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, 2022 and 2021 and for the three and nine months endedSeptember 30, 2022 and 2021, 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, 2021 and 2020 and for the years endedDecember 31, 2021 , 2020 and 2019, together with related notes thereto, contained in our annual report on Form 10-K for the year endedDecember 31, 2021 (the "Annual Report"). This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties and should be read in conjunction with the disclosures and information contained in "Cautionary Note Regarding Forward-Looking Statements" in the Annual Report. Our actual results may differ materially from those projected in these forward-looking statements as a result of various factors, including those set forth under Part I, Item 1A "Risk Factors" or in other parts of the Annual Report. Certain amounts may not foot due to rounding. 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. 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.
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. We founded Doma to create a home ownership process for today's consumers who expect instant, digital experiences. 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 five years across a team of more than 100 data scientists and engineers. It creates a revolutionary new end-to-end real estate 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 more affordable 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 facilitating the entire closing 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 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 customers, the individuals purchasing
a new home or refinancing their existing mortgage:
•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 partner's
loan production systems, to enable frictionless order origination and
fulfillment. Substantially all Doma Enterprise orders are underwritten by Doma.
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•Local Markets ("Local") - we target partnerships with realtors, attorneys and
non-centralized loan originators via a 105-branch footprint across ten states as
of September 30, 2022 . For the quarter ended September 30, 2022 , 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 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% - 18%) 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 category is comprised 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 82% - 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, 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
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segment results and a reconciliation between segment adjusted gross profit and
our consolidated loss before income taxes.
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 toStates Title Holding, Inc. ,Capitol changed its name toDoma 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 anSEC -registered andNew York Stock Exchange -listed shell company. Becoming a public company has required us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and practices. Also, we have incurred 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. Macroeconomic Trends COVID-19 has resulted in significant macroeconomic impacts, market disruptions, and volatility in the real estate market. The on-going macroeconomic trends impacting the residential real estate market include a shortage in the supply of homes for sale, increasing home prices, rising mortgage interest rates, inflation, disrupted labor markets and geopolitical uncertainties associated with the war inUkraine . 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. Our success depends on a high volume of residential and, to a lesser extent, commercial real estate transactions, throughout the markets in which we operate. Responses to the COVID-19 pandemic initially led to a material decline in purchase transactions. SubsequentU.S. federal stimulus measures in 2021, including interest rate reductions by theFederal Reserve , and local regulatory initiatives, such as permitting remote notarization, led to a quick recovery for the real estate industry and resulted in an increase in mortgage refinancing and purchase volumes, which we believe benefited our business model. Through the first three quarters of 2022, to combat inflation, theFederal Reserve has raised the benchmark interest rate by a total of 300 basis points, including separate 75 basis point increases in June, July, and September of 2022. TheFederal Reserve raised the benchmark interest rate by another 75 basis points in November of 2022. Average interest rates for a 30-year fixed rate mortgage rose to 6.11% as ofSeptember 2022 as compared to 2.9% for the corresponding period of 2021. As interest rates rise, the outlook on refinance transactions continues to decline. 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.
We continue to monitor economic and regulatory developments closely as we navigate the volatility and uncertainty created by the pandemic and the subsequent macroeconomic activity.
New York Stock Exchange Notice on Continued Listing Standards
OnAugust 1, 2022 , we received notice from theNew York Stock Exchange (the "NYSE") that we were no longer in compliance with the NYSE continued listing standards, set forth in Section 802.01C of the NYSE's Listed Company Manual ("Section 802.01C") because the average closing price of the Company's common stock was less than$1.00 per share over a consecutive 30 trading-day period. Pursuant to Section 802.01C, the Company has a 41 -------------------------------------------------------------------------------- Table of Contents period of six months following the receipt of the notice to regain compliance with the minimum share price requirement. The Company may regain compliance at any time during the six-month cure period if on the last trading day of any calendar month during the cure period the common stock has a closing share price of at least$1.00 and an average closing share price of at least$1.00 over the 30 trading-day period ending on the last trading day of that month. If the Company is unable to regain compliance with the$1.00 share price rule within this period, the NYSE will initiate procedures to suspend and delist the common stock. Section 802.01C also provides for an exception to the six-month cure period if the action required to cure the price condition requires stockholder approval, as would be the case to effectuate a reverse stock split, in which case the action needs to be approved by no later than the Company's next annual stockholder's meeting, and the price condition will be deemed cured if the price of the common stock promptly exceeds$1.00 per share and the price remains above that level for at least the following 30 trading days. The Company intends to cure the deficiency within a period permissible under Section 802.01C. However, there can be no assurances that the Company will meet continued listing standards within the specified cure period. We are diligently working to evidence compliance with the minimum price requirement for continued listing on the NYSE. The notification has no immediate effect on the listing of our common stock on the NYSE. We intend to monitor the closing price of our common stock and consider our available options in the event the closing price of our common stock remains below$1.00 per share.
