Business Overview

Doma Holdings, Inc. (DOMA) is a real estate technology company that is revolutionizing the residential real estate closing process through its innovative Doma Intelligence platform. The company's mission is to create a vastly more simple, efficient, and affordable real estate closing experience for homeowners, lenders, title agents, and real estate professionals.

Doma operates in two reportable segments: Underwriting and Corporate and Other. The Underwriting segment reflects the results of the company's title insurance underwriting business, primarily through its Third-Party Agents channel. The Corporate and Other segment includes the company's operations related to the execution of its title, escrow, and settlement services through its Doma Enterprise channel, which targets partnerships with national lenders and mortgage originators that maintain centralized lending operations.

Doma's primary business activity is the issuance of residential and commercial title insurance on purchase and refinance transactions. The company's Underwriting segment retains a portion of the title premium (approximately 16% - 18%) in exchange for underwriting risk to its balance sheet, while the Third-Party Agents channel, which includes the title underwriting and insurance services provided to Lennar, a related party, retains the remaining portion.

The company's Corporate and Other segment reflects its operations related to the execution of its title, escrow, and settlement services through its Doma Enterprise channel. This channel targets partnerships with national lenders and mortgage originators, integrating Doma's Doma Intelligence platform with the partner's production systems to enable frictionless order origination and fulfillment.

Financials

For the full year 2023, Doma reported annual revenue of $311,396,000, a decrease from the previous year. The company's annual net income was -$117,290,000, and its annual operating cash flow and free cash flow were -$76,095,000 and -$84,765,000, respectively.

In the fourth quarter of 2023, the company's revenue increased by 11% sequentially to $85 million, primarily due to the continued strength in the homebuilder market. Doma's retained premiums and fees (RP&F), a key metric that excludes the premiums retained by third-party agents, increased by 7% sequentially to $17 million in the fourth quarter.

Adjusted gross profit, a non-GAAP measure that excludes the impact of depreciation and amortization, was $8 million in the fourth quarter, up from $6 million in the third quarter. Adjusted gross profit as a percentage of RP&F increased to 47% in the fourth quarter, up from 39% in the third quarter, due to increased RP&F and lower provision for claims.

Adjusted EBITDA, the company's main profitability measure, improved to -$3 million in the fourth quarter, compared to -$5 million in the third quarter, primarily due to the increase in RP&F, lower provision for claims, and the company's cost reduction efforts.

Liquidity

As of March 31, 2024, Doma had $65.5 million in cash and cash equivalents and restricted cash, $16.6 million in held-to-maturity debt securities, and $50.4 million in available-for-sale debt securities. The company's restricted net assets, primarily related to its title insurance subsidiary, Doma Title Insurance, Inc. (DTI), are a significant proportion of its consolidated net assets.

During the company's financial close and forecasting process for the year ended December 31, 2023, Doma identified conditions and events that raised substantial doubt about its ability to continue as a going concern. However, this doubt was alleviated through management's plans, including the HSCM Fourth Amendment and Topco Term Facility, which the company believes will be sufficient to meet its working capital and capital expenditure requirements for at least 12 months from the date of the latest quarterly report.

Transformation and Strategic Initiatives

2023 was a transformational year for Doma, as the company successfully executed significant cost reduction actions, divested its non-core local agency operations, and streamlined its business to focus on its core strengths and support its invaluable customers.

A key component of Doma's go-forward strategy is the launch of its groundbreaking Upfront Title insurance product, which the company believes will enable it to provide a much lower-cost and more streamlined solution for homeowners. The Upfront Title product is designed to integrate seamlessly with mortgage software systems utilized by large lenders and the core automated underwriting systems used by the government-sponsored enterprises (GSEs).

By offering the Upfront Title product directly to mortgage software platforms and the GSEs, Doma aims to enable lender customers to obtain instant title certainty at the point of deciding whether or not to underwrite a loan, as well as provide their homeowner customers with a price generally far below current industry standard rates for title insurance. This configuration is also expected to help Doma shift more of its revenue towards higher-margin software licensing revenue over time.

In the first quarter of 2024, Doma launched an early-stage pilot program for its Upfront Title product with one of the largest mortgage technology platforms in the country. The company is already seeing encouraging early results from this pilot, and if successful, it plans to expand the partnership in the second half of 2024, both on a geographic basis and by offering a more enhanced Upfront Title product configuration to additional lenders and mortgage technology platforms.

While the Upfront Title pilot is not expected to generate material revenue in the first half of 2024, Doma believes it is on track to demonstrate pilot program success in the first half of the year, which would position the company to expand the partnership in the second half of the year.

Doma's Underwriting segment continues to perform well, with the fourth quarter of 2023 seeing a 7% sequential increase in RP&F and a 22% increase in adjusted gross profit. The underwriter's performance was aided by the strength in the homebuilder portion of the business and positive improvement in gross profit resulting from favorable reserve development. The company expects to see continued positive momentum in its Underwriting business, benefiting from lower costs driven by its most recent cost reduction actions.

Regulatory and Political Tailwinds

The public and political support for more affordable housing outcomes, specifically through more innovative title insurance solutions, has grown significantly in recent weeks. In his State of the Union address, President Biden announced a plan to lower housing costs for Americans, including a focus on reducing title insurance costs.

Additionally, the Federal Housing Finance Agency (FHFA) has approved a pilot to waive the requirement for lenders' title insurance on certain refinances. Doma believes it is one of the only players in the industry with the proven technology and underwriting capabilities to participate in this FHFA pilot program, as its patented technology has been proven to automate the bulk of the title search and exam process for the majority of conforming refinance transactions.

The company believes it is well-positioned to provide its Upfront Title product as a licensed offering to the GSEs for the majority of refinances they purchase from lenders, as well as to offer a seamless and instant integration with any lender who might choose to participate in the FHFA pilot program.

Risks and Challenges

Doma faces several risks and challenges, including the continued volatility and uncertainty in the macroeconomic environment, particularly the impact of rising interest rates on the residential real estate market. The company's success is directly tied to the volume of residential and commercial real estate transactions, and a prolonged downturn in the housing market could adversely affect its financial performance.

Additionally, Doma operates in a highly regulated industry, and changes in laws and regulations governing the title insurance and real estate settlement services industries could have a significant impact on the company's business.

The company also faces competition from traditional title insurance providers, as well as emerging technology-driven competitors, which could impact its market share and pricing power.

Conclusion

Doma has undergone a significant transformation in 2023, streamlining its operations, reducing costs, and launching its innovative Upfront Title product. The company's focus on providing more affordable and technology-driven title insurance solutions positions it well to capitalize on the growing public and political support for reducing housing costs for American homeowners.

While the company faces several risks and challenges, Doma's strong underwriting performance, coupled with the early success of its Upfront Title pilot program, suggest that the company is on the right track to deliver long-term value for its shareholders.