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, 2006. 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. Due to the
seasonal nature of our business, 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.
Recent
Accounting Pronouncements
In
March 2007, the Financial Accounting
Standards Board (“FASB”) ratified Emerging Issues Task Force (“EITF”) Issue No.
06-10, Accounting for Collateral Assignment Split-Dollar Life Insurance
Arrangements (“EITF No. 06-10”). EITF No. 06-10 requires an
employer to recognize a liability for the postretirement benefit related
to a
collateral assignment split-dollar life insurance arrangement in accordance
with
either Statement of Financial Accounting Standards (“SFAS”) No. 106 or
Accounting Principles Board (“APB”) Opinion No. 12 if the employer has agreed to
maintain a life insurance policy during the employee’s retirement or provide the
employee with a death benefit. EITF No. 06-10 also requires an
employer to recognize and measure an asset based on the nature and substance
of
the collateral assignment split-dollar life insurance
arrangement. EITF No. 06-10 is effective for fiscal years beginning
after December 15, 2007 with early adoption permitted. We have
determined that the adoption of EITF No. 06-10 will not have a material
effect
on our financial statements.
In
February 2007, FASB issued SFAS No.
159, The Fair Value Option for Financial Assets and Financial Liabilities
- Including
an amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS
No. 159 provides companies with an option to report selected financial
assets
and liabilities at fair value. Unrealized gains and losses on items
for which the fair value option has been elected are reported in
earnings. SFAS No. 159 is effective as of the beginning of an
entity’s first fiscal year that begins after November 15, 2007 with early
adoption permitted. We are evaluating the effect that the adoption of
SFAS No. 159 will have 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 and have been adopted. See Note 7, “Pensions and
Other Post-Retirement Benefits.” The new measurement date requirement
applies for fiscal years ending after December 15, 2008.
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 effect that the adoption of SFAS
No. 157 will have on our financial statements.
The
following table sets forth the computation of basic and diluted earnings
per
common share:
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
millions, except per common share amounts)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income – numerator for basic and diluted earnings per common
share
|
|
$ |
7.9
|
|
|
$ |
35.6
|
|
|
$ |
12.6
|
|
|
$ |
49.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares – denominator for basic earnings per common
share
|
|
|
16.7
|
|
|
|
16.7
|
|
|
|
17.0
|
|
|
|
16.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
debt
|
|
|
2.1
|
|
|
|
0.5
|
|
|
|
1.5
|
|
|
|
0.5
|
|
Employee
stock options and restricted stock
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for diluted earnings per common share
|
|
|
19.0
|
|
|
|
17.3
|
|
|
|
18.6
|
|
|
|
17.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$ |
0.48
|
|
|
$ |
2.13
|
|
|
$ |
0.74
|
|
|
$ |
2.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share
|
|
$ |
0.42
|
|
|
$ |
2.06
|
|
|
$ |
0.68
|
|
|
$ |
2.82
|
|
In
connection with the issuance of the
3.25 percent Convertible Senior Debt due 2034 (“2004 debentures”), we entered
into a call option designed to mitigate the potential dilution from the
conversion of the 2004 debentures. Under the ten-year term of the
call option, we may require a counterparty to deliver approximately 2.3 million
shares of our common stock to us at a price which approximates the conversion
price of the 2004 debentures. At June 30, 2007, 942,800 shares under
the call option were not included in the calculation of diluted earnings
per
common share because the effect would be anti-dilutive.
3.
|
MERGERS
AND ACQUISITIONS
|
We
completed no material acquisitions
in the first six months of 2007.
On
September 8, 2006, we completed the
merger with Capital Title Group, Inc. (“Capital Title”) whereby Capital Title
became a wholly-owned subsidiary of LandAmerica. Capital Title
consists of a title insurance underwriter, several title and escrow agency
operations, a property appraisal company, a settlement services provider,
and
other related companies. Capital Title services customers primarily
in Arizona, California and Nevada in addition to providing lender services
on a
national basis. We believe that our merger with Capital Title has
strengthened our presence in key western states and added scale to the services
we provide to our mortgage lending customers.
The
merger with Capital Title 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 Capital Title’s common stock for
approximately $252.6 million which consisted of $202.9 million of cash,
including direct transaction costs of $3.6 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 Capital Title have been included in our consolidated
financial statements since the merger date.