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 generally accepted accounting principles ("GAAP") measures, for
the periods indicated:
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(in thousands, except for open and closed order numbers)
Key operating data:
Opened orders 21,509 52,867 81,932 135,442
Closed orders 15,302 35,300 61,448 99,386
GAAP financial data:
Revenue (1) $ 107,856 $ 162,582 $ 343,807 $ 420,364
Gross profit (2) $ 7,355 $ 28,302 $ 21,632 $ 81,232
Net loss $ (84,113) $ (34,270) $ (192,791) $ (69,327)
Non-GAAP financial data (3):
Retained premiums and fees $ 42,715 $ 70,986 $ 143,426 $ 193,249
Adjusted gross profit $ 11,606 $ 30,280 $ 32,866 $ 88,937
Ratio of adjusted gross profit to
retained premiums and fees 27 % 43 % 23 % 46 %
Adjusted EBITDA $ (30,232) $ (20,109) $ (118,527) $ (35,291)
_________________
(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. A
closed order for a home purchase 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 our Doma Intelligence platform to provide an overall improved customer and referral partner 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% - 18% 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
The 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 82% - 84% of the premiums
related to a title insurance policy referral pursuant to the terms of long-term
contracts.
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-------------------------------------------------------------------------------- Table of Contents 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, severance costs, goodwill impairment 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- Accrued net premiums written from Third-Party Agent referrals" below for further explanation of this accrual. For the three and nine months endedSeptember 30, 2022 and 2021, 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 fromJanuary 1, 2021 throughFebruary 23, 2021 . Pursuant to a renewed agreement, which became effective onFebruary 24, 2021 , we cede only 25% of the written premium on such instantly underwritten policies 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 for 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 are mainly generated from our investment portfolio. We primarily invest in fixed income securities, mainly composed of corporate debt obligations, certificates of deposit,U.S. Treasuries, foreign government securities 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 82% - 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 comprised of three components: IBNR losses, known claims loss and loss adjustment expenses 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 throughout the 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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Personnel costs
Personnel costs include base salaries, employee benefits, bonuses paid to employees, stock-based compensation, payroll taxes and severance. 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 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.
Goodwill impairment consists of non-cash impairment charges relating to goodwill. We review goodwill for impairment annually onOctober 1 and more frequently if events or changes in circumstances indicate that an impairment may exist. If the carrying value of the reporting unit continues to exceed its fair value, the fair value of the reporting unit's goodwill is calculated and an impairment loss equal to the excess is recorded.
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 recording 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.
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Three and Nine Months Ended September 30, 2022 Compared to the Three and Nine
Months Ended September 30, 2021 The following table sets forth a summary of our consolidated results of operations for the periods indicated, and the changes between periods.
