Exhibit 99.6
Total Care Auto,
Powered by Landcar
COMBINED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2021 and 2020
TOTAL CARE AUTO, POWERED BY LANDCAR
C O N T E N T S
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Combined Financial Statements: | ||||
Balance Sheets | 1-2 | |||
Statements of Income | 3 | |||
Statements of Comprehensive Income | 4 | |||
Statements of Changes in Stockholders’ Equity | 5 | |||
Statements of Cash Flows | 6-7 | |||
Notes to Combined Financial Statements | 8-29 |
TOTAL CARE AUTO, POWERED BY LANDCAR
Combined Balance Sheets
As of September 30, 2021 and December 31, 2020
Combined 9/30/2021 | Combined 12/31/2020 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents, at estimated fair value | $ | 57,434,881 | $ | 74,708,047 | ||||
Short-term investments, at estimated fair value | 3,521,236 | 201,310 | ||||||
Premiums receivables | 16,055,473 | 13,577,564 | ||||||
Reinsurance recoverable | 15,406 | 1,339 | ||||||
Other receivable | 69,827 | 13,012 | ||||||
Accrued investment income | 636,829 | 473,707 | ||||||
Prepaid expenses | 25,940 | 106,157 | ||||||
Mortgage loans, at amortized, current portion, net of the uncollectible allowance of $0 | — | 86,971 | ||||||
Deferred acquisition costs, current portion | 120,462,177 | 102,916,570 | ||||||
Related party receivable | — | — | ||||||
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Total current assets | 198,221,769 | 192,084,677 | ||||||
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Investments | ||||||||
Bonds, available for sale, at estimated fair value (amortized cost: $25,028,265 and $12,363,757) | 25,180,812 | 12,673,890 | ||||||
Bonds, held-to-maturity, amortized cost | 36,200,790 | 33,363,406 | ||||||
Preferred stock, available-for-sale, at estimated fair value | 2,121 | 3,445,191 | ||||||
Common stock, available-for-sale, at estimated fair value | 61,080,409 | 35,642,082 | ||||||
Mortgage loans, amortized cost, long-term portion | 789,326 | 2,363,317 | ||||||
Alternative investments | 4,220,654 | 197,241 | ||||||
Related party notes receivable | 58,755,354 | 91,680,000 | ||||||
Notes receivable, non-current portion | — | — | ||||||
Deferred acquisition costs, long-term portion | 346,022,896 | 293,521,236 | ||||||
Deferred income tax asset | 58,628 | 310,824 | ||||||
Property and equipment, net of accumulated depreciation of $2,543,403 and $2,629,659 | 1,493,326 | 2,167,006 | ||||||
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Total noncurrent assets | 533,804,316 | 475,364,193 | ||||||
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Total assets | $ | 732,026,085 | $ | 667,448,870 | ||||
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The accompanying notes are an integral part of these combined financial statements
1
TOTAL CARE AUTO, POWERED BY LANDCAR
Combined Balance Sheets (Continued)
As of September 30, 2021 and December 31, 2020
Combined 9/30/2021 | Combined 12/31/2020 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 8,896,995 | $ | 9,806,397 | ||||
Securities payable | 3,971 | — | ||||||
Taxes, licenses, and fees, excluding income taxes | 63,042 | 103,536 | ||||||
Claims payable | 1,113,433 | 1,100,319 | ||||||
Interest payable | — | 20,652 | ||||||
Unearned premiums, current portion | 199,857,637 | 179,481,064 | ||||||
Line of credit | — | 14,000,000 | ||||||
Income taxes payable | 101,795 | 21,239 | ||||||
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Total current liabilities | 210,036,873 | 204,533,207 | ||||||
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Other liabilities: | ||||||||
Unpaid losses and loss adjustment expenses | 2,105,804 | 2,424,159 | ||||||
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Total other liabilities | 2,105,804 | 2,424,159 | ||||||
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Noncurrent liabilities: | ||||||||
Unearned premiums, long-term portion | 471,755,115 | 421,345,772 | ||||||
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Total noncurrent liabilities | 471,755,115 | 421,345,772 | ||||||
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Total liabilities | 683,897,792 | 628,303,138 | ||||||
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Stockholders’ equity: | ||||||||
Common stock | 2,501,000 | 2,501,000 | ||||||
Additional paid-in capital | 85,125,956 | 85,125,956 | ||||||
Retained earnings (deficit) | (39,648,257 | ) | (48,791,357 | ) | ||||
Accumulated other comprehensive income (loss), net | 149,594 | 310,133 | ||||||
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Total stockholders’ equity | 48,128,293 | 39,145,732 | ||||||
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Total liabilities and stockholders’ equity | $ | 732,026,085 | $ | 667,448,870 | ||||
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The accompanying notes are an integral part of these combined financial statements
2
TOTAL CARE AUTO, POWERED BY LANDCAR
Combined Statements of Income
For the Nine Months Ended September 30, 2021 and 2020
Combined 9/30/2021 | Combined 9/30/2020 | |||||||
Premium and administrative fee income | $ | 160,446,723 | $ | 143,472,588 | ||||
Service and licensing fee income | 31,050,000 | 27,700,000 | ||||||
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Total income | 191,496,723 | 171,172,588 | ||||||
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Cost of sales: | ||||||||
Claims expense incurred | 32,257,253 | 31,971,636 | ||||||
Other cost of sales | 668,844 | 387,258 | ||||||
Amortization of deferred acquisition costs | 90,394,542 | 73,666,165 | ||||||
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Total cost of sales | 123,320,639 | 106,025,059 | ||||||
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Gross profit | 68,176,084 | �� | 65,147,529 | |||||
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Operating expenses: | ||||||||
Salaries and benefits | 2,889,507 | 2,751,098 | ||||||
Rent | 194,707 | 174,969 | ||||||
Depreciation | 692,499 | 665,069 | ||||||
Professional fees | 782,438 | 799,489 | ||||||
Advertising | 20,349 | — | ||||||
Other general and administrative | 1,012,121 | 1,254,418 | ||||||
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Total expenses | 5,591,621 | 5,645,043 | ||||||
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Gain from operations | 62,584,463 | 59,502,486 | ||||||
Net investment income | 6,285,285 | 3,664,311 | ||||||
Net realized gains | 874,321 | 710,405 | ||||||
Other income | 2,126,783 | 1,908,964 | ||||||
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Net income before provision for income taxes | 71,870,852 | 65,786,166 | ||||||
Provision for income taxes | 1,717,752 | 866,933 | ||||||
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Net income | $ | 70,153,100 | $ | 64,919,233 | ||||
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The accompanying notes are an integral part of these combined financial statements
3
TOTAL CARE AUTO, POWERED BY LANDCAR
Combined Statements of Comprehensive Income
For the Nine Months Ended September 30, 2021 and 2020
Combined 9/30/2021 | Combined 9/30/2020 | |||||||
Net income | $ | 70,153,100 | $ | 64,919,233 | ||||
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Other comprehensive income (loss): | ||||||||
Unrealized investment gain (loss) arising during the period | (176,373 | ) | 230,706 | |||||
Reclassification adjustment for (gains) losses included in net income | 15,834 | (84,467 | ) | |||||
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Other comprehensive income (loss): | (160,539 | ) | 146,239 | |||||
Income tax expense related to items of other comprehensive income (loss) | — | — | ||||||
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Other comprehensive income (loss), net of income tax | (160,539 | ) | 146,239 | |||||
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Total comprehensive income | $ | 69,992,561 | $ | 65,065,472 | ||||