Selected
unaudited pro forma results of
operations, assuming the merger had occurred as of January 1, 2006, are set
forth below:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30, 2006
|
|
|
June
30, 2006
|
|
|
|
|
|
|
|
|
|
|
(In
millions, except per common share amounts)
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$ |
1,087.0
|
|
|
$ |
2,099.1
|
|
Net
income
|
|
|
36.1
|
|
|
|
45.8
|
|
Net
income per common share
|
|
|
2.06
|
|
|
|
2.59
|
|
Net
income per common share assuming dilution
|
|
|
2.00
|
|
|
|
2.52
|
|
The
above pro forma results include
consultant fees of $3.3 million related to the merger, and do not include
any
synergies we expect to realize. The 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
2006.
4.
INVESTMENTS
We
classify our fixed-maturity and
equity investments as trading or available-for-sale. Trading
investments are bought and held principally for the purpose of selling them
in
the near term. All fixed-maturity and equity investments not
classified as trading are classified as available-for-sale. During
first quarter 2007, we transferred $142.6 million of our fixed-maturity
securities from available-for-sale securities to trading
securities. Additionally $2.3 million of unrealized gains on these
available-for-sale securities which were previously included in accumulated
other comprehensive income (loss) were reclassified and recorded in the
consolidated statement of operations caption “Net realized investment
gains.” We did not transfer any of our securities between investment
categories during second quarter 2007. Trading and available-for-sale
investments are recorded at fair market value. Unrealized holding
gains and losses on trading investments are included in
earnings. Unrealized holding gains and losses on available-for-sale
investments are excluded from earnings and are reported as a separate component
of accumulated other comprehensive income (loss), net of income taxes, until
realized. Realized gains and losses from the sale of
available-for-sale and trading investments are determined on a
specific-identification basis. Dividend and interest income are
recognized when earned.
On
January 1, 2007, we adopted the
provisions of 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 certain financial
instruments, clarifies which financial instruments are not subject to the
requirements of Statement No. 133, establishes a requirement to evaluate
certain
interests in securitized financial assets, and makes certain amendments to
Statement No. 140 regarding a qualifying special-purpose entity’s ability to
hold
certain
types of financial instruments. Our adoption of the provisions of
SFAS No. 155 did not have a material effect on our financial statements for
second quarter 2007 or for the first half of 2007.
5. INCOME
TAXES
Our
effective income tax rate was 33.5
percent for the first half of 2007 and 35.0 percent for the first half of
2006. The difference in the effective tax rate was due primarily to
favorable permanent differences and changes in the mix of state tax rates
relative to state taxable income or loss 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 that we are required to
estimate the income and commissions associated with the sale of policies
by
agents during the tax year. The increased tax liability, which would
result in an increase in deferred tax assets, is approximately $35
million. However, we are disputing the proposed adjustment as we
continue to believe that our tax treatment of these transactions is correct
and
we believe that we will prevail in any dispute with the IRS related to this
matter. Accordingly, no interest or penalties have been accrued for
this proposed IRS adjustment as of June 30, 2007. We expect to defend
the matter vigorously through the IRS appeal process and, if necessary, through
litigation. We do not expect the ultimate resolution of this matter will
have a
material adverse effect on our financial condition or results of
operations.
On
January 1, 2007, we adopted the
provisions of FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”) and
FASB Staff Position FIN 48-1, Definition of Settlement in FASB
Interpretation No. 48 (“FSP FIN 48-1”). FIN 48 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. FSP FIN 48-1 provides guidance on how an enterprise
should determine whether a tax position is effectively settled for the purpose
of recognizing previously unrecognized tax benefits. At January 1,
2007, the balance of the unrecognized tax benefits was $4.0
million. If recognized, this amount would affect our effective tax
rate. We have elected to treat any interest and penalties as tax
expense in accordance with the provisions of FIN 48.
We
file tax returns in the US federal
jurisdiction and various state and foreign jurisdictions. For federal
and most state and local taxes, the statute of limitations has expired and
we
are no longer subject to examinations by tax authorities for years prior
to
2003.
Since
December 31, 2006, there have
been no events that have had a material impact on our tax accounts.
It
is reasonably possible that within
the next twelve months the amount of unrecognized tax benefits will increase
as
a result of tax positions taken during the current period, the nature
of
which
are
consistent with those unrecognized tax benefits at January 1,
2007. The estimated range of the increase is from $1.5 million to
$1.7 million.
