Form 10-Q September 30, 2006
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
|
|
|
|
THE
SECURITIES EXCHANGE ACT OF 1934
|
|
For
the
Quarterly Period Ended September 30, 2006
or
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
|
|
|
|
THE
SECURITIES EXCHANGE ACT OF 1934
|
|
For
the
transition period from _____________ to _______________
Commission
File No.:
1-13990
LANDAMERICA
FINANCIAL GROUP, INC.
(Exact
name of registrant as specified in its charter)
Virginia
|
|
54-1589611
|
(State
or other jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
|
|
5600
Cox Road
Glen
Allen, Virginia
|
|
23060
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(804)
267-8000
(Registrant's
telephone number, including area code)
101
Gateway Centre Parkway, Richmond, Virginia
23235-5135
|
(Former
name, former address and former fiscal year, if changed since last
report)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
x
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of “accelerated
filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large
accelerated filerx Accelerated
filer o Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o
No
x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
Common
Stock, No Par Value
|
17,734,133
shares
|
|
October
27, 2006
|
LANDAMERICA
FINANCIAL GROUP, INC. AND SUBSIDIARIES
|
INDEX
|
|
|
|
Page
No.
|
|
PART
I. FINANCIAL INFORMATION
|
|
|
|
|
ITEM
1.
|
CONSOLIDATED
FINANCIAL STATEMENTS:
|
|
|
|
|
|
Consolidated
Balance Sheets
|
3
|
|
|
|
|
Consolidated
Statements of Operations
|
5
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
6
|
|
|
|
|
Consolidated
Statements of Changes in Shareholders’ Equity
|
7
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
8
|
|
|
|
ITEM
2.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
27
|
|
|
|
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
44
|
|
|
|
ITEM
4.
|
CONTROLS
AND PROCEDURES
|
44
|
|
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
|
ITEM
1.
|
LEGAL
PROCEEDINGS
|
45
|
|
|
|
ITEM
1A.
|
RISK
FACTORS
|
45
|
|
|
|
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
45
|
|
|
|
ITEM
6.
|
EXHIBITS
|
46
|
|
|
|
SIGNATURE
|
47
|
LANDAMERICA
FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
millions)
|
|
September
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTMENTS:
|
|
|
|
|
|
|
|
Fixed
maturities available-for-sale -
at
fair value (amortized cost: 2006 -
$1,253.9; 2005 -
$1,154.2)
|
|
$
|
1,262.8
|
|
$
|
1,163.5
|
|
Equity
securities - at fair value (cost: 2006 -
$108.6; 2005 -
$94.5)
|
|
|
120.3
|
|
|
102.4
|
|
Federal
funds sold
|
|
|
438.4
|
|
|
4.2
|
|
Short-term
investments
|
|
|
421.1
|
|
|
484.6
|
|
|
|
|
|
|
|
|
|
Total
Investments
|
|
|
2,242.6
|
|
|
1,754.7
|
|
|
|
|
|
|
|
|
|
CASH
|
|
|
87.1
|
|
|
89.1
|
|
|
|
|
|
|
|
|
|
LOANS
RECEIVABLE
|
|
|
494.8
|
|
|
437.9
|
|
|
|
|
|
|
|
|
|
ACCRUED
INTEREST RECEIVABLE
|
|
|
20.2
|
|
|
19.6
|
|
|
|
|
|
|
|
|
|
NOTES
AND ACCOUNTS RECEIVABLE
|
|
|
|
|
|
|
|
Notes
(less allowance for doubtful accounts: 2006 -
$3.8; 2005 -
$4.3)
|
|
|
17.4
|
|
|
16.0
|
|
Trade
accounts receivable (less allowance for doubtful accounts: 2006
-
$11.1; 2005 -
$7.9)
|
|
|
123.8
|
|
|
124.6
|
|
|
|
|
|
|
|
|
|
Total
Notes and Accounts Receivable
|
|
|
141.2
|
|
|
140.6
|
|
|
|
|
|
|
|
|
|
INCOME
TAXES RECEIVABLE
|
|
|
3.1
|
|
|
-
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT - at cost (less accumulated depreciation and amortization:
2006 -
$220.4; 2005 -
$209.5)
|
|
|
148.5
|
|
|
114.4
|
|
|
|
|
|
|
|
|
|
TITLE
PLANTS
|
|
|
104.7
|
|
|
93.9
|
|
|
|
|
|
|
|
|
|
GOODWILL
|
|
|
745.1
|
|
|
584.3
|
|
|
|
|
|
|
|
|
|
INTANGIBLE
ASSETS (less accumulated amortization 2006 - $80.8; 2005 -
$61.3)
|
|
|
183.0
|
|
|
156.3
|
|
|
|
|
|
|
|
|
|
DEFERRED
INCOME TAXES
|
|
|
130.7
|
|
|
130.2
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
210.7
|
|
|
174.0
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
4,511.7
|
|
$
|
3,695.0
|
|
See
Notes to Consolidated Financial Statements.
LANDAMERICA
FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
millions, except share amounts)
|
|
September
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
POLICY
AND CONTRACT CLAIMS
|
|
$
|
765.8
|
|
$
|
697.6
|
|
|
|
|
|
|
|
|
|
DEPOSITS
|
|
|
997.2
|
|
|
547.2
|
|
|
|
|
|
|
|
|
|
ACCOUNTS
PAYABLE AND ACCRUED LIABILITIES
|
|
|
405.1
|
|
|
399.1
|
|
|
|
|
|
|
|
|
|
NOTES
PAYABLE
|
|
|
686.7
|
|
|
479.3
|
|
|
|
|
|
|
|
|
|
DEFERRED
SERVICE ARRANGEMENTS
|
|
|
223.1
|
|
|
211.2
|
|
|
|
|
|
|
|
|
|
INCOME
TAXES PAYABLE
|
|
|
-
|
|
|
18.1
|
|
|
|
|
|
|
|
|
|
OTHER
|
|
|
68.5
|
|
|
64.0
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
3,146.4
|
|
|
2,416.5
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (See Note 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock, no par value, 45,000,000 shares authorized, shares issued
and
outstanding: 2006 - 17,794,133; 2005 -
17,291,213
|
|
|
473.6
|
|
|
443.1
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive loss
|
|
|
(40.5
|
)
|
|
(42.3
|
)
|
|
|
|
|
|
|
|
|
Retained
earnings
|
|
|
932.2
|
|
|
877.7
|
|
|
|
|
|
|
|
|
|
Total
Shareholders’ Equity
|
|
|
1,365.3
|
|
|
1,278.5
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$
|
4,511.7
|
|
$
|
3,695.0
|
|
See
Notes to Consolidated Financial Statements.
LANDAMERICA
FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
THREE
MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(In
millions, except per share amounts)
(Unaudited)
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
(as
restated)
|
|
|
|
(as
restated)
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenue
|
|
$
|
954.2
|
|
$
|
1,016.3
|
|
$
|
2,827.6
|
|
$
|
2,782.2
|
|
Investment
and other income
|
|
|
31.7
|
|
|
27.3
|
|
|
93.9
|
|
|
73.0
|
|
Net
realized investment gains
|
|
|
6.1
|
|
|
1.9
|
|
|
5.5
|
|
|
3.0
|
|
|
|
|
992.0
|
|
|
1,045.5
|
|
|
2,927.0
|
|
|
2,858.2
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agents’
commissions
|
|
|
404.6
|
|
|
402.7
|
|
|
1,191.9
|
|
|
1,098.9
|
|
Salaries
and employee benefits
|
|
|
280.9
|
|
|
293.1
|
|
|
846.4
|
|
|
823.3
|
|
General,
administrative and other
|
|
|
176.0
|
|
|
165.5
|
|
|
517.5
|
|
|
503.9
|
|
Provision
for policy and contract claims
|
|
|
74.9
|
|
|
54.2
|
|
|
176.2
|
|
|
145.7
|
|
Premium
taxes
|
|
|
12.4
|
|
|
12.2
|
|
|
34.7
|
|
|
32.5
|
|
Interest
expense
|
|
|
11.3
|
|
|
8.8
|
|
|
30.2
|
|
|
24.8
|
|
Amortization
of intangibles
|
|
|
6.8
|
|
|
7.6
|
|
|
19.4
|
|
|
22.3
|
|
Write-off
of intangible and long-lived assets
|
|
|
0.5
|
|
|
37.6
|
|
|
10.2
|
|
|
37.6
|
|
|
|
|
967.4
|
|
|
981.7
|
|
|
2,826.5
|
|
|
2,689.0
|
|
INCOME
BEFORE INCOME TAXES
|
|
|
24.6
|
|
|
63.8
|
|
|
100.5
|
|
|
169.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAX EXPENSE
|
|
|
9.4
|
|
|
21.4
|
|
|
36.0
|
|
|
63.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
15.2
|
|
$
|
42.4
|
|
$
|
64.5
|
|
$
|
105.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME PER COMMON SHARE
|
|
$
|
0.92
|
|
$
|
2.41
|
|
$
|
3.82
|
|
$
|
5.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
|
|
|
16.6
|
|
|
17.6
|
|
|
16.9
|
|
|
17.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME PER COMMON SHARE ASSUMING DILUTION
|
|
$
|
0.89
|
|
$
|
2.35
|
|
$
|
3.69
|
|
$
|
5.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING ASSUMING
DILUTION
|
|
|
17.1
|
|
|
18.0
|
|
|
17.5
|
|
|
17.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
DIVIDENDS DECLARED PER COMMON SHARE
|
|
$
|
0.22
|
|
$
|
0.18
|
|
$
|
0.58
|
|
$
|
0.48
|
|
See
Notes to Consolidated Financial Statements.
LANDAMERICA
FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
NINE
MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(In
millions)
(Unaudited)
|
|
2006
|
|
2005
|
|
|
|
|
|
(as
restated)
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
64.5
|
|
$
|
105.8
|
|
Adjustments
to reconcile net income to cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
43.0
|
|
|
44.2
|
|
Write-off
of intangible and other long-lived assets
|
|
|
10.2
|
|
|
37.6
|
|
Amortization
of bond premium
|
|
|
4.8
|
|
|
5.0
|
|
Net
realized investment gains
|
|
|
(5.5
|
)
|
|
(3.0
|
)
|
Deferred
income tax benefit
|
|
|
(4.6
|
)
|
|
(14.3
|
)
|
Change
in assets and liabilities, net of businesses acquired:
|
|
|
|
|
|
|
|
Accounts
and notes receivable
|
|
|
7.7
|
|
|
(16.0
|
)
|
Income
taxes receivable/payable
|
|
|
(20.4
|
)
|
|
49.2
|
|
Accounts
payable and accrued expenses
|
|
|
(29.4
|
)
|
|
19.5
|
|
Policy
and contract claims
|
|
|
46.2
|
|
|
37.7
|
|
Deferred
service arrangements
|
|
|
7.2
|
|
|
4.1
|
|
Other
|
|
|
(0.8
|
)
|
|
(2.3
|
)
|
Net
cash provided by operating activities
|
|
|
122.9
|
|
|
267.5
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of title plant, property and equipment, net
|
|
|
(49.1
|
)
|
|
(24.9
|
)
|
Purchase
of business, net of cash acquired
|
|
|
(211.7
|
)
|
|
(26.7
|
)
|
Investments
in unconsolidated subsidiaries
|
|
|
-
|
|
|
(11.1
|
)
|
Change
in cash surrender value of life insurance
|
|
|
(1.8
|
)
|
|
(1.6
|
)
|
Change
in short-term investments
|
|
|
89.6
|
|
|
(175.9
|
)
|
Cost
of investments acquired:
|
|
|
|
|
|
|
|
Fixed
maturities
|
|
|
(308.2
|
)
|
|
(287.6
|
)
|
Equity
securities
|
|
|
(51.7
|
)
|
|
(69.5
|
)
|
Proceeds
from investment sales or maturities:
|
|
|
|
|
|
|
|
Fixed
maturities
|
|
|
245.5
|
|
|
272.3
|
|
Equity
securities
|
|
|
47.8
|
|
|
12.1
|
|
Net
change in federal funds sold
|
|
|
(434.3
|
)
|
|
(1.9
|
)
|
Change
in loans receivable
|
|
|
(57.6
|
)
|
|
(55.1
|
)
|
Net
cash used in investing activities
|
|
|
(731.5
|
)
|
|
(369.9
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Net
change in deposits
|
|
|
450.0
|
|
|
149.4
|
|
Proceeds
from the exercise of options and incentive plans
|
|
|
1.4
|
|
|
6.4
|
|
Tax
benefit of stock options exercised
|
|
|
0.9
|
|
|
-
|
|
Cost
of common shares repurchased
|
|
|
(28.1
|
)
|
|
(38.3
|
)
|
Dividends
paid
|
|
|
(10.0
|
)
|
|
(8.6
|
)
|
Proceeds
from issuance of notes payable
|
|
|
303.5
|
|
|
23.5
|
|
Payments
on notes payable
|
|
|
(111.1
|
)
|
|
(21.1
|
)
|
Net
cash provided by financing activities
|
|
|
606.6
|
|
|
111.3
|
|
Net
(decrease) increase in cash
|
|
|
(2.0
|
)
|
|
8.9
|
|
Cash
at beginning of period
|
|
|
89.1
|
|
|
73.0
|
|
Cash
at end of period
|
|
$
|
87.1
|
|
$
|
81.9
|
|
Non-cash
financing:
|
|
|
|
|
|
|
|
Common
shares issued for Capital Title merger
|
|
$
|
49.7
|
|
$
|
-
|
|
See
Notes to Consolidated Financial Statements.