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The accompanying notes are an integral part of these combined financial statements
4
TOTAL CARE AUTO, POWERED BY LANDCAR
Combined Statements of Changes in Stockholders’ Equity
For the Nine Months Ended September 30, 2021 and
the Year Ended December 31, 2020
Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income | Total | ||||||||||||||||
Combined | ||||||||||||||||||||
Balance at January 1, 2020 | $ | 2,501,000 | $ | 85,125,956 | $ | (60,289,983 | ) | $ | 163,894 | $ | 27,500,867 | |||||||||
Net income | — | — | 89,106,126 | — | 89,106,126 | |||||||||||||||
Dividends paid | — | — | (77,607,500 | ) | — | (77,607,500 | ) | |||||||||||||
Comprehensive income, net | — | — | — | 146,239 | 146,239 | |||||||||||||||
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Balance at December 31, 2020 | 2,501,000 | 85,125,956 | (48,791,357 | ) | 310,133 | 39,145,732 | ||||||||||||||
Net income | — | — | 70,153,100 | — | 70,153,100 | |||||||||||||||
Dividends paid | — | — | (61,010,000 | ) | — | (61,010,000 | ) | |||||||||||||
Comprehensive income, net | — | — | — | (160,539 | ) | (160,539 | ) | |||||||||||||
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Balance at September 30, 2021 | $ | 2,501,000 | $ | 85,125,956 | $ | (39,648,257 | ) | $ | 149,594 | $ | 48,128,293 | |||||||||
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The accompanying notes are an integral part of these combined financial statements
5
TOTAL CARE AUTO, POWERED BY LANDCAR
Combined Statements of Cash Flows
For the Nine Months Ended September 30, 2021 and 2020
Combined 9/30/2021 | Combined 9/30/2020 | |||||||
Reconciliation of net income to net cash provided by operating activities: | ||||||||
Net income | $ | 70,153,100 | $ | 64,919,233 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Realized gain on investments | (874,321 | ) | (710,405 | ) | ||||
Unrealized (gain) loss on investments | (4,129,424 | ) | (580,500 | ) | ||||
Amortization (accretion) of bonds | 733,121 | 481,148 | ||||||
Depreciation | 692,499 | 692,499 | ||||||
Change in: | ||||||||
Premiums receivables | (2,477,909 | ) | (3,557,253 | ) | ||||
Reinsurance recoverable | (14,067 | ) | (19,471 | ) | ||||
Accrued investment income | (163,122 | ) | 266,283 | |||||
Prepaid expenses | 80,217 | 27,734 | ||||||
Deferred acquisition costs | (70,047,267 | ) | (43,176,499 | ) | ||||
Deferred income tax asset/liability | 252,196 | (14,072 | ) | |||||
Related party receivable | — | 5,877 | ||||||
Income tax recoverable/payable | 80,556 | 31,310 | ||||||
Unpaid losses and loss adjustment expenses | (318,355 | ) | 69,714 | |||||
Claims payable | 13,114 | 7,291 | ||||||
Interest payable | (20,652 | ) | 20,771 | |||||
Accounts payable and accrued expenses | (966,217 | ) | 3,627,826 | |||||
Securities payable | 3,971 | 544,990 | ||||||
Taxes, licenses, and fees | (40,494 | ) | (9,228 | ) | ||||
Unearned premiums | 70,785,916 | 32,567,255 | ||||||
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Net cash provided by operating activities | 63,742,863 | 55,194,503 | ||||||
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The accompanying notes are an integral part of these combined financial statements
6
TOTAL CARE AUTO, POWERED BY LANDCAR
Combined Statements of Cash Flows (Continued)
For the Nine Months Ended September 30, 2021 and 2020
Combined 9/30/2021 | Combined 9/30/2020 | |||||||
Cash flows from investing activities: | ||||||||
Proceeds from short-term investments | $ | (3,319,926 | ) | $ | 1,247,118 | |||
Proceeds from sale of investments | 148,976,986 | 44,857,900 | ||||||
Proceeds from mortgage loan principal collections | 1,660,962 | 1,503,447 | ||||||
Purchase of property and equipment | — | (181,340 | ) | |||||
Purchase of investments | (186,248,697 | ) | (50,394,796 | ) | ||||
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Net cash used by investing activities | (38,930,675 | ) | (2,967,671 | ) | ||||
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Cash flows from financing activities: | ||||||||
Proceeds from (repayment of) line of credit | (14,000,000 | ) | 14,000,000 | |||||
Related party notes receivable funded | — | (67,213,939 | ) | |||||
Proceeds from related party notes receivable | 32,924,646 | 73,000,000 | ||||||
Dividends paid | (61,010,000 | ) | (57,720,000 | ) | ||||
Other cash used | — | — | ||||||
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Net cash used by financing activities | (42,085,354 | ) | (37,933,939 | ) | ||||
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Net increase (decrease) in cash and cash equivalents | (17,273,167 | ) | 14,292,893 | |||||
Cash and cash equivalents at beginning of year | 74,708,047 | 51,031,396 | ||||||
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Cash and cash equivalents at end of year | $ | 57,434,881 | $ | 65,324,289 | ||||
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Supplemental Disclosures of Cash Flow Information: | ||||||||
Interest paid | $ | — | $ | — | ||||
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Taxes paid | $ | 1,385,000 | $ | 1,162,691 | ||||
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The accompanying notes are an integral part of these combined financial statements
7
TOTAL CARE AUTO, POWERED BY LANDCAR
Notes to Combined Financial Statements
For the Nine Months Ended September 30, 2021 and 2020
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Description of the Company
Total Care Auto, Powered by Landcar (“TCA”) is made up of two different entities: Landcar Agency, Inc. (“LCA”), and Landcar Casualty Company (“LCC”).
The combined financial statements presented herein contain the accounts of both of these entities. All significant intercompany balances and transactions have been eliminated in combination.
TCA offers extended vehicle service contracts, prepaid maintenance contracts, vehicle theft assistance contracts, key replacement contracts, guaranteed asset protection (“GAP”) contracts, paintless dent repair contracts, appearance protection contracts, tire and wheel, Anti-bacterial, and lease wear and tear contracts. In addition, TCA provides the required contractual liability insurance if needed. The majority of these warranty contracts are sold through affiliated automobile dealerships.
Basis of Presentation
The accompanying combined financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”) using the accrual method of accounting. All income is recorded when earned and all expenses are recorded when incurred regardless of when such amounts are received or paid.
Use of Estimates
The preparation of combined financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent asset s and liabilities at the date of the combined financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the reserve for unpaid losses and loss adjustment expenses, unearned premiums, collectability of the notes receivables and mortgage loans, and fair value of investments.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with a maturity date of three months or less at the time of purchase and are stated at cost, which approximates fair market value. TCA maintains cash balances in demand deposits and money market funds in which the carrying amount approximates fair value.
Short-term investments
Short-term investments are made up of bonds with a maturity date of more than three months, but less than 12 months. These holdings are stated at cost, which approximates fair market value.
8
TOTAL CARE AUTO, POWERED BY LANDCAR
Notes to Combined Financial Statements
For the Nine Months Ended September 30, 2021 and 2020
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Restricted Cash and Securities
TCA places securities on statutory deposit with certain state agencies to retain the right to do business in those states.