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 quarterly review of the
underlying claims data and trends therein, we have provided for claims losses
using approximately 9.3 percent and 5.3 percent of operating revenue from
the
Title Operations segment for the second quarters of 2007 and 2006, respectively,
and approximately 7.9 percent and 5.4 percent of operating revenue from the
Title Operations segment for the first half of 2007 and 2006,
respectively. The increase in the claims provision ratio was
primarily due to an increase in the frequency and severity of claims reported
for policy years 2004 through 2006 which resulted in upward development for
those policy years. The claims provision increased by $33.6 million,
or $21.8 million after taxes, in second quarter 2007 compared to second quarter
2006. Since we are subject to liability on claims for an extended
period of time, slight changes in current claims experience can have a
significant effect on 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 June 30, 2007 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 the three and
six
months ending June 30, 2007 and 2006. The 2007 information is based
on preliminary data provided by our consulting actuaries.
The
amounts are as
follows:
|
|
Three
Months Ended June 30,
|
|
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
Components
of net pension expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0.3
|
|
|
$ |
0.2
|
|
Interest
cost
|
|
|
3.7
|
|
|
|
3.6
|
|
|
|
0.7
|
|
|
|
0.9
|
|
Expected
return on plan assets
|
|
|
(4.7 |
) |
|
|
(4.5 |
) |
|
|
-
|
|
|
|
-
|
|
Amortization
of unrecognized transition obligation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.3
|
|
Recognized
prior service cost
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.1
|
|
Recognized
loss
|
|
|
1.4
|
|
|
|
1.8
|
|
|
|
-
|
|
|
|
0.2
|
|
Loss
due to settlement or curtailment
|
|
|
3.0
|
|
|
|
1.0
|
|
|
|
-
|
|
|
|
-
|
|
Net
pension expense
|
|
$ |
3.4
|
|
|
$ |
1.9
|
|
|
$ |
1.0
|
|
|
$ |
1.7
|
|
|
|
Six
Months Ended June 30,
|
|
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
Components
of net pension expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0.6
|
|
|
$ |
0.5
|
|
Interest
cost
|
|
|
7.3
|
|
|
|
7.2
|
|
|
|
1.4
|
|
|
|
1.8
|
|
Expected
return on plan assets
|
|
|
(9.4 |
) |
|
|
(9.0 |
) |
|
|
-
|
|
|
|
-
|
|
Amortization
of unrecognized transition obligation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.6
|
|
Recognized
prior service cost
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.2
|
|
Recognized
loss
|
|
|
2.9
|
|
|
|
3.6
|
|
|
|
-
|
|
|
|
0.3
|
|
Loss
due to settlement or curtailment
|
|
|
3.0
|
|
|
|
2.0
|
|
|
|
-
|
|
|
|
-
|
|
Net
pension expense
|
|
$ |
3.8
|
|
|
$ |
3.8
|
|
|
$ |
2.0
|
|
|
$ |
3.4
|
|
On
December 31, 2004, we froze the accumulation of benefits available under
our
principal pension plan.
8.
|
COMMITMENTS
AND CONTINGENCIES
|
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. and LandAmerica
Financial Group, Inc. (collectively, “Gateway 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,
“Gateway Defendants”). The lawsuit claimed substantial monetary and
punitive damages for unfair competitive business practices in conjunction
with
Gateway Plaintiffs’ loss of over 300 employees in California, most of which
appears to have occurred within an approximately twenty-four month
period. 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, which Gateway Plaintiffs
disputed. After completion of discovery, a jury trial began in early
May 2006 and resulted in a verdict for Gateway of approximately $8.3
million. Judgment was not entered pending resolution of the
Cross-Complaints.
On
January 14, 2005, First California
Title Company, New Century Title Company (“New Century”) and United Title
Company (collectively, “Capital Title Plaintiffs”) filed a Complaint in the
Superior Court of the State of California, County of Los Angeles, against
Financial Title Company, Mercury Companies, Inc. (“Mercury”), Stacy Neves,
Stephanie Howard, George Willard and Tony Becker (Case No. BC 327332)
(collectively, “Capital Title Defendants”). The lawsuit claimed
substantial monetary and punitive damages for unfair competitive business
practices in conjunction with Capital Title Plaintiffs’ loss of approximately 80
employees in California to Capital Title Defendants over an approximately
eight
month period. The complaint was later amended to include Alliance
Title Company and Christine De’Martini as named defendants. On
September 8, 2006, we completed a merger in which Capital Title Plaintiffs
became affiliated companies. A jury trial began on October 17,
2006. On December 28, 2006, the jury returned its verdict for Capital
Title Plaintiffs in the approximate amount of $2 million. The
punitive damages phase of the bifurcated trial was held on January 2, 2007
and
resulted in a punitive damages award for Capital Title Plaintiffs in the
approximate amount of $14.6 million. Judgment was entered on March 8,
2007. Capital Title Defendants filed several post-trial motions including
motions for a new trial on the issue of punitive damages. On March
22, 2007, the trial court granted Mercury’s motion for new trial on the issue of
punitive damages. Having found that the punitive damages awarded by
the jury in favor of plaintiff New Century violated due process, the trial
court
reduced the amount of the punitive damages awarded against Mercury from $11.6
million to $2.9 million. On April 18, 2007, the trial court issued a
Minute Order modifying the previous judgment entered in favor of New Century
to
reflect this reduction of punitive damages. The trial court denied
similar motions for
new
trial
brought by other Capital Title Defendants. Accordingly, the total
amount of punitive damages awarded against Capital Title Defendants, after
the
March 22, 2007 order, is $5.9 million.