LANDAMERICA
FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
NINE
MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(In
millions, except per share amounts)
(Unaudited)
|
|
Common
Stock
|
|
Accumulated
Other Comprehensive
|
|
Retained
|
|
Total
Shareholders’
|
|
|
|
Shares
|
|
Amounts
|
|
Income
(Loss)
|
|
Earnings
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
-
December 31, 2004 (as restated)
|
|
|
18.0
|
|
$
|
491.5
|
|
$
|
(17.6
|
)
|
$
|
723.8
|
|
$
|
1,197.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
105.8
|
|
|
105.8
|
|
Other
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized loss on securities - net of tax benefit of $8.2
|
|
|
-
|
|
|
-
|
|
|
(15.5
|
)
|
|
-
|
|
|
(15.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of call options, net of tax
|
|
|
-
|
|
|
(0.7
|
)
|
|
-
|
|
|
-
|
|
|
(0.7
|
)
|
Common
stock retired
|
|
|
(0.7
|
)
|
|
(38.3
|
)
|
|
-
|
|
|
-
|
|
|
(38.3
|
)
|
Stock
options and incentive plans
|
|
|
0.3
|
|
|
9.5
|
|
|
-
|
|
|
-
|
|
|
9.5
|
|
Common
dividends ($0.48/share)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(8.6
|
)
|
|
(8.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
- September 30, 2005 (as restated)
|
|
|
17.6
|
|
$
|
462.0
|
|
$
|
(33.1
|
)
|
$
|
821.0
|
|
$
|
1,249.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
-
December 31, 2005
|
|
|
17.3
|
|
$
|
443.1
|
|
$
|
(42.3
|
)
|
$
|
877.7
|
|
$
|
1,278.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
64.5
|
|
|
64.5
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gain on securities - net of tax expense of $1.1
|
|
|
-
|
|
|
-
|
|
|
1.8
|
|
|
-
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock retired
|
|
|
(0.4
|
)
|
|
(28.1
|
)
|
|
-
|
|
|
-
|
|
|
(28.1
|
)
|
Common
stock issued
|
|
|
0.7
|
|
|
49.7
|
|
|
-
|
|
|
-
|
|
|
49.7
|
|
Stock
options and incentive plans
|
|
|
0.2
|
|
|
8.9
|
|
|
-
|
|
|
-
|
|
|
8.9
|
|
Common
dividends ($0.58/share)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(10.0
|
)
|
|
(10.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
- September
30,
2006
|
|
|
17.8
|
|
$
|
473.6
|
|
$
|
(40.5
|
)
|
$
|
932.2
|
|
$
|
1,365.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Consolidated Financial Statements.
LANDAMERICA
FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
|
INTERIM
FINANCIAL INFORMATION
|
|
The
accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted
in
the United States for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They
do not
include all information and notes required by generally accepted
accounting principles for complete financial statements. These statements
should be read in conjunction with the Consolidated Financial Statements
and notes thereto included in the Annual Report on Form 10-K of
LandAmerica Financial Group, Inc. for the year ended December 31,
2005. In
the opinion of management, all adjustments (consisting of normal
and
recurring adjustments) considered necessary for a fair presentation
of
this information have been reflected. Operating results for the interim
periods are not necessarily indicative of results for a full
year.
|
|
When
used in these notes, the terms “LandAmerica,” “we,” “us” or “our” means
LandAmerica Financial Group, Inc. and all entities included in our
Consolidated Financial Statements.
|
|
Certain
2005 amounts have been reclassified to conform to the 2006
presentation.
|
Restatement
On
February 13, 2006, we announced that we would restate previously filed financial
results to correct the accounting for policy and contract claims reserves.
The
error resulted in a net understatement of reported earnings. We have restated
the consolidated financial statements contained herein for the three and nine
months ended September 30, 2005. The restatement had no effect on our net cash
provided by or used in operating, investing or financing activities. For further
information refer to Note 1 to the Notes to Consolidated Financial Statements
on
Form 10-K for the year ended December 31, 2005.
The
following tables set forth the effects of the restatement within our previously
reported Consolidated Balance Sheet and Consolidated Statements of
Operations:
|
|
At
September 30, 2005
|
|
|
|
As
Previously
Reported
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
Effects
on Consolidated Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
$
|
143.7
|
|
$
|
115.2
|
|
Total
assets
|
|
|
3,571.8
|
|
|
3,543.3
|
|
Policy
and contract claims
|
|
|
762.9
|
|
|
681.5
|
|
Total
liabilities
|
|
|
2,374.8
|
|
|
2,293.4
|
|
Shareholders’
equity
|
|
|
1,197.0
|
|
|
1,249.9
|
|
|
|
For
the Three Months Ended
September
30, 2005
|
|
For
the Nine Months Ended
September
30, 2005
|
|
|
|
As
Previously
Reported
|
|
As
Restated
|
|
As
Previously
Reported
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions, except per share amounts)
|
|
Effects
on Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for policy and contract claims
|
|
$
|
55.4
|
|
$
|
54.2
|
|
$
|
155.5
|
|
$
|
145.7
|
|
Income
before income taxes
|
|
|
62.6
|
|
|
63.8
|
|
|
159.4
|
|
|
169.2
|
|
Income
taxes
|
|
|
21.0
|
|
|
21.4
|
|
|
59.9
|
|
|
63.4
|
|
Net
income
|
|
|
41.6
|
|
|
42.4
|
|
|
99.5
|
|
|
105.8
|
|
Net
income per common share
|
|
$
|
2.37
|
|
$
|
2.41
|
|
$
|
5.63
|
|
$
|
5.98
|
|
Net
income per common share assuming dilution
|
|
$
|
2.31
|
|
$
|
2.35
|
|
$
|
5.56
|
|
$
|
5.91
|
|
Effective
January 1, 2006, we adopted the provisions of Statement of Financial Accounting
Standards (“SFAS”) No. 123, Accounting
for Stock-Based Compensation
("SFAS
No. 123”) as revised by Financial Accounting Standards No. 123(R), Share-Based
Payment
("SFAS
No. 123-(R)"). We
have
used the modified prospective adoption method. Under this method, the
share-based compensation cost recognized beginning January 1, 2006 includes
compensation cost for (i) all share-based payments granted prior to, but not
vested as of January 1, 2006, based on the grant date fair value originally
estimated in accordance with the provisions of SFAS No. 123 and (ii) all
share-based payments granted subsequent to December 31, 2005, based on the
grant
date fair value
Prior
to
January 1, 2006, we accounted for share-based compensation plans in accordance
with the provisions of APB Opinion No. 25, Accounting
for Stock Issued to Employees,
as
permitted by SFAS No. 123. Accordingly, no compensation expense was recognized
for our stock options since all options granted had an exercise price equal
to
the market value of the underlying stock on the date of grant. There were no
new
options granted during 2005 or the first nine months of 2006.
The
following pro forma information for the three and nine months ended September
30, 2005 shows net income and earnings per basic and diluted share as if
compensation expense for our employee stock options had been determined on
a
fair value method of accounting:
|
|
Pro
forma
|
|
|
|
Three
Months Ended
September
30, 2005
|
|
Nine
Months Ended
September
30, 2005
|
|
|
|
(as
restated)
|
|
|
|
|
|
|
|
|
|
(In
millions, except per share amounts)
|
|
|
|
|
|
|
|
Net
income, as reported
|
|
$
|
42.4
|
|
$
|
105.8
|
|
Add:
Stock-based employee compensation included in reported net income,
net of
related tax effects
|
|
|
0.8
|
|
|
2.0
|
|
Deduct:
Total stock-based employee compensation expense determined under
fair
value based method for all awards, net of related tax
effects
|
|
|
(0.8
|
)
|
|
(2.1
|
)
|
|
|
|
|
|
|
|
|
Pro
forma net income
|
|
$
|
42.4
|
|
$
|
105.7
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
Basic
- as reported
|
|
$
|
2.41
|
|
$
|
5.98
|
|
Basic
- pro forma
|
|
$
|
2.41
|
|
$
|
5.97
|
|
|
|
|
|
|
|
|
|
Diluted
- as reported
|
|
$
|
2.35
|
|
$
|
5.91
|
|
Diluted
- pro forma
|
|
$
|
2.34
|
|
$
|
5.90
|
|
Recent
Accounting Pronouncements
In
October 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position FAS 123(R)-5, Amendment
of FASB Staff Position FAS 123(R)-1
and FASB
Staff Position FAS 123(R)-6, Technical
Corrections of FASB Statement No. 123(R) (“FSPs”).
These FSPs address whether a modification of an instrument in connection
with an
equity restructuring should be considered a modification for purposes of
applying FSP FAS 123(R)-1 and address certain technical corrections of FASB
Statement No. 123(R), respectively. These FSPs are effective in the first
reporting period beginning after October 10, 2006 and October 20, 2006,
respectively. We believe that adopting these FSPs will not have a material
impact on our financial statements.
In
September 2006, FASB issued SFAS No. 157, Fair
Value Measurements (“SFAS
No. 157”). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007
with earlier application encouraged. We are evaluating the impact of adopting
SFAS No. 157 on our financial statements.
In
September 2006, FASB issued SFAS No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statements No. 87, 88, 106 and 132(R)
(“SFAS
No. 158”). This standard requires employers to recognize the underfunded or
overfunded status of a defined benefit postretirement plan as an asset or
liability in its statement of financial position and to recognize changes in
the
funded status in the year in which the changes occur through accumulated other
comprehensive income. Additionally, SFAS No. 158 requires employers to measure
the funded status of a plan as of the date of its year-end statement of
financial position. The new reporting requirement and related new footnote
disclosure rules of SFAS No. 158 are effective for fiscal years ending after
December 15, 2006. The new measurement date requirement applies for fiscal
years
ending after December 15, 2008.
We
estimate the impact of adopting SFAS No. 158 to be approximately $14 million,
reflected as a reduction in net assets on our balance sheet, with no impact
to
our results of operations or cash flow.
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 108, Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements (“SAB
108”), to address diversity in practice in quantifying financial statement
misstatements. SAB 108 requires that we quantify misstatements based on their
impact on each of our financial statements and related disclosures. SAB 108
is
effective as of the end of our 2006 fiscal year, allowing a one-time
transitional cumulative effect adjustment to retained earnings as of January
1,
2006 for errors that were not previously deemed material, but are material
under
the guidance in SAB 108. We believe that SAB 108 will not have a material impact
on our financial statements.
In
June
2006, FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109
(“FIN
48”). FIN 48 clarifies the accounting for uncertain tax positions. The
interpretation prescribes a recognition threshold and measurement attribute
for
the financial statement recognition and measurement of a tax position taken
or
expected to be taken in a tax return. FIN 48 is effective for fiscal years
beginning after December 15, 2006 with earlier adoption permitted. We are
currently evaluating the impact of adopting FIN 48 on our financial
statements.
In
February 2006, FASB issued SFAS No. 155, Accounting
for Certain Hybrid Financial Instruments, an amendment of FASB Statements No.
133 and 140
(“SFAS
No. 155”). SFAS No. 155 permits remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require
bifurcation, clarifies which interest-only strips and principal-only strips
are
not subject to the requirements of Statement No. 133, establishes a requirement
to evaluate interests in securitized financial assets to identify interests
that
are freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation, clarifies that
concentrations of credit risk in the form of subordination are not embedded
derivatives and amends Statement No. 140 to eliminate the prohibition on a
qualifying special-purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. SFAS No. 155 is effective for all financial instruments acquired
or
issued after the beginning of fiscal years that begin after September 15, 2006.
We are evaluating the impact of adopting SFAS No. 155 on our financial
statements.
2. EARNINGS
PER SHARE
The
following table sets forth the computation of basic and diluted earnings per
share:
|
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
(as
restated)
|
|
|
|
(as
restated)
|
|
|
|
(In
millions, except per share amounts)
|
|
Numerator:
|
|
|
|
Net
income - numerator for basic and diluted earnings per
share
|
|
$
|
15.2
|
|
$
|
42.4
|
|
$
|
64.5
|
|
$
|
105.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares - denominator for basic earnings per share
|
|
|
16.6
|
|
|
17.6
|
|
|
16.9
|
|
|
17.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
debt
|
|
|
0.4
|
|
|
0.2
|
|
|
0.4
|
|
|
-
|
|
Employee
stock options
|
|
|
0.1
|
|
|
0.2
|
|
|
0.2
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for diluted earnings per share
|
|
|
17.1
|
|
|
18.0
|
|
|
17.5
|
|
|
17.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$
|
0.92
|
|
$
|
2.41
|
|
$
|
3.82
|
|
$
|
5.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share
|
|
$
|
0.89
|
|
$
|
2.35
|
|
$
|
3.69
|
|
$
|
5.91
|
|
3. INCOME
TAXES
Our
effective income tax rate, which includes a provision for state income and
franchise taxes for non-insurance subsidiaries, was 38.2% for third quarter
2006, 33.5% for third quarter 2005, 35.8% for the first nine months of 2006
and
37.5% for the first nine months of 2005. The difference in the effective tax
rate was due primarily to changes in the mix of state taxes related to our
non-insurance subsidiaries.
As
a
result of an audit of the 2003 to 2004 tax years, the Internal Revenue Service
(“IRS”) has proposed certain adjustments relating to our tax treatment of agency
revenue. Currently, revenue from title policies issued through independent
agents is recognized when the policies are reported by the agent for book and
tax purposes. The IRS believes we are required to estimate the income and
commissions associated with the sale of policies by agents during the tax year.
We have estimated our maximum tax exposure with respect to the matter to be
approximately $35 million; however, we are disputing the proposed adjustment
as
we continue to believe that our tax treatment of these transactions are correct
and we believe we will prevail in any dispute with the IRS related to this
matter. Accordingly, no amount has been accrued for this proposed IRS
adjustment. We expect to defend the matter vigorously through the IRS appeal
process and, if necessary,
through
litigation. We do not expect that the ultimate resolution of this matter will
have a material adverse effect on our financial condition or results of
operations.
4. INVESTMENTS
Effective
January 1, 2006, we adopted the FASB Staff Positions Nos. 115-1 and 124-1
(“FSPs”) which address the determination as to when an investment is considered
impaired, whether that impairment is other than temporary, and the measurement
of the impairment loss. The FSPs also provide guidance on the accounting
subsequent to the recognition of an other-than-temporary impairment and require
additional disclosures about unrealized losses that have not been recognized
as
other-than-temporary impairments. The guidance amends FASB Statement No. 115,
Accounting
for Certain Investments in Debt and Equity Securities.