Premiums Receivable/Bad Debts
Receivables are recorded when invoices are issued and are presented in the balance sheet net of the allowance for doubtful accounts. Receivables are written off when they are determined to be uncollectible. TCA believes no allowance for doubtful accounts is necessary as of September 30, 2021 and December 31, 2020.
Investment Securities
Bonds and treasury instruments at September 30, 2021 and December 31, 2020 consist of held-to-maturity securities and available-for-sale securities.
Held-to-maturity securities are reported at cost, adjusted for amortization of premiums and accretion of discounts that are recognized in interest income using the interest method over the period to maturity. A portion of the bonds are classified as available-for-sale securities. Available-for-sale securities are reported at market value.
Declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that are other than temporary would result in write-downs of the individual securities to their fair value. The related write-downs would be included in earnings as realized losses. During the 2021 and 2020 fiscal years, no such write-downs were noted.
Equity securities are made up of preferred and common stock. These are reported at market value with the change in value being recognized in net income.
Cost Method Investments
During 2012, LCA invested in Mercato Partners Growth II GP, LLC and has accounted for it using the cost method in accordance with FASB Accounting Standards Codification (ASC- 323), Investments – Equity Method and Joint Ventures. During the nine months ended September 30, 2021, the Company received distributions from the fund related to the investment performance of the assets held. The carrying value of this investment as of September 30, 2021 and December 31, 2020 was $0 and $197,421, respectively. Management performs an annual assessment of these investments for impairment.
Mortgages and Notes Receivable
Mortgage loans and notes receivable are carried at the outstanding principal balances with an allowance for estimated uncollectible amounts, if any.
9
TOTAL CARE AUTO, POWERED BY LANDCAR
Notes to Combined Financial Statements
For the Nine Months Ended September 30, 2021 and 2020
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Deferred Acquisition Costs
Direct expenses paid for the acquisition of contracts on which revenue has been received but not yet earned have been deferred and are amortized over the related contract period.
Property and Equipment
Property and equipment is recorded at cost at the time of purchase and depreciated over the useful life of the assets using the straight-line depreciation method. Acquisitions of under $5,000 are expensed in the year purchased. The estimated useful lives for the various asset classes are as follows:
Asset Categories | Useful life | |
Furniture and equipment | 10 years | |
Computer hardware | 3 years | |
Computer software | 5 years | |
Leasehold improvements | 3-5 years |
Property and equipment was made up of the following as of September 30, 2021 and December 31, 2020:
2021 | 2020 | |||||||
Property and Equipment | ||||||||
Furniture and fixtures | $ | 413,894 | $ | 413,894 | ||||
Computer hardware and office equipment | 181,852 | 310,559 | ||||||
Software | 3,437,212 | 4,069,479 | ||||||
Work in progress | 3,771 | 2,733 | ||||||
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Total | 4,036,729 | 4,796,665 | ||||||
Accumulated depreciation | (2,543,403 | ) | (2,629,659 | ) | ||||
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Net property and equipment | $ | 1,493,326 | $ | 2,167,006 | ||||
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Depreciation expense for the nine months ended September 30, 2021 and 2020 amounted to $692,499 and $665,069 respectively.
Costs of software developed for internal use are capitalized in a work in progress account until the project has been placed in service. Depreciation begins once the project has been placed in service.
10
TOTAL CARE AUTO, POWERED BY LANDCAR
Notes to Combined Financial Statements
For the Nine Months Ended September 30, 2021 and 2020
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Unearned Premiums
Revenue is earned over the period of the related warranty contract. Accordingly, TCA records a deferred revenue reserve to ratably recognize revenue over the contract period.
Unpaid Losses and Loss Adjustment Expense Reserve
Losses and loss adjustment expense reserves represent management’s best estimate of the ultimate net cost of all reported and unreported losses incurred through September 30, 2021 and December 31, 2020. TCA does not discount liabilities for unpaid losses or unpaid loss adjustment expense reserves. The reserves for unpaid losses and loss adjustment expenses are estimated using individual case-basis valuations and statistical analysis. Those estimates are subject to the effects of trends in loss severity and frequency. Although considerable variability is inherent in such estimates, management believes the reserves for losses and loss adjustment expenses are adequate. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known; such adjustments are included in current operations.
Claims are counted when incidents that may result in a liability are reported and are based on policy coverage.
Revenue Recognition
Effective January 1, 2019, the Company adopted new FASB guidance contained in ASU 2014-09, Revenue Recognition (Topic 606): Revenue from Contracts with Customers, using the modified retrospective method applied to all active contracts. This standard revises the criteria for revenue recognition. Under the new guidance, the transaction price is attributed to the underlying performance obligations in the contract and revenue is deferred and recognized as income as the Company satisfies the performance obligations in the contract as the obligations under the contracts are performed. Under the new guidance, revenue is recognized more slowly as compared to the historic revenue recognition pattern. Incremental costs of obtaining a contract are capitalized and amo rtized to the extent the Company expects to recover those costs. The Company considers all revenue other than investment and interest income to be the result of contracts with customers. Each contract is considered to have one performance obligation which extends over the life of the contract. The method for recognizing revenue for the various types of contracts is described in the following paragraphs. Expenses are matched with earned premiums resulting in recognition of profits over the life of the contracts. Unearned premium reserves are established to cover the unexpired portion of premiums written.
11
TOTAL CARE AUTO, POWERED BY LANDCAR
Notes to Combined Financial Statements
For the Nine Months Ended September 30, 2021 and 2020
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Revenue Recognition (Continued)
Earnings methods are assigned based on contract type and expected claim patterns and consist of the pro-rata, rule of 78’s, and reverse rule of 78’s methods. GAP insurance unearned premium reserve is calculated by the rule of 78’s. The other contracts are earned ratably over the contract period.
Extended vehicle service contracts are earned ratably over the contract based on historical claims payment patterns for TCA.
The Company receives monthly retrospective commissions from third party vendors. These commissions are earned when received and are reported as other income on the statement of income and comprehensive income.
Revenue from service and licensing fees is earned monthly as it is received.
The timing of revenue recognition, billings and cash collections results in billed account s receivables, contract assets (reported as deferred acquisition costs) and contract liabilities (reported as unearned premium) on the Company’s balance sheets. Balances as of September 30, 2021 and December 31, 2020 were as follows:
2021 | 2020 | |||||||
Billed receivables | $ | 16,055,473 | $ | 13,577,564 | ||||
Contract assets | $ | 466,485,073 | $ | 396,437,806 | ||||
Contract liabilities | $ | 671,612,752 | $ | 600,826,836 |
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TOTAL CARE AUTO, POWERED BY LANDCAR
Notes to Combined Financial Statements
For the Nine Months Ended September 30, 2021 and 2020
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Revenue Recognition (Continued)
Premium and administrative fee income for the nine months ended September 30, 2021 and 2020 by product is as follows:
2021 | 2020 | |||||||
Company: | ||||||||
LCC: | ||||||||
Guaranteed asset protection contracts | $ | 6,112,854 | $ | 5,796,760 | ||||
Lease, wear and tear | 80,687 | 3,687 | ||||||
LCA: | ||||||||
Service contracts | 81,217,937 | 69,099,352 | ||||||
Maintenance | 22,628,390 | 22,367,035 | ||||||
Vehicle theft assistance | 18,779,883 | 17,708,341 | ||||||
Paintless dent repair and appearance protection | 17,447,451 | 16,576,094 | ||||||
Guaranteed asset protection administrative fees | 5,020,522 | 5,091,493 | ||||||
Key replacement | 5,383,130 | 3,952,089 | ||||||
Tire and wheel | 1,304,309 | 1,074,226 | ||||||
Anti-bacterial | 2,192,872 | 1,604,211 | ||||||
Lease, wear and tear | 283,038 | 222,362 | ||||||
Other | (4,350 | ) | (23,062 | ) | ||||
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Total | $ | 160,446,723 | $ | 143,472,588 | ||||
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Dividends
LCA pays monthly dividends to the shareholders that are based on the prior month’s earnings. Dividends are only accrued when they are formally declared by the board. If the board does not make a declaration, then dividends will be accounted for when paid.