Voluntary
mediation beginning on April
4, 2007 led the parties in both cases to a settlement in July 2007, providing
for a payment in the amount of $12.5 million by Mercury to LandAmerica and
the
resolution of all claims, including but not limited to cross claims, post-trial
motions and appeals, thus eliminating the necessity for later scheduled trials,
including the trial on the Cross Complaints, and appeal deadlines.
On
January 25, 2002, Miles R. Henderson
and Patricia A. Henderson (“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 Plaintiffs in the Henderson
Suit
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 (“Plaintiffs in the Simon
Suit”) in the Court of Common Pleas for Cuyahoga County, Ohio on March 5, 2003.
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, 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 court has set a class certification hearing
date of December 6-7, 2007. 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. 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.
On
September 20, 2004, Kenneth and
Deette Higgins (“Plaintiffs in the Higgins Suit”) filed a putative class action
suit (the “Higgins Suit”) against Commonwealth Land Title Insurance Company
(“Commonwealth”) in the Circuit Court of Nassau County, Florida. On
February 3, 2005, Plaintiffs in the Higgins Suit filed an Amended Class Action
Complaint. Plaintiffs in the Higgins Suit allege that Commonwealth
had a practice of charging refinance borrowers higher basic rates for title
insurance, rather than the lower reissue rates for which they are alleged
to
have qualified, and of failing to disclose the potential availability of
the
lower rates. Plaintiffs in the Higgins Suit seek to have the case
certified as a class action on behalf of all Florida persons or entities
who
refinanced their mortgages or fee interests on the identical premises from
July
1, 1999 to the present where there was no change in the fee ownership
and
who
were
charged a premium in excess of the reissue premium. Plaintiffs in the
Higgins Suit have demanded an unspecified amount of compensatory damages,
declaratory relief, attorneys’ fees, costs and pre-judgment
interest. This case is in the early stages, there has been no class
certification, and Commonwealth believes it has 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.
On
July
24, 2006, A. D. Alberton (“Plaintiff in the Alberton Suit”) filed a putative
class action suit (the “Alberton Suit”) against Commonwealth which is currently
pending in the United States District Court for the Eastern District of
Pennsylvania. A similar putative class action suit was filed against
Lawyers by Shariee L. De Cooman (“Plaintiff in the De Cooman Suit”) in the Court
of Common Pleas of Allegheny County, Pennsylvania on or about August 12,
2005. On November 1, 2005, Plaintiff in the De Cooman Suit filed an
Amended Complaint. Plaintiff in the Alberton Suit alleges that
Commonwealth charged rates for title insurance in excess of statutorily mandated
rates and/or failed to disclose to consumers that they were entitled to reduced
title insurance premiums and seeks to certify a class on behalf of all consumers
who paid premiums for the purchase of title insurance on Pennsylvania properties
from Commonwealth at any time during the year 2000 until August 2005 and
qualified for a discounted refinance or reissue rate discount and did not
receive such discount. Plaintiff in the De Cooman Suit alleges that
Lawyers charged the basic rate rather than a reissue or discounted rate to
certain consumers and seeks to certify a class on behalf of all owners of
residential real estate in Pennsylvania who, at any time during the ten years
prior to August 12, 2005 paid premiums for the purchase of title insurance
from
Lawyers, qualified for a reissue or other discounted rate, and did not receive
such rate. The court in the Alberton Suit has set a class
certification hearing date of October 16, 2007. The trial is
currently scheduled to commence on January 14, 2008. The court in the De
Cooman
Suit has set a class certification hearing date of October 9,
2007. Plaintiff in the Alberton Suit has demanded an unspecified
amount of compensatory damages, declaratory relief, triple damages, restitution,
pre-judgment and post-judgment interest and expert fees, attorneys’ fees and
costs. Plaintiff in the De Cooman Suit has demanded an unspecified
amount of compensatory damages, punitive damages, triple damages, prejudgment
interest, and attorneys’ fees, litigation expenses and costs. These
cases are in the early stages, there has been no class certification, and
defendants believe 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
Proceedings
We
have
received certain information requests and subpoenas from various regulatory
authorities relating to our business practices and those of the title insurance
industry.
