DOMA HOLDINGS INC. The following discussion and analysis of the financial condition and results of operations of Doma should be read together with the unaudited condensed consolidated financial statements as ofSeptember 30, 2021 and 2020 and for the three and nine months endedSeptember 30, 2021 and 2020, together with the related notes thereto, contained in this Quarterly Report on Form 10-Q ("Quarterly Report"), as well as the audited consolidated financial statements as ofDecember 31, 2020 and 2019 and for the years endedDecember 31, 2020 , 2019 and 2018, together with related notes thereto, contained in our registration statement on Form S-1 (No. 333-258942), as amended (the "Registration Statement"). This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties, including, but not limited to, those described in the "Risk Factors" section of the Registration Statement. Our actual results may differ materially from those projected in these forward-looking statements as a result of various factors. Certain amounts may not foot due to rounding. Unless the context otherwise requires, references to "company," "Company," "Doma," "we," "us," "our" and similar terms refer toDoma Holdings, Inc. (f/k/aCapitol Investment Corp. V) and its consolidated subsidiaries. References to "Capitol" refer to our predecessor company prior to the consummation of the Business Combination. References to "Old Doma" refer to Old Doma prior to the Business Combination and toStates Title Holding, Inc. ("States Title"), the wholly owned subsidiary of Doma, upon the consummation of the Business Combination. All forward-looking statements in this Quarterly Report are based on information available to us as of the date hereof, and we assume no obligation to update any such forward-looking statements to reflect future events or circumstances, except as required by law.
Overview
Doma was founded in 2016 to focus top-tier data scientists, product managers,
and engineers on building game-changing technology to completely reimagine the
residential real estate closing process. Our approach to the title and escrow
process is driven by our innovative full stack platform, Doma Intelligence. The
Doma Intelligence platform is the result of significant investment in research
and development over more than four years across a team of more than 100 data
scientists and engineers, creating a revolutionary new end-to-end closing
platform that seeks to eliminate all of the latent, manual tasks involved in
underwriting title insurance, performing core escrow functions, generating
closing documentation and getting documents signed and recorded. The platform
harnesses the power of data analytics, machine learning and natural language
processing, which will enable us to deliver a cheaper and faster closing
transaction with a seamless customer experience at every point in the process.
Doma's machine intelligence algorithms are being trained and optimized on 30
years of historical anonymized closing transaction data allowing us to make
underwriting decisions in less than a minute and significantly reduce the time,
effort and cost of the entire process.
Our Business Model
Today, we primarily originate, underwrite, and provide title, escrow and
settlement services for the two most prevalent transaction types in the
residential real estate market: purchase/resale and refinance transactions. We
operate and report our business through two complementary reporting segments,
Distribution and Underwriting. See "-Basis of Presentation" below.
Our Distribution segment reflects the sale of our products and services, other
than underwriting and insurance services reflected in our Underwriting segment,
that we provide through our captive title agents and agencies ("Direct Agents").
We market our products and services through two channels to appeal to our
referral partners and ultimately reach our end customers, the borrowers or home
buyers/sellers:
•Doma Enterprise - we target partnerships with national lenders and mortgage
originators that maintain centralized lending operations. Once a partnership has
been established, we integrate our Doma Intelligence platform with the client's
loan production systems, to enable frictionless order origination and
fulfillment. Substantially all Doma Enterprise orders are underwritten by Doma.
•Local Markets ("Local") - we target partnerships with realtors, attorneys and
non-centralized loan originators via a 94-branch footprint across ten states (as
of September 30, 2021 ). For the quarter ended
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September 30, 2021 , approximately 90% of our lender and owner policies from our
Local channel were underwritten by Doma, while the remaining share was
underwritten by third-party underwriters.
Our Underwriting segment reflects the sale of our underwriting and insurance
services. These services are integrated with our Direct Agents channel and are
also provided to other non-captive title and escrow agents in the market
("Third-Party Agents") through our captive title insurance carrier. For
customers sourced through the Third-Party Agents channel, we retain a portion of
the title premium (approximately 16%) in exchange for underwriting risk to our
balance sheet. The Third-Party Agents channel includes the title underwriting
and insurance services we provide to Lennar, a related party, for its home
builder transactions.
The financial results of our Direct Agents channel impact both our Distribution
and Underwriting reporting segments, whereas the results from the Third-Party
Agents channel impact only the Underwriting reporting segment.
Our expenses generally consist of direct fulfillment expenses related to closing
a transaction and insuring the risk, customer acquisition costs related to
acquiring new business, and other operating expenses as described below:
•Direct fulfillment expenses - comprised of direct labor and direct non-labor
expenses. Direct labor expenses refer to payroll costs associated with employees
who directly contribute to the opening and closing of an order. Some examples of
direct labor expenses include title and escrow services, closing services, and
customer service. Direct non-labor expenses refer to non-payroll expenses that
are closely linked with order volume, such as provision for claims, title
examination expense, office supplies, and premium and other related taxes.
•Customer acquisition costs - this expense category is the summation of sales
payroll, sales commissions, customer success payroll, sales related travel and
entertainment, and an allocated portion of corporate marketing.
•Other operating expenses - all other expenses that do not directly contribute
to the fulfillment or acquisition of an order or policy are considered other
operating expenses. This category is predominately comprised of research and
development costs, corporate support expenses, occupancy, and other general and
administrative expenses.
We expect to continue to invest in our Doma Intelligence platform as well as
organic and inorganic growth opportunities in order to remain competitive with
existing large-scale industry incumbents who are well financed and have
significant resources to defend their existing market positions. Over time, we
plan to use our cash flows to invest in customer acquisition, research and
development, and new product offerings, to further improve revenue growth and
accelerate the elimination of the friction and expense of closing a residential
real estate transaction.
Basis of Presentation
We report results for our two operating segments:
•Distribution - our Distribution segment reflects our Direct Agents operations
of acquiring customer orders and providing title and escrow services for real
estate closing transactions. We acquire customers through our Local and Doma
Enterprise customer referral channels.
•Underwriting - our Underwriting segment reflects the results of our title
insurance underwriting business, including policies referred through our Direct
Agents and Third-Party Agents channels. The referring agents retain
approximately 84% of the policy premiums in exchange for their services. The
retention rate varies by state and agent.
Costs are allocated to the segments to arrive at adjusted gross profit, our
segment measure of profit and loss. Our accounting policies for segments are the
same as those applied to our consolidated financial statements, except as
described below under "-Key Components of Revenues and Expenses." Inter-segment
revenues and expenses are eliminated in consolidation. See Note 7 in our
condensed consolidated financial statements for a summary of our segment results
and a reconciliation between segment adjusted gross profit and our consolidated
loss before income taxes.
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Significant Events and Transactions
The Business Combination
On the Closing Date, Capitol consummated the Business Combination with Old Doma,
pursuant to the Agreement. In connection with the closing of the Business
Combination, Old Doma changed its name to States Title Holding, Inc. , Capitol
changed its name to Doma Holdings, Inc. ("Doma") and Old Doma became a wholly
owned subsidiary of Doma. Doma continues the existing business operations of Old
Doma as a publicly traded company. Refer to Note 3 to the condensed consolidated
financial statements for additional details on the Business Combination.
As a result of the Business Combination, we became the operating successor to an
SEC -registered and New York Stock Exchange -listed shell company, which has
required us to hire additional personnel and implement procedures and processes
to address public company regulatory requirements and practices. As is typical,
we expect to incur additional annual expenses as a public company for, among
other things, directors' and officers' liability insurance, director fees, and
additional internal and external accounting, legal, and administrative
resources.