13
TOTAL CARE AUTO, POWERED BY LANDCAR
Notes to Combined Financial Statements
For the Nine Months Ended September 30, 2021 and 2020
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Income Taxes
LCC accounts for income taxes in accordance with FASB ASC 740, Income Taxes. FASB ASC 740 is an asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the tax and financial reporting basis of certain assets and liabilities. LCC has deferred tax assets and liabilities principally from differences in the methods of accounting for reserves, unamortized acquisition costs and unrealized gain and losses on common and preferred stock.
LCA has elected under IRC Section 1362 to be an S-Corporation. In lieu of corporation income taxes, the stockholders of an S-Corporation are taxed on their proportionate share of LCA’s taxable income.
TCA accounts for uncertain tax positions in accordance with provisions of FASB ASC 740. Management has determined that TCA does not have any uncertain tax positions and associated unrecognized benefits that materially impact the financial statements or related disclosures. Since tax matters are subject to some degree of uncertainty, there can be no assurance that TCA’s tax returns will not be challenged by the taxing authorities and that TCA or their shareholders will not be subject to additional tax, penalties, and interest as a result of such challenge. Generally, LCA’s and LCC’s tax returns remain open for three years for federal and state income tax examination.
Concentration of Credit Risk
Financial instruments, which potentially subject TCA to concentrations of credit risk, consist of temporary cash investments, fixed maturity securities, mortgage loans, notes receivables and other investments.
TCA maintains interest bearing accounts at a financial institution. The accounts at this institution are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. TCA’s total cash exceeded the insurance limit as of September 30, 2021 and December 31, 2020. The Company has not experienced any losses in such accounts and does not believe it is exposed to any significant credit risks relating to its cash accounts.
TCA invests in money market funds that are not insured or guaranteed by the FDIC or any other government agency. Although a money market fund seeks to preserve the value of an investment at $1.00 per share, it is possible to lose money by investing in the fund. As of September 30, 2021 and December 31, 2020, TCA held $6,211,848 and $3,498,838 in money market funds, respectively.
14
TOTAL CARE AUTO, POWERED BY LANDCAR
Notes to Combined Financial Statements
For the Nine Months Ended September 30, 2021 and 2020
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Fair Value of Financial Instruments
TCA categorizes assets and liabilities measured at fair value into a three -level hierarchy based on the priority of the inputs to the valuation technique used to determine fair value in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Assets and liabilities valued at fair value are categorized based on the inputs to the valuation techniques as follows:
Level 1 – Inputs that utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that an entity has the ability to access.
Level 2 – Inputs that include quoted prices for similar assets and liabilities in active markets and inputs that are observable, either directly or indirectly, for substantially the full term of the financial instrument. Fair values for these instruments are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows.
Level 3 – Inputs that are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity.
Subsequent to initial recognition, TCA may remeasure the carrying value of assets and liabilities measured on a nonrecurring basis to fair value. Adjustments to fair value usually result when certain assets are impaired. Such assets are written down from their carrying amounts to their fair value.
Comprehensive Income
TCA presents comprehensive income in accordance with the standards establish ed by the Comprehensive Income topic of FASB ASC 220. Comprehensive income consists of net income and net unrealized gains or losses on debt securities and is presented in the statement of changes in stockholders’ equity and statement of comprehensive income.
COVID-19 Uncertainties
The COVID-19 pandemic has not had a significant impact on the Company’s underwriting results and the Company does not expect it to going forward.
15
TOTAL CARE AUTO, POWERED BY LANDCAR
Notes to Combined Financial Statements
For the Nine Months Ended September 30, 2021 and 2020
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March of 2016, the FASB issued ASU 2016-02, Leases, which requires all leases that have a term of more than 12 months to be recognized as assets and liabilities on the balance sheet at inception. A lessee would recognize a lease liability to make lease payments owed to a lessor (liability) and a benefit for the right to use the leased asset (asset) for the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee would depend on whether the les see is expected to consume more than an insignificant portion of the economic benefits embedded in the underlying asset. This new guidance is effective for fiscal years beginning after December 15, 2021. TCA does not anticipate a significant impact on TCA’s results of operations, financial position, or cash flows as a result of this new standard.
In June of 2016, the FASB issued Accounting Standards Update 2016 -13, Financial Instruments – Credit Losses, which requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. This requirement eliminates the probable initial recognition threshold in Current GAAP which has delayed recognition of credit losses until the loss was probable. Instead, the new treatment will better reflect an entity’s current estimate of all expected credit losses. In addition, the new guidance requires that any credit losses on available -for-sale debt securities to be presented as an allowance rather than as a write-down. Initial allowance for credit losses is added to the purchase price rather than reported as a credit loss expense. Subsequent changes in the allowance for credit losses are recorded in credit loss expense. This will allow entities to also record reversals of credit losses in current period net income, whereas the current GAAP prohibits reflecting these improvements in current period earnings. This guidance will become effective for the Company’s year ending on December 31, 2023. The Company does not expect a significant impact to the Company’s financials as a result of this guidance.
16
TOTAL CARE AUTO, POWERED BY LANDCAR
Notes to Combined Financial Statements
For the Nine Months Ended September 30, 2021 and 2020
3. | INVESTMENTS |
The carrying amounts of investment securities and their fair values as of September 30, 2021 and December 31, 2020 are as follows:
2021 | ||||||||||||||||
Cost/ Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
Investments: | ||||||||||||||||
Common stock | $ | 47,334,605 | $ | 14,248,594 | $ | 502,790 | $ | 61,080,409 | ||||||||
Preferred stock | — | 2,121 | — | 2,121 | ||||||||||||
Bonds, available-for-sale | 25,028,265 | 219,607 | 67,060 | 25,180,812 | ||||||||||||
Bonds, held-to-maturity | 36,200,790 | 526,921 | 97,747 | 36,629,964 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total investments | $ | 108,563,660 | $ | 14,997,243 | $ | 667,597 | $ | 122,893,306 | ||||||||
|
|
|
|
|
|
|
| |||||||||
2020 | ||||||||||||||||
Cost/ Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
Investments: | ||||||||||||||||
Common stock | $ | 26,034,522 | $ | 10,031,833 | $ | 424,273 | $ | 35,642,082 | ||||||||
Preferred stock | 3,223,872 | 221,319 | — | 3,445,191 | ||||||||||||
Bonds, available-for-sale | 12,363,757 | 311,534 | 1,401 | 12,673,890 | ||||||||||||
Bonds, held-to-maturity | 33,363,406 | 804,061 | 11,879 | 34,155,588 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total investments | $ | 74,985,557 | $ | 11,368,747 | $ | 437,553 | $ | 85,916,751 | ||||||||
|
|
|
|
|
|
|
|
A summary of amortized cost and fair value of TCA’s investment in bonds at September 30, 2021, is as follows:
Amortized Cost | Fair Value | |||||||
2021 | $ | 200,993 | $ | 201,528 | ||||
2022 through 2025 | 42,556,411 | 43,039,474 | ||||||
2026 through 2030 | 10,783,076 | 10,846,415 | ||||||
2031 through 2040 | 5,758,771 | 5,765,546 | ||||||
After 2041 | 1,929,804 | 1,957,813 | ||||||
|
|
|
| |||||
Total by maturity | $ | 61,229,055 | $ | 61,810,776 | ||||
|
|
|
|
17
TOTAL CARE AUTO, POWERED BY LANDCAR
Notes to Combined Financial Statements
For the Nine Months Ended September 30, 2021 and 2020
3. | INVESTMENTS (Continued) |
On a regular basis, TCA reviews its investment portfolios for securities in an unrealized loss position for other-than-temporary impairment. This review for potential impairment is performed on a specific identification basis and requires significant management judgment related to a number of qualitative and quantitative factors including the severity o f the impairment, the duration of the impairment, recent trends and expected market performance. Management considers all unrealized losses as of September 30, 2021 to be temporary. The securities summarized below were in an unrealized loss position for which other-than-temporary declines in value have not been recognized as of September 30, 2021.