The
adoption did not have a material effect on our financial
statements.
Gross
unrealized losses and fair value aggregated by investment category and length
of
time that individual securities have been in a continuous unrealized loss
position were as follows:
|
|
September
30, 2006
|
|
|
|
Less
Than 12 Months
|
|
12
Months or More
|
|
Total
|
|
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
|
|
|
|
|
|
(In
millions)
|
|
Fixed
maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
treasuries and U.S. government corporations and agencies
|
|
$
|
5.4
|
|
$
|
0.1
|
|
$
|
8.0
|
|
$
|
0.1
|
|
$
|
13.4
|
|
$
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States
and political subdivisions
|
|
|
14.4
|
|
|
-
|
|
|
71.3
|
|
|
0.9
|
|
|
85.7
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities issued by foreign governments
|
|
|
3.1
|
|
|
-
|
|
|
0.4
|
|
|
-
|
|
|
3.5
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
utilities
|
|
|
1.6
|
|
|
-
|
|
|
1.0
|
|
|
-
|
|
|
2.6
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
securities
|
|
|
113.4
|
|
|
0.7
|
|
|
158.4
|
|
|
3.5
|
|
|
271.8
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
|
|
|
34.4
|
|
|
0.5
|
|
|
106.2
|
|
|
2.8
|
|
|
140.6
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
-
|
|
|
-
|
|
|
0.5
|
|
|
-
|
|
|
0.5
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
|
15.0
|
|
|
1.4
|
|
|
2.7
|
|
|
0.5
|
|
|
17.7
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
187.3
|
|
$
|
2.7
|
|
$
|
348.5
|
|
$
|
7.8
|
|
$
|
535.8
|
|
$
|
10.5
|
|
As
of
September 30, 2006, we held 790 securities with a total estimated fair value
of
$535.8 million which had gross unrealized losses of $10.5 million. Of the 790
securities, 404 were in a continuous unrealized loss position for greater than
one year and had a total estimated fair value of $348.5 million and gross
unrealized losses of $7.8 million. The 404 securities with unrealized losses
in
excess of twelve months were either investment grade long-term bonds, preferred
stocks or common stocks, and we have the intent and ability to hold those
securities to recovery.
In
connection with the previously announced redomestication of our principal
underwriters to Nebraska, in the first quarter of 2007, we expect a significant
dividend from one of our underwriters to the parent, LandAmerica Financial
Group, Inc. The dividend will be funded by liquidating part of our fixed income
portfolio. As we no longer have the intent to hold certain fixed income
securities to recovery, we impaired 33 securities in our fixed income portfolio
and realized a loss of $1.6 million during the period ended September 30, 2006.
The remaining securities with unrealized losses in excess of twelve months
are
investment grade long-term bonds that we have the intent and the ability to
hold
to recovery.
We
have
concluded that none of the available-for-sale securities with unrealized losses
at September 30, 2006, has experienced an other-than-temporary impairment.
This
conclusion was based on a number of factors including: (1) the significance
of
the decline; (2) whether the securities were rated below investment grade;
(3)
how long the securities have been in an unrealized loss position; and (4) our
ability and intent to retain the investment for a sufficient period of time
for
it to recover.
At
September 30, 2006, no industry group comprised more than 10 percent of our
investment portfolio. This portfolio is widely diversified among various
geographic regions in the United States, and is not dependent on economic
stability of one particular region.
At
September 30, 2006, we did not hold any fixed maturity securities in any single
issuer which exceeded 10 percent of shareholder’s equity other than securities
issued or guaranteed by the U.S. government.
On
March
28, 2006, we entered into an Agreement and Plan of Merger (the “Merger
Agreement”) with Capital Title Group, Inc. (“CTG”) and CTG Acquisition
Corporation (“Merger Sub”), a wholly owned subsidiary of LandAmerica. Under the
terms of the Merger Agreement, the Merger Sub merged with and into CTG (the
“Merger”) and CTG continued as the surviving corporation in the Merger and
became a wholly-owned subsidiary of LandAmerica. On September 8, 2006, we
completed the merger with CTG which consists of a title insurance underwriter,
agent, and settlement services provider and related companies. CTG services
customers primarily in Arizona, California and Nevada. We believe that our
acquisition of CTG will strengthen our presence in key western states and add
scale to our Lender Services platform.
The
Merger was accounted for using the purchase method in accordance with FASB
SFAS
No. 141, Business
Combinations (“SFAS
No. 141”).
Under
the
terms of the Merger Agreement, we acquired 100 percent of CTG’s common stock for
approximately $252.3 million which consisted of $202.6 million of cash,
including direct transaction costs of $3.3 million, and $49.7 million of our
common stock, which represented 775,576 shares. In recording the merger, the
value of the 775,576 shares issued was determined based on the measurement
criteria in EITF 99-12, Determination
of the Measurement Date for the Market Price of Acquirer Securities Issued
in a
Purchase Business Combination.
In
accordance with SFAS No. 141, the cost of the Merger was preliminarily allocated
to the assets acquired and liabilities assumed based on their fair values as
of
the close of the merger, with the amounts exceeding the fair value being
recorded as goodwill. As the values of certain assets and liabilities are
preliminary in nature, they are subject to adjustment as additional information
is obtained, including, but not limited to, valuation of separately identifiable
intangibles, property, plant and equipment, title plants, deferred taxes,
exiting certain contractual arrangements and the expected plans to rationalize
the
combined
workforce. The valuations will be finalized within 12 months of the close of
the
merger. When the valuations are finalized, any changes to the preliminary
valuation of assets acquired or liabilities assumed may result in adjustments
to
separately identifiable intangibles and goodwill. The results of operations
of
CTG have been included in our consolidated financial statements since the merger
date.
|
In
connection with the Merger, we issued $100.0 million principal amount
of
Series E Senior Notes and drew down $100.0 million of our revolving
credit
facility to fund a portion of the merger. (See Note 11, “Credit
Arrangements” for further
information.)
|
|
Selected
unaudited pro forma results of operations for the period ended September
30, 2006, assuming the merger had occurred as of January 1, 2005,
is set
forth below:
|
|
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
(In
millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$
|
1,050.1
|
|
$
|
1,142.6
|
|
$
|
3,149.2
|
|
$
|
3,140.2
|
|
Net
income
|
|
|
8.3
|
|
|
47.5
|
|
|
54.4
|
|
|
114.4
|
|
Net
income per common share
|
|
|
0.48
|
|
|
2.60
|
|
|
3.09
|
|
|
6.22
|
|
Net
income per common share assuming dilution
|
|
|
0.47
|
|
|
2.53
|
|
|
2.99
|
|
|
6.12
|
|
|
The
above pro forma results are presented for information purposes only
and
may not be indicative of the operating results that would have occurred
had this merger been consummated as of the beginning of
2005.
|
6.
|
POLICY
AND CONTRACT CLAIMS
|
We
review
our claims experience quarterly, and in conjunction with our outside actuaries,
evaluate the adequacy of our claims reserve. We consider factors such as
historical timing of reported claims and claims payment over the period in
which
policies are effective against actual experience by year of policy issue to
determine the amount of claims liability required for each year for which
policies are outstanding. We also consider the impact of current trends in
marketplace activity, including refinance activity, which may shorten the time
period a policy is outstanding, bankruptcies and individual large claims
attributable to any particular period in determining the expected liability
associated with each year.
Based
on
our review of the underlying claims data and trends therein, we have provided
for claims losses using approximately 8.0% and 5.3% of operating revenue from
the Title Operations segment for the third quarters of 2006 and 2005,
respectively, and approximately 6.3% and 5.3% of operating revenue from the
Title Operations segment for the first nine months of 2006 and 2005. The
increase in the claims provision ratio was primarily due to upward development
in policy years 2001 through 2005. Since there is
an
extended time period for which we are liable, slight changes in current claims
experience can result in a significant impact in the amount of liability
required for potential Incurred But Not Reported (“IBNR”) claims. We believe
that we have reserved appropriately for all reported and IBNR claims at
September 30, 2006 based on the results of the actuarial evaluation and
evaluation of any known trend.
7.
|
PENSIONS
AND OTHER POST-RETIREMENT
BENEFITS
|
The
following presents the estimated net pension expense recorded in the financial
statements for each of the three and nine-month periods ending September 30,
2006, and 2005. The 2006 information is based on preliminary data provided
by
our consulting actuaries.
The
amounts are as follows:
|
|
Three
Months Ended September 30,
|
|
|
|
Pension
Benefits
|
|
Other
Benefits
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
(In
millions)
|
|
Components
of net pension (income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
-
|
|
$
|
-
|
|
$
|
0.2
|
|
$
|
0.2
|
|
Interest
cost
|
|
|
3.6
|
|
|
3.6
|
|
|
0.9
|
|
|
0.7
|
|
Expected
return on plan assets
|
|
|
(4.5
|
)
|
|
(3.9
|
)
|
|
-
|
|
|
-
|
|
Amortization
of unrecognized transition obligation
|
|
|
-
|
|
|
-
|
|
|
0.3
|
|
|
0.3
|
|
Prior
service cost recognized
|
|
|
-
|
|
|
-
|
|
|
0.1
|
|
|
0.2
|
|
Recognized
loss
|
|
|
1.8
|
|
|
0.9
|
|
|
0.2
|
|
|
-
|
|
(Gain)
or loss due to settlement or curtailment
|
|
|
(2.0
|
)
|
|
1.3
|
|
|
-
|
|
|
-
|
|
Net
pension (income) expense
|
|
$
|
(1.1
|
)
|
$
|
1.9
|
|
$
|
1.7
|
|
$
|
1.4
|
|
|
|
Nine
Months Ended September 30,
|
|
|
|
Pension
Benefits
|
|
Other
Benefits
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
(In
millions)
|
|
Components
of net pension expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
-
|
|
$
|
-
|
|
$
|
0.7
|
|
$
|
0.6
|
|
Interest
cost
|
|
|
10.8
|
|
|
10.6
|
|
|
2.7
|
|
|
2.3
|
|
Expected
return on plan assets
|
|
|
(13.5
|
)
|
|
(11.7
|
)
|
|
-
|
|
|
-
|
|
Amortization
of unrecognized transition obligation
|
|
|
-
|
|
|
-
|
|
|
0.9
|
|
|
0.9
|
|
Prior
service cost recognized
|
|
|
-
|
|
|
-
|
|
|
0.3
|
|
|
0.4
|
|
Recognized
loss
|
|
|
5.4
|
|
|
2.9
|
|
|
0.5
|
|
|
-
|
|
(Gain)
or loss due to settlement or curtailment
|
|
|
-
|
|
|
3.5
|
|
|
-
|
|
|
-
|
|
Net
pension expense
|
|
$
|
2.7
|
|
$
|
5.3
|
|
$
|
5.1
|
|
$
|
4.2
|
|
On
December 31, 2004, we froze the accumulation of benefits available under our
principal pension plan.
Weighted-average
assumptions used to determine net cost for each of the three and nine-month
periods ending September 30, 2006, and 2005 are as follows:
|
|
Pension
Benefits
|
|
Other
Benefits
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
5.50
|
%
|
|
6.00
|
%
|
|
5.50
|
%
|
|
6.00
|
%
|
Expected
return on plan assets
|
|
|
8.25
|
%
|
|
8.00
|
%
|
|
N/A
|
|
|
N/A
|
|
Rate
of compensation increase
|
|
|
N/A
|
|
|
N/A
|
|
|
3.50
|
%
|
|
3.50
|
%
|
8.
|
COMMITMENTS
AND CONTINGENCIES
|
Pending
Legal Proceedings
General
We
are
involved in certain litigation arising in the ordinary course of our businesses.
Although the ultimate outcome of these matters cannot be ascertained at this
time and the results of legal proceedings cannot be predicted with certainty,
we
believe, based on current knowledge, that the resolution of these matters will
not have a material adverse effect on our financial position or results of
operations.
Litigation
Not in the Ordinary Course of Business
On
June
22, 2004, Gateway Title Company, Inc. (“Gateway”), Commonwealth Land Title
Company, Inc. (“Commonwealth”) and LandAmerica Financial Group, Inc.
(“Plaintiffs”) filed a Complaint, subsequently amended by a First Amended
Complaint filed June 25,
2004,
in
the Superior Court of California, County of Los Angeles, Central District (the
“Court”), against the Mercury Company and its affiliates Financial Title,
Alliance Title, Investors Title and various individuals including Joseph
DiChiacchio, a former manager of LandAmerica (Case No. BC 317441) (collectively,
the “Defendants”). The lawsuit claims substantial monetary and punitive damages
for unfair competitive business practices in conjunction with Plaintiffs’ loss
of over 300 employees in California, most of which appears to have occurred
within an approximately twenty-four month period. On August 12, 2004, the Court
granted a Temporary Restraining Order, followed by a Preliminary Injunction
granted September 27, 2004, against the Defendants based upon a showing of
significant likelihood of Plaintiffs prevailing on the merits combined with
irreparable harm to Plaintiffs if injunctive relief did not issue. The
injunctive relief generally prohibited the solicitation of Plaintiffs’
employees. The preliminary injunctive relief has now expired. On December 13,
2004, Alliance Title Company, Inc., Financial Title Company, Inc., Roberto
Olivera and Ray Arias filed a Cross-Complaint for unfair competitive business
practices. On December 13, 2004, Mr. DiChiacchio also filed a Cross-Complaint
alleging similar claims, including back wages and additional bonus payments.
Plaintiffs are disputing and intend to vigorously defend the Cross-Complaints.
A
mandatory settlement conference was held on August 1, 2005 and voluntary
mediation on September 7, 2005. After completion of discovery, a jury trial
began in early May 2006 and resulted in a verdict for Gateway of approximately
$8.4 million. Judgment has not been entered pending resolution of the
Cross-Complaints. We are evaluating whether or not to appeal the verdict. We
believe that the award of damages to Gateway exceeds any claim of offset raised
in the Cross-Complaints we expect to be scheduled for trial early in 2007.