Impact of COVID-19 and Other Macroeconomic Trends
On March 11, 2020 , the World Health Organization declared COVID-19, the disease
caused by the novel coronavirus, a pandemic. COVID-19 has resulted in
significant macroeconomic impacts and market disruptions, particularly as
federal, state, and local governments enacted emergency measures intended to
combat the spread of the virus, including shelter-in-place orders, travel
limitations, quarantine periods and social distancing. In response, we took
appropriate measures to ensure the health and safety of our employees, clients
and partners, including work-from-home policies and limits to physical contact
between our employees and our customers and partners.
We operate in the real estate industry and our business volumes are directly
impacted by market trends for mortgage refinancing transactions, existing real
estate purchase transactions, and new real estate purchase transactions,
particularly in the residential segment of the market. Responses to the COVID-19
pandemic initially led to a material decline in purchase transactions, and, for
a period of time, the future performance of the U.S. economy was perceived to be
in peril. As a result, Doma management made the difficult decision to reduce our
workforce by approximately 12%, resulting in approximately $1.4 million of
severance costs. Subsequent U.S. federal stimulus measures, including interest
rate reductions by the Federal Reserve , and local regulatory initiatives, such
as permitting remote notarization, led to an increase in mortgage refinancing
and purchase volumes, which we believe benefited our business model. While real
estate transactions have largely returned to or exceeded pre-pandemic levels, we
continue to monitor economic and regulatory developments closely as we navigate
the pandemic.
Demand for mortgages tends to correlate closely with changes in interest rates,
meaning that our order trends are likely to be impacted by future changes in
interest rates. However, we believe that our current, low market share and
disruptive approach to title insurance, escrow, and closing services will enable
us to gain market share, which in turn should mitigate the risk to our revenue
growth trends relative to industry incumbents.
The North American Title Acquisition
On January 7, 2019 , we acquired from Lennar Corporation ("Lennar") its
subsidiary, North American Title Insurance Company ("NATIC"), which operated its
title insurance underwriting business, and its third-party title insurance
agency business, which was operated under its North American Title Company brand
(collectively, the "Acquired Business"), for total stock and deferred cash
consideration of $171.7 million (the "North American Title Acquisition"),
including $87.0 million in the form of a seller financing note.
The North American Title Acquisition provided us with insurance licenses and an
agency network across the United States , as well as a substantial data set to
accelerate our machine intelligence technology. This acquisition marked a
significant milestone for Doma in achieving national scale and licensure in
pursuit of our long-term growth strategy. Whereas we generated minimal revenue
prior to the North American Title Acquisition, following its consummation we
began to operate our business with a broad distribution footprint and data that
enabled us to
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accelerate the rollout of our Doma Intelligence platform. The North American
Title Acquisition also resulted in our recording of $111.5 million in goodwill
and $61.4 million in acquired marketable securities.
Since the North American Title Acquisition, we have implemented several
initiatives to integrate and realign the operations of the Acquired Business.
This includes transforming the Acquired Business's retail agency operations by
streamlining our physical branch footprint, consolidating branch back office
functions into a common corporate operation, and implementing a common
production platform across all our branches. We continue to invest in the
development and rollout of the Doma Intelligence platform across our Local
branch footprint. We expect to realize significant cost savings over time as
manual processes are replaced with our proprietary machine learning platform and
data science-driven approach to title and closing services. The benefits of this
effort, particularly on margin growth, are likely to be realized gradually in
future reporting periods. As a result, our recent results of operations,
including for the years ended December 31, 2020 and 2019 and the three and nine
months ended September 30, 2021 and 2020, may not be indicative of our results
for future periods.
Key Operating and Financial Indicators
We regularly review several key operating and financial indicators to evaluate
our performance and trends and inform management's budgets, financial
projections and strategic decisions.
The following table presents our key operating and financial indicators, as well
as the relevant GAAP measures, for the periods indicated:
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(in thousands, except for open and closed order numbers)
Key operating data:
Opened orders 52,867 37,572 135,442 101,161
Closed orders 35,300 25,358 99,386 65,026
GAAP financial data:
Revenue (1) $ 162,582 $ 121,072 $ 420,364 $ 292,304
Gross profit (2) $ 28,302 $ 26,379 $ 81,232 $ 61,418
Net loss $ (34,270) $ (3,622) $ (69,327) $ (26,540)
Non-GAAP financial data (3):
Retained premiums and fees $ 70,986 $ 54,048 $ 193,249 $ 136,172
Adjusted gross profit $ 30,280 $ 27,600 $ 88,937 $ 64,654
Ratio of adjusted gross profit to
retained premiums and fees 43 % 51 % 46 % 47 %
Adjusted EBITDA $ (20,109) $ (649) $ (35,291) $ (15,926)
_________________
n.m. = not meaningful
(1)Revenue is comprised of (i) net premiums written, (ii) escrow, other
title-related fees and other, and (iii) investment, dividend and other income.
Net loss is made up of the components of revenue and expenses. For more
information about measures appearing in our consolidated income statements,
refer to "-Key Components of Revenue and Expenses-Revenue" below.
(2)Gross profit, calculated in accordance with GAAP, is calculated as total
revenue, minus premiums retained by Third-Party Agents, direct labor expense
(including mainly personnel expense for certain employees involved in the direct
fulfillment of policies) and direct non-labor expense (including mainly title
examination expense, provision for claims, and depreciation and amortization).
In our consolidated income statements, depreciation and amortization is recorded
under the "other operating expenses" caption.
(3)Retained premiums and fees, adjusted gross profit and adjusted EBITDA are
non-GAAP financial measures. Refer to "-Non-GAAP Financial Measures" below for
additional information and reconciliations of these measures to the most closely
comparable GAAP financial measures.
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Opened and closed orders
Opened orders represent the number of orders placed for title insurance and/or
escrow services (which includes the disbursement of funds, signing of documents
and recording of the transaction with the county office) through our Direct
Agents, typically in connection with a home purchase or mortgage refinancing
transaction. An order may be opened upon an indication of interest in a specific
property from a customer and may be cancelled by the customer before or after
the signing of a purchase or loan agreement. Closed orders represent the number
of opened orders for title insurance and/or escrow services that were
successfully fulfilled in each period with the issuance of a title insurance
policy and/or provision of escrow services. Opened and closed orders do not
include orders or referrals for title insurance from our Third-Party Agents. For
avoidance of doubt, a closed order for a home purchase or resale transaction
typically results in the issuance of two title insurance policies, whereas a
refinance transaction typically results in the issuance of one title insurance
policy.
We review opened orders as a leading indicator of our Direct Agents revenue
pipeline and closed orders as a direct indicator of Direct Agents revenue for
the concurrent period, and believe these measures are useful to investors for
the same reasons. We believe that the relationship between opened and closed
orders will remain relatively consistent over time, and that opened order growth
is generally a reliable indicator of future financial performance. However,
degradation in the ratio of opened orders to closed orders may be a leading
indicator of adverse macroeconomic or real estate market trends.
Retained premiums and fees
Retained premiums and fees, a non-GAAP financial measure, is defined as total
revenue under GAAP minus premiums retained by Third-Party Agents. See "-Non-GAAP
Financial Measures" below for a reconciliation of our retained premiums and fees
to gross profit, the most closely comparable GAAP measure, and additional
information about the limitations of our non-GAAP measures.