Less than 12 Months | ||||||||||||
Asset class: | Cost/ Amortized Cost | Unrealized Loss | Market Value | |||||||||
Bonds | $ | 21,337,022 | $ | (128,396 | ) | $ | 21,208,626 | |||||
Common stocks | 3,759,059 | (346,712 | ) | 3,412,347 | ||||||||
|
|
|
|
|
| |||||||
Total | $ | 25,096,081 | $ | (475,108 | ) | $ | 24,620,973 | |||||
|
|
|
|
|
| |||||||
12 Months or More | ||||||||||||
Asset class: | Cost/ Amortized Cost | Unrealized Loss | Market Value | |||||||||
Bonds | $ | 2,421,911 | $ | (36,411 | ) | $ | 2,385,500 | |||||
Common stocks | $ | 12,098,228 | $ | (156,078 | ) | $ | 11,942,150 | |||||
|
|
|
|
|
| |||||||
Total | $ | 14,520,139 | $ | (192,489 | ) | $ | 14,327,650 | |||||
|
|
|
|
|
| |||||||
Total | ||||||||||||
Cost/ Amortized Cost | Unrealized Loss | Market Value | ||||||||||
Asset class: | ||||||||||||
Bonds | $ | 23,758,933 | $ | (164,807 | ) | $ | 23,594,126 | |||||
Common stocks | 15,857,287 | (502,790 | ) | 15,354,497 | ||||||||
|
|
|
|
|
| |||||||
Total | $ | 39,616,220 | $ | (667,597 | ) | $ | 38,948,623 | |||||
|
|
|
|
|
|
18
TOTAL CARE AUTO, POWERED BY LANDCAR
Notes to Combined Financial Statements
For the Nine Months Ended September 30, 2021 and 2020
3. | INVESTMENTS (Continued) |
The securities summarized below were in an unrealized loss position for which other -than- temporary declines in value have not been recognized as of December 31, 2020.
Less than 12 Months | ||||||||||||
Cost/ Amortized Cost | Unrealized Loss | Market Value | ||||||||||
Asset class: | ||||||||||||
Bonds | $ | 4,287,599 | $ | (13,280 | ) | $ | 4,274,319 | |||||
Common stocks | 7,021,225 | (311,984 | ) | 6,709,241 | ||||||||
|
|
|
|
|
| |||||||
Total | $ | 11,308,824 | $ | (325,264 | ) | $ | 10,983,560 | |||||
|
|
|
|
|
| |||||||
12 Months or More | ||||||||||||
Cost/ Amortized Cost | Unrealized Loss | Market Value | ||||||||||
Asset class: | ||||||||||||
Common stocks | 2,436,874 | (112,289 | ) | 2,324,585 | ||||||||
|
|
|
|
|
| |||||||
Total | $ | 2,436,874 | $ | (112,289 | ) | $ | 2,324,585 | |||||
|
|
|
|
|
| |||||||
Total | ||||||||||||
Cost/ Amortized Cost | Unrealized Loss | Market Value | ||||||||||
Asset class: | ||||||||||||
Bonds | $ | 4,287,599 | $ | (13,280 | ) | $ | 4,274,319 | |||||
Common stocks | 9,458,099 | (424,273 | ) | 9,033,826 | ||||||||
|
|
|
|
|
| |||||||
Total | $ | 13,745,698 | $ | (437,553 | ) | $ | 13,308,145 | |||||
|
|
|
|
|
|
19
TOTAL CARE AUTO, POWERED BY LANDCAR
Notes to Combined Financial Statements
For the Nine Months Ended September 30, 2021 and 2020
3. | INVESTMENTS (Continued) |
Assets measured at fair market value are as follows:
Assets Measured at Fair Value | ||||||||||||||||
Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
September 30, 2021 | ||||||||||||||||
Bonds | $ | 25,180,812 | $ | 25,180,812 | $ | — | $ | — | ||||||||
Preferred stocks | 2,121 | 2,121 | — | — | ||||||||||||
Common stocks | 61,080,409 | 61,080,409 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 86,263,342 | $ | 86,263,342 | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
December 31, 2020 | ||||||||||||||||
Bonds | $ | 12,673,890 | $ | 12,673,890 | $ | — | $ | — | ||||||||
Preferred stocks | 3,445,191 | 3,445,191 | — | — | ||||||||||||
Common stocks | 35,642,082 | 35,642,082 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 51,761,163 | $ | 51,761,163 | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
|
Investments held in trust or on deposit with various state insurance departments and reinsurers on September 30, 2021 and December 31, 2020 are reported at statement values as follows:
2021 | 2020 | |||||||
Utah | $ | 2,103,155 | $ | 2,098,757 | ||||
Nevada | 225,186 | 214,711 | ||||||
New Mexico | 227,865 | 225,012 | ||||||
|
|
|
| |||||
Total | $ | 2,556,206 | $ | 2,538,480 | ||||
|
|
|
|
20
TOTAL CARE AUTO, POWERED BY LANDCAR
Notes to Combined Financial Statements
For the Nine Months Ended September 30, 2021 and 2020
3. | INVESTMENTS (Continued) |
Realized gains and losses by investment class for the nine months ended September 30, 2021 and 2020 are as follows:
2021 | 2020 | |||||||
Bonds: | ||||||||
Gross gains from sales | $ | 70,569 | $ | 319,239 | ||||
Gross losses from sales | (81,178 | ) | (28,724 | ) | ||||
Preferred stock: | ||||||||
Gross gains from sales | 250,444 | 48,872 | ||||||
Gross losses from sales | (9,932 | ) | (34,065 | ) | ||||
Common stock: | ||||||||
Gross gains from sales | 898,880 | 1,257,196 | ||||||
Gross losses from sales | (255,226 | ) | (855,927 | ) | ||||
Short-term investments | 91 | 3,814 | ||||||
Other invested assets | 673 | — | ||||||
|
|
|
| |||||
Net capital gains | $ | 874,321 | $ | 710,405 | ||||
|
|
|
|
Mortgage Loans
Mortgage loans at September 30, 2021 and December 31, 2020 totaled $789,326 and $2,450,288 respectively. The maximum and minimum lending rates for mortgage loans during the year were 7.50% and 4.40%.