On
January 25, 2002, Miles R. Henderson and Patricia A. Henderson (the “Plaintiffs
in the Henderson Suit”) filed a putative class action suit (the “Henderson
Suit”) against Lawyers Title Insurance Corporation (“Lawyers Title”) in
the
Court
of Common Pleas for Cuyahoga County, Ohio.
Lawyers
Title removed the case to the District Court for the Northern District of Ohio
on March 6, 2002, and the Plaintiffs amended the complaint on March 8, 2002.
On
June 28, 2002, the District Court remanded the case to the Court of Common
Pleas
for Cuyahoga County, Ohio. A similar putative class action suit was filed
against Commonwealth, by Rodney P. Simon and Tracy L. Simon (the “Plaintiffs in
the Simon Suit”) in the Court of Common Pleas for Cuyahoga County, Ohio on March
5, 2003. The Plaintiffs in both suits alleged that the defendants had a practice
of charging original rates for owners title insurance policies when lower,
reissue rates should have been charged. Both defendants initially responded
by
demanding that the actions be arbitrated, but on final appeal to the Ohio
Supreme Court, the Court ruled that arbitration was not required for either
suit. On remand to the trial court, the Plaintiffs in the Henderson Suit are
now
seeking to have the case certified as a class action on behalf of all sellers
and buyers of residential property in Ohio who paid the higher original rate
from 1992 to the present. The hearing on class certification has been scheduled
for April 16, 2007. The Plaintiffs in the Simon Suit are seeking to have the
case certified as a class action on behalf of all sellers of residential
property in Ohio, who paid the original rate from 1993 to the present, as
requested in the original complaint, although no hearing date on the class
certification has been scheduled. The Plaintiffs in both cases have demanded
an
unspecified amount of compensatory damages, declaratory and injunctive relief,
punitive damages, and attorneys’ fees and costs. These cases are in the early
stages, there have been no class certifications, and the defendants believe
that
they have meritorious defenses. At this stage of the litigation, the amount
or
range of loss that could result from an unfavorable outcome cannot be reasonably
estimated.
We
are
defendants in a number of other purported class action cases pending in various
states that include allegations that certain consumers were overcharged for
title insurance and/or related services. The dollar amount of damages sought
has
generally not been specified in these cases except for jurisdictional limits.
We
intend to vigorously defend these actions.
Regulatory
Investigations and Inquiries
We
have
received certain information requests and subpoenas from various regulatory
authorities relating to our business practices and the title insurance industry.
As detailed below, a number of these inquiries focus on captive reinsurance,
among other matters.
Captive
reinsurance involves the provision of reinsurance by a reinsurance company
that
is owned by another entity, typically a lender, developer or other party that
is
a provider of real estate-related services. From the inception of our captive
reinsurance programs in 1997 through 2004, reinsurance premiums paid by us
to
captive reinsurers totaled approximately $12.0 million. The revenues from these
programs were not material to our results of operations. We voluntarily
terminated our captive reinsurance arrangements as of February 2005,
notwithstanding our belief that we had operated the programs in accordance
with
applicable law. In addition, as set out on page 21, we settled certain of these
investigations without admitting any liability.
Specifically,
we have received the following regulatory inquiries:
In
2004,
the Office of the Attorney General of the State of New York (“NYAG”) initiated
an investigation into the business practices of companies engaged in the title
insurance business. We have received subpoenas and requests from the NYAG
seeking information and documents related to certain industry business
practices, including, among other things, competitive market practices, the
compensation of title insurance agents and producers by underwriters, and
captive and other reinsurance arrangements, and we continue to respond to those
subpoenas and requests. The Company has participated in settlement discussions
with the NYAG and the insurance department of the State of New York with regard
to alleged violations of New York Insurance Law that they perceive as a result
of the NYAG’s investigation.
We
also
received initial inquiries in 2004 and responded to or continue to respond
to
inquiries regarding the title industry’s business practices from the following
state agencies: the California Department of Insurance and the Colorado Division
of Insurance regarding captive reinsurance; the insurance departments of North
Carolina and Pennsylvania as part of their review of competitive market
practices and agent compensation in the title insurance industry; and the State
of Washington Office of Insurance Commissioner regarding captive reinsurance,
potential illegal inducements and rebates by title insurance companies and
title
insurance rates.
Additionally,
in 2005, we received and responded to or continue to respond to inquiries
regarding the title industry’s business practices from the following state
agencies: the California Department of Real Estate regarding captive
reinsurance; the California Department of Insurance regarding our community
development and investment, California title plants, and examinations of our
adherence to filed premium rates and claims handling practices, including
whether refunds of overcharges to certain consumers may be required; the
Colorado Attorney General regarding captive reinsurance; the Colorado Department
of Insurance regarding affiliated business arrangements; the Connecticut
Department of Insurance regarding producer compensation and captive reinsurance
arrangements; the Florida Department of Financial Services regarding affiliated
business arrangements; the Hawaii Insurance Division regarding producer
compensation arrangements and captive reinsurance; the Idaho Department of
Insurance regarding captive reinsurance and premium splits between agent and
underwriter; the
Massachusetts
Attorney General regarding reinsurance and the title insurance market; the
Minnesota Department of Commerce regarding captive and other reinsurance
arrangements; the Tennessee Department of Insurance regarding producer
compensation arrangements and competitive market practices of Title Insurance
Company of America, and requiring the submission of an attestation regarding
any
finite reinsurance arrangements existing in that state; and regulatory
departments from seven other states, excluding those that have been settled,
regarding captive reinsurance arrangements. We also received and responded
in
2005 to a request for information from the United States Department of Housing
and Urban Development in conjunction with its investigation involving various
builders, lenders and real estate brokers in connection with their participation
in captive reinsurance companies.
In
2006,
we received and are responding to an Administrative Subpoena from the Minnesota
Department of Commerce with regard to a market examination. The insurance
department of the State of New York has commenced a market conduct exam and
indicated its intent to determine the Company’s adherence to filed premium
rates, including whether refunds of overcharges to certain consumers may be
required. The Maryland Department of Insurance has requested captive reinsurance
information. The California Department of Insurance requested information
regarding any technology arrangements with settlement services
providers.
We
also
reached agreements with the insurance departments of the states of California
and Arizona in 2005 and Virginia, Nevada, Colorado and North Carolina in 2006
to
settle filed or potential claims regarding captive reinsurance and other
regulatory matters except overcharges of certain consumers in California,
without admitting any liability. These six states accounted for approximately
82% of our captive reinsurance business.
In
June
2005, we established reserves of $19.0 million to cover anticipated exposure
to
regulatory matters nationwide, an amount which includes the settlements with
the
California, Arizona, Nevada, Virginia, Colorado and North Carolina departments
of insurance. Based on actual settlements, we released $6.7 million of this
reserve back into earnings in fiscal year 2005. The remaining reserve at
September 30, 2006 was approximately $5.9 million.
The
State
of Washington Office of Insurance Commissioner issued its exam report on title
insurance business practices on October 16, 2006, indicating it will not seek
fines or penalties for allegedly improper conduct involving illegal incentives
and inducements to steer business and it will focus its efforts on future
compliance and prevention.
Also,
in
addition to or in connection with the above-referenced inquiries, multiple
states, including California, Florida, Louisiana, Nevada, New Mexico, Texas
and
New York, are examining pricing levels and/or competition in the title insurance
industry, with a view to determining whether prices are justified, and if not,
to implement rate changes, including potential reductions.
The
Texas
Commissioner held a hearing of the current Texas title rate case beginning
on
August 16, 2006 and the case is now pending before the Commissioner who may
order a rate adjustment. In the course of prehearing discovery, the Department
has sought and we have provided statistical data and testimony relating to
the
types and level of expenses for both underwriters and agents, captive
reinsurance, rebating and other practices that may have the effect of raising
the expenses of title insurers and agents.
On
June
30, 2006, the Acting Superintendent of Insurance for New Mexico issued an
Interim Order that the 2006 title insurance rates announced in a March 2006
order and scheduled to take effect on July 1, 2006 are to be implemented on
an
interim basis, subject to later revision if it is ultimately determined that
the
rates should be reduced and subject to refund. An annual title rate case to
determine 2007 rates has been set for hearing beginning November 16,
2006.
In
Nevada, a Commissioner of Insurance Order was issued on September 25, 2006
following a June 19, 2006 hearing and a July 3, 2006 request for information.
The Order came to no conclusion on current rate levels or competition and
directed the Nevada Division of Insurance staff to conduct further inquiries
and
provide a report by November 30, 2006.
On
July
3, 2006, California issued a Notice of Proposed Action which sets forth proposed
regulations governing the rating of title insurance and related services,
including the imposition of interim rate reductions and future filing of
mandated statistical plans that would impose substantially higher costs on
title
insurance operations in California, and held a hearing on such Proposed Action
on August 30, 2006.
On
July
17, 2006, the Florida Office of Insurance Regulation announced the completion
of
a review of title insurance regulation in the state and said the information
from the study would be used to begin a full review of title insurance rates
charged in Florida. The Florida Office of Insurance Regulation has developed
a
rule to govern the upcoming rate analysis and rate setting process.
The
New
York Department of Insurance has scheduled a public hearing on November 3,
2006
to inquire into matters relating to current rates charged by title insurance
companies in New York.
We
may
receive additional subpoenas and/or requests for information in the future
from
state or federal government agencies. We will evaluate, and we intend to
cooperate in connection with, all such subpoenas and requests.
Based
on
the information known to management at this time, it is not possible to predict
the outcome of any of the currently pending governmental inquiries and
investigations into the title insurance industry’s market, business practices,
pricing levels, and other matters described above, or the market’s response
thereto. However, any material change in our business practices may have an
adverse effect on our business, operating results and financial
condition.
Other
Commitments and Guarantees
We
had
guarantees of indebtedness of others of approximately $3.5 million at September
30, 2006 and $3.9 million at December 31, 2005.
Our
industrial bank subsidiary regularly commits to fund real estate loans. The
amount of such commitments was not material as of September 30,
2006.
Lease
Commitments
|
We
entered into sale-leaseback transactions whereby we sold and leased
back
assets classified as furniture and equipment. In connection with
the
relocation and consolidation of our corporate offices and shared
resources
center, we terminated a portion of the sales-leaseback agreements.
The
cost of terminating the leases was approximately $2.4 million, which
has
been reflected in our results of operations for the three and nine
months
ended September 30, 2006.
|
In
December 2004, the Board of Directors approved a share repurchase program with
an expiration of February 2006 that authorized us to repurchase up to one
million shares of our common stock at a cost not to exceed $60.0 million. During
the fourth quarter 2005, we fully executed that share repurchase program. As
a
result, in October 2005, the Board of Directors approved a share repurchase
program expiring July 2007 that authorized us to repurchase an additional 1.25
million shares of our common stock. We have repurchased 429,000 shares during
the first nine months of 2006 for $28.1 million at an average price of $65.53
per share. At September 30, 2006, we had approximately 758,000 shares remaining
in our authorized repurchase program.
10.
|
WRITE-OFF
OF INTANGIBLE AND OTHER LONG-LIVED
ASSETS
|
In
January 2006, we announced our plan to relocate and consolidate our corporate
offices and shared resources operations. As a result, we wrote down the building
and related assets to the fair value less cost to sell. The impairment charge
for the write down was approximately $10.2 million, which has been reflected
in
our results of operations for the nine months ended September 30, 2006. As
of
October 16, 2006, we sold our existing corporate office building and related
assets.
Effective
October 2005, LandAmerica Tax and Flood Services, Inc. (“LATF”), one of our
wholly-owned subsidiaries, ceased providing future tax services to one of its
largest tax and flood customers for two states, California and Colorado, but
continued to manage that customer’s tax and flood services portfolio in 23
states in the western United States. As a result of the loss of business, we
conducted an impairment test of LATF’s long-lived assets in accordance with
Statement of Financial Accounting Standards No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, using
estimated future
cash
flows. Additionally, we conducted an impairment test of LATF’s goodwill
intangible in accordance with Statement of Financial Accounting Standards No.
142, Goodwill
and Other Intangible Assets,
using
cash flow analysis to project the discounted future cash flows produced by the
reporting unit. On October 7, 2005, we determined that LATF’s customer
relationship intangible was impaired by $37.6 million and the net impairment
charge was included in our results of operations for the three and nine-month
periods ended September 30, 2005. In addition, we determined that LATF’s
goodwill balance of $188.0 million was not impaired.
Senior
Notes
On
July
28, 2006, we entered into a Note Purchase and Master Shelf Agreement (the “Note
Purchase Agreement”) with Prudential Investment Management, Inc. (“Prudential”)
and the other purchasers thereunder. Under the Note Purchase Agreement, we
issued $50.0 million of Senior Notes, Series D (the “Series D Notes”) to the
Series D Note purchasers on August 31, 2006 and we issued $100.0 million of
Senior Notes, Series E (the “Series E Notes”) to the Series E Note purchasers on
September 7, 2006. In addition, the Note Purchase Agreement contained provisions
for an uncommitted shelf facility for which we may issue, on or prior to July
28, 2009, up to $75.0 million of Senior Notes (the “Shelf Notes”) to Prudential,
upon mutually acceptable terms and conditions as may be agreed upon at the
time
of issuance. As of September 30, 2006, there were no borrowings outstanding
under the Shelf Notes.
The
Series D Notes mature on August 31, 2016 and bear interest at a rate of 6.66%
per annum. Series E Notes mature on August 31, 2016 and bear interest at a
rate
of 6.70% per annum. The Shelf Notes, if issued, will bear interest at a
to-be-determined per annum rate and will have maturities of no more than ten
years. The Note Purchase Agreement, which governs the Series D Notes, Series
E
Notes and Shelf Notes, contains certain restrictive covenants, including a
minimum debt to capitalization ratio and debt service ratio.
