Doma supports controversial White House title pilot

March 13, 2024 5:52 PM

Doma Holdings' management is embracing the White House's title insurance waiver pilot, saying it is one of the only companies in the industry that has the technology to support the initiative.

The company is bucking the American Land Title Association, the title industry trade group that opposes the plan because it says the pilot turns the government-sponsored enterprises into "de facto title insurers" even though they lack the expertise in this form of risk management.

But Doma's CEO Max Simkoff claimed his company was one of the only title firms that had the proven technology and underwriting capabilities to participate in the Federal Housing Finance Agency pilot.

"Because our technology operates using a completely automated front end, we can not only provide it as a licensed offering to the GSEs for the majority of refinances that they purchase from lenders… but also provide a seamless and instant integration with any lender who might choose to participate in this program," Simkoff said on the company's earnings call.

Simkoff said he was "dismayed" by ALTA representatives' comments that the pilot would not benefit low-income and/or minority home purchasers.

"Our own data from the past several years has shown that the majority of conforming refinances were completed by individuals who are below 120% of their area median income, the definition of lower moderate income utilized by the GSEs," Simkoff said. "And again, our technology was used to safely underwrite over 75% of these transactions."

Doma was the only title underwriter reporting after the State of the Union speech. After the big four players disclosed results, Fitch Ratings in a March 5 report noted that revenues in aggregate for these companies was down 29% last year, because high mortgage rates suppressed transaction volume.

"Results in 2023 were driven by continued low levels of refinance volumes, which are extremely sensitive to changing mortgage rates, and a decline in demand for purchase orders as rates and affordability concerns affected consumers," the Fitch report said.

It noted the cybersecurity incidents at Fidelity National Financial and First American Financial highlighted the ongoing operational risks for title insurers.

In the short term, these events should not affect the ratings of either company. But going forward, "Fitch is continuing to monitor any long-term financial, operational or reputational impacts, as well as potential governance or risk management issues that could arise."

Below NMN reviews earnings of the title insurers for the fourth quarter.

Doma misses profitability target

In past earnings reports, Doma management said it looked to be profitable on a non-GAAP metric, adjusted EBITDA in the fourth quarter.

But it reported a $3 million loss as measured by adjusted EBITDA, an improvement compared to a loss of $5 million in the third quarter and a loss of $11 million for the fourth quarter of 2022. Management blamed the interest rate environment during the period for the miss.

Using GAAP, Doma had a net loss of $18 million for the quarter, compared with losses of $22 million for the prior period and $109.4 million for the fourth quarter of 2022.

For the full year, it lost $124.4 million, an improvement over the $302.2 million loss in 2022.

Fidelity says cybersecurity incident had limited impact

Fidelity National Financial lost $69 million in the fourth quarter, but claimed the cybersecurity incident reported on Nov. 21 only had a small effect on its results.

"As far as the minor negative impact to our fourth quarter title segment results, we estimate the incident reduced adjusted pretax title earnings by $8 million to $10 million and lowered our adjusted pretax title margin, by roughly 50 basis points, from 12.3%, which would have been in line with the prior year quarter to 11.8% as reported," CEO Mike Nolan said in the earnings call.

Nolan said the effect on relationships with Fidelity's customers has been negligible, adding "I personally talked to a number of large customers, who've given no indication that there's any concerns."

The fourth quarter loss primarily came from the investment in F&G, for which Fidelity took a $261 million net loss on. The title segment actually earned $228 million in the period.

For the third quarter, FNF earned $426 million, but took a net loss of $5 million for the fourth quarter of 2022.

It earned $517 million for all of 2023, less than half of the $1.3 billion profits reported for the prior year.

Fourth quarter open orders of 257,000 were down from 318,000 quarter-to-quarter and 266,000 year-over-year.

First American notes significant impact from cyber attack

First American Financial reported its own cyber breach on Dec. 21, and took its systems offline. And that had a significant impact on its fourth quarter activities and financial results, the company said.

The company was performing well prior to the incident, Ken DeGiorgio, CEO, said in the earnings press release.

"Our title orders and related product demand appear to have returned to normal levels, however," DeGiorgio continued. "We expect no significant ongoing impact from the incident."

But in a BTIG report on First American and Stewart, analyst Soham Bhonsle noted that the latter's management, in their earnings call, suggested that some title agents want to diversify their risk, which could be beneficial for Stewart and other competitors in the long-term.

Bhonsle's "early checks" align with that point of view. However, "to be clear, this does not necessarily mean that First American (or Fidelity) will lose volumes going forward, but rather creates an opening for other players (such as a Stewart or private players) to compete for orders that they probably weren't in contention for before," Bhonsle wrote.

But even with the costs of the incident, First American was profitable in the fourth quarter, with net income of $34.1 million, compared with a loss of $1.7 million in the third quarter but net income of $54.3 million for the fourth quarter of 2022.

Full year net income of $216.8 million was down 18% from $263 million for 2022.

Open orders ended the quarter at 124,600, down from 157,300 in the third quarter and 153,100 in the fourth quarter of 2022.

Open orders increase year-over-year at Stewart

Meanwhile, Stewart Information Services reported a 10% increase in open orders in the fourth quarter versus the prior year.

Management attributed the rise to the acquisitions it made of agencies during 2023, it said on the earnings call.

It had open orders of 68,583, compared with 81,267 in the third quarter and 62,307 for the fourth quarter of 2022.

The company reported net income of $8.8 million for the fourth quarter, down from $14 million the prior quarter and $13.3 million for the previous year period.

It earned $30.4 million for all of 2023, well below the $162.3 million profits for 2022.

"Our fourth quarter results reflect continuing uncertainty in the real estate market due to the higher interest rate environment coupled with the normal seasonality," CEO Fred Eppinger said in the press release. "Although we are encouraged by the moderation of interest rates into the mid-6% range during the fourth quarter and into early 2024, we maintain our outlook that higher interest rates will negatively impact real estate transaction volume in the first half of 2024."

Old Republic also reports increased orders

While Old Republic International's title insurance business also had a year-over-year rise in open orders, it remained in fourth place by market share.

It had 67,366 open orders during the fourth quarter, compared with 80,519 in the third quarter and 66,350 for the fourth quarter of 2022.

The title segment reported pretax operating income of $43.9 million, up from the third quarter's $37.4 million but down the year prior's $45 million.

Meanwhile, the run-off mortgage insurance unit that is in the process of being sold to Arch had pretax operating income of $2.3 million, down from $3.9 million one year prior.

Old Republic International took a realized investment loss on the business of $45.6 million because of the pending sale, which is expected to close in the first half of 2024.

The parent company, which also has a general insurance line, earned $190.6 million in the fourth quarter, down from $300.6 million for the same period in 2022.

Investors' income slips over 22%

Investors Title reported that its net income decreased 22.5% to $5.8 million for the fourth quarter compared with $7.1 million during the third quarter and $7.5 million in the prior year period.

For the year, net income decreased 9.3% to $21.7 million, from $23.9 million for 2022.

"Results for the quarter reflect the ongoing slowdown in real estate transaction activity, as well as typical seasonal patterns," said J. Allen Fine, chairman, in a press release.

Fine pointed to the pretax operating profit margin of 11.7% as showing those solid results.

"The level of claims activity remained low, and investment earnings continued to benefit from higher interest rates and stock market gains," Fine said. "Additionally, we continue to make select investments in software and other initiatives, which will help make us a more competitive and efficient company over the course of the market cycle."