Three Months Ended September 30,
2022 2021 $ Change % Change
(in thousands, except percentages)
Revenues:
Net premiums written $ 94,488 $ 141,491 $ (47,003) (33) %
Escrow, other title-related fees and
other 12,627 20,452 (7,825) (38) %
Investment, dividend and other income 741 639 102 16 %
Total revenues $ 107,856 $ 162,582 $ (54,726) (34) %
Expenses:
Premiums retained by Third-Party Agents$ 65,141 $ 91,596 $ (26,455) (29) % Title examination expense 3,709 5,289 (1,580) (30) % Provision for claims 4,665 6,685 (2,020) (30) % Personnel costs 60,481 62,410 (1,929) (3) % Other operating expenses 20,656 21,693 (1,037) (5) % Goodwill impairment 33,746 - 33,746 * Total operating expenses$ 188,398 $ 187,673 $ 725 - % Loss from operations (80,542) (25,091) (55,451) 221 % Other (expense) income: Change in fair value of Warrant and Sponsor Covered Shares liabilities 1,438 (4,478) 5,916 (132) % Interest expense (4,584) (4,531) (53) 1 % Loss before income taxes (83,688) (34,100) (49,588) 145 % Income tax expense (425) (170) (255) 150 % Net loss$ (84,113) $ (34,270) $ (49,843) 145 %
* = Not presented as prior period amount is zero
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Nine Months Ended September 30,
2022 2021 $ Change % Change
(in thousands, except percentages)
Revenues:
Net premiums written $ 299,080 $ 358,754 $ (59,674) (17) %
Escrow, other title-related fees and
other 43,106 59,092 (15,986) (27) %
Investment, dividend and other income 1,621 2,518 (897) (36) %
Total revenues $ 343,807 $ 420,364 $ (76,557) (18) %
Expenses:
Premiums retained by Third-Party Agents$ 200,381 $ 227,115 $ (26,734) (12) % Title examination expense 14,836 15,643 (807) (5) % Provision for claims 15,586 16,741 (1,155) (7) % Personnel costs 211,507 159,829 51,678 32 % Other operating expenses 67,047 53,038 14,009 26 % Goodwill impairment 33,746 - 33,746 * Total operating expenses$ 543,103 $ 472,366 $ 70,737 15 % Loss from operations (199,296) (52,002) (147,294) 283 % Other (expense) income: Change in fair value of Warrant and Sponsor Covered Shares liabilities 20,531 (4,478) 25,009 (558) % Interest expense (13,280) (12,341) (939) 8 % Loss before income taxes (192,045) (68,821) (123,224) 179 % Income tax expense$ (746) $ (506) $ (240) 47 % Net loss$ (192,791) $ (69,327) $ (123,464) 178 %
* = Not presented as prior period amount is zero
Revenue
Net premiums written. Net premiums written decreased by$47.0 million , or 33%, in the three months endedSeptember 30, 2022 compared to the same period in the prior year, driven by a 54% decrease in premiums from our Direct Agents channel and a 27% decrease in premiums from our Third-Party Agents channel. Net premiums written decreased by$59.7 million , or 17%, in the nine months endedSeptember 30, 2022 compared to the same period in the prior year, driven by a 35% decrease in premiums from our Direct Agents channel and an 11% decrease from our Third-Party Agents channel. For the three and nine months endedSeptember 30, 2022 , Direct Agents premium decline was driven by closed order decline of 57% and 38%, respectively. For the three and nine months endedSeptember 30, 2022 , the decrease in premiums from our Third-Party Agents channel was driven by an overall decrease in market activity, specifically in the refinance market, resulting from the rising interest rate environment, partially offset by an increase in premiums associated with new home buildings that closed during the periods. Escrow, other title-related fees and other. Escrow, other title-related fees and other decreased$7.8 million , or 38%, in the three months endedSeptember 30, 2022 and decreased$16.0 million , or 27%, in the nine months endedSeptember 30, 2022 , compared to the same periods in the prior year, driven by the corresponding closed order decline of 57% and 38%, respectively. The decline in closed order activity was partially offset by higher average 48 -------------------------------------------------------------------------------- Table of Contents escrow fees per direct order of 42% and 18% in the three and nine months endedSeptember 30, 2022 , respectively, compared to the same period in the prior year, resulting from a higher mix of purchase orders. Investment, dividend and other income. Investment, dividend and other income decreased$0.9 million or 36% in the nine months endedSeptember 30, 2022 compared to the same period in the prior year, primarily due to one-time realized gains on investments from portfolio rebalancing during the nine months endedSeptember 30, 2021 . Expenses Premiums retained by Third-Party Agents. Premiums retained by Third-Party Agents decreased by$26.5 million , or 29%, in the three months endedSeptember 30, 2022 and decreased by$26.7 million , or 12%, for the nine months endedSeptember 30, 2022 compared to the same periods in the prior year. These movements were driven principally by decreases in premium in our Third-Party Agents channel. There was no material change in the average commissions paid to our Third-Party Agents. Title examination expense. Title examination expense decreased by$1.6 million , or 30%, in the three months endedSeptember 30, 