Our business strategy is focused on leveraging the Doma Intelligence platform to
provide an overall improved customer experience and to drive time and expense
efficiencies principally in our Direct Agents channel. In our Third-Party Agents
channel in contrast, we provide our underwriting expertise and balance sheet to
insure the risk on policies referred by such Third-Party Agents and, for that
service, we typically receive approximately 16% of the premium for the policy we
underwrite. As such, we use retained premiums and fees, which is net of the
impact of premiums retained by Third-Party Agents, as an important measure of
the earning power of our business and our future growth trends, and believe it
is useful to investors for the same reasons.
Adjusted gross profit
Adjusted gross profit, a non-GAAP financial measure, is defined as gross profit
(loss) under GAAP, adjusted to exclude the impact of depreciation and
amortization. See "-Non-GAAP Financial Measures" below for a reconciliation of
our adjusted gross profit to gross profit, the most closely comparable GAAP
measure and additional information about the limitations of our non-GAAP
measures.
Management views adjusted gross profit as an important indicator of our
underlying profitability and efficiency. As we generate more business that is
serviced through our Doma Intelligence platform, we expect to reduce fulfillment
costs as our direct labor expense per order continues to decline, and we expect
the adjusted gross profit per transaction to grow faster than retained premiums
and fees per transaction over the long term.
Ratio of adjusted gross profit to retained premiums and fees
Ratio of adjusted gross profit to retained premiums and fees, a non-GAAP
measure, expressed as a percentage, is calculated by dividing adjusted gross
profit by retained premiums and fees. Both the numerator and denominator are net
of the impact of premiums retained by Third-Party Agents because that is a cost
related to our Underwriting segment over which we have limited control, as
Third-Party Agents customarily retain approximately 84% of the premiums related
to a title insurance policy referral pursuant to the terms of long-term
contracts.
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We view the ratio of adjusted gross profit to retained premiums and fees as an
important indicator of our operating efficiency and the impact of our
machine-learning capabilities, and believe it is useful to investors for the
same reasons.
We expect improvement to our ratio of adjusted gross profit to retained premiums
and fees over the long term, reflecting the continued reduction in our average
fulfillment costs per order.
Adjusted EBITDA
Adjusted EBITDA, a non-GAAP financial measure, is defined as net income (loss)
before interest, income taxes and depreciation and amortization, and further
adjusted to exclude the impact of stock-based compensation, COVID-related
severance costs and the change in fair value of Warrant and Sponsor Covered
Shares liabilities. See "-Non-GAAP Financial Measures" below for a
reconciliation of our adjusted EBITDA to net loss, the most closely comparable
GAAP measure and additional information about the limitations of our non-GAAP
measures.
We review adjusted EBITDA as an important measure of our recurring and
underlying financial performance, and believe it is useful to investors for the
same reason.
Key Components of Revenues and Expenses
Revenues
Net premiums written
We generate net premiums by underwriting title insurance policies and recognize
premiums in full upon the closing of the underlying transaction. For some of our
Third-Party Agents, we also accrue premium revenue for title insurance policies
we estimate to have been issued in the current period but reported to us by the
Third-Party Agent in a subsequent period. See "-Critical Accounting Policies and
Estimates- Net premiums written from Third-Party Agent referrals" below for
further explanation on this accrual. For the three and nine month periods ended
September 30, 2021 and 2020, the average time lag between the issuing of these
policies by our Third-Party Agents and the reporting of these policies or
premiums to us has been approximately three months. Net premiums written is
inclusive of the portion of premiums retained by Third-Party Agents, which is
recorded as an expense, as described below.
To reduce the risk associated with our underwritten insurance policies, we
utilize reinsurance programs to limit our maximum loss exposure. Under our
reinsurance treaties, we cede the premiums on the underlying policies in
exchange for a ceding commission from the reinsurer and our net premiums written
exclude such ceded premiums.
Our principal reinsurance quota share agreement covers instantly underwritten
policies from refinance and home equity line of credit transactions under which
we historically ceded 100% of the written premium of each covered policy.
Pursuant to the renewed agreement, which became effective in February 2021 , we
cede only 25% of the written premium on such instantly underwritten policies,
instead of 100%, up to a total reinsurance coverage limit of $80.0 million in
premiums reinsured, after which we retain 100% of the written premium on
instantly underwritten policies. This reduction in ceding percentage has
resulted in higher net premiums written per transaction when compared to prior
period results. Refer to Note 2 to the condensed consolidated financial
statements above for additional details on our reinsurance treaties.
Escrow, other title-related fees and other
Escrow fees and other title-related fees are charged in association with
managing the closing of real estate transactions, including the processing of
funds on behalf of the transaction participants, gathering and recording the
required closing documents, providing notary services, and other real estate or
title-related activities. Other fees relate to various ancillary services we
provide, including fees for rendering a cashier's check, document preparation
fees, homeowner's association letter fees, inspection fees, lien letter fees and
wire fees. We also recognize ceding commissions received in connection with
reinsurance treaties, to the extent the amount of such ceding commissions
exceeds reinsurance-related costs.
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This revenue item is most directly associated with our Distribution segment. For
segment-level reporting, agent premiums retained by our Distribution segment are
recorded as revenue under the "escrow, other title-related fees and other"
caption of our segment income statements, while our Underwriting segment records
a corresponding expense for insurance policies issued by us. The impact of these
internal transactions is eliminated upon consolidation.
Investment, dividends and other income
Investment, dividends and other income is generated mainly by income on our
investment portfolio, which consists mainly of our statutory reserves and excess
statutory capital. We primarily invest in fixed income securities, mainly
composed of corporate debt obligations, U.S. government agency obligations,
certificates of deposit, U.S. Treasuries and mortgage loans.
Expenses
Premiums retained by Third-Party Agents
When customers are referred to us and we underwrite a policy, the referring
Third-Party Agent retains a significant portion of the premium, which typically
amounts to approximately 84% of the premium. The portion of premiums retained by
Third-Party Agents is recorded as an expense. These referral expenses relate
exclusively to our Underwriting segment. As we continue to grow our Direct
Agents channel relative to our Third-Party Agents channel, we expect that
premiums retained by Third-Party Agents will decline as a percentage of revenue
over time.
For segment-level reporting, premiums retained by our Direct Agents (which are
recorded as Distribution segment revenue) are recorded as part of "premiums
retained by agents" expense for our Underwriting segment. The impact of these
internal transactions is eliminated upon consolidation.
Title examination expense
Title examination expense is incurred in connection with the search and
examination of public information prior to the issuance of title insurance
policies.
Provision for claims
Provision for claims expense is viewed by management to be comprised of three
components: incurred but not reported ("IBNR") reserves, known claims loss and
loss adjustment expense reserves, and escrow-related losses.
IBNR is a loss reserve that primarily reflects the sum of expected losses for
unreported claims. The expense is calculated by applying a rate (the loss
provision rate) to total title insurance premiums. The loss provision rate is
determined at the beginning of each year based in part upon an assessment
performed by an independent actuarial firm utilizing generally accepted
actuarial methods. The assessment also takes account of industry trends, the
regulatory environment and geographic considerations and is updated during the
year based on developments. This loss provision rate is set to provide for
losses on current year policies. Due to our long claim exposure, our provision
for claims periodically includes amounts of adverse or positive claims
development on policies issued in prior years, when claims on such policies are
higher or lower than initially expected.
Based on the risk profile of premium vintages over time and based upon the
projections of an independent actuarial firm, we build or release reserves
related to our older policies. Our IBNR may increase as a proportion of our
revenue as we continue to increase the proportion of our business serviced
through our Doma Intelligence platform, though we believe it will decrease over
the long term as our predictive machine intelligence technology produces
improved results.