The
Government Accountability Office released its final report on the title
insurance industry on April 17, 2007 (the “Report”). The Report makes
recommendations regarding federal and state oversight of the title insurance
industry, including but not limited to, better consumer information,
consideration of the need for modification to the Real Estate Settlement
Procedures Act and increased cooperation among regulators.
Various
states are studying the title
insurance product, market, pricing, business practices, and potential regulatory
and legislative changes. Multiple states, including California,
Florida, Nevada, New Mexico, New York, Texas, and Washington, are examining
pricing levels and/or title insurance regulations. If it is
determined that prices are not justified, rate changes may be implemented,
including potential reductions.
Some
of
the pricing examinations, like those conducted in Texas and New Mexico, are
conducted annually or biannually and usually result in adjustments to the
prices
we can charge. Subsequent to the 2004 Texas Title Insurance Biennial
Hearings in August 2006, the Texas Commissioner of Insurance ordered a rate
reduction of 3.2 percent effective February 1, 2007. The Texas
Department of Insurance has noticed the 2006 Texas Title Insurance Biennial
Hearings with the rulemaking phase to begin on September 5, 2007 and the
ratemaking phase to begin on October 16, 2007. Subsequent to a
hearing of the New Mexico title rate case concluded on January 18, 2007,
on July
20, 2007, the New Mexico Superintendent of Insurance ordered a rate reduction
of
6.36 percent and a change in the agent/underwriter split from 80/20 to 84.2/15.8
effective September 1, 2007. It is expected that a motion for
rehearing will be filed by the New Mexico Land Title Association to request
the
Superintendent to reconsider the order. If the Superintendent denies
the motion for rehearing, the rate order can then be appealed to the New
Mexico
Public Regulatory Commission. If the New Mexico Public Regulatory
Commission upholds the rate order, it can then be appealed to a New Mexico
district court, with further appellate review available up to the New Mexico
Supreme Court.
The
California Department of Insurance
(“CA DOI”) submitted to the Office of Administrative Law (“OAL”) proposed
regulations governing the rating of title insurance and related services
that
could impose future rate reductions and filing of mandated statistical plans
that impose substantially higher costs on title insurance operations in
California. On February 21, 2007, OAL disapproved the regulatory
action for failure to comply with certain standards and requirements and
on
February 28, 2007 issued a written decision detailing the reasons for
disapproval. On June 28, 2007, CA DOI submitted revised regulations to OAL
that
would become effective January 1, 2009, and OAL approved the regulations
on July
25, 2007 and sent them to the California Secretary of
State. LandAmerica and other title companies doing business in the
California market continue to engage in discussions with the CA DOI regarding
alternative approaches to the regulations but may pursue an appeal if such
discussions are unsuccessful.
In
addition, a number of state
inquiries have focused on captive reinsurance. 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. We settled
these investigations with six states, representing approximately 81.4 percent
of
our captive reinsurance business, without admitting any liability.
In
June 2005, we established reserves
of $19.0 million to cover anticipated exposure to regulatory matters nationwide,
an amount which includes settlements with the California, Arizona, Nevada,
Virginia, Colorado, and North Carolina departments of
insurance. Based on these settlements and the status of inquiries, we
released $6.7 million of this reserve back into earnings in fiscal year 2005
and
$0.8 million in fiscal year 2006. The remaining reserve at June 30,
2007 was approximately $1.9 million.
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, or the market’s response thereto. However, any material
change in our business practices, pricing levels, or regulatory environment
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 $2.2 million at June 30, 2007 and approximately $3.4
million at December 31, 2006.