2022 and decreased by$0.8 million , or 5%, in the nine months endedSeptember 30, 2022 compared to the same periods in the prior year, due to the corresponding declines in order volumes. Offsetting these declines was an increase in fixed expenses incurred to support fulfillment, including title plant maintenance expenses and software license fees. Provision for claims. Provision for claims decreased by$2.0 million , or 30%, in the three months endedSeptember 30, 2022 compared to the same period in the prior year, primarily due to a reduction in the provision for claims related to the current year due to the corresponding decrease in premiums written. This was offset by a decrease in reserve releases for claims incurred from prior period business. For the three months endedSeptember 30, 2022 reserve releases related to prior period policies were$0.5 million compared to$2.4 million for the corresponding period in the prior year. The provision for claims, expressed as a percentage of net premiums written, was 4.9% and 4.7% for the three months endedSeptember 30, 2022 and 2021, respectively. Provision for claims decreased by$1.2 million , or 7%, for the nine months endedSeptember 30, 2022 compared to the same period in the prior year, primarily due to a reduction in the provision for claims related to the current year due to the corresponding decrease in premiums written. For the nine months endedSeptember 30, 2022 reserve releases related to prior year policies were$2.6 million compared to$6.8 million for the corresponding period in the prior year. The provision for claims, expressed as a percentage of net premiums written, was 5.2% and 4.7% for the nine months endedSeptember 30, 2022 and 2021, respectively. The reported loss emergence on policies issued in prior years was lower than expected. Personnel costs. Personnel costs decreased by$1.9 million , or 3%, for the three months endedSeptember 30, 2022 compared to the same period in the prior year, due to decreases in direct labor and customer acquisition expenses partially offset by increases in severance costs from previously disclosed workforce reduction plans and stock compensation expense. The Company's personnel costs benefited during the quarter as a result of the workforce reduction plans. Personnel costs increased by$51.7 million , or 32%, in the nine months endedSeptember 30, 2022 compared to the same period in the prior year, due to investments in direct labor and customer acquisition, investments in research and development, 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 invested in driving growth of Doma Intelligence-enabled closings. Other operating expenses. Other operating expenses decreased by$1.0 million , or 5%, in the three months endedSeptember 30, 2022 primarily due to decreases in outside professional service fees and premium taxes resulting from the overall reduction in revenue. These decreases were partially offset by higher amortization expenses related to investments in the development of our Doma Intelligence platform. In the nine months endedSeptember 30, 2022 , other operating expenses increased by$14.0 million , or 26%, compared to the same periods in the prior year, driven by higher insurance costs, higher amortization expenses related to investments in the development of our Doma Intelligence platform, higher occupancy costs, higher 49
-------------------------------------------------------------------------------- Table of Contents expenses to support revenue growth such as hardware and software purchases, and higher corporate support expenses to operate as a public company, such as improved operating systems, and travel and entertainment spend.Goodwill impairment.Goodwill impairment increased by$33.7 million in the three and nine months endedSeptember 30, 2022 due to lower forecasted revenue as a result of adverse mortgage and housing market conditions, including rapidly rising interest rates and low housing inventory, and a sustained decrease in the Company's stock price. Change in fair value of Warrant and Sponsor Covered Shares liabilities. The change in fair value of Warrant and Sponsor Covered Shares liabilities (as defined in Note 3) decreased by$5.9 million , or 132%, in the three months endedSeptember 30, 2022 and by$25.0 million , or 558%, in the nine months endedSeptember 30, 2022 compared to the same periods in the prior year due to adverse changes in the inputs to the valuation of the liabilities, primarily the Company's declining stock price. In 2021, the change in fair value of Warrant and Sponsor Covered Shares liabilities was an expense, and in 2022, it is a benefit. Interest expense. Interest expense remained flat in the three months endedSeptember 30, 2022 as there was no material change in the debt structure between those periods. Interest expense increased by$0.9 million , or 8%, in the nine months endedSeptember 30, 2022 compared to the same period in the prior year, due to a higher amount of average debt outstanding, which is a result of the paid in kind interest expense on the$150.0 million Senior Debt facility that was funded during the first quarter of 2021.