Known claims loss and loss adjustment expense reserves is an expense that
reflects the best estimate of the remaining cost to resolve a claim, based on
the information available at the time. In practice, most claims do not settle
for the initial known claims provision; rather, as new information is developed
during the course of claims administration, the initial estimates are revised,
sometimes downward and sometimes upward. This additional development is provided
for in the actuarial projection of IBNR, but it is not allocable to specific
claims. Actual
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costs that are incurred in the claims administration are booked to loss
adjustment expense, which is primarily comprised of legal expenses associated
with investigating and settling a claim.
Escrow-related losses are primarily attributable to clerical errors that arise
during the escrow process and caused by the settlement agent. As the proportion
of our orders processed through our Doma Intelligence platform continues to
increase, we expect escrow-related losses to decline over time.
Personnel costs
Personnel costs include base salaries, employee benefits, bonuses paid to
employees, and payroll taxes. This expense is primarily driven by the average
number of employees and our hiring activities in a given period.
In our presentation and reconciliation of segment results and our calculation of
gross profit, we classify personnel costs as either direct or indirect expenses,
reflecting the activities performed by each employee. Direct personnel costs
relate to employees whose job function is directly related to our fulfillment
activities, including underwriters, closing agents, escrow agents, funding
agents, and title and curative agents, and are included in the calculation of
our segment adjusted gross profit. Indirect personnel costs relate to employees
whose roles do not directly support our transaction fulfillment activities,
including sales agents, training specialists and customer success agents,
segment management, research and development and other information technology
personnel, and corporate support staff.
Other operating expenses
Other operating expenses are comprised of occupancy, maintenance and utilities,
product taxes (for example, state taxes on gross premiums written), professional
fees (including legal, audit and other third-party consulting costs), software
licenses and sales tools, travel and entertainment costs, and depreciation and
amortization, among other costs.
Change in fair value of Warrant and Sponsor Covered Shares liabilities
Change in fair value of Warrant and Sponsor Covered Shares liabilities consists
of unrealized gains and losses as a result of marking our Warrants and Sponsor
Covered Shares to fair value at the end of each reporting period.
Income tax expense
Although we are in a consolidated net loss position and report our federal
income taxes as a consolidated tax group, we incur state income taxes in certain
jurisdictions where we have profitable operations. Additionally, we incur
mandatory minimum state income taxes in certain jurisdictions. Also, we have
recognized deferred tax assets but have offset them with a full valuation
allowance, reflecting substantial uncertainty as to their recoverability in
future periods. Until we report at least three years of profitability, we may
not be able to realize the tax benefits of these deferred tax assets.
Results of Operations
We discuss our historical results of operations below, on a consolidated basis
and by segment. Past financial results are not indicative of future results.
Three and Nine Months Ended September 30, 2021 Compared to the Three and Nine
Months Ended September 30, 2020
The following table sets forth a summary of our consolidated results of
operations for the periods indicated, and the changes between periods.
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Three Months Ended September 30,
2021 2020 $ Change % Change
(in thousands, except percentages)
Revenues:
Net premiums written $ 141,491 $ 103,587 $ 37,904 37 %
Escrow, other title-related fees and
other 20,452 16,742 3,710 22 %
Investment, dividend and other income 639 743 (104) (14) %
Total revenues $ 162,582 $ 121,072 $ 41,510 34 %
Expenses:
Premiums retained by Third-Party Agents$ 91,596 $ 67,024 $ 24,572 37 % Title examination expense 5,289 4,624 665 14 % Provision for claims 6,685 5,242 1,443 28 % Personnel costs 62,410 36,197 26,213 72 % Other operating expenses 21,693 10,210 11,483 112 % Total operating expenses$ 187,673 $ 123,297 $ 64,376 52 % Loss from operations (25,091) (2,225) (22,866) 1028 % Other (expense) income: Change in fair value of Warrant and Sponsor Covered Shares liabilities (4,478) - (4,478) * Interest expense (4,531) (1,193) (3,338) 280 % Loss before income taxes (34,100) (3,418) (30,682) 898 % Income tax expense$ (170) $ (204) $ 34 (17) % Net loss$ (34,270) $ (3,622) $ (30,648) 846 %
* = Not presented as prior period amount is zero
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Nine Months Ended September 30,
2021 2020 $ Change % Change
(in thousands, except percentages)
Revenues:
Net premiums written $ 358,754 $ 246,738 $ 112,016 45 %
Escrow, other title-related fees and
other 59,092 43,298 15,794 36 %
Investment, dividend and other income 2,518 2,268 250 11 %
Total revenues $ 420,364 $ 292,304 $ 128,060 44 %
Expenses:
Premiums retained by Third-Party Agents$ 227,115 $ 156,132 $ 70,983 45 % Title examination expense 15,643 11,811 3,832 32 % Provision for claims 16,741 10,065 6,676 66 % Personnel costs 159,829 104,652 55,177 53 % Other operating expenses 53,038 31,136 21,902 70 % Total operating expenses$ 472,366 $ 313,796 $ 158,570 51 % Loss from operations (52,002) (21,492) (30,510) 142 % Other (expense) income: Change in fair value of Warrant and Sponsor Covered Shares liabilities (4,478) - (4,478) * Interest expense (12,341) (4,428) (7,913) 179 % Loss before income taxes (68,821) (25,920) (42,901) 166 % Income tax expense$ (506) $ (620) $ 114 (18) % Net loss$ (69,327) $ (26,540) $ (42,787) 161 % * = Not presented as prior period amount is zero Revenue Net premiums written. Net premiums written increased by$37.9 million , or 37%, in the three months endedSeptember 30, 2021 compared to the same period in the prior year, driven by a 42% increase in premiums from our Direct Agents channel and a 35% increase in premiums from our Third-Party Agents channel. Net premiums written increased by$112.0 million , or 45%, in the nine months endedSeptember 30, 2021 compared to the same period in the prior year, driven by a 49% increase in premiums from our Direct Agents channel and a 45% increase in premiums from our Third-Party Agents channel. For the three and nine month periods endedSeptember 30, 2021 , Direct Agents premium growth was driven by closed order growth of 39% and 53%, respectively. For the three month period endedSeptember 30, 2021 , higher average retained premium per order of 2% contributed to the increase in premiums. For the nine month period endedSeptember 30, 2021 , closed order growth was offset by lower average premiums per order of 3%, due to a higher share of refinance orders during the year. Third-party agent growth reflects the results of management's continued efforts to increase wallet share capture from existing Third-Party Agents as well as efforts to generate new agent relationships to accelerate growth. For the nine month period endedSeptember 30, 2021 , the rise in premiums was also driven by an overall increase in market activity. Escrow, other title-related fees and other. Escrow, other title-related fees and other increased$3.7 million , or 22%, in the three months endedSeptember 30, 2021 and$15.8 million , or 36%, in the nine months endedSeptember 30, 2021 compared to the same periods in the prior year, driven by the corresponding closed order growth. 