In
October 2005, the Board of Directors
approved a share repurchase program expiring in July 2007 (the “2005 Program”)
that authorized us to repurchase 1.25 million shares of our common
stock. Under the 2005 Program, we repurchased 375,000 shares during
the first six months of 2006 for $24.6 million, at an average cost of $65.49
per
share; we repurchased 243,000 shares during the second half of 2006 for $15.6
million, at an average cost of $64.06 per share. During the first
three months of 2007, we repurchased 569,000 shares for $39.9 million, at
an
average cost of $70.18 per share. As of March 31, 2007, there were no
authorized shares remaining under the 2005 Program.
In
February 2007, the Board of
Directors approved a share repurchase program expiring in October 2008 (the
“2007 Program”) that authorized us to repurchase 1.5 million shares of our
common stock. Under the 2007 Program, we repurchased 474,000 shares
during second quarter 2007 for $42.0 million, at an average cost of $88.54
per
share. At June 30, 2007, there were approximately 1,026,000
authorized shares remaining under the 2007 Program.
Effective
April 1, 2007, our 3.25
percent convertible senior debentures due 2034 became convertible to common
stock during second quarter 2007 through and including June 30,
2007. These debentures are also convertible during third quarter 2007
through and including September 30, 2007. The 2004 debentures are
convertible into shares of our common stock at a current conversion rate
of
18.6733 shares per $1,000 principal amount of the 2004 debentures, which
is
equivalent to a conversion price of approximately $53.55 per share of common
stock.
Effective
July 1, 2007, our 3.125
percent convertible senior debentures due 2033 became convertible to common
stock during third quarter 2007 through and including September 30,
2007. The 2003 debentures are convertible into shares of our common
stock at a current conversion rate of 15.1573 shares per $1,000 principal
amount
of the 2003 debentures, which is equivalent to a conversion price of
approximately $65.97 per share of common stock.
10.
|
IMPAIRMENT
OF INTANGIBLE AND OTHER LONG-LIVED
ASSETS
|
We
became aware that one of our tax and
flood processing customers, Fremont General Corporation, received a cease
and
desist order from the Federal Deposit Insurance Corporation relating to lending
practices in its mortgage origination business. As a result of this
probable loss of business from this customer, we conducted an impairment
test of
LandAmerica Tax and Flood Services, Inc.’s customer relationship intangible
asset in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. On April 10, 2007, we determined
it was probable that LandAmerica Tax and Flood Services, Inc.’s customer
relationship intangible was impaired. Additionally, we conducted an
impairment test of the Lender Services segment’s goodwill balance in accordance
with SFAS No. 142, Goodwill and Other Intangible Assets, before its
annual testing date of October 1, 2007, as the probable loss of business
was
deemed to be an indicator of potential impairment. In first quarter
2007, we recorded a customer relationship intangible impairment charge of
$20.8
million, or $12.5 million net of taxes, which was reflected in our results
of
operations. The impairment charge did not result in any future cash
expenditures. In addition, we concluded that the Lender Services
segment’s goodwill balance was not impaired.
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 existing corporate offices
and related assets to fair value less cost to sell. For the six
months ended June 30, 2006, the impairment charge for the write down was
approximately $9.7 million, or $6.3 million net of taxes, which was reflected
in
our consolidated results of operations.
11. SEGMENT
INFORMATION
We
are engaged in the business of
providing title insurance as well as a broad array of real estate
transaction-related services through our subsidiaries. We have three
reporting segments that fall within three primary business segments: Title
Operations, Lender Services, and Financial Services. The remaining
immaterial businesses have been combined into a category called Corporate
and
Other.
Title
Operations includes residential
and commercial title insurance business, escrow and closing services, commercial
real estate services, and other real estate transaction management
services.
Lender
Services provides services to
national and regional mortgage lenders consisting primarily of mortgage
origination (e.g. real estate transaction management services, consumer mortgage
credit reporting, flood zone determinations, residential appraisal, and
valuation services, etc.), loan servicing (e.g. real estate tax processing
and
default management), and loan subservicing.
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 and, to a lesser degree, in Arizona and
Nevada.
Corporate
and Other includes home
warranty, residential property inspection, commercial property valuations
and
assessment businesses, and due diligence services as well as the unallocated
portion of the corporate expenses related to our corporate offices and
unallocated interest expense.
We
provide real estate transaction
services through direct operations and agents throughout the United States
and
in Mexico, Canada, the Caribbean, Latin America, Europe, and
Asia. International operations account for less than 1 percent of our
operating revenue.