Supplemental Segment Results Discussion - Three and Nine Months Ended
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, 2022 Three Months Ended
Distribution Underwriting Eliminations Consolidated Distribution Underwriting Eliminations Consolidated
(in thousands)
Net premiums written $ - $ 94,488 $ - $ 94,488 $ - $
141,587 $ (96)
24,778 1,064 (13,215) 12,627 47,573 823 (27,944) 20,452
Investment, dividend and
other income (55) 796 - 741 47 592 - 639
Total revenue $ 24,723 $ 96,348 $ (13,215) $ 107,856 $ 47,620 $ 143,002 $ (28,040) $ 162,582
Premiums retained by agents
(2) - 78,356 (13,215) 65,141 - 119,636 (28,040) 91,596
Direct labor (3) 17,353 2,867 - 20,220 21,791 2,157 - 23,948
Other direct costs (4) 3,710 2,514 - 6,224 5,650 4,423 - 10,073
Provision for claims 737 3,928 - 4,665 1,243 5,442 - 6,685
Adjusted gross profit (5) $ 2,923 $ 8,683 $ - $ 11,606 $ 18,936 $ 11,344 $ - $ 30,280
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Nine Months Ended September 30, 2022 Nine Months Ended
Distribution Underwriting Eliminations Consolidated Distribution Underwriting Eliminations Consolidated
(in thousands)
Net premiums written $ - $ 299,080 $ - $ 299,080 $ - $
359,730
89,071 2,402 (48,367) 43,106 131,506 2,621 (75,035) 59,092
Investment, dividend and
other income (74) 1,695 - 1,621 130 2,388 - 2,518
Total revenue $ 88,997 $ 303,177
- 248,748 (48,367) 200,381 - 303,126 (76,011) 227,115
Direct labor (3) 63,997 7,911 - 71,908 56,884 5,945 - 62,829
Other direct costs (4) 15,143 7,923 - 23,066 16,846 7,896 - 24,742
Provision for claims 2,593 12,993 - 15,586 1,777 14,964 - 16,741
Adjusted gross profit (5) $ 7,264 $ 25,602 $ - $ 32,866 $ 56,129 $ 32,808 $ - $ 88,937
_________________
(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. Direct labor excludes severance costs.
(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 decreased by $22.9 million , or 48%, and $42.6
million , or 32%, for three and nine months ended September 30, 2022 ,
respectively, compared to the same periods in the prior year, driven by the
closed order decline discussed above. For the three and nine months ended
September 30, 2022 , higher average escrow revenue per order in both periods from
a higher ratio of purchase orders, which carry a higher price point compared to
refinance orders, offset the decrease in closed orders.
Underwriting segment revenue decreased by $46.7 million , or 33%, and $61.6
million , or 17%, for the three and nine months ended September 30, 2022 ,
respectively, as compared to the same periods in the prior year, reflecting the
reduction in title policies underwritten from both Direct and Third-Party Agents
as a result of current market conditions.
Distribution segment adjusted gross profit decreased by $16.0 million , or 85%,
and $48.9 million , or 87%, for the three and nine months ended September 30,
2022 , respectively, compared to the same periods in the prior year, driven by
closed order decline and investments in fulfillment infrastructure to support
volume growth and migration of transactions to the Doma Intelligence platform.
The impact of increases in direct labor as a percentage of revenue slowed during
the three months ended September 30, 2022 as a result of the workforce reduction
actions taken during the second and third quarters of 2022.
Underwriting segment adjusted gross profit decreased by $2.7 million , or 23%,
and $7.2 million , or 22%, for three and nine months ended September 30, 2022 , as
compared to the same periods in the prior year, reflecting the reduction in
title policies underwritten from both Direct and Third-Party Agents as a result
of current market conditions. Contributing to the declines are higher direct
labor expenses as a percentage of revenue and an increase in the provision for
claims ratio. For the nine month period, an increase in the premium tax to
revenue ratio contributed to the decline in adjusted gross profit for the
Underwriting segment.