4. | UNAMORTIZED ACQUISITION COSTS |
Commissions paid for premiums received but not yet earned have been deferred. These deferred acquisition costs are being amortized over the contracts term. For the nine months ended September 30, 2021 and 2020, commissions and insurance capitalized were as follows:
2021 | 2020 | |||||||
Company: | ||||||||
LCC: | ||||||||
Guaranteed asset protection contracts | $ | 7,467,554 | $ | 7,073,870 | ||||
Lease, wear and tear | 712,094 | 522,977 | ||||||
LCA: | ||||||||
Vehicle theft assistance contracts | 20,596,288 | 16,620,880 | ||||||
Extended vehicle service contracts | 103,174,905 | 87,998,553 | ||||||
Paintless dent repair | 7,212,830 | 5,479,037 | ||||||
Appearance protection | 13,144,338 | 9,568,451 | ||||||
Key replacement contracts | 6,686,933 | 4,976,774 | ||||||
Maintenance contracts | 1,881,158 | 1,711,812 | ||||||
Tire and wheel | 393,139 | 283,994 | ||||||
Anti-bacterial | 1,419,278 | 999,251 | ||||||
Lease, wear and tear | 326,962 | 196,909 | ||||||
Guaranteed asset protection contracts admin | 5,062,057 | 5,656,106 | ||||||
Other | 543,919 | 491,197 | ||||||
|
|
|
| |||||
Total | $ | 168,621,455 | $ | 141,579,811 | ||||
|
|
|
|
Total amortization expense for the periods ended September 30, 2021 and 2020 amounted to $90,394,542 and $73,666,165 respectively.
21
TOTAL CARE AUTO, POWERED BY LANDCAR
Notes to Combined Financial Statements
For the Nine Months Ended September 30, 2021 and 2020
5. | UNEARNED PREMIUMS |
Extended vehicle service, prepaid maintenance, vehicle theft assistance, key replacement, GAP, paintless dent repair, and appearance protection contract income received but not yet earned has been deferred. These unearned premiums are being amortized over the contract term of the related policies. For the nine months ended September 30, 2021 and 2020, premiums capitalized were as follows:
2021 | 2020 | |||||||
Company: | ||||||||
LCC: | ||||||||
Guaranteed asset protection contracts | $ | 8,209,553 | $ | 7,313,134 | ||||
Lease, wear and tear | 632,468 | 383,859 | ||||||
LCA: | ||||||||
Vehicle theft assistance contracts | 23,492,304 | 19,190,450 | ||||||
Extended vehicle service contracts | 130,531,710 | 109,184,088 | ||||||
Paintless dent repair | 8,749,250 | 6,814,630 | ||||||
Appearance protection | 15,365,832 | 11,557,675 | ||||||
Key replacement contracts | 8,780,986 | 6,577,634 | ||||||
Maintenance contracts | 24,407,677 | 22,127,510 | ||||||
Guaranteed asset protection contracts admin fee | 4,684,637 | 4,943,873 | ||||||
Tire and wheel | 1,315,623 | 1,086,622 | ||||||
Anti-bacterial | 2,823,023 | 1,988,090 | ||||||
Lease, wear and tear | 513,945 | 446,956 | ||||||
|
|
|
| |||||
Total | $ | 229,507,008 | $ | 191,614,521 | ||||
|
|
|
|
Total earned premiums for the nine months ended September 30, 2021 and 2020 amounted to $160,446,723 and $143,472,588, respectively.
6. | UNPAID CLAIMS, LOSSES AND LOSS ADJUSTMENT EXPENSES |
Reserves for incurred losses and loss adjustment expenses attributable to insured events of prior years has increased (decreased) by approximately ($680,000) and ($126,000) as of September 30, 2021 and December 31, 2020, respectively, as a result of re-estimation of unpaid losses and loss adjustment expenses. This change is generally a result of on -going analysis of recent loss development trends. Original estimates change as additional information becomes known regarding individual claims.
2021 | 2020 | |||||||
(In thousands) | ||||||||
Balance at January 1 | $ | 2,201 | $ | 2,115 | ||||
|
|
|
| |||||
Incurred, related to: | ||||||||
Current year | 4,388 | 7,414 | ||||||
Prior year | (680 | ) | (126 | ) | ||||
|
|
|
| |||||
Total incurred | 3,708 | 7,288 | ||||||
|
|
|
| |||||
Paid, related to: | ||||||||
Current year | 2,619 | 5,260 | ||||||
Prior year | 1,439 | 1,942 | ||||||
|
|
|
| |||||
Total paid | 4,058 | 7,202 | ||||||
|
|
|
| |||||
Balance at September 30, 2021 and December 31, 2020 | $ | 1,851 | $ | 2,201 | ||||
|
|
|
|
22
TOTAL CARE AUTO, POWERED BY LANDCAR
Notes to Combined Financial Statements
For the Nine Months Ended September 30, 2021 and 2020
6. | UNPAID CLAIMS, LOSSES AND LOSS ADJUSTMENT EXPENSES (Continued) |
The following is information about incurred claims development as of September 30, 2021 as well as cumulative claim frequency and the total of incurred-but-not-reported liabilities plus expected development on reported claims included within the net incurred claims amounts.