43 -------------------------------------------------------------------------------- Table of Contents Investment, dividend and other income. Investment, dividend and other income increased$0.3 million or 11% in the nine months endedSeptember 30, 2021 compared to the same period in the prior year, primarily due to one-time realized gains on investments from portfolio rebalancing. Expenses Premiums retained by Third-Party Agents. Premiums retained by Third-Party Agents increased by$24.6 million , or 37%, in the three months endedSeptember 30, 2021 and$71.0 million , or 45%, for the nine months endedSeptember 30, 2021 compared to the same periods in the prior year. The increases were driven principally by the growth in underwritten policies referred by Third-Party Agents, and there was no material change in average commissions paid to our Third-Party Agents. Title examination expense. Title examination expense increased by$0.7 million , or 14%, in the three months endedSeptember 30, 2021 and$3.8 million , or 32%, for the nine months endedSeptember 30, 2021 compared to the same periods in the prior year, principally due to growth in Direct Agents opened and closed orders and premiums written. Provision for claims. Provision for claims increased by$1.4 million , or 28%, in the three months endedSeptember 30, 2021 and$6.7 million , or 66%, for the nine months endedSeptember 30, 2021 compared to the same periods in the prior year primarily due to new business written premiums from the corresponding periods. The provision for claims, expressed as a percentage of net premiums written, was 4.7% and 5.1% for the three months endedSeptember 30, 2021 and 2020, respectively, and 4.7% and 4.1% for the nine months endedSeptember 30, 2021 and 2020, respectively. The reported loss emergence in both periods on policies issued in prior years was lower than expected. Personnel costs. Personnel costs increased by$26.2 million , or 72%, in the three months endedSeptember 30, 2021 and$55.2 million , or 53%, for the nine months endedSeptember 30, 2021 compared to the same periods in the prior year, due to investments in direct labor and customer acquisition, the expansion of our corporate support functions to operate as a public company, and an increase in operations and management staff supporting the Direct Agents channel as the organization invests in driving growth of Doma Intelligence-enabled closings. Other operating expenses. Other operating expenses increased by$11.5 million , or 112%, in the three months endedSeptember 30, 2021 and$21.9 million , or 70%, in the nine months endedSeptember 30, 2021 compared to the same periods in the prior year, driven by higher corporate support expenses to operate as a public company such as improved operating systems and human resources services, higher expenses to support revenue growth such as hardware and software purchases and travel and entertainment spend, higher amortization expenses related to investments in the development of our Doma Intelligence platform, and higher amortization of intangibles related to our rebranding to "Doma." Depreciation and amortization increased by$0.8 million , or 62%, and$4.5 million , or 138%, in the three and nine months endedSeptember 30, 2021 compared to the same period in the prior year due to these factors. Change in fair value of Warrant and Sponsor Covered Shares liabilities. The fair value of Warrant and Sponsor Covered Shares (as defined in Note 2) liabilities increased by$4.5 million in the three and nine months endedSeptember 30, 2021 compared to the same periods in the prior year, primarily due to the$5.2 million increase in the Warrant liabilities resulting from the subsequent measurement of the Public and Private Placement Warrants as ofSeptember 30, 2021 . The Warrant liabilities increased in fair value due to the corresponding increase in the market price of the Warrants, which is correlated to movements in Doma's stock price. This was partially offset by the$0.7 million decrease in the fair value of the Sponsor Covered Shares liability resulting from updates to the market inputs used to estimate that liability. Interest expense. Interest expense increased by$3.3 million , or 280%, in the three months endedSeptember 30, 2021 and$7.9 million , or 179%, for the nine months endedSeptember 30, 2021 compared to the same periods in the prior year, due to a higher amount of debt outstanding as well as a higher effective interest rate in 2021, which is a result of the issuance of the new$150.0 million Senior Debt facility during the first quarter of 2021. 44 -------------------------------------------------------------------------------- Table of Contents Supplemental Segment Results Discussion - Three and Nine Months EndedSeptember 30, 2021 Compared to the Three and Nine Months EndedSeptember 30, 2021 The following table sets forth a summary of the results of operations for our Distribution and Underwriting segments for the years indicated. See "-Basis of Presentation" above. Three Months Ended September 30, 2021
Three Months Ended
Distribution Underwriting Eliminations Consolidated Distribution Underwriting Eliminations Consolidated
(in thousands)
Net premiums written $ - $ 141,587 $ (96) $ 141,491 $ - $ 103,587 $ - $ 103,587
Escrow, other title-related
fees and other (1) 47,573 823 (27,944) 20,452 36,094 490 (19,842) 16,742
Investment, dividend and
other income 47 592 - 639 (40) 783 - 743
Total revenue $ 47,620 $ 143,002
- 119,636 (28,040) 91,596 - 86,866 (19,842) 67,024
Direct labor (3) 21,791 2,157 - 23,948 13,185 1,707 - 14,892
Other direct costs (4) 5,650 4,423 - 10,073 4,711 1,603 - 6,314
Provision for claims 1,243 5,442 - 6,685 617 4,625 - 5,242
Adjusted gross profit (5) $ 18,936 $ 11,344 $ - $ 30,280 $ 17,541 $ 10,059 $ - $ 27,600
Nine Months Ended September 30, 2021
Nine Months Ended
Distribution Underwriting Eliminations Consolidated Distribution Underwriting Eliminations Consolidated
(in thousands)
Net premiums written $ - $ 359,730 $ (976) $ 358,754 $ - $ 246,738 $ - $ 246,738
Escrow, other title-related
fees and other (1) 131,506 2,621 (75,035) 59,092 93,043 1,088 (50,833) 43,298
Investment, dividend and
other income 130 2,388 - 2,518 614 1,654 - 2,268
Total revenue $ 131,636 $ 364,739
- 303,126 (76,011) 227,115 - 206,965 (50,833) 156,132
Direct labor (3) 56,884 5,945 - 62,829 40,213 4,891 - 45,104
Other direct costs (4) 16,846 7,896 - 24,742 12,433 3,916 - 16,349
Provision for claims 1,777 14,964 - 16,741 1,006 9,059 - 10,065
Adjusted gross profit (5) $ 56,129 $ 32,808 $ - $ 88,937 $ 40,005 $ 24,649 $ - $ 64,654
__________________
(1)Includes fee income from closings, escrow, title exams, ceding commission
income, as well as premiums retained by Direct Agents.
(2)This expense represents a deduction from the net premiums written for the
amounts that are retained by Direct Agents and Third-Party Agents as
compensation for their efforts to generate premium income for our Underwriting
segment. The impact of premiums retained by our Direct Agents and the expense
for reinsurance or co-insurance procured on Direct Agent sourced premiums are
eliminated in consolidation.
(3)Includes all compensation costs, including salaries, bonuses, incentive
payments, and benefits, for personnel involved in the direct fulfillment of
title and/or escrow services.
(4)Includes title examination expense, office supplies, and premium and other
taxes.
(5)See "-Non-GAAP Financial Measures-Adjusted gross profit" below for a
reconciliation of consolidated adjusted gross profit, which is a non-GAAP
measure, to our gross profit, the most closely comparable GAAP financial
measure.
Distribution segment revenue increased by $11.6 million , or 32%, and $38.0
million , or 41%, for the three and nine months ended September 30, 2021 ,
respectively, compared to the same periods in the prior year driven by the
closed order growth discussed above. For the three months ended September 30,
2021 , higher average revenue per order of 10% contributed to the increase in
Distribution segment revenue, while for the nine month period ended
September 30, 2021 , lower average revenue per order of 7% offset the increase.
Underwriting segment revenue increased by $38.1 million , or 36%, and $115.3
million , or 46%, for the three and nine months ended September 30, 2021 ,
respectively, as compared to the same periods in the prior year, reflecting
significant growth in title policies underwritten from both Direct and
Third-Party Agents.
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Distribution segment adjusted gross profit improved $1.4 million , or 8%, and
$16.1 million , or 40%, for the three and nine months ended September 30, 2021
compared to the same periods in the prior year, driven by closed order growth
and efficiency improvements in direct expenses per order. Underwriting segment
adjusted gross profit increased by $1.3 million , or 13%, and $8.2 million , or
33%, during the three and nine months ended September 30, 2021 compared to the
same periods in the prior year, reflecting increased demand across all channels
of the business, and improvements realized in direct expenses that more than
offset the increase in provision for title claims expenses for the period.