Supplemental Key Operating and Financial Indicators Results Discussion - Three
and Nine Months Ended September 30, 2022 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
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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,
2022 2021 $ Change % Change
(in thousands, except percentages and open and closed order numbers)
Opened orders 21,509 52,867 (31,358) (59) %
Closed orders 15,302 35,300 (19,998) (57) %
Retained premiums and fees $ 42,715 $ 70,986 $ (28,271) (40) %
Adjusted gross profit 11,606 30,280 (18,674) (62) %
Ratio of adjusted gross profit to
retained premiums and fees 27 % 43 % (16) p.p (37) %
Adjusted EBITDA $ (30,232) $ (20,109) $ (10,123) 50 %
Nine Months Ended September 30,
2022 2021 $ Change % Change
(in thousands, except percentages and open and closed order numbers)
Opened orders 81,932 135,442 (53,510) (40) %
Closed orders 61,448 99,386 (37,938) (38) %
Retained premiums and fees $ 143,426 $ 193,249 $ (49,823) (26) %
Adjusted gross profit 32,866 88,937 (56,071) (63) %
Ratio of adjusted gross profit to
retained premiums and fees 23 % 46 % (23) p.p (50) %
Adjusted EBITDA $ (118,527) $ (35,291) $ (83,236) 236 %
Opened and closed orders
For the three months ending September 30, 2022 , we opened 21,509 orders and
closed 15,302 orders, a decrease of 59% and 57%, respectively, over the same
period in the prior year. For the nine months ending September 30, 2022 , we
opened 81,932 orders and closed 61,448 orders, a decrease of 40% and 38%,
respectively, over the same period in the prior year. The decline in both open
and closed orders in both periods is due to the rising interest rate environment
and shrinking population of refinance-eligible homeowners along with the
reduction in home inventories that limit overall home purchase transactions.
Closed orders decreased 56% in our Doma Enterprise channel and decreased by 62%
in our Local channel for the three months ended September 30, 2022 as compared
to the same period in the prior year, due to the contracting refinance market
and low home inventories, and further exacerbated by a decline in closed order
pull-through rates as prospective transactors were impacted by rapidly rising
interest rates.
Closed orders decreased 16% in our Doma Enterprise channel for the nine months
ended September 30, 2022 as compared to the same period in the prior year, due
to the market and inventory trend previously described and partially offset by
new customer acquisitions, increased wallet share with existing customers, and
an expanding geographical footprint. Closed orders decreased 56% in our Local
channel for the nine months ended September 30, 2022 as compared to the same
period in the prior year, due to the market and inventory trend previously
described.
Retained premiums and fees
Retained premiums and fees decreased by$28.3 million , or 40%, and$49.8 million , or 26%, during the three and nine months endedSeptember 30, 2022 , respectively, compared to the same periods in the prior year, driven by closed order reductions and title policy declines across the Direct and Third-Party Agent channels. 52
-------------------------------------------------------------------------------- Table of Contents Adjusted gross profit Adjusted gross profit decreased by$18.7 million , or 62%, and$56.1 million , or 63%, during the three and nine months endedSeptember 30, 2022 , respectively, compared to the same periods in the prior year, due to declines in retained premiums and fees in the same periods. Investments in fulfillment infrastructure to support volume growth and migration of transactions to the Doma Intelligence platform contributed to the decrease in adjusted gross profit. The impact of increases in direct labor as a percentage of revenue slowed during the three months endedSeptember 30, 2022 as a result of the workforce reduction actions taken during the second and third quarters of 2022.
Ratio of adjusted gross profit to retained premiums and fees
The ratio of adjusted gross profit to retained premiums and fees decreased 16 percentage points and 23 percentage points during the three and nine months endedSeptember 30, 2022 compared to the same periods in the prior year due to closed order reductions and title policy declines. Additionally, the decreases are due to a higher ratio of direct labor expenses as a percentage of retained premiums and fees and an increase in the provision for claims ratio compared to the same periods in the prior year. The rise in direct labor expenses are the result of hiring fulfillment labor in advance of volume growth and the near-term inefficiencies associated with the migration of transactions to the Doma Intelligence platform. The impact of increases in direct labor as a percentage of revenue slowed during the three months endedSeptember 30, 2022 as a result of the workforce reduction actions taken during the second and third quarters of 2022. Offsetting impacts to the ratio of adjusted gross profit to retained premiums and fees during the three months endedSeptember 30, 2022 were a higher mix of closed purchase orders, which carry a higher price point as compared to closed refinance orders, and a reduction in the premium tax ratio compared to the same period in the prior year. Adjusted EBITDA Adjusted EBITDA decreased by$10.1 million to negative$30.2 million and by$83.2 million to negative$118.5 million for the three and nine months endedSeptember 30, 2022 due to a decrease in retained premium and fees and higher operating costs from investments in corporate support functions to operate as a public company, research and development, and operations and management staff to accelerate growth and transformation of our home purchase product offering on the Doma Intelligence platform. The impact of increases in direct labor as a percentage of revenue slowed during the three months endedSeptember 30, 2022 as a result of the workforce reduction actions taken during the second and third quarters of 2022. 