We
used
the proceeds from the sale of the Series D Notes to pay our 7.16% Senior Notes,
Series A that matured on August 31, 2006. The proceeds from the sale of the
Series E Notes were used to pay a portion of the CTG merger. (See
Note
5, “Merger Agreement.”)
Credit
Facility
On
July
28, 2006, we entered into a Revolving Credit Agreement (the “Credit Agreement”)
with SunTrust Bank, as administrative agent, issuing bank and swingline lender,
and the other lenders party thereto. The Credit Agreement established a new,
five-year revolving credit arrangement that replaced our previous five-year
revolving credit arrangement entered into as of November 6, 2003.
The
Credit Agreement established a credit facility in the aggregate principal amount
of up to $200.0 million. The Credit Agreement contains certain restrictive
covenants, including a minimum debt to capital ratio, an interest coverage
ratio
and maintenance of consolidated net worth requirement. With respect to the
consolidated net worth requirement, consolidated net worth cannot be less than
an amount equal to the sum of (1) 85% of the consolidated net worth at December
31, 2005, plus; (2) 50% of consolidated net income on a cumulative basis for
each succeeding quarter starting with the quarter ending March 31, 2006, plus;
(3) 100% of the amount by which total shareholders’ equity is increased as a
result of any public or private common stock offerings, excluding issuances
of
stock options and restricted stock to employees. As of September 30, 2006,
there
was $100.0 million outstanding under the Credit Agreement which was used to
pay
a portion of the CTG merger.
We
are
engaged in the business of providing title insurance as well as a broad array
of
real estate transaction-related services. We have three reporting segments
that
fall within three primary business segments, Title Operations, Lender Services
and Financial Services. The remaining immaterial reportable segments have been
combined into a group called Corporate and Other.
Based
on
changes in our organizational structure and the combination of service offerings
in our Lender Services segment, we have reclassified LandAmerica OneStop, Inc.’s
services operations, which provide title and closing services to national
lenders, to the Lender Services segment from the Title Operations segment.
Amounts from 2005 have been reclassified to conform to the 2006 presentation.
Title
Operations includes title insurance policies, escrow and closing services,
and
other real estate transaction management services for the residential and
commercial market.
Lender
Services provides services consisting primarily of title and closing,
residential appraisal and valuation services, real estate tax processing, flood
zone determinations, mortgage loan subservicing, consumer mortgage credit
reporting and default management services for the national lenders
market.
Financial
Services consists of Orange County Bancorp and its wholly-owned subsidiary,
Centennial Bank, a California industrial bank primarily engaged in the business
of providing real estate loans in the Southern California market.
Corporate
and Other includes home warranty, residential inspection and commercial
appraisals and assessments, as well as the unallocated portion of the corporate
expenses related to our corporate offices and unallocated interest
expense.
We
provide title services through direct operations and agents throughout the
United States. We also offer title insurance in Mexico, Europe, Canada, the
Caribbean and Latin America. Commercial assessment services are provided in
Europe. The international operations account for less than 1 percent of our
income before income taxes. Tax-related services are offered nationwide.
Appraisal services are provided in 48 states.
The
following tables provide selected financial information about our operations
by
segment for the three and nine-month periods ending September 30, 2006, and
2005:
|
|
Three
Months Ended September 30,
|
|
|
|
Operating
Revenue
|
|
Personnel
Cost
|
|
Depreciation
|
|
Amortization
of Intangible
Assets
|
|
Income
Before
Taxes
|
|
|
|
(In
millions)
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Title
Operations
|
|
$
|
865.2
|
|
$
|
234.3
|
|
$
|
6.1
|
|
$
|
3.3
|
|
$
|
48.4
|
|
Lender
Services
|
|
|
59.6
|
|
|
23.4
|
|
|
1.4
|
|
|
2.6
|
|
|
3.4
|
|
Financial
Services
|
|
|
0.2
|
|
|
0.6
|
|
|
-
|
|
|
-
|
|
|
4.1
|
|
Corporate
and Other
|
|
|
29.2
|
|
|
22.6
|
|
|
1.0
|
|
|
0.9
|
|
|
(31.3
|
)
|
Total
|
|
$
|
954.2
|
|
$
|
280.9
|
|
$
|
8.5
|
|
$
|
6.8
|
|
$
|
24.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
(as restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Title
Operations
|
|
$
|
926.3
|
|
$
|
250.8
|
|
$
|
5.3
|
|
$
|
2.9
|
|
$
|
112.4
|
|
Lender
Services
|
|
|
62.9
|
|
|
23.1
|
|
|
1.0
|
|
|
3.8
|
|
|
(34.0
|
)
|
Financial
Services
|
|
|
0.4
|
|
|
0.6
|
|
|
-
|
|
|
-
|
|
|
3.7
|
|
Corporate
and Other
|
|
|
26.7
|
|
|
18.6
|
|
|
1.1
|
|
|
0.9
|
|
|
(18.3
|
)
|
Total
|
|
$
|
1,016.3
|
|
$
|
293.1
|
|
$
|
7.4
|
|
$
|
7.6
|
|
$
|
63.8
|
|
|
|
Nine
Months Ended September 30,
|
|
|
|
Operating
Revenue
|
|
Personnel
Cost
|
|
Depreciation
|
|
Amortization
of
Intangible
Assets
|
|
Income
Before
Taxes
|
|
|
|
(In
millions)
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Title
Operations
|
|
$
|
2,566.2
|
|
$
|
703.1
|
|
$
|
17.3
|
|
$
|
8.8
|
|
$
|
171.8
|
|
Lender
Services
|
|
|
177.1
|
|
|
71.5
|
|
|
3.7
|
|
|
7.8
|
|
|
12.2
|
|
Financial
Services
|
|
|
0.7
|
|
|
1.8
|
|
|
-
|
|
|
0.1
|
|
|
12.5
|
|
Corporate
and Other
|
|
|
83.6
|
|
|
70.0
|
|
|
2.6
|
|
|
2.7
|
|
|
(96.0
|
)
|
Total
|
|
$
|
2,827.6
|
|
$
|
846.4
|
|
$
|
23.6
|
|
$
|
19.4
|
|
$
|
100.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
(as restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Title
Operations
|
|
$
|
2,503.5
|
|
$
|
700.7
|
|
$
|
15.4
|
|
$
|
8.2
|
|
$
|
220.6
|
|
Lender
Services
|
|
|
206.0
|
|
|
67.4
|
|
|
3.1
|
|
|
11.4
|
|
|
0.3
|
|
Financial
Services
|
|
|
0.8
|
|
|
1.8
|
|
|
-
|
|
|
0.2
|
|
|
9.4
|
|
Corporate
and Other
|
|
|
71.9
|
|
|
53.4
|
|
|
3.4
|
|
|
2.5
|
|
|
(61.1
|
)
|
Total
|
|
$
|
2,782.2
|
|
$
|
823.3
|
|
$
|
21.9
|
|
$
|
22.3
|
|
$
|
169.2
|
|
ITEM
2.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Overview
Our
long-term goal is to enhance our position as one of the largest providers of
real estate transaction services. To accomplish this objective, we have expanded
operations through internal growth and selective strategic acquisitions. Our
business operations are organized under three primary business segments: Title
Operations, Lender Services and Financial Services. Other business operations
not required to be reported separately are reported in a category called
Corporate and Other. Based
on
changes in the organizational structure and combination of service offerings
in
the Lender Services segment, we have reclassified our LandAmerica OneStop
services operations, which provide title and closing services to national
lenders, to the Lender Services segment from the Title Operations segment.
Amounts from 2005 have been reclassified to conform to the 2006 presentation.
A
description of these segments, including certain key factors impacting these
businesses, are provided in Note 12 to Consolidated Financial Statements
included herein and in our Annual Report on Form 10-K for the year ended
December 31, 2005 as filed with the Securities and Exchange Commission on March
9, 2006. Also, starting with first quarter 2006, we are providing direct
operating revenue from our commercial operations as opposed to the previous
definition of commercial revenue as being premiums from policies providing
coverage over $1 million in liability.
The
title
insurance business is closely related to the overall level of residential and
commercial real estate activity, which is generally affected by the relative
strength or weakness of the United States economy. In addition, title insurance
volumes fluctuate based on the effect that changes in interest rates have on
the
level of real estate activity. Periods of increasing interest rates usually
have
an adverse impact on real estate activity and therefore premium and fee revenue.
In contrast, real estate activity usually increases when interest rates fall.
We
typically report our lowest revenue in the first quarter, with revenue
increasing into the second quarter and through the third quarter. The fourth
quarter customarily may be as strong as the third quarter, depending on the
level of activity in the commercial real estate market. Due to a down turn
in
the real estate environment during 2006, our results have not followed the
typical seasonal patterns with third quarter 2006 results below second quarter
2006 results.
Critical
Accounting Estimates
The
preparation of our financial statements requires management to make estimates
and judgments that affect the reported amounts of certain assets, liabilities,
revenue, expenses and related disclosures surrounding contingencies and
commitments. A summary of our significant critical accounting estimates can
be
found in Management’s Discussion and Analysis in our Annual Report on Form 10-K
for the year ended December 31, 2005 as filed with the Securities and Exchange
Commission. Actual results could differ from these estimates.
Recent
Accounting Pronouncements
In October
2006, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position FAS 123(R)-5, Amendment
of FASB Staff Position FAS 123(R)-1
and FASB
Staff Position FAS 123(R)-6, Technical
Corrections of FASB Statement No. 123(R) (“FSPs”).
These FSPs address whether a modification of an instrument in connection with
an
equity restructuring should be considered a modification for purposes of
applying FSP FAS 123(R)-1 and address certain technical corrections of FASB
Statement No. 123(R), respectively. These FSPs are effective in the first
reporting period beginning after October 10, 2006 and October 20, 2006,
respectively. We believe that adopting these FSPs will not have a material
impact on our financial statements.
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, Fair
Value Measurements (“SFAS
No. 157”). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007
with earlier application encouraged. We are evaluating the impact of adopting
SFAS No. 157 on our financial statements.
In
September 2006, FASB issued SFAS No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statements No. 87, 88, 106 and 132(R)
(“SFAS
No. 158”). This standard requires employers to recognize the underfunded or
overfunded status of a defined benefit postretirement plan as an asset or
liability in its statement of financial position and to recognize changes in
the
funded status in the year in which the changes occur through accumulated other
comprehensive income. Additionally, SFAS No. 158 requires employers to measure
the funded status of a plan as of the date of its year-end statement of
financial position. The new reporting requirement and related new footnote
disclosure rules of SFAS No. 158 are effective for fiscal years ending after
December 15, 2006. The new measurement date requirement applies for fiscal
years
ending after December 15, 2008.
We
estimate the impact of adopting SFAS No. 158 to be approximately $14 million,
reflected as a reduction in net assets on our balance sheet, with no impact
to
our results of operations or cash flow.
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 108, Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements (“SAB
108”), to address diversity in practice in quantifying financial statement
misstatements. SAB 108 requires that we quantify misstatements based on their
impact on each of our financial statements and related disclosures. SAB 108
is
effective as of the end of our 2006 fiscal year, allowing a one-time
transitional cumulative effect adjustment to retained earnings as of January
1,
2006 for errors that were not previously deemed material, but are material
under
the guidance in SAB 108. We believe that SAB 108 will not have a material impact
on our financial statements.
In
June
2006, the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, an interpretation of FASB Statement No.
109
(“FIN
48”). FIN 48 clarifies the accounting for uncertain tax positions. The
interpretation prescribes a recognition threshold and measurement attribute
for
the financial statement recognition and measurement of a tax position taken
or
expected to be taken in a tax return. FIN 48 is effective for fiscal years
beginning after December 15, 2006 with earlier adoption permitted. We are
currently evaluating the impact of adopting FIN 48 on our financial
statements.
In
February 2006, FASB issued SFAS No. 155, Accounting
for Certain Hybrid Financial Instruments, an amendment of FASB Statements No.
133 and 140
(“SFAS
No. 155”). SFAS No. 155 permits remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require
bifurcation, clarifies which interest-only strips and principal-only strips
are
not subject to the requirements of Statement No. 133, establishes a requirement
to evaluate interests in securitized financial assets to identify interests
that
are freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation, clarifies that
concentrations of credit risk in the form of subordination are not embedded
derivatives and amends Statement No. 140 to eliminate the prohibition on a
qualifying special-purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. SFAS No. 155 is effective for all financial instruments acquired
or
issued after the beginning of fiscal years that begin after September 15, 2006.
We are evaluating the impact of adopting SFAS No. 155 on our financial
statements.
Results
of Operations
Operating
Revenue
The
following table provides a
summary
of our operating revenue for the three and nine-month periods ended September
30, 2006 and 2005:
|
|
Three
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
(as
restated)
|
|
|
|
(Dollars
in millions)
|
|
Title
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
Operations
|
|
$
|
361.6
|
|
|
37.9
|
%
|
$
|
422.7
|
|
|
41.6
|
%
|
Agency
Operations
|
|
|
503.6
|
|
|
52.8
|
|
|
503.6
|
|
|
49.6
|
|
|
|
|
865.2
|
|
|
90.7
|
|
|
926.3
|
|
|
91.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lender
Services
|
|
|
59.6
|
|
|
6.2
|
|
|
62.9
|
|
|
6.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Services
|
|
|
0.2
|
|
|
-
|
|
|
0.4
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
and Other
|
|
|
29.2
|
|
|
3.1
|
|
|
26.7
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
954.2
|
|
|
100.0
|
%
|
$
|
1,016.3
|
|
|
100.0
|
%
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
(as
restated)
|
|
|
|
(Dollars
in millions)
|
|
Title
Operations
|
|
|
|
|
|
|
|
|
|
Direct
Operations
|
|
$
|
1,079.1
|
|
|
38.2
|
%
|
$
|
1,128.8
|
|
|
40.6
|
%
|
Agency
Operations
|
|
|
1,487.1
|
|
|
52.6
|
|
|
1,374.7
|
|
|
49.4
|
|
|
|
|
2,566.2
|
|
|
90.8
|
|
|
2,503.5
|
|
|
90.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lender
Services
|
|
|
177.1
|
|
|
6.3
|
|
|
206.0
|
|
|
7.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Services
|
|
|
0.7
|
|
|
-
|
|
|
0.8
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
and Other
|
|
|
83.6
|
|
|
2.9
|
|
|
71.9
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,827.6
|
|
|
100.0
|
%
|
$
|
2,782.2
|
|
|
100.0
|
%
|
Title
Operations - Operating
revenue from direct title operations decreased $61.1 million, or 14.5%, in
third
quarter 2006 from third quarter 2005 and decreased $49.7 million, or 4.4%,
in
the first nine months of 2006 from the comparable period in 2005. Before the
impact of the CTG Merger, operating revenue from direct operations decreased
$74.9 million, or 17.7%, in third quarter 2006 from third quarter 2005 and
decreased $63.5 million, or 5.6%, in the first nine months of 2006 compared
to
the first nine months of 2005. During third quarter 2006, direct operating
revenue was negatively impacted by the decline in order volume from the
softening real estate market, partially offset by an increase in the direct
operating revenue per direct closed order. Direct operating revenue for the
first nine months of 2006 was impacted by the decline in order volume offset
in
part by an increase in the direct operating revenue per direct closed order
and
strong commercial activity.