Supplemental Key Operating and Financial Indicators Results Discussion - Three
and Nine Months Ended September 30, 2021 Compared to the Three and Nine Months
Ended September 30, 2021
The following table presents our key operating and financial indicators,
including our non-GAAP financial measures, for the periods indicated, and the
changes between periods. This discussion should be read only as a supplement to
the discussion of our GAAP results above. See "-Non-GAAP Financial Measures"
below for important information about the non-GAAP financial measures presented
below and their reconciliation to the respective most closely comparable GAAP
measures.
Three Months Ended September 30,
2021 2020 $ Change % Change
(in thousands, except percentages and open and closed order numbers)
Opened orders 52,867 37,572 15,295 41 %
Closed orders 35,300 25,358 9,942 39 %
Retained premiums and fees $ 70,986 $ 54,048 $ 16,938 31 %
Adjusted gross profit 30,280 27,600 2,680 10 %
Ratio of adjusted gross profit to
retained premiums and fees 43 % 51 % (8) p.p (16) %
Adjusted EBITDA $ (20,109) $ (649) (19,460) 2998 %
Nine Months Ended September 30,
2021 2020 $ Change % Change
(in thousands, except percentages and open and closed order numbers)
Opened orders 135,442 101,161 34,281 34 %
Closed orders 99,386 65,026 34,360 53 %
Retained premiums and fees $ 193,249 $ 136,172 $ 57,077 42 %
Adjusted gross profit 88,937 64,654 24,283 38 %
Ratio of adjusted gross profit to
retained premiums and fees 46 % 47 % (1) p.p (2) %
Adjusted EBITDA $ (35,291) $ (15,926) (19,365) 122 %
Opened and closed orders
For the three months ending September 30, 2021 , we opened 52,867 orders and
closed 35,300 orders, an increase of 41% and 39%, respectively, over the same
period in the prior year. Closed orders increased 386% for the three months
ended September 30, 2021 as compared to the same period in the prior year in our
Doma Enterprise channel due to new customer acquisitions, increased wallet share
with existing customers, and an expanding geographical footprint. Closed orders
decreased by 8% in our Local channel in the third quarter of 2021 compared to
the same period in the prior year due to the contracting refinance market, which
was partially offset by growth in purchase orders.
For the nine months ending September 30, 2021 , we opened 135,442 orders and
closed 99,386 orders, an increase of 34% and 53%, respectively, over the same
period in the prior year. Closed orders increased 462% year over year in our
Doma Enterprise channel due to new customer acquisitions, increased wallet share
with existing
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customers, and an expanding geographical footprint. Closed order growth was 7%
in our Local channel in the nine months ended September 30, 2021 compared to the
same period in the prior year driven by growth in both refinance and purchase
orders.
Retained premiums and fees
Retained premiums and fees increased by $16.9 million , or 31%, and $57.1
million , or 42%, during the three and nine months ended September 30, 2021
compared to the same periods in the prior year, driven by strong closed order
and title policy growth across Direct and Third-Party Agents.
Adjusted gross profit
Adjusted gross profit increased by $2.7 million , or 10%, and $24.3 million , or
38%, during the three and nine months ended September 30, 2021 compared to the
same periods in the prior year, due to growth in retained premiums and fees of
$16.9 million and $57.1 million in the same periods. The growth in retained
premiums and fees was partially offset by investments in fulfillment
infrastructure to support future growth.
Ratio of adjusted gross profit to retained premiums and fees
The ratio of adjusted gross profit to retained premiums and fees decreased 8
percentage points and 1 percentage point during the three and nine months ended
September 30, 2021 , respectively, compared to the same periods in the prior
year. The decrease is primarily due to higher direct labor expenses of $9.1
million , or 61%, and $17.7 million , or 39%, during the three and nine months
ended September 30, 2021 , respectively, compared to the same periods in the
prior year. The rise in direct labor expenses exceeded retained premium and fee
growth as fulfillment labor was hired in advance of future volume growth.
Contributing to the increase during the nine months ended September 30, 2021 was
a slight increase in the provision for claims as a percentage of net written
premium from 4.1% to 4.7%.
Adjusted EBITDA
Adjusted EBITDA decreased by $19.5 million , or 2998%, to negative $20.1 million
for the three months ended September 30, 2021 , driven by $22.1 million of higher
operating costs from investments in corporate support functions to successfully
operate as a public company, research and development, and operations and
management staff to support growth and transformation in the Direct Agents
channel. This was offset by a $2.7 million improvement in adjusted gross profit.
Adjusted EBITDA decreased by $19.4 million , or 122%, to negative $35.3 million
for the nine months ended September 30, 2021 , driven by $44.0 million of higher
operating costs from the same investments in the Company. This was offset by a
$24.3 million improvement in adjusted gross profit.
Non-GAAP Financial Measures
The non-GAAP financial measures described in this Quarterly Report should be
considered only as supplements to results prepared in accordance with GAAP and
should not be considered as substitutes for GAAP results. These measures,
retained premiums and fees, adjusted gross profit, and adjusted EBITDA, have not
been calculated in accordance with GAAP and are therefore not necessarily
indicative of our trends or profitability in accordance with GAAP. These
measures exclude or otherwise adjust for certain cost items that are required by
GAAP. Further, these measures may be defined and calculated differently than
similarly-titled measures reported by other companies, making it difficult to
compare our results with the results of other companies. We caution investors
against undue reliance on our non-GAAP financial measures as a substitute for
our results in accordance with GAAP.
Management uses these non-GAAP financial measures, in conjunction with GAAP
financial measures to: (i) monitor and evaluate the growth and performance of
our business operations; (ii) facilitate internal comparisons of the historical
operating performance of our business operations; (iii) facilitate external
comparisons of the results of our overall business to the historical operating
performance of other companies that may have different capital structures or
operating histories; (iv) review and assess the performance of our management
team and other employees; and (v) prepare budgets and evaluate strategic
planning decisions regarding future operating investments.
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Retained premiums and fees
The following presents our retained premiums and fees and reconciles the measure
to our gross profit, the most closely comparable GAAP financial measure, for the
periods indicated:
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(in thousands) (in thousands)
Revenue $ 162,582 $ 121,072 $ 420,364 $ 292,304
Minus:
Premiums retained by Third-Party
Agents 91,596 67,024 227,115 156,132
Retained premiums and fees $ 70,986 $ 54,048 $ 193,249 $ 136,172
Minus:
Direct labor 23,948 14,892 62,829 45,104
Provision for claims 6,685 5,242 16,741 10,065
Depreciation and amortization 1,978 1,221 7,705 3,236
Other direct costs (1) 10,073 6,314 24,742 16,349
Gross Profit $ 28,302 $ 26,379 $ 81,232 $ 61,418
__________________(1)Includes title examination expense, office supplies, and premium and other taxes.
Adjusted gross profit
The following table reconciles our adjusted gross profit to our gross profit,
the most closely comparable GAAP financial measure, for the periods indicated:
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(in thousands) (in thousands)
Gross Profit $ 28,302 $ 26,379 $ 81,232 $ 61,418
Adjusted for:
Depreciation and amortization 1,978 1,221 7,705 3,236
Adjusted Gross Profit $ 30,280 $ 27,600 $ 88,937 $ 64,654
Adjusted EBITDA
The following table reconciles our adjusted EBITDA to our net loss, the most
closely comparable GAAP financial measure, for the periods indicated:
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Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(in thousands) (in thousands)
Net loss (GAAP) $ (34,270) $ (3,622) $ (69,327) $ (26,540)
Adjusted for:
Depreciation and amortization 1,978 1,221 7,705 3,236
Interest expense 4,531 1,193 12,341 4,428
Income taxes 170 204 506 620
EBITDA $ (27,591) $ (1,004) $ (48,775) $ (18,256)
Adjusted for:
Stock-based compensation 3,004 355 9,006 945
COVID-related severance costs - - - 1,385
Change in fair value of Warrant and
Sponsor Covered Shares liabilities 4,478 - 4,478 -
Adjusted EBITDA $ (20,109) $ (649) $ (35,291) $ (15,926)
Liquidity and Capital Resources
We measure liquidity in terms of our ability to fund the cash requirements of
our business operations, including our working capital and capital expenditure
needs and other commitments. Our recurring working capital requirements relate
mainly to our cash operating costs. Our capital expenditure requirements consist
mainly of software development related to our Doma Intelligence platform.