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. 53 -------------------------------------------------------------------------------- Table of Contents 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, 2022 2021 2022 2021 (in thousands) (in thousands) Revenue$ 107,856 $ 162,582 $ 343,807 $ 420,364 Minus: Premiums retained by Third-Party Agents 65,141 91,596 200,381 227,115 Retained premiums and fees$ 42,715 $ 70,986 $ 143,426 $ 193,249 Minus: Direct labor 20,220 23,948 71,908 62,829 Provision for claims 4,665 6,685 15,586 16,741 Depreciation and amortization 4,251 1,978 11,234 7,705 Other direct costs (1) 6,224 10,073 23,066 24,742 Gross Profit$ 7,355 $ 28,302 $ 21,632$ 81,232 __________________
(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,
2022 2021 2022 2021
(in thousands) (in thousands)
Gross Profit $ 7,355 $ 28,302 $ 21,632 $ 81,232
Adjusted for:
Depreciation and amortization 4,251 1,978 11,234 7,705
Adjusted Gross Profit $ 11,606 $ 30,280 $ 32,866 $ 88,937
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,
2022 2021 2022 2021
(in thousands) (in thousands)
Net loss (GAAP) $ (84,113) $ (34,270) $ (192,791) $ (69,327)
Adjusted for:
Depreciation and amortization 4,251 1,978 11,234 7,705
Interest expense 4,584 4,531 13,280 12,341
Income taxes 425 170 746 506
EBITDA $ (74,853) $ (27,591) $ (167,531) $ (48,775)
Adjusted for:
Stock-based compensation 7,746 3,004 27,394 9,006
Severance costs 4,567 - 8,395 -
Goodwill impairment 33,746 - 33,746 -
Change in fair value of Warrant and
Sponsor Covered Shares liabilities (1,438) 4,478 (20,531) 4,478
Adjusted EBITDA $ (30,232) $ (20,109) $ (118,527) $ (35,291) 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$189.4 million in cash and cash equivalents and restricted cash and$47.6 million in available-for-sale debt securities as ofSeptember 30, 2022 . We believe our cash on hand and the available-for-sale debt securities 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
Senior secured credit agreement
InDecember 2020 , Old Doma entered into a loan and security agreement withHudson 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 onJanuary 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. The Senior Debt is secured by a first-priority pledge and security interest in substantially all of the assets of our wholly owned subsidiary States Title (which represents substantially all of our assets), including the assets of any of its 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 liquidity and revenues. The liquidity covenant requires States Title to have at least$20.0 million of liquidity, 55 -------------------------------------------------------------------------------- Table of Contents 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 States Title's 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, States Title is in compliance 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 our common stock.
Other commitments and contingencies
Our commitments for leases, excluding any imputed interest, related to our office space and equipment, amounted to$35.7 million as ofSeptember 30, 2022 of which$2.6 million is payable in 2022. Refer to Note 17 to our condensed consolidated financial statements for a summary of our future commitments. Our headquarters lease expires in 2024. As ofSeptember 30, 2022 , 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,
2022 2021
(in thousands)
Net cash used in operating activities $ (139,197) $ (32,547)
Net cash used in investing activities (55,596) (18,313)
Net cash provided by financing activities 330 352,528 Operating activities In the first nine months of 2022, net cash used in operating activities was$139.2 million driven by the net loss of$192.8 million , cash paid for accrued expenses of$18.1 million and non-cash costs relating to the change in the fair value of warrant and Sponsor Covered Shares liabilities of$20.5 million . This was offset by changes in prepaid expenses, deposits and other assets of$3.1 million and the liability for loss and loss adjustments expenses of$3.5 million and non-cash costs including depreciation and amortization of$11.2 million and stock-based compensation expense of$27.8 million . 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 associated with the Business Combination of$14.8 million . This was partially 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 .
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 2022, net cash used in investing activities was
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assets was $29.1 million in the same period, largely consisting of technology
development costs related to the Doma Intelligence platform.
In the first nine months of 2021, net cash used in investing activities was
$18.3 million , and reflected mainly $33.4 million of proceeds from the sale of
investments offset by $33.7 million of purchases of investments. Cash paid for
fixed assets was $18.8 million in the same period, largely consisting of
technology development costs related to Doma Intelligence.
Financing activities
Net cash provided by financing activities was immaterial in the first nine months of 2022.