Closed
orders from the Company’s direct title operations decreased 27.9% in third
quarter 2006 from third quarter 2005 while the direct operating revenue per
direct closed order increased approximately 18.6%. Closed orders decreased
20.5%
in the first nine months of 2006 compared to the prior year period while the
direct operating revenue per direct closed order increased 20.3%. Before the
impact of the CTG Merger, closed orders from direct title operations decreased
30.6% in third quarter 2006 from third quarter 2005 and 21.5% in the first
nine
months of 2006 from the comparable period in 2005.
Revenue
from direct title commercial operations was $89.2 million in third quarter
2006,
compared to $90.3 million in third quarter 2005, a decrease of 1.2% from third
quarter 2005, and $274.7 million in the first nine months of 2006, compared
to
$246.7 million in the first nine months of 2005, an increase of
11.3%.
Operating
revenue from agency title operations was $503.6 million in third quarter 2006
and third quarter 2005. Operating revenue from agency title operations increased
$112.4 million, or 8.2%, in the first nine months of 2006 over the first nine
months of 2005. Growth in agency
business,
particularly in certain southeastern markets, contributed to the increase in
agency revenue year over year and kept agency revenue flat quarter over quarter
even though the overall real estate market has declined.
Lender
Services - Operating
revenue decreased $3.3 million, or 5.2%, in third quarter 2006 compared to
third
quarter 2005. Results for third quarter 2006 were impacted by declines in the
title and closing business and credit services businesses, offset in part by
growth in the default services business and the impact of acquisitions. Before
the impact of acquisitions, operating revenue decreased $7.6 million, or 12.1%,
in third quarter 2006 compared to third quarter 2005.
Operating
revenue decreased $28.9 million, or 14.0%, in the first nine months of 2006
compared to the first nine months of 2005. Before the impact of acquisitions,
operating revenue decreased $33.4 million, or 16.2%, in the first nine months
of
2006 compared to the first nine months of 2005. Results for the first nine
months of 2005 included accelerated deferred revenue related to the Company’s
tax and flood business of $32.7 million. Before the recognition of accelerated
revenue in 2005 and the impact of acquisitions in 2006, the decrease in the
first nine months of 2006 compared to the first nine months of 2005 was
primarily due to a decline in the credit services business, partially offset
by
growth in the default and loan subservicing businesses.
Corporate
and Other -
Operating revenue for the Corporate and Other segment increased by $2.5 million,
or 9.4%, in third quarter 2006 over third quarter 2005 and increased by $11.7
million, or 16.3%, in the first nine months of 2006 over the same period in
2005. The increase in operating revenue in third quarter 2006 over third quarter
2005 was due to strong commercial business. The increase in operating revenue
for the first nine months of 2006 over the comparable period in 2005 was due
to
strong commercial business and increased revenue in the home warranty
business.
Investment
and Other Income
Investment
and other income increased $4.4
million, or 16.1%, in
third
quarter 2006 over third quarter 2005 and
$20.9
million, or 28.6%, in the first nine months of 2006 over the first nine months
of 2005.
The
Financial Services segment generated $2.3 million of additional investment
income in third quarter 2006 over third quarter 2005, and $8.0 million of
additional investment income in the first nine months of 2006 over the first
nine months of 2005. These increases were due to an increase in the portfolio
of
investments and an increase in interest rates.
Net
Realized Investment Gains
Net
realized investment gains were $6.1 million in third quarter 2006 compared
to
$1.9 million in third quarter 2005. The increase was primarily due to gains
from
the repositioning of our REIT portfolio. Net realized investment gains were
$5.5
million in the first nine months of 2006 compared to $3.0 million in the first
nine months of 2005. Net realized investment gains in the first nine months
of
2006 include a realized loss of $1.6 million related to the impairment of
certain
securities. For further details, see Note 4, “Investments” of the Notes to
Consolidated Financial Statements in Part I, Item 1 of this report.
Salary
and Employee Benefits
The
following table provides a summary of our salary and employee benefit costs
for
the three and nine-month periods ending September 30, 2006 and
2005:
|
|
Three
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
(as
restated)
|
|
|
|
(Dollars
in millions)
|
|
Title
Operations
|
|
$
|
234.3
|
|
|
83.4
|
%
|
$
|
250.8
|
|
|
85.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lender
Services
|
|
|
23.4
|
|
|
8.3
|
|
|
23.1
|
|
|
7.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Services
|
|
|
0.6
|
|
|
0.2
|
|
|
0.6
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
and Other
|
|
|
22.6
|
|
|
8.1
|
|
|
18.6
|
|
|
6.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
280.9
|
|
|
100.0
|
%
|
$
|
293.1
|
|
|
100.0
|
%
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
(as
restated)
|
|
|
|
(Dollars
in millions)
|
|
Title
Operations
|
|
$
|
703.1
|
|
|
83.1
|
%
|
$
|
700.7
|
|
|
85.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lender
Services
|
|
|
71.5
|
|
|
8.4
|
|
|
67.4
|
|
|
8.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Services
|
|
|
1.8
|
|
|
0.2
|
|
|
1.8
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
and Other
|
|
|
70.0
|
|
|
8.3
|
|
|
53.4
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
846.4
|
|
|
100.0
|
%
|
$
|
823.3
|
|
|
100.0
|
%
|
Title
Operations - Title
Operations salary and employee benefit costs decreased by $16.5 million, or
6.6%, in third quarter 2006 compared to third quarter 2005 and increased $2.4
million, or 0.3%, in the first nine months of 2006 compared to the first nine
months of 2005. Before the impact of acquisitions, salary and employee benefit
costs decreased $25.3 million, or 10.1%, in third quarter 2006 from third
quarter 2005 and decreased $6.4 million, or 0.9% in the first nine months of
2006 from the first nine months of 2005. Average Full Time Equivalent
(“FTE”)
counts for the Title Operations segment were 10,727 in third quarter 2006 versus
11,147 in third quarter 2005, or a decrease of 3.8% (7.5% before acquisitions).
FTEs for the Title Operations segment decreased to 10,623 in the first nine
months of 2006 from 10,683 in the first nine months of 2005, or a decrease
of
0.6% (1.9% before acquisitions).
Lender
Services -
Lender
Services salary and employee benefit costs increased by $0.3 million, or 1.3%,
in third quarter 2006 compared to third quarter 2005. Salary and employee
benefit costs increased by $4.1 million, or 6.1%, in the first nine months
of
2006 compared to the first nine months of 2005. Before the impact of
acquisitions, salary and employee benefit costs for Lender Services decreased
by
$1.3 million, or 5.6%, in third quarter 2006 compared to third quarter 2005
due
to a reduction of 95 FTEs, offset by an increase in average wages and benefit
costs and increased by $2.4 million, or 3.6%, in the first nine months of 2006
compared to the first nine months of 2005 due to an increase in average wages
and benefit costs offset by a reduction of 17 FTEs.
Corporate
and Other
-
Corporate and Other salary and employee benefit costs increased $4.0 million,
or
21.5%, in third quarter 2006 over third quarter 2005 and increased $16.6
million, or 31.1%, in the first nine months of 2006 over the first nine months
of 2005 which was primarily due to headcount and salary increases in the
operating units of our home warranty, and commercial appraisal and assessment
businesses and headcount and salary increases related to our investment in
technology resources.
Agent
Commissions
The
following table provides a summary of agent commissions and related revenue
in
the Title Operations segment for the three and nine-month periods ending
September 30, 2006 and 2005:
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in millions)
|
|
Agent
commissions
|
|
$
|
404.6
|
|
$
|
402.7
|
|
$
|
1,191.9
|
|
$
|
1,098.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agent
revenue
|
|
$
|
503.6
|
|
$
|
503.6
|
|
$
|
1,487.1
|
|
$
|
1,374.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
Retained by agents
|
|
|
80.3
|
%
|
|
80.0
|
%
|
|
80.1
|
%
|
|
79.9
|
%
|
The
commission rate varies by the geographic area in which the commission was paid
and by individual agent agreement.
Provision
for Policy and Contract Claims
We
review
our claims experience quarterly, and in conjunction with our outside actuaries,
evaluate the adequacy of our claims reserve. We consider factors such as
historical timing of claims reported and historical timing of claims paid over
the period in which policies are effective against actual experience by year
of
policy issue to determine the amount of claims liability required for each
year
for which policies are outstanding. We also consider the impact of current
trends in marketplace activity, including refinance activity, which may shorten
the time period a policy is outstanding, bankruptcies and individual large
claims attributable to any particular period in determining the expected
liability associated with each year.
Based
on
our review of the underlying claims data and trends therein, we have provided
for claims losses using approximately 8.0% and 5.3% of operating revenue from
the Title Operations segment for the third quarters of 2006 and 2005,
respectively, and approximately 6.3% and 5.3% of operating revenue from the
Title Operations segment for the first nine months of 2006 and 2005. The
increase in the claims provision ratio was primarily due to upward development
in policy years 2001 through 2005. Since there is an extended time period for
which we are liable, slight changes in current claims experience can result
in a
significant impact in the amount of liability required for potential Incurred
But Not Reported (“IBNR”) claims. We believe that we have reserved appropriately
for all reported and IBNR claims at September 30, 2006 based on the results
of
the actuarial evaluation and evaluation of any known trend.
Write-off
of Intangible and Other Long-Lived Assets
In
connection with the relocation and consolidation our corporate offices and
shared resources operations, we wrote down our existing building and related
assets to fair value less cost to sell by approximately $0.5 million in the
third quarter of 2006 and $10.2 million in the first nine months of 2006.
In the
third quarter and first nine months of 2005, we recorded a $37.6 million
write-down for a portion of the customer relationship intangible related
to the
2003 acquisition of our tax and flood business. For further details, see
Note
10, “Write-off of Intangible and Other Long-Lived Assets” of the Notes to
Consolidated Financial Statements in Part I, Item 1 of this report.
Amortization
Amortization
expense decreased by $0.8 million in third quarter 2006 compared to third
quarter 2005 and by $2.9 million in the first nine months of 2006 compared
to
the first nine months of 2005. The decreases are primarily the result of the
write-off of customer relationship intangibles assets in 2005 of $37.6 million
within our Lender Services segment. We are amortizing the intangible assets
acquired as part of these businesses over their estimated useful
lives.
Interest
Expense
Interest
expense increased by $2.5 million in third quarter 2006 compared to third
quarter 2005 and by $5.4 million in the first nine months of 2006 compared
to
the first nine months of 2005. The increase was related to increases in
interest-bearing deposits and borrowings at Centennial Bank, our industrial
bank
subsidiary and interest on our senior notes and credit facility. See “Liquidity
and Capital Resources” for further details. We anticipate that interest expense
will continue to exceed prior period levels throughout 2006.
Premium
Taxes
Insurance
companies are generally not subject to state income or franchise taxes. However,
they are subject to a “premium tax” on certain operating revenue, depending on
the state. The tax rates and amounts that are subject to tax vary from state
to
state. Premium taxes as a percentage of total title insurance revenue were
approximately 1.4% and 1.2% in the third quarters of 2006 and 2005,
respectively, and 1.3% and 1.2% in the first nine months of 2006 and 2005,
respectively.
General,
Administrative and Other
The
following table provides a summary of our general, administrative and other
costs for the three and nine-month periods ending September 30, 2006 and
2005:
|
|
Three
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in millions)
|
|
Title
Operations
|
|
$
|
116.5
|
|
|
66.2
|
%
|
$
|
113.6
|
|
|
68.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lender
Services
|
|
|
30.2
|
|
|
17.2
|
|
|
30.7
|
|
|
18.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Services
|
|
|
0.7
|
|
|
0.4
|
|
|
0.3
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
and Other
|
|
|
28.6
|
|
|
16.2
|
|
|
20.9
|
|
|
12.6
|
|
Total
|
|
$
|
176.0
|
|
|
100.0
|
%
|
$
|
165.5
|
|
|
100.0
|
%
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in millions)
|
|
Title
Operations
|
|
$
|
353.5
|
|
|
68.3
|
%
|
$
|
353.4
|
|
|
70.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lender
Services
|
|
|
84.9
|
|
|
16.4
|
|
|
86.5
|
|
|
17.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Services
|
|
|
1.3
|
|
|
0.3
|
|
|
1.2
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
and Other
|
|
|
77.8
|
|
|
15.0
|
|
|
62.8
|
|
|
12.5
|
|
Total
|
|
$
|
517.5
|
|
|
100.0
|
%
|
$
|
503.9
|
|
|
100.0
|
%
|
Title
Operations - Title
Operations general and administrative expenses increased by $2.9 million, or
2.6%, in third quarter 2006 from third quarter 2005 and increased $0.1 million
in the first nine months of 2006 from the first nine months of 2005. General
and
administrative expenses in third quarter 2006 and the first nine months of
2006
included the impact of acquisitions of $3.8 million. General and administrative
expenses in the first nine months of 2005 included $19.0 million of accrued
legal costs related to captive reinsurance inquiries and $10.3 million for
the
settlement of a class action lawsuit. Before these items, general and
administrative costs decreased $0.9 million, or 0.8%, in third quarter 2006
from
third quarter 2005 and increased $25.6 million, or 7.9%, in the first nine
months of 2006 from the first nine months of 2005. The increase in general
and
administrative costs in the first nine months of 2006 from the first nine months
of 2005 occurred primarily in the first half of the year and was due to
increased fees from outside services as a result of higher volumes of operating
revenue and increased legal costs associated with state regulatory
inquiries.