We had $413.7 million in cash and cash equivalents and restricted cash as of
September 30, 2021 . We believe our operating cash flows, together with our cash
on hand and the cash proceeds from the Business Combination and the related
private placement, will be sufficient to meet our working capital and capital
expenditure requirements for a period of at least 12 months from the date of
this Quarterly Report.
We may need additional cash due to changing business conditions or other
developments, including unanticipated regulatory developments and competitive
pressures. To the extent that our current resources are insufficient to satisfy
our cash requirements, we may need to seek additional equity or debt financing.
Debt
Lennar seller financing note
As part of the North American Title Acquisition, Lennar issued Old Doma a note
for $87.0 million on January 7, 2019 with a maturity date of January 7, 2029 .
Cash interest on the note accrued at the LIBOR one-month rate, plus a fixed rate
of 8.5% per annum on a "pay-in-kind" ("PIK") basis. Old Doma repaid the note in
full in January 2021 , after making several principal prepayments in 2019 and
2020.
Senior secured credit agreement
In December 2020 , Old Doma entered into a loan and security agreement with
Hudson Structured Capital Management Ltd. ("HSCM"), providing for a $150.0
million senior secured term loan ("Senior Debt"), which was fully funded by the
lenders, which are affiliates of HSCM, at its principal face value on January
29, 2021 (the "Funding Date") and matures on the fifth anniversary of the
Funding Date. The Senior Debt bears interest at a rate of 11.25% per annum, of
which 5.0% is payable in cash in arrears and the remaining 6.25% accrues to the
outstanding principal balance on a PIK basis. Interest is payable or compounded,
as applicable, quarterly. Principal prepayments on the Senior Debt are
permitted, subject to a premium, which declines from 8% of principal today to 4%
in 2023 and to zero in 2024.
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The Senior Debt is secured by a first-priority pledge and security interest in
substantially all of the assets of the Company, including the assets of our
existing and future domestic subsidiaries (in each case, subject to customary
exclusions, including the exclusion of regulated insurance company
subsidiaries). The Senior Debt is subject to customary affirmative and negative
covenants, including limits on the incurrence of debt and restrictions on
acquisitions, sales of assets, dividends and certain restricted payments. The
Senior Debt is also subject to two financial maintenance covenants, related to
our liquidity and revenues. The liquidity covenant requires the Company to have
at least $20.0 million of liquidity, calculated as of the last day of each
month, as the sum of (i) our unrestricted cash and cash equivalents and (ii) the
aggregate unused and available portion of any working capital or other revolving
credit facility. The revenue covenant, which is tested as of the last day of
each fiscal year, requires that our consolidated GAAP revenue for the year to be
greater than $130.0 million . The Senior Debt is subject to customary events of
default and cure rights. As of the date of this Quarterly Report, we complied
with all Senior Debt covenants.
Upon funding, Old Doma issued penny warrants to affiliates of HSCM equal to
1.35% of Old Doma's fully diluted shares. The warrants were net exercised on the
Closing Date and such affiliates of HSCM received the right to receive
approximately 4.2 million shares of Doma common stock.
Other commitments and contingencies
Our commitments for leases, related to our office space and equipment, amounted
to $37.6 million as of September 30, 2021 of which $2.3 million is payable in
2021. Refer to Note 12 to our condensed consolidated financial statements for a
summary of our future commitments. Our headquarters lease expires in 2024. As of
the date of this Quarterly Report, we did not have any other material
commitments for cash expenditures. We also administer escrow deposits as a
service to customers, a substantial portion of which are held at third-party
financial institutions. Such deposits are not reflected on our balance sheet,
but we could be contingently liable for them under certain circumstances (for
example, if we dispose of escrowed assets). Such contingent liabilities have not
materially impacted our results of operations or financial condition to date and
are not expected to do so in the near term.
Cash flows
The following table summarizes our cash flows for the periods indicated:
Nine Months Ended September 30,
2021 2020
(in thousands)
Net cash used in operating activities $ (32,547) $ (16,401)
Net cash used in investing activities (18,313) (53,909)
Net cash provided by financing activities 352,528
42,701
Operating activities In the first nine months of 2021, net cash used in operating activities was$32.5 million driven by the net loss of$69.3 million and cash paid for prepaid expenses of$14.8 million . This was offset by increases of accrued expenses and other liabilities of$13.8 million and the liability for loss and loss adjustment expenses of$8.9 million and non-cash costs including depreciation and amortization of$7.7 million and stock-based compensation expense of$8.4 million . In the first nine months of 2020, net cash used in operating activities was$16.4 million driven by the net loss of$26.5 million and cash paid for prepaid expenses of$6.2 million . This was offset by increases in the liability for loss and loss adjustment expenses of$3.4 million and accounts payable of$2.7 million and non-cash costs including PIK interest of$5.1 million and depreciation and amortization of$3.2 million . 50 -------------------------------------------------------------------------------- Table of Contents Investing activities Our capital expenditures have historically consisted mainly of costs incurred in the development of the Doma Intelligence platform. Our other investing activities generally consist of transactions in fixed maturity investment securities to provide regular interest payments. In the first nine months of 2021, net cash used in investing activities was$18.3 million , and reflected$33.7 million of purchases of investments offset by$33.4 million of proceeds from the sale of investments. Cash paid for fixed assets was$18.8 million in the same period, largely consisting of technology development costs related to the Doma Intelligence platform. In the first nine months of 2020, net cash used in investing activities was$53.9 million and reflected$58.6 million of purchases of investments offset by$15.8 million of proceeds from the sale of investments. In the same period, cash paid for fixed assets was$12.7 million , largely consisting of technology development costs related to Doma Intelligence. We also received$1.3 million from the sale of a title plant in the same period. Financing activities Net cash provided by financing activities was$352.5 million in the first nine months of 2021, reflecting$625.0 million in proceeds from the Business Combination andPIPE Investment (as defined in Note 3) and$150.0 million of proceeds from the Senior Debt. This increase was offset by$294.9 million in redemptions of redeemable common and preferred stock and$63.2 million in payment of costs directly attributable to the issuance of common stock in connection with Business Combination andPIPE Investment . The net cash provided by financing activities was also offset by the$65.5 million repayment of the Lennar seller financing note. Net cash provided by financing activities was$42.7 million in the first nine months of 2020, reflecting$70.7 million in proceeds from the issuance of Series C preferred stock, offset by a$28.1 million payment on the Lennar seller financing note. Critical Accounting Policies and Estimates Our consolidated financial statements have been prepared in accordance with GAAP. Preparation of the financial statements requires our management to make several judgments, estimates and assumptions relating to the reported amount of revenue and expenses, assets and liabilities and the disclosure of contingent assets and liabilities. We evaluate our significant estimates on an ongoing basis, including, but not limited to, liability for loss and loss adjustment expenses, goodwill, accrued net premiums written from Third-Party Agents referrals, and the Sponsor Covered Shares liability. We consider an accounting judgment, estimate or assumption to be critical when (1) the estimate or assumption is complex in nature or requires a high degree of judgment and (2) the use of different judgments, estimates and assumptions could have a material impact on our consolidated financial statements. Our significant accounting policies are described in Note 2 to our annual audited consolidated financial statements. Our critical accounting estimates are described below. Liability for loss and loss adjustment expenses Our liability for loss and loss adjustment expenses include mainly reserves for known claims as well as reserves for IBNR claims. Each known claim is reserved based on our estimate of the costs required to settle the claim. IBNR is a loss reserve that primarily reflects the sum of expected losses for