle service agreement fees and GAP commissions

IWS, Geminus and PWI

 $14,835  $13,303 

Maintenance support service fees

Trinity

  954   1,798 

Warranty product commissions

Trinity

  882   1,132 

Homebuilder warranty service fees

PWSC (a)

  —   1,816 

Homebuilder warranty commissions

PWSC (a)

  —   237 

Business services consulting fees

Ravix, Csuite and SNS

  9,718   4,170 

Service fee and commission revenue

 $26,389  $22,456 

 

 (a)The Company disposed of PWSC on July 29, 2022 

  

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2023

 

Vehicle service agreement fees include the fees collected to cover the costs of future automobile mechanical breakdown claims and the associated administration of those claims. Vehicle service agreement fees are earned over the duration of the vehicle service agreement contracts as the single performance obligation is satisfied. Vehicle service agreement fees are initially recorded as deferred service fees with revenues recognized over the term of the contract based on the proportion of expected claims to total overall claims to be incurred over the life of the contract.  The Company believes this reasonably represents the transfer of services to the vehicle service contract holder over the warranty term. The Company compares the remaining deferred service fees balance to the estimated amount of expected future claims under the vehicle service agreement contracts and records an additional accrual if the deferred service fees balance is less than expected future claims costs.

 

In certain jurisdictions the Company is required to refund to a customer a pro-rata share of the vehicle service agreement fees if a customer cancels the agreement prior to the end of the term. Depending on the jurisdiction, the Company may be entitled to deduct from the refund a cancellation fee and/or amounts for claims incurred prior to cancellation. While refunds vary depending on the term and type of product offered, historically refunds have averaged 9% to 13% of the original amount of the vehicle service agreement fee. Revenues recorded by the Company are net of variable consideration related to refunds and the associated refund liability is included in accrued expenses and other liabilities. The Company estimates refunds based on the actual historical refund rates by warranty type taking into consideration current observable refund trends in estimating the expected amount of future customer refunds to be paid at each reporting period.

 

Maintenance support service fees include the service fees collected to administer equipment breakdown and maintenance support services and are earned as services are rendered.

 

Warranty product commissions include the commissions from the sale of warranty contracts for certain new and used heating, ventilation, air conditioning ("HVAC"), standby generator, commercial LED lighting and commercial refrigeration equipment. The Company acts as an agent on behalf of the third-party insurance companies that underwrite and guaranty these warranty contracts. The Company does not guaranty the performance underlying the warranty contracts it sells. Warranty product commissions are earned at the time of the warranty product sales.

 

Homebuilder warranty service fees in 2022 include fees collected from the sale of warranties issued by new homebuilders. The Company received a single warranty service fee as its transaction price at the time it entered into a written contract with each of its builder customers. Each contract contained two separate performance obligations - warranty administrative services and other warranty services. Warranty administrative services include enrolling each home sold by the builder into the program and the warranty administrative system and delivering the warranty product. Other warranty services include answering builder or homeowner questions regarding the home warranty and dispute resolution services.

 

Homebuilder warranty commissions in 2022 include commissions from the sale of warranty contracts for those builders who have requested and receive insurance backing of their warranty obligations. The Company acted as an agent on behalf of the third-party insurance company that underwrites and guaranties these warranty contracts. Homebuilder warranty commissions were earned on the certification date, which is typically the date of the closing of the sale of the home to the buyer. The Company also earned fees to manage remediation or repair services related to claims on insurance-backed warranty obligations, which were earned when the claims are closed.

 

Kingsway Search Xcelerator consulting revenue includes the revenue from providing outsourced finance and human resources consulting services, as well as healthcare professional staffing services. The Company invoices for services revenue based on contracted rates.  Revenue is earned as services are provided.

 

The Company's revenue recognition policies are further described in Note 2(p), "Summary of Significant Accounting Policies - Revenue recognition," to the consolidated financial statements in the 2022 Annual Report.

 

During the first quarter of 2022, IWS recorded a net charge of $0.9 million relating to a change in estimate in accounting for deferred revenue and deferred contract costs associated with vehicle service agreement fees, resulting in an increase to deferred service fees of $1.1 million and an increase in deferred contract costs of $0.2 million.

 

Service fee receivables

 

Receivables from contracts with customers are reported as service fee receivable, net in the consolidated balance sheets and at March 31, 2023 and December 31, 2022 were $10.6 million and $10.3 million, respectively.  The increase in receivables from contracts with customers is primarily due to the timing difference between the Company's satisfaction of performance obligations and customer payments.

 

Service fee receivable is reported net of an estimated allowance for credit losses. During the three months ended  March 31, 2023, the Company recorded an increase to its allowance for credit losses of less than $0.1 million. Service fee receivables that are deemed to be uncollectible are written off against the allowance for credit losses when identified.  There was no material write-off of service fee receivable that was deemed to be uncollectible during the three months ended  March 31, 2023.

 

Deferred service fees

 

The Company records deferred service fees resulting from contracts with customers when payment is received in advance of satisfying the performance obligations. Changes in deferred service fees for the three months ended  March 31, 2023 were as follows:

 

(in thousands)

 

Three Months Ended March 31, 2023

 

Balance, December 31, 2022

 $82,713 

Deferral of revenue

  14,770 

Recognition of deferred service fees

  (15,116)

Balance, March 31, 2023

 $82,367 

 

The decrease in deferred service fees between December 31, 2022 and March 31, 2023 is primarily due to deferred service fees recognized in excess of additions to deferred service fees during the three months ended March 31, 2023.

 

The Company expects to recognize within one year as service fee and commission revenue approximately 51.7% of the deferred service fees as of March 31, 2023. Approximately $12.5 million and $13.0 million of service fee and commission revenue recognized during the three months ended March 31, 2023 and March 31, 2022 was included in deferred service fees as of December 31, 2022 and December 31, 2021, respectively.

 

KINGSWAY FINANCIAL SERVICES INC.

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2023

 

Deferred contract costs

 

Deferred contract costs represent the deferral of incremental costs to obtain or fulfill a contract with a customer.  Incremental costs to obtain a contract with a customer primarily include sales commissions.  The Company capitalizes costs incurred to fulfill a contract if the costs are identifiable, generate or enhance resources used to satisfy future performance obligations and are expected to be recovered.  Costs to fulfill a contract include labor costs for set-up activities directly related to the acquisition of vehicle service agreements.  Contract costs are deferred and amortized over the expected customer relationship period consistent with the pattern in which the related revenues are earned. Amortization of incremental costs to obtain a contract and costs to fulfill a contract with a customer are recorded in commissions and general and administrative expenses, respectively, in the unaudited consolidated statements of operations.  No impairment charges related to deferred contract costs were recorded during the three months ended March 31, 2023 and March 31, 2022.

 

The deferred contract costs balances and related amortization expense for the three months ended  March 31, 2023 and March 31, 2022 are comprised as follows:

 

(in thousands)

 

Three months ended March 31, 2023

  

Three months ended March 31, 2022

 
  

Costs to Obtain a Contract

  

Costs to Fulfill a Contract

  

Total

  

Costs to Obtain a Contract

  

Costs to Fulfill a Contract

  

Total

 

Balance at December 31, net

 $13,174  $83  $13,257  $10,850  $80  $10,930 

Additions

  2,336   7   2,343   2,353   6   2,359 

Amortization

  (2,109)  (7)  (2,116)  (1,328)  (6)  (1,334)

Balance at March 31, net

 $13,401  $83  $13,484  $11,875  $80  $11,955