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Meritage Homes Recognizes Revenue From Insurance Policies Not Yet Renewed
Home builder counts estimated future renewals as revenue.
February 17, 2021
As part of its financial services segment, Meritage Homes (MTH), a home builder targeting first time and move-up home buyers, offers title and escrow, mortgage, and insurance services. In the fourth quarter of 2019, Meritage began operating a wholly owned insurance broker that works with insurance companies nationwide to offer homeowners' insurance and other insurance products to its home buyers..
In its 2019 10-K, Meritage provided detail regarding its revenue recognition policy for its financial services segment:
“Our performance obligations for policy renewal commissions are considered satisfied upon issuance of the initial policy.”
In its 2020 10-K, Meritage includes new language that is more explicit:
“Revenue from financial services includes estimated future insurance policy renewal commissions as our performance obligations are satisfied upon issuance of the initial policy with a third party broker.”
It’s unclear why Meritage assumes homeowners are certain to renew with the same insurer— in perpetuity or at least for the duration of their mortgage— since, on average, 16% of homeowners switch insurance companies annually. Meritage says contract assets for estimated future renewal commissions are not material.
In 2020, Meritage’s financial services segment— which includes estimated future policy renewals— accounted for 3% of the company’s pre-tax net income. In 2019, the segment accounted for 6.8% and in 2018 it accounted for 8.5%.
Related: LEN, DHI, INVH, NVR, PHM, TOL, TMHC, KBH, LGIH, GRBK
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