The
following tables provide selected
financial information about our operations by segment for the three and six
months ended June 30, 2007 and 2006:
|
|
Three
Months Ended June 30,
|
|
|
|
Operating
Revenue
|
|
|
Personnel
Cost
|
|
|
Depreciation
|
|
|
Amortization
of Intangible
Assets
|
|
|
Impairment
of
Intangible
and
Long-
Lived
Assets
|
|
|
Income
Before
Taxes
|
|
|
|
(In
millions)
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Title
Operations
|
|
$ |
863.3
|
|
|
$ |
262.0
|
|
|
$ |
7.0
|
|
|
$ |
3.4
|
|
|
$ |
-
|
|
|
$ |
30.4
|
|
Lender
Services
|
|
|
68.9
|
|
|
|
26.3
|
|
|
|
2.8
|
|
|
|
1.2
|
|
|
|
-
|
|
|
|
1.7
|
|
Financial
Services
|
|
|
0.2
|
|
|
|
0.8
|
|
|
|
-
|
|
|
|
0.1
|
|
|
|
-
|
|
|
|
5.0
|
|
Corporate
and Other
|
|
|
39.1
|
|
|
|
26.9
|
|
|
|
3.9
|
|
|
|
0.6
|
|
|
|
-
|
|
|
|
(25.4 |
) |
Total
|
|
$ |
971.5
|
|
|
$ |
316.0
|
|
|
$ |
13.7
|
|
|
$ |
5.3
|
|
|
$ |
-
|
|
|
$ |
11.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Title
Operations
|
|
$ |
882.0
|
|
|
$ |
240.6
|
|
|
$ |
5.6
|
|
|
$ |
3.1
|
|
|
$ |
-
|
|
|
$ |
72.8
|
|
Lender
Services
|
|
|
59.7
|
|
|
|
23.5
|
|
|
|
1.2
|
|
|
|
2.6
|
|
|
|
-
|
|
|
|
6.5
|
|
Financial
Services
|
|
|
0.3
|
|
|
|
0.6
|
|
|
|
-
|
|
|
|
0.1
|
|
|
|
-
|
|
|
|
4.4
|
|
Corporate
and Other
|
|
|
29.1
|
|
|
|
24.1
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
-
|
|
|
|
(26.3 |
) |
Total
|
|
$ |
971.1
|
|
|
$ |
288.8
|
|
|
$ |
7.3
|
|
|
$ |
6.3
|
|
|
$ |
-
|
|
|
$ |
57.4
|
|
|
|
Six
Months Ended June 30,
|
|
|
|
Operating
Revenue
|
|
|
Personnel
Cost
|
|
|
Depreciation
|
|
|
Amortization
of
Intangible
Assets
|
|
|
Impairment
of
Intangible
and
Long-
Lived
Assets
|
|
|
Income
Before
Taxes
|
|
|
|
(In
millions)
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Title
Operations
|
|
$ |
1,654.7
|
|
|
$ |
516.8
|
|
|
$ |
14.2
|
|
|
$ |
5.4
|
|
|
$ |
-
|
|
|
$ |
64.5
|
|
Lender
Services
|
|
|
151.8
|
|
|
|
54.3
|
|
|
|
4.3
|
|
|
|
3.3
|
|
|
|
20.8
|
|
|
|
(7.0 |
) |
Financial
Services
|
|
|
0.4
|
|
|
|
1.7
|
|
|
|
-
|
|
|
|
0.1
|
|
|
|
-
|
|
|
|
10.1
|
|
Corporate
and Other
|
|
|
75.9
|
|
|
|
51.0
|
|
|
|
6.0
|
|
|
|
2.5
|
|
|
|
-
|
|
|
|
(48.6 |
) |
Total
|
|
$ |
1,882.8
|
|
|
$ |
623.8
|
|
|
$ |
24.5
|
|
|
$ |
11.3
|
|
|
$ |
20.8
|
|
|
$ |
19.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Title
Operations
|
|
$ |
1,701.0
|
|
|
$ |
468.8
|
|
|
$ |
11.2
|
|
|
$ |
5.5
|
|
|
$ |
-
|
|
|
$ |
123.4
|
|
Lender
Services
|
|
|
117.5
|
|
|
|
48.1
|
|
|
|
2.3
|
|
|
|
5.2
|
|
|
|
-
|
|
|
|
8.8
|
|
Financial
Services
|
|
|
0.5
|
|
|
|
1.2
|
|
|
|
-
|
|
|
|
0.1
|
|
|
|
-
|
|
|
|
8.4
|
|
Corporate
and Other
|
|
|
54.4
|
|
|
|
47.4
|
|
|
|
1.6
|
|
|
|
1.8
|
|
|
|
9.7
|
|
|
|
(64.7 |
) |
Total
|
|
$ |
1,873.4
|
|
|
$ |
565.5
|
|
|
$ |
15.1
|
|
|
$ |
12.6
|
|
|
$ |
9.7
|
|
|
$ |
75.9
|
|
ITEM
2.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
following discussion and analysis
of financial condition and results of operations updates and should be read
in
conjunction with our Annual Report on Form 10-K for the year ended December
31,
2006 as filed with the Securities and Exchange Commission on February 28,
2007. A description of our business segments and certain key factors
that affect these businesses are provided in Note 11 to Consolidated Financial
Statements included herein and in our Annual Report on Form 10-K for the
year
ended December 31, 2006. For information on risks and uncertainties
related to our business that may make past performances not indicative of
future
results, or cause actual results to differ materially from any forward-looking
statements made by us, see “Forward-Looking and Cautionary
Statements.”