Lender
Services - Lender
Services general and administrative expenses decreased by $0.5 million in third
quarter 2006 from the comparable period in 2005 and decreased $1.6 million,
or
1.8%, in the first nine months of 2006 from the comparable period in 2005.
Before the impact of acquisitions, general and administrative expenses decreased
by $3.5 million, or 11.4%, in third quarter 2006 from third quarter 2005 and
decreased $4.7 million, or 5.4%, in the first nine months of 2006 from the
first
nine months of 2005. The decrease in general and administrative expenses was
primarily due to lower expenses as a result of lower volume.
Corporate
and Other
-
Corporate and Other general and administrative expenses increased by $7.7
million, or 36.8%, in third quarter 2006 from third quarter 2005 and
increased by $15.0
million, or 23.9%, in
the
first nine months of 2006 over the
comparable period in 2005. The increase in general and administrative expenses
in third quarter 2006 from third quarter 2005 was due in part to higher
personnel costs, increased investments in technology resources and relocation
and related exit costs of our corporate offices of $3.8 million. The increase
in
general and administrative expenses in the first nine months of 2006 compared
to
the first nine months of 2005 was primarily related to increased data processing
costs as we focus on
technology
initiatives, higher operating expenses related to our commercial assessment
business as a result of higher volumes, and approximately $5.2 million of costs
associated with the relocation and consolidation of our corporate
offices.
Income
Taxes
Our
effective income tax rate, which includes a provision for state income and
franchise taxes for non-insurance subsidiaries, was 35.8% for the first nine
months of 2006 and 37.5% for the first nine months of 2005. The difference
in
the effective tax rate was due primarily to the mix of state taxes related
to
our non-insurance subsidiaries.
Net
Income
Our
reported net income was $15.2 million or $0.89 per share on a diluted basis
for
third quarter 2006, compared to a net income of $42.4 million or $2.35 per
share
on a diluted basis for third quarter 2005. Our reported net income was $64.5
million or $3.69 per share on a diluted basis for first nine months 2006,
compared to a net income of $105.8 million or $5.91 per share on a diluted
basis
for first nine months 2005.
Liquidity
and Capital Resources
Cash
provided by operating activities was $122.9 million for the first nine months
of
2006 compared to $267.5 million provided by operating activities for the first
nine months of 2005. The decrease in cash provided by operating activities
was
due to the timing of income tax payments and payments for accounts payable
and
accrued expenses. The principal non-operating uses of cash for the first nine
months of 2006 and 2005 were capital expenditures, acquisitions, additions
to
the investment portfolio, loans receivable, common stock repurchased and the
repayment of debt. The net of all activities was a decrease in cash of $2.0
million for the first nine months of 2006 and an increase in cash of $8.9
million for the first nine months of 2005. At September 30, 2006, we held cash
of $87.1 million and investments of $2,242.6 million. In addition, we invested
a
temporary commercial customer deposit in federal funds sold investments of
$407.9 million.
On
September 8, 2006, we completed the merger with CTG which consists of a title
insurance underwriter, agent, and settlement services provider and related
companies. CTG services customers primarily in Arizona, California and Nevada.
We believe that our acquisition of CTG will strengthen our presence in key
western states and add scale to our Lender Services platform. We acquired 100
percent of CTG’s common stock for approximately $252.3 million, which consisted
of $202.6 million of cash, including direct transaction costs of $3.3 million,
and $49.7 million of our common stock, which represented 775,576 shares. CTG’s
operating results are expected to be accretive by 2 to 3 percent to our earnings
in 2007. We expect that within one year after the close of the transaction,
synergies will produce annual run rate pretax cost reduction of approximately
$14 million. (For further details, see Note 5, “Merger Agreement” of the Notes
to Consolidated Financial Statements in Part I, Item 1 of this
report.)
We
issued
$50.0 million of Senior Notes, Series D to the Series D Note purchasers on
August 31, 2006 and issued $100.0 million of Senior Notes, Series E to the
Series E Note purchasers on September 7, 2006. In addition, the Note Purchase
Agreement contained provisions for an uncommitted shelf facility by which we
may
issue, on or prior to July 28, 2009, up to $75.0 million of our Shelf Notes
to
Prudential, upon mutually acceptable terms and conditions as may be agreed
upon
at the time of issuance. As of September 30, 2006, there were no borrowings
outstanding under these Shelf Notes. (For further details, see Note 11, “Credit
Arrangements” of the Notes to Consolidated Financial Statements in Part I, Item
1 of this report.)
We
used
the proceeds from the sale of the Series D Notes to pay our 7.16% Senior Notes,
Series A that matured on August 31, 2006. The proceeds from the sale of the
Series E Notes were used to pay a portion of the CTG Merger. (For further
details, see Note 5, “Merger Agreement” of the Notes to Consolidated Financial
Statements in Part I, Item 1 of this report.)
On
July
28, 2006, we entered into a Credit Agreement with SunTrust Bank, as
administrative agent, issuing bank and swingline lender, and the other lenders
party thereto. The Credit Agreement established a new, $200 million, five-year
revolving credit arrangement that replaced our previous five-year revolving
credit arrangement entered into as of November 6, 2003. As of September 30,
2006, there were $100.0 million of borrowings outstanding under the Credit
Agreement which was used to pay a portion of the CTG Merger. We anticipate
repaying the outstanding borrowings by March 2007.
In
June
2006, we completed the process of redomesticating our three principal title
insurance subsidiaries, Commonwealth Land Title Insurance Company, Lawyers
Title
Insurance Corporation and Transnation Title Insurance Company from the States
of
Pennsylvania, Virginia and Arizona, respectively, to the State of Nebraska.
The
redomestication of these title insurance subsidiaries is expected to result
in
streamlined regulatory, tax and statutory accounting functions derived from
having these subsidiaries subject to the same laws and regulations. Under
Nebraska insurance laws and regulations, approximately $62 million of the net
assets of our consolidated insurance subsidiaries are available during the
remainder of 2006 for ordinary dividends, loans or advances to us. The
redomestication of these subsidiaries is expected to increase the cumulative
amount of surplus that is available to pay dividends to us by the aggregate
amount that these subsidiaries’ total statutory claims reserves exceed GAAP
claims reserves after income taxes, subject to certain annual limitations and
any approval that may be required by the Nebraska Department of Insurance.
As of
December 31, 2005, statutory claims reserves exceeded GAAP claims reserves
by
approximately $237 million before income taxes. We anticipate that any such
additional dividends will be used for general corporate purposes, including
but
not limited to the repayment of debt, acquisitions and the repurchase of our
common stock.
In
December 2005, we filed a Shelf Registration Statement on Form S-3 for up to
$400.0 million of our debt and/or equity securities. We may from time to time
issue debt and equity securities as market conditions permit and our financing
needs arise.
In
October 2005, the Board of Directors approved a share repurchase program
expiring July 2007 that authorized us to repurchase an additional 1.25 million
shares of our common stock. We have repurchased 429,000 shares during the first
nine months of 2006 for $28.1
million
at an average price of $65.53 per share. At September 30, 2006, we had
approximately 758,000 shares remaining in our authorized repurchase program.
(For
further details, see Note 9, “Shareholders’ Equity” of the Notes to Consolidated
Financial Statements in Part I, Item 1 of this report.)
Our
industrial bank maintains an allowance for loan losses related to our loans
receivable. During third quarter 2006, we did not experience a significant
change in the underlying components of the allowance for loan losses or the
balance in total. There have been no significant changes in the underlying
rationale for management’s provision for loan losses or significant changes in
asset quality.
Interest
Rate Risk
The
following table provides information about our financial instruments that are
sensitive to changes in interest rates. For investment securities, the table
presents principal cash flows and related weighted interest rates by expected
maturity dates. Actual cash flows could differ from the expected
amounts.
Interest
Rate Sensitivity
|
|
Principal
Amount by Expected Maturity
|
|
Average
Interest Rate
|
|
(Dollars
in millions)
|
|
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
and
After
|
|
Total
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book
value
|
|
$
|
12.0
|
|
$
|
53.9
|
|
$
|
60.2
|
|
$
|
75.1
|
|
$
|
52.6
|
|
$
|
523.7
|
|
$
|
777.5
|
|
$
|
775.5
|
|
Average
yield
|
|
|
3.67
|
%
|
|
4.54
|
%
|
|
4.35
|
%
|
|
4.65
|
%
|
|
4.76
|
%
|
|
4.94
|
%
|
|
4.81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-taxable
available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book
value
|
|
|
2.9
|
|
|
3.8
|
|
|
24.1
|
|
|
25.8
|
|
|
19.9
|
|
|
392.1
|
|
|
468.6
|
|
|
479.5
|
|
Average
yield
|
|
|
5.04
|
%
|
|
4.22
|
%
|
|
4.38
|
%
|
|
4.06
|
%
|
|
4.26
|
%
|
|
4.34
|
%
|
|
4.33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
Receivable*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book
Value
|
|
|
0.1
|
|
|
1.2
|
|
|
0.5
|
|
|
2.0
|
|
|
5.7
|
|
|
489.3
|
|
|
498.8
|
|
|
494.1
|
|
Average
yield
|
|
|
10.84
|
%
|
|
8.93
|
%
|
|
7.75
|
%
|
|
8.01
|
%
|
|
15.07
|
%
|
|
6.89
|
%
|
|
7.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book
value
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
7.8
|
|
|
7.8
|
|
|
7.8
|
|
Average
yield
|
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
2.90
|
%
|
|
2.90
|
%
|
|
|
|
|
*Excludes
reserves, discounts and other
costs.
|
Long-term
debt was $686.7 million at September 30, 2006, bearing interest at a weighted
average rate of 5.21%. Additionally, interest-bearing passbook and certificate
of deposit liabilities were $736.7 million at September 30, 2006 at an interest
rate of 4.90%.
Regulatory
Investigations and Inquiries
We
have
received certain information requests and subpoenas from various regulatory
authorities relating to our business practices and the title insurance industry.
As detailed below, a number of these inquiries focus on captive reinsurance,
among other matters.
Captive
reinsurance involves the provision of reinsurance by a reinsurance company
that
is owned by another entity, typically a lender, developer or other party that
is
a provider of real estate-related services. From the inception of our captive
reinsurance programs in 1997 through 2004, reinsurance premiums paid by us
to
captive reinsurers totaled approximately $12.0 million. The revenues from these
programs were not material to our results of operations. We voluntarily
terminated our captive reinsurance arrangements as of February 2005,
notwithstanding our belief that we had operated the programs in accordance
with
applicable law. In addition, as set out on page 41, we settled certain of these
investigations without admitting any liability.
Specifically,
we have received the following regulatory inquiries:
In
2004,
the Office of the Attorney General of the State of New York (“NYAG”) initiated
an investigation into the business practices of companies engaged in the title
insurance business. We have received subpoenas and requests from the NYAG
seeking information and documents related to certain industry business
practices, including, among other things, competitive market practices, the
compensation of title insurance agents and producers by underwriters, and
captive and other reinsurance arrangements, and we continue to respond to those
subpoenas and requests. The Company has participated in settlement discussions
with the NYAG and the insurance department of the State of New York with regard
to alleged violations of New York Insurance Law that they perceive as a result
of the NYAG’s investigation.
We
also
received initial inquiries in 2004 and responded to or continue to respond
to
inquiries regarding the title industry’s business practices from the following
state agencies: the California Department of Insurance and the Colorado Division
of Insurance regarding captive reinsurance; the insurance departments of North
Carolina and Pennsylvania as part of their review of competitive market
practices and agent compensation in the title insurance industry; and the State
of Washington Office of Insurance Commissioner regarding captive reinsurance,
potential illegal inducements and rebates by title insurance companies and
title
insurance rates.
Additionally,
in 2005, we received and responded to or continue to respond to inquiries
regarding the title industry’s business practices from the following state
agencies: the California Department of Real Estate regarding captive
reinsurance; the California Department of Insurance regarding our community
development and investment, California title plants, and examinations of our
adherence to filed premium rates and claims handling practices, including
whether refunds of overcharges to certain consumers may be required; the
Colorado Attorney General regarding captive reinsurance; the Colorado Department
of Insurance regarding affiliated business arrangements; the Connecticut
Department of Insurance regarding producer compensation and captive reinsurance
arrangements; the Florida Department of Financial Services regarding affiliated
business arrangements; the Hawaii Insurance Division regarding producer
compensation
arrangements and captive reinsurance; the Idaho Department of Insurance
regarding captive reinsurance and premium splits between agent and underwriter;
the Massachusetts Attorney General regarding reinsurance and the title insurance
market; the Minnesota Department of Commerce regarding captive and other
reinsurance arrangements; the Tennessee Department of Insurance regarding
producer compensation arrangements and competitive market practices of Title
Insurance Company of America, and requiring the submission of an attestation
regarding any finite reinsurance arrangements existing in that state; and
regulatory departments from seven other states, excluding those that have been
settled, regarding captive reinsurance arrangements. We also received and
responded in 2005 to a request for information from the United States Department
of Housing and Urban Development in conjunction with its investigation involving
various builders, lenders and real estate brokers in connection with their
participation in captive reinsurance companies.