unreported claims. The expense is calculated by applying the loss provision rate to total title insurance premiums. With the assistance of a third-party actuarial firm, we determine the loss provision rate for the policies written in the current year. This assessment considers factors such as historical experience and other factors, including industry trends, claim loss history, legal environment, geographic considerations and the types of title insurance policies written (i.e., real estate purchase or refinancing transactions). The loss provision rate is set to provide for losses on current year policies, but due to development of prior years and our long claim duration, it periodically includes amounts of estimated adverse or positive development on prior years' policies. The estimates used require considerable judgment and are established as management's best estimate of future outcomes, however, the amount of IBNR reserved based on these estimates could ultimately prove to be inadequate 51 -------------------------------------------------------------------------------- Table of Contents to cover actual future claims experience. We continually monitor for any events and/or circumstances that arise during the year which may indicate that the assumptions used to record the provision for claims estimate requires reassessment. Our total loss reserve as ofSeptember 30, 2021 amounted to$78.7 million , which we believe, based on historical claims experience and actuarial analyses, is adequate to cover claim losses resulting from pending and future claims for policies issued throughSeptember 30, 2021 . We continually review and adjust our reserve estimates to reflect loss experience and any new information that becomes available.Goodwill We have significant goodwill on our balance sheet related to acquisitions, as goodwill represents the excess of the acquisition price over the fair value of net assets acquired and liabilities assumed in a business combination.Goodwill is tested and reviewed annually for impairment onOctober 1 of each fiscal year, and between annual tests if events or circumstances arise that would more likely than not reduce the fair value of any one of our reporting units below its respective carrying amount. In addition, an interim impairment test may be completed upon a triggering event or when there is a reorganization of reporting structure or disposal of all or a portion of a reporting unit. As ofSeptember 30, 2021 , we had$111.5 million of goodwill, relating to the North American Title Acquisition, of which$88.1 million and$23.4 million was allocated to our Distribution and Underwriting reporting units, respectively. In performing our annual goodwill impairment test, we first perform a qualitative assessment, which requires that we consider significant estimates and assumptions regarding macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, changes in management or key personnel, changes in strategy, changes in customers, changes in the composition or carrying amount of a reporting unit or other factors that have the potential to impact fair value. If, after assessing the totality of events and circumstances, we determine that it is more likely than not that the fair values of our reporting units are greater than the carrying amounts, then the quantitative goodwill impairment test is not performed, as goodwill is not considered to be impaired. However, if we determine that the fair value of a reporting unit is more likely than not to be less than its carrying value, then a quantitative assessment is performed. For the quantitative assessment, the determination of estimated fair value of our reporting units requires us to make assumptions about future discounted cash flows, including profit margins, long-term forecasts, discount rates and terminal growth rates and, if possible, a comparable market transaction model. If, based upon the quantitative assessment, the reporting unit fair value is less than the carrying amount, a goodwill impairment is recorded equal to the difference between the carrying amount of the reporting unit's goodwill and its fair value, not to exceed the carrying value of goodwill allocated to that reporting unit, and a corresponding impairment loss is recorded in the consolidated statements of operations. We completed our annual goodwill impairment test onOctober 1, 2020 . We determined, after performing a qualitative review of each reporting unit, that the fair value of each reporting unit exceeded its respective carrying value. Accordingly, there was no indication of impairment and the quantitative goodwill impairment test was not performed. We did not identify any events, changes in circumstances, or triggering events since the performance of our annual goodwill impairment test that would require us to perform an interim goodwill impairment test during the fiscal year. Accrued net premiums written from Third-Party Agent referrals We recognize revenues on title insurance policies issued by Third-Party Agents when notice of issuance is received from Third-Party Agents, which is generally when cash payment is received. In addition, we estimate and accrue for revenues on policies sold but not reported by Third-Party Agents as of the relevant balance sheet closing date. This accrual is based on historical transactional volume data for title insurance policies that have closed and were not reported before the relevant balance sheet closing, as well as trends in our operations and in the title and housing industries. There could be variability in the amount of this accrual from period to period and amounts subsequently reported to us by Third-Party Agents may differ from the estimated accrual recorded in the preceding period. If the amount of revenue subsequently reported to us by Third Party Agents is higher or lower than our estimate, we record the difference in revenue in the period in which it is reported. For the three and nine months endedSeptember 30, 2021 and 2020, the time lag between the closing of transactions by Third-Party Agents and the 52 -------------------------------------------------------------------------------- Table of Contents reporting of policies, or premiums from policies issued by Third-Party Agents to us has been approximately three months. Sponsor Covered Shares liability The Sponsor Covered Shares, as described in Note 3, will become vested contingent upon the price of Doma common stock exceeding certain thresholds or upon some strategic events, which include events that are not indexed to Doma common stock. We obtained a third-party valuation of the Sponsor Covered Shares as ofJuly 28, 2021 (i.e., the Closing Date) andSeptember 30, 2021 using the Monte Carlo simulation methodology and based upon assumptions regarding stock price, dividend yield, expected term, volatility and risk-free rate. The share price represents the trading price as of each valuation date. The expected dividend yield is zero as we have never declared or paid cash dividends and have no current plans to do so during the expected term. The expected term represents the vesting period, which is 9.83 years. The expected volatility of 55.2% was calculated based on the average of (i) the Doma implied volatility calculated using longest term stock option and (ii) median leverage adjusted (asset) volatility calculated using a set of Guideline Public Companies ("GPCs"). Volatility for the GPCs was calculated over a lookback period of 9.83 years (or longest available data for GPCs whose trading history was shorter than 9.83 years), commensurate with the contractual term of the Sponsor Covered Shares. The risk-free rate utilizes the 10-yearU.S. Constant Maturity. Finally, the annual change in control probability is estimated to be 2.0%. As ofSeptember 30, 2021 , the Sponsor Covered Shares liability amounted to$8.6 million . New Accounting Pronouncements For information about recently issued accounting pronouncements, refer to Note 2 to our condensed consolidated financial statements included elsewhere in this filing. Emerging Growth Company Accounting Election Section 102(b)(1) of the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act") exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company's condensed financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.. Item 3. Quantitative and Qualitative Disclosures About Market Risks Our principal market risk is interest rate risk because our results of operations can vary due to changes in interest rates. In a declining interest rate environment, we would expect our results of operations to be positively impacted by higher loan refinancing activity. However, in a rising interest rate environment, we would expect our results of operations to be negatively impacted by lower loan refinancing activity. We would expect both of these scenarios to be mitigated by home purchase loan activity. Fluctuations in interest rates may also impact the interest income earned on floating-rate investments and the fair value of our fixed-rate investments. An increase in interest rates decreases the market value of fixed-rate investments. Conversely, a decrease in interest rates increases the fair market value of fixed-rate investments. 53
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