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 in 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.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with GAAP. Preparation of the financial statements requires 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 Agent 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 a 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 and prior years. 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 provision rate on prior year policies
will continue to change as actual experience on those specific policy years
develop. As the Company's claims experience matures, we refine estimates on
prior policy years to put more consideration to the Company's actual claims
experience as compared to industry experience. Changes in the loss provision
rate for recent policy years are considered likely and could result in a
material adjustment to the IBNR reserves.
The estimates used require considerable judgment and are established as
management's best estimate of future outcomes, however, the amount of IBNR
reserves based on these estimates could ultimately prove to be inadequate 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.
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Our total loss reserve as of September 30, 2022 amounted to $83.8 million , which
we believe, based on historical claims experience and actuarial analyses, is
adequate to cover claim losses resulting from pending and future claims for
policies issued through September 30, 2022 .
A summary of the Company's loss reserves is as follows:
September 30, 2022 December 31, 2021
($ in thousands)
Known title claims $ 6,708 8 % $ 7,578 9 %
IBNR title claims 76,760 91 % 72,621 90 %
Total title claims $ 83,468 99 % $ 80,199 99 %
Non-title claims 323 1 % 68 1 %
Total loss reserves $ 83,791 100 % $ 80,267 100 %
We continually review and adjust our reserve estimates to reflect loss experience and any new information that becomes available.
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 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, 2022 , we had$77.7 million of goodwill, relating to the North American Title Acquisition, of which$54.3 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 conduct our annual goodwill impairment test as ofOctober 1 . Based on the last annual test performed, we determined, after performing a test of each reporting unit, that the fair value of each reporting unit exceeded its respective carrying value. During the three months endedSeptember 30, 2022 , management determined that the Company was less likely to reach previously forecasted revenue as a result of adverse mortgage and housing market conditions, including rapidly rising interest rates and low housing inventory. Additionally, these factors and a significant, sustained decrease in the Company's stock price in the three months endedSeptember 30, 2022 indicated that the Company had a triggering event. The Company performed a valuation of the Distribution and Underwriting reporting units using discounted cash flow and market valuation methodologies. The resulting valuation of the Underwriting reporting unit indicated that its estimated fair value was above its carrying value. The estimated fair value of the Distribution reporting unit was below its carrying value. As such, the Company 58 -------------------------------------------------------------------------------- Table of Contents determined that the Distribution reporting unit's goodwill was impaired. During the three months endedSeptember 30, 2022 , the Company recognized a goodwill impairment charge of$33.7 million . The assumptions used in the reporting unit valuations require significant judgment, including judgment about appropriate growth rates, and the amount and timing of expected future cash flows. The Company's forecasted cash flows were based on the current assessment of the markets and were based on assumed growth rates expected as of the measurement date. The key assumptions used in the cash flows were long-term revenue forecasts, profit margins, discount rates and terminal growth rates. The assumptions used consider the current early growth stage of the Company, comparison of the Company's market capitalization to enterprise value, and the emergence from a period impacted by COVID-19 and related macroeconomic trends. The industry markets are currently at volatile levels and future developments are difficult to predict. The Company believes that its procedures for estimating future cash flows for each reporting unit are reasonable and consistent with current market conditions as of the testing date. If the markets that impact the Company's business continue to deteriorate, the Company could recognize further goodwill impairment.
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. The time lag between the closing of transactions by Third-Party Agents and the reporting of policies, or premiums from policies issued by Third-Party Agents to us has been approximately three months. In addition to the premium accrual, we also record accruals for the corresponding direct expenses related to this revenue, including premiums retained by Third-Party Agents, premium taxes, and provision for claims.
Sponsor Covered Shares liability
The Sponsor Covered Shares, as described in Note 3, will become vested contingent upon the price of our common stock exceeding certain thresholds or upon some strategic events, which include events that are not indexed to our common stock. We obtained a third-party valuation of the Sponsor Covered Shares as ofDecember 31, 2021 andSeptember 30, 2022 using the Monte Carlo simulation methodology and based upon market inputs 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 8.8 years. The expected volatility of 75.0% was estimated considering (i) the Doma implied volatility calculated using longest term stock option (ii) the Doma implied warrant volatility using the term of the Public and Private Warrants and (iii) 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 8.8 years (or longest available data for GPCs whose trading history was shorter than 8.8 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 of
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.
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Table of Contents 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.
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