In
2006,
we received and are responding to an Administrative Subpoena from the Minnesota
Department of Commerce with regard to a market examination. The insurance
department of the State of New York has commenced a market conduct exam and
indicated its intent to determine the Company’s adherence to filed premium
rates, including whether refunds of overcharges to certain consumers may
be
required. The Maryland Department of Insurance has requested captive reinsurance
information. The California Department of Insurance requested information
regarding any technology arrangements with settlement services
providers.
We
also
reached agreements with the insurance departments of the states of California
and Arizona in 2005 and Virginia, Nevada, Colorado and North Carolina in 2006
to
settle filed or potential claims regarding captive reinsurance and other
regulatory matters except overcharges of certain consumers in California,
without admitting any liability. These six states accounted for approximately
82% of our captive reinsurance business.
In
June
2005, we established reserves of $19.0 million to cover anticipated exposure
to
regulatory matters nationwide, an amount which includes the settlements with
the
California, Arizona, Nevada, Virginia, Colorado and North Carolina departments
of insurance. Based on actual settlements, we released $6.7 million of this
reserve back into earnings in fiscal year 2005. The remaining reserve at
September 30, 2006 was approximately $5.9 million.
The
State
of Washington Office of Insurance Commissioner issued its exam report on title
insurance business practices on October 16, 2006, indicating it will not seek
fines or penalties for allegedly improper conduct involving illegal incentives
and inducements to steer business and it will focus its efforts on future
compliance and prevention.
Also,
in
addition to or in connection with the above-referenced inquiries, multiple
states, including California, Florida, Louisiana, Nevada, New Mexico, Texas
and
New York, are examining pricing levels and/or competition in the title insurance
industry, with a view to determining whether prices are justified, and if not,
to implement rate changes, including potential reductions.
The
Texas
Commissioner held a hearing of the current Texas title rate case beginning
on
August 16, 2006 and the case is now pending before the Commissioner who may
order a rate adjustment. In the course of prehearing discovery, the Department
has sought and we have provided statistical data and testimony relating to
the
types and level of expenses for both underwriters and agents, captive
reinsurance, rebating and other practices that may have the effect of raising
the expenses of title insurers and agents.
On
June
30, 2006, the Acting Superintendent of Insurance for New Mexico issued an
Interim Order that the 2006 title insurance rates announced in a March 2006
order and scheduled to take effect on July 1, 2006 are to be implemented on
an
interim basis, subject to later revision if it is ultimately determined that
the
rates should be reduced and subject to refund. An annual title rate case to
determine 2007 rates has been set for hearing beginning November 16,
2006.
In
Nevada, a Commissioner of Insurance Order was issued on September 25, 2006
following a June 19, 2006 hearing and a July 3, 2006 request for information.
The Order came to no conclusion on current rate levels or competition and
directed the Nevada Division of Insurance staff to conduct further inquiries
and
provide a report by November 30, 2006.
On
July 3, 2006,
California issued a Notice of Proposed Action which sets forth proposed
regulations governing the rating of title insurance and related services,
including the imposition of interim rate reductions and future filing of
mandated statistical plans that would impose substantially higher costs on
title
insurance operations in California, and held a hearing on such Proposed Action
on August 30, 2006.
On
July
17, 2006, the Florida Office of Insurance Regulation announced the completion
of
a review of title insurance regulation in the state and said the information
from the study would be used to begin a full review of title insurance rates
charged in Florida. The Florida Office of Insurance Regulation has developed
a
rule to govern the upcoming rate analysis and rate setting process.
The
New
York Department of Insurance has scheduled a public hearing on November 3,
2006
to inquire into matters relating to current rates charged by title insurance
companies in New York.
We
may
receive additional subpoenas and/or requests for information in the future
from
state or federal government agencies. We will evaluate, and we intend to
cooperate in connection with, all such subpoenas and requests.
Based
on
the information known to management at this time, it is not possible to predict
the outcome of any of the currently pending governmental inquiries and
investigations into the title insurance industry’s market, business practices,
pricing levels, and other matters described above, or the market’s response
thereto. However, any material change in our business practices may have an
adverse effect on our business, operating results and financial
condition.
Forward-Looking
and Cautionary Statements
We
caution readers that the statements contained herein regarding our future
financial condition, results of operations, future business plans, operations,
opportunities, or prospects, including any factors which may affect future
earnings, are forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based upon management’s current knowledge and
assumptions about future events and involve risks and uncertainties that could
cause actual results, performance or achievements to be materially different
from anticipated results, performance or achievements, expressed or implied
by
such forward-looking statements. Such risks and uncertainties include: (i)
our
results of operations and financial condition are susceptible to changes in
mortgage interest rates and general economic conditions; (ii) changes to the
participants in the secondary mortgage market could affect the demand for title
insurance products; (iii) we are subject to government regulation; (iv)
heightened regulatory scrutiny of us and the title insurance industry, including
the pricing of title insurance products and services, could materially and
adversely affect our business, operating results, and financial condition;
(v)
we may not be able to fuel our growth through acquisitions; (vi) our inability
to integrate and manage successfully our acquired businesses could adversely
affect our business, operating results, and financial condition; (vii)
regulatory non-compliance, fraud, or defalcations by our title insurance agents
or employees could adversely affect our business, operating results, and
financial condition; (viii) competition in our industry affects our revenue;
(ix) significant industry changes and new product and service introductions
require timely and cost-effective responses; (x) our litigation risks include
substantial claims by large classes of claimants; (xi) key accounting and
essential product delivery systems are concentrated in a few locations; (xii)
provisions of our articles of incorporation and bylaws, our shareholder rights
plan, and applicable state corporation and insurance laws could limit another
party’s ability to acquire us and could deprive shareholders of the opportunity
to obtain a takeover premium for shares of common stock owned by them; (xiii)
our future success depends on our ability to continue to attract and retain
qualified employees; and (xiv) our conduct of business in foreign markets
creates financial and operational risks and uncertainties that may materially
and adversely affect our business, operating results, and financial condition.
For more details on factors that may cause actual results to differ materially
from such forward-looking statements, see our Annual Report on Form 10-K for
the
year ended December 31, 2005, and other reports from time to time filed with
or
furnished to the Securities and Exchange Commission.
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
The
information required by this Item is set forth under the caption “Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Interest Rate Risk” in Part I, Item 2 of this report. There are no other
material changes to the disclosure on this matter made in our Annual Report
on
Form 10-K for the year ended December 31, 2005.
ITEM
4.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
An
evaluation was performed under the supervision and with the participation of
our
management, including our Chief Executive Officer, or CEO, and Chief Financial
Officer, or
CFO,
of
the effectiveness of our disclosure controls and procedures as of September
30,
2006. Based on that evaluation, our management, including our CEO and CFO,
concluded that our disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in reports that we file or
submit under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported as specified in the SEC's rules and forms,
and is accumulated and communicated to our management, including our CEO and
CFO, to allow timely decisions regarding required disclosure.
Remediation
of Material Weakness in Internal Control
As
reported in our 2005 Form 10-K, we determined that we did not maintain effective
controls over the reconciliation of claims payment and recovery data used to
support the estimate of our policy and contract claims reserve. During the
first
quarter of 2006, we enhanced our professional staff responsible for the claims
reserve analysis and implemented controls surrounding the claims data
reconciliation and system report reliance. We believe that these changes in
controls can be applied consistently and appropriately in future periods and
that the implementation of these enhanced controls has effectively remediated
the material weakness in controls described above.
Changes
in Internal Controls
During
the quarter ended September 30, 2006, we implemented a new general ledger system
to record and report financial transactions. Other than the item described
above, there were no other changes in our internal control over financial
reporting that occurred during the quarter ended September 30, 2006 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
PART
II. OTHER INFORMATION
ITEM
1.
|
LEGAL
PROCEEDINGS
|
The
information contained in Note 8 “Commitments and Contingencies” of the Notes to
Consolidated Financial Statements filed as Part I, Item 1 of this Quarterly
Report on Form 10-Q is incorporated herein by reference.
Our
business is subject to various risks, including the risks described in our
2005
Form 10-K and the risk described below. Our business, operating results and
financial condition could be materially and adversely affected by any of these
risks. Please note that additional risks not presently known to us or that
we
currently deem immaterial may also impair our business and
operations.
Changes
to the participants in the secondary mortgage market could affect the demand
for
title insurance products.
The
demand for our title insurance products and services depends upon, among other
things, the volume of commercial and residential real estate transactions,
including mortgage refinancing transactions. In turn, the volume of commercial
and residential real estate transactions, depends in part upon the requirement
of participants in the secondary mortgage market, who purchase large volumes
of
real estate loans secured by commercial and residential real property (including
but not limited to Federal National Mortgage Association, the Federal Home
Loan
Mortgage Corporation and the Government National Mortgage Association), that
title insurance policies be obtained on such real property. Therefore, changes
to the composition of the participants in the secondary mortgage market or
their
requirements that title insurance policies be obtained could adversely affect
the demand for our title insurance products.
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
(c)
|
The
following table sets forth the details of purchases of common stock
under
our share purchase plans and our Executive Voluntary Deferral Plan
and
Outside Directors Deferral Plan that occurred in the third quarter
of
2006:
|
Period
|
|
Rounded
Total
Number
of
Shares
Purchased
|
|
Average
Price
Paid
per Share
|
|
Rounded
Total
Number of Shares
Purchased
as Part of
Publicly
Announced
Plans
or Programs
|
|
Not
Rounded
Maximum
Number of
Shares
that May Yet
Be
Purchased Under
the
Plans or Programs
|
|
|
|
|
|
|
|
|
|
|
|
July
1 through July 31, 2006
|
|
|
22,061
|
|
$
|
64.88
|
|
|
21,000
|
|
|
1,389,476
|
|
August
1 through August 31, 2006
|
|
|
824
|
|
$
|
64.15
|
|
|
-
|
|
|
1,388,652
|
|
September
1 through September 30, 2006
|
|
|
41,286
|
|
$
|
66.02
|
|
|
33,000
|
|
|
1,347,366
|
|
|
(1)
|
A
total of 10,171 shares of our common stock were purchased in connection
with two employee benefit plans during the third quarter 2006. These
repurchases were made in open-market transactions on behalf of a
trust
maintained by us for the Executive Voluntary Deferral Plan and the
Outside
Directors Deferral Plan.
|
|
(2)
|
On
October 26, 2005, we announced an additional share purchase plan
providing
for the purchase of up to 1,250,000 shares of our common stock expiring
at
the end of July 2007. As of September 30, 2006, we had purchased
a total
of 492,000 shares authorized under this purchase
plan.
|
No.
|
Description
|
|
|
4.1
|
Note
Purchase and Master Shelf Agreement, dated as of July 28, 2006, by
and
among the Registrant and the purchasers named therein, with accompanying
forms of 6.66% Senior Note, Series D, due 2016, 6.70% Senior Note,
Series
E, due 2016 and Shelf Note. The foregoing exhibits need not be filed
herewith pursuant to Item 601(b)(4)(iii) of Regulation S-K. The
Registrant, by signing this Report on Form 10-Q, agrees to furnish
the
Securities and Exchange Commission, upon its request, a copy of any
instrument which defines the rights of holders of long-term debt
of the
Registrant and its consolidated subsidiaries, and for any unconsolidated
subsidiaries for which financial statements are required to be filed
that
authorizes a total amount of securities not in excess of 10% of the
total
assets of the Registrant and its subsidiaries on a consolidated
basis.
|
|
|
10.1
|
Revolving
Credit Agreement, dated July 28, 2006 between the Registrant and
SunTrust
Bank, as Administrative Agent for a syndicate of financial institutions
named therein, incorporated by reference to Exhibit 10.1 of the
Registrant’s Form 10-Q for the quarter ended June 30, 2006, File No.
1-13990.
|
|
|
31.1
|
Rule
13a-14(a) Certification of Chief Executive Officer*
|
|
|
31.2
|
Rule
13a-14(a) Certification of Chief Financial Officer*
|
|
|
32.1
|
Statement
of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350*
|
|
|
32.2
|
Statement
of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350*
|
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
LANDAMERICA
FINANCIAL GROUP, INC.
|
|
|
(Registrant)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date:
October 31, 2006
|
|
/s/
Christine R. Vlahcevic
|
|
|
|
Christine
R. Vlahcevic
|
|
|
|
Senior
Vice President-
|
|
|
|
Corporate
Controller
|
|
|
|
(Principal
Accounting Officer)
|
|
EXHIBIT
INDEX
No.
|
Description
|
|
|
4.1
|
Note
Purchase and Master Shelf Agreement, dated as of July 28, 2006, by
and
among the Registrant and the purchasers named therein, with accompanying
forms of 6.66% Senior Note, Series D, due 2016, 6.70% Senior Note,
Series
E, due 2016 and Shelf Note. The foregoing exhibits need not be filed
herewith pursuant to Item 601(b)(4)(iii) of Regulation S-K. The
Registrant, by signing this Report on Form 10-Q, agrees to furnish
the
Securities and Exchange Commission, upon its request, a copy of any
instrument which defines the rights of holders of long-term debt
of the
Registrant and its consolidated subsidiaries, and for any unconsolidated
subsidiaries for which financial statements are required to be filed
that
authorizes a total amount of securities not in excess of 10% of the
total
assets of the Registrant and its subsidiaries on a consolidated
basis.
|
|
|
10.1
|
Revolving
Credit Agreement, dated July 28, 2006 between the Registrant and
SunTrust
Bank, as Administrative Agent for a syndicate of financial institutions
named therein, incorporated by reference to Exhibit 10.1 of the
Registrant’s Form 10-Q for the quarter ended June 30, 2006, File No.
1-13990.
|
|
|
31.1
|
Rule
13a-14(a) Certification of Chief Executive Officer*
|
|
|
31.2
|
Rule
13a-14(a) Certification of Chief Financial Officer*
|
|
|
32.1
|
Statement
of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350*
|
|
|
32.2
|
Statement
of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350*
|
*
Filed
herewith.