Incurred Claims and Allocated Claims Adjustment Expenses (000s) | As of September 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
Total of Incurred- | ||||||||||||||||||||||||||||||||||||||||||||||||
but-Not-Reported | ||||||||||||||||||||||||||||||||||||||||||||||||
Liabilities Plus | ||||||||||||||||||||||||||||||||||||||||||||||||
Expected | Cumulative | |||||||||||||||||||||||||||||||||||||||||||||||
Development of | Number of | |||||||||||||||||||||||||||||||||||||||||||||||
For the Years Ended December 31, | Reported Claims | Reported Claims | ||||||||||||||||||||||||||||||||||||||||||||||
Accident Year | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | ||||||||||||||||||||||||||||||||||||||
2012 | 848 | 936 | 936 | 936 | 936 | 936 | 936 | 936 | 936 | 936 | — | 373 | ||||||||||||||||||||||||||||||||||||
2013 | 1,326 | 1,330 | 1,333 | 1,333 | 1,333 | 1,333 | 1,333 | 1,333 | 1,333 | — | 551 | |||||||||||||||||||||||||||||||||||||
2014 | 2,413 | 2,671 | 2,680 | 2,681 | 2,681 | 2,681 | 2,681 | 2,681 | — | 916 | ||||||||||||||||||||||||||||||||||||||
2015 | 4,389 | 4,489 | 4,502 | 4,501 | 4,501 | 4,501 | 4,501 | — | 1,510 | |||||||||||||||||||||||||||||||||||||||
2016 | 6,978 | 7,202 | 7,224 | 7,226 | 7,226 | 7,226 | — | 2,057 | ||||||||||||||||||||||||||||||||||||||||
2017 | 10,045 | 9,186 | 9,165 | 9,163 | 9,163 | — | 2,412 | |||||||||||||||||||||||||||||||||||||||||
2018 | 8,502 | 8,471 | 8,478 | 8,481 | — | 2,526 | ||||||||||||||||||||||||||||||||||||||||||
2019 | 8,502 | 8,304 | 8,295 | 7 | 2,488 | |||||||||||||||||||||||||||||||||||||||||||
2020 | 7,288 | 6,614 | 35 | 1,870 | ||||||||||||||||||||||||||||||||||||||||||||
2021 | 4,388 | 1,422 | 946 | |||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||
Ultimate incurred | $ | 53,618 | ||||||||||||||||||||||||||||||||||||||||||||||
Cumulative Paid Claims and Allocated Claims Adjustment Expenses (000s) | ||||||||||||||||||||||||||||||||||||||||||||||||
For the Years Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||
Accident Year | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | ||||||||||||||||||||||||||||||||||||||
2012 | 649 | 936 | 936 | 936 | 936 | 936 | 936 | 935 | 935 | 936 | ||||||||||||||||||||||||||||||||||||||
2013 | 980 | 1,330 | 1,333 | 1,333 | 1,333 | 1,333 | 1,333 | 1,333 | 1,333 | |||||||||||||||||||||||||||||||||||||||
2014 | 1,879 | 2,670 | 2,680 | 2,681 | 2,681 | 2,681 | 2,681 | 2,681 | ||||||||||||||||||||||||||||||||||||||||
2015 | 3,211 | 4,474 | 4,501 | 4,501 | 4,501 | 4,501 | 4,501 | |||||||||||||||||||||||||||||||||||||||||
2016 | 5,105 | 7,172 | 7,222 | 7,226 | 7,226 | 7,226 | ||||||||||||||||||||||||||||||||||||||||||
2017 | 7,388 | 9,145 | 9,163 | 9,163 | 9,163 | |||||||||||||||||||||||||||||||||||||||||||
2018 | 6,528 | 8,437 | 8,473 | 8,481 | ||||||||||||||||||||||||||||||||||||||||||||
2019 | 6,528 | 8,261 | 8,288 | |||||||||||||||||||||||||||||||||||||||||||||
2020 | 5,166 | 6,569 | ||||||||||||||||||||||||||||||||||||||||||||||
2021 | 2,619 | |||||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||
Total cumulative paid | 51,797 | |||||||||||||||||||||||||||||||||||||||||||||||
All o/s liabilities before 2010 | — | |||||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||
| Liabilities for losses and LAE, net of reinsurance | | $ | 1,821 | ||||||||||||||||||||||||||||||||||||||||||||
|
|
Below is a reconciliation of the disclosure of incurred and paid claims development to the liability for unpaid loss and loss adjustment expenses.
September 30, | December 31, | |||||||
2021 | 2020 | |||||||
Net liability for losses & LAE (000s) | $ | 1,821 | $ | 2,171 | ||||
Reinsurance recoverable on unpaid claims: | 4 | — | ||||||
|
|
|
| |||||
Unallocated claims adjustment expense | 27 | 30 | ||||||
|
|
|
| |||||
Adjusting and other expense liability (000s) | 27 | 30 | ||||||
|
|
|
| |||||
Total gross liability for unpaid claims and claims adjustment expense | $ | 1,852 | $ | 2,201 | ||||
|
|
|
|
23
TOTAL CARE AUTO, POWERED BY LANDCAR
Notes to Combined Financial Statements
For the Nine Months Ended September 30, 2021 and 2020
6. | UNPAID CLAIMS, LOSSES AND LOSS ADJUSTMENT EXPENSES (Continued) |
The following is supplementary information about average historical claims duration as of September 30, 2021.
Average Annual Percentage Payout of Incurred Claims by Age | ||||||||||||||||||||||||||||||||||||||||
Years | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | ||||||||||||||||||||||||||||||
All lines | 73.9 | % | 99.6 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
7. | LINE OF CREDIT |
On July 27, 2015, the Company signed a line of credit with a financial institution for up to $15,000,000 in financing. Effective April 16, 2021, the limit on the line of credit was increased to $25,000,000. The line of credit bears a fixed interest rate of the LIBOR daily floating rate plus 1% per year, interest payable monthly. The line of credit may be repaid at any time and is collateralized by the assets of the Company. As of September 30, 2021 and December 31, 2020, the balance on the line of credit was $0 and $14,000,000 with accrued interest of $0 and $20,652, respectively.
8. | RELATED PARTY TRANSACTIONS |
TCA’s transactions with the primary stockholder and immediate family, affiliated companies, and management personnel involve the following:
Cash: TCA had $45,311,775 and $67,021,399 in a sweep account as of September 30, 2021 and December 31, 2020, respectively, which is held by a company affiliated through common control. Interest earned on that account was $248,363 and $483,309 for the nine months ended September 30, 2021 and 2020, respectively. Accrued interest receivable on the cash management account was $24,852 and $27,745 as of September 30, 2021 and December 31, 2020, respectively.
Accounts receivable: Approximately 76% and 80% of premiums receivable as of September 30, 2021 and December 31, 2020, respectively, were from related party dealerships.
Accounts payable: Payroll for TCA is paid by LCC and LCA and is subsequently reimbursed by the affiliated entities.
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TOTAL CARE AUTO, POWERED BY LANDCAR
Notes to Combined Financial Statements
For the Nine Months Ended September 30, 2021 and 2020
8. | RELATED PARTY TRANSACTIONS (Continued) |
Notes receivable: Notes receivable with interest rates ranging from of 0.35% - 3.43% from an affiliated company of $58,755,354 and $91,680,000 were held by the Company as of September 30, 2021 and December 31, 2020 with accrued interest of $0 and $20,652, respectively.
On December 20, 2019, as part of adopting ASC 606 as described in Note 10, the Company entered into notes receivable agreements with its owners in the amount of $73,000,000 with an interest rate of 1.69% annually. The agreements call for annual principal and interest payments on January 1st of each year for four years. These notes were repaid in full during the year ended December 31, 2020.
On March 23, 2020, the Company signed a line of credit with an affiliated company to provide up to $20,000,000 in financing. The line of credit bears a fixed interest rate of the LIBOR daily floating rate plus 1% per year, interest payable monthly. The line of credit may be repaid at any time. As of December 31, 2020, the balance on the line of credit was $14,000,000 which is included in the $91,680,000 disclosed above. The line of credit was repaid during 2021 and is not reflected in the September 30, 2021 balance above.
Minimum payments due from the notes receivable above are as follows:
Years ending December 31, | ||||
2021 | $ | — | ||
2022 | 18,000,000 | |||
2023 | 13,755,354 | |||
2024 | 27,000,000 | |||
Thereafter | — | |||
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| |||
Total | $ | 58,755,354 | ||
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|
Unearned premiums: Approximately 99% and 99% of the gross unearned premiums as of September 30, 2021 and December 31, 2020, respectively, were from related party dealerships which amounts to $665,516,483 and $581,145,472, respectively.
Dividends: Upon approval of the board of directors, TCA paid dividends totaling $61,010,000 and $57,720,000 to their stockholders during the nine months ended September 30, 2021 and 2020, respectively.
Management fees: TCA pays a management fee to an affiliated company per contract sold for extended vehicle service, GAP, VTA, paintless dent repair, and appearance protection contracts. The management fee for the nine months ended September 30, 2021 and 2020 totaled $1,424,375 and $1,312,048, respectively.
Service and licensing fee income: Effective January 1, 2020, the Company receives a management fee from an affiliated company on a monthly basis for maintenance and use of policy administration software. The management fee for the nine months ended September 30, 2021 and 2020 totaled $31,050,000 and $27,700,000, respectively.
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TOTAL CARE AUTO, POWERED BY LANDCAR
Notes to Combined Financial Statements
For the Nine Months Ended September 30, 2021 and 2020
8. | RELATED PARTY TRANSACTIONS (Continued) |
Service and maintenance contract income: TCA had gross sales of extended vehicle service contracts and prepaid maintenance contracts in the amount of $154,954,805 and $131,329,017 and also paid gross commissions of $66,350,145 and $54,321,440 to related party dealerships for the nine months ended September 30, 2021 and 2020, respectively.
GAP contract income: TCA had gross sales of GAP contracts of $12,480,474 and $12,008,681 from related party dealerships for the nine months ended September 30, 2021 and 2020, respectively.
VTA contract income: TCA had gross sales of vehicle theft assistance (“VTA”) contracts of $23,901,887 and $19,193,011 from related party dealerships for the nine months ended September 30, 2021 and 2020, respectively. TCA also paid gross commissions of $13,830,781 and $10,501,373 to related party dealerships for the nine months ended September 30, 2021 and 2020, respectively.
Paintless dent repair and appearance protection contract income: TCA had gross sales of paintless dent repair and appearance protection contract income in the amount of $24,116,491 and $18,372,593 and also paid gross commissions of $13,817,032 and $11,516,762 to related party dealerships for the nine months ended September 30, 2021 and 2020, respectively.
Key replacement protection income: The Company had sales of key replacement protection contracts of $8,782,005 and $6,580,522 from related party dealerships for the nine months ended September 30, 2021 and 2020, respectively. The Company also paid commissions of $4,712,441 and $3,200,907 to related party dealerships for the nine months ended September 30, 2021 and 2020, respectively.
Other income: The Company had sales of other products including lease wear and tear, tire and wheel, and Anti-bacterial of $5,328,178 and $3,957,533 from related party dealerships for the nine months ended September 30, 2021 and 2020, respectively.
Commissions: The Company pays commissions to related parties based on monthly contract counts. In addition to the product-specific commissions noted in the respective product descriptions above, the Company paid additional commissions and other incentives to affiliated companies of $58,126,197 and $52,659,129 for the nine months ended September 30, 2021 and 2020, respectively.
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TOTAL CARE AUTO, POWERED BY LANDCAR
Notes to Combined Financial Statements
For the Nine Months Ended September 30, 2021 and 2020
8. | RELATED PARTY TRANSACTIONS (Continued) |
Rent Expense: TCA leases office space from a company affiliated by common control under a month-to-month lease. The lease is classified as an operating lease. Rent expense for the nine months ended September 30, 2021 and 2020 totaled $194,707 and $174,969 respectively. Future minimum lease payments are as follows:
Year | Amount | |||
2021 | $ | 260,320 | ||
2022 | 266,828 | |||
2023 | 273,499 | |||
2024 | 280,336 | |||
Thereafter | 1,297,195 | |||
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| |||
Total | $ | 2,378,178 | ||
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|
9. | INCOME TAXES |
LCC is taxed as a non-life insurer under provisions of the Internal Revenue Code based on a modified statutory accounting method.
The following is a summary of LCC’s provision for federal income taxes for the nine months ended September 30, 2021 and 2020:
2021 | 2020 | |||||||
Current income tax benefit | $ | 1,465,556 | $ | 881,006 | ||||
Deferred income taxes | 252,196 | (14,073 | ) | |||||
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| |||||
Provision for income taxes | $ | 1,717,752 | $ | 866,933 | ||||
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|
|
|
LCC’s deferred tax assets and liabilities at September 30, 2021 and December 31, 2020 consisted of the following:
2021 | 2020 | |||||||
Reserves | $ | 43,053 | $ | 51,281 | ||||
Unearned premiums | 1,515,238 | 1,367,190 | ||||||
Reserves—transition adjustment | (15,664 | ) | (19,579 | ) | ||||
Net unrealized gain on securities | (1,483,999 | ) | (1,088,068 | ) | ||||
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|
|
| |||||
Total net deferred tax asset | $ | 58,628 | $ | 310,824 | ||||
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|
|
|
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TOTAL CARE AUTO, POWERED BY LANDCAR
Notes to Combined Financial Statements
For the Nine Months Ended September 30, 2021 and 2020
9. | INCOME TAXES (Continued) |
The difference between pre-tax statutory net income and taxable net income is due to the discounting of the loss reserves and unearned premiums as follows:
2021 | 2020 | |||||||
Statutory net income before taxes | $ | 6,432,060 | $ | 3,949,840 | ||||
Adjustments for: | ||||||||
Interest and dividends subject to section 832 | 93,756 | 74,055 | ||||||
Discounting of loss reserves | 44,161 | (28,140 | ) | |||||
Discounting of unearned premiums | 704,990 | 474,429 | ||||||
Tax-exempt interest | (205,788 | ) | (197,786 | ) | ||||
Dividends received deduction | (169,236 | ) | (98,436 | ) | ||||
|
|
|
| |||||
Net taxable income | $ | 6,899,943 | $ | 4,173,962 | ||||
|
|
|
| |||||
Tax at statutory rates | $ | 1,448,988 | $ | 876,532 | ||||
Changes from prior year accrual | 16,568 | 4,474 | ||||||
|
|
|
| |||||
Income taxes | $ | 1,465,556 | $ | 881,006 | ||||
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10. | RETIREMENT PLAN |
The employees of TCA are covered under a 401(k) defined contribution plan. TCA pays an amount equal to 50% of the employee’s contribution up to 6% of the employee’s salary. TCA’s contributions to the plan for the nine months ended September 30, 2021 and 2020 were $64,240 and $45,117 respectively.
11. | CONTINGENCIES |
TCA is subject to litigation from the settlement of claims contested in the normal course of business. The losses from the actual settlement of such unknown claims are taken into consideration in the computation of the estimated claims liabilities.
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TOTAL CARE AUTO, POWERED BY LANDCAR
Notes to Combined Financial Statements
For the Nine Months Ended September 30, 2021 and 2020
12. | CAPITAL AND SURPLUS |
The State of Utah has adopted the National Association of Insurance Commissioner’s (“NAIC”) risk-based capital (“RBC”) calculation to evaluate the minimum capital requirements for an insurance company to support its overall business operations in consideration of its size and risk profile. LCC’s risk-based capital is calculated by applying factors to various asset, premium, and reserve items.
The RBC requirements provide for four different levels of regulatory attention depending on the ratio of LCC’s total adjusted capital (“TAC”) to its authorized control level (“ACL”). The four regulatory attention levels (and the associated percentage of TAC to ACL) are defined as follows: (1) Company Action (200%), (2) Regulatory Action (150%), (3) Authorized Control (100%), and (4) Mandatory Control Levels (75%). As of September 30, 2021 and December 31 2020, LCC and LCL maintained TAC in excess of 200% of ACL.
LCA’s common stock has no par value with 10,000 shares authorized of which 1,000 shares are issued and outstanding. LCC’s common stock has a $5 par value with 1,000,000 shares authorized of which 500,000 shares are issued and outstanding.
13. | SUBSEQUENT EVENTS |
Subsequent events have been considered by management through the date of this report, which is the date the financial statements were available to be issued. Other than those noted below, no events have occurred subsequent to September 30, 2021 which would have a material effect on the financial condition of the Company.
During September 2021 the Company entered into negotiations to sell the Company. This transaction is anticipated to be completed prior to December 31, 2021.
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