Overview
Revision
of Prior Year
Numbers
In
2007, we refined our definition and
measurement of commercial revenue and have revised our 2006 commercial revenue
to be comparable to the 2007 presentation.
Operations
As
estimated by the Mortgage Bankers
Association (“MBA”), total residential mortgage originations declined
approximately $20 billion, or 2.7 percent, in second quarter 2007 from the
comparable period in 2006 due to a softened buy/sell market that was offset
in
part by a stronger
refinance
market. Residential mortgage originations as estimated by the MBA
improved 0.7 percent during the first half of 2007 when compared with the
first
half of 2006 because the effect of a stronger refinance market during the
first
six months of the year outweighed the effects of the softened buy/sell market,
which was a primary cause of the second quarter 2007 decline.
Operating
revenues were $971.5 million and $971.1 million for the three months ended
June
30, 2007 and 2006, respectively, and $1,882.8 million and $1,873.4 million
for
the six months ended June 30, 2007 and 2006, respectively.
Before
the effect of mergers and acquisitions, our overall decrease in residential
mortgage originations in second quarter 2007 resulted in the decline in
operating revenues from agency and direct title operations in the Title
Operations segment as well as declines in the home warranty and property
inspection businesses when compared with second quarter 2006. These
declines were offset in part by growth in title and non-title commercial
operations and growth in the default management services
business. The first half of 2007 showed trends similar to second
quarter of 2007 and was also positively affected by the acceleration of deferred
revenue in the loan servicing business in first quarter 2007.
Our
provision for claims as a percentage of operating revenue has trended upward
recently, primarily due to claims frequency and severity for recent policy
years. We have noted a similar upward trend in provisions for claims
occurring throughout the title insurance industry. Since we are
subject to liability for claims for an extended period of time, slight increases
in claims frequency and severity for more recent policy years can result
in a
significant increase in the amount of liability required for potential
claims.
In
first quarter 2007, we recorded a
customer relationship intangible impairment charge of $20.8 million, or $12.5
million net of taxes, as a result of the probable loss of business from Fremont
General Corporation (“Fremont”), one of our tax and flood processing
customers. Fremont received a cease and desist order from the Federal
Deposit Insurance Corporation related to lending practices in its mortgage
origination business. The impairment charge did not result in any
future cash expenditures. We also conducted an impairment test of the
Lender Services segment’s goodwill balance as the probable loss of business was
deemed to be an indication of potential impairment. We concluded that
the Lender Services segment goodwill balance was not impaired. We
have continued to service the Fremont loan portfolio that existed at the
time
the cease and desist order was issued. For further details, see Note
10, “Impairment of Intangible and Other Long-lived Assets” of the Notes to
Consolidated Financial Statements in Part I, Item 1 of this report.
We
completed the merger with Capital
Title Group, Inc. (“Capital Title”) on September 8, 2006. Capital
Title has been integrated into the Title Operations and Lender Services segments
as of the merger date. As of June 30, 2007, we have achieved
annualized pretax cost savings of approximately $11 million. We
expect that by the end of 2007, synergies will produce annualized pretax
cost
savings of approximately $16 million. For further details, see Note
3, “Mergers and Acquisitions” of the Notes to Consolidated Financial Statements
in Part I, Item 1 of this report.
As
part of becoming a unified operating
company, we are engaged in a number of initiatives to maximize our efficiency
and improve return on equity. These initiatives include a
company-wide technology initiative to reduce the complexity and costs of
over
300 operating systems to a substantially reduced number of applications when
completely phased in during 2009. Once implemented in 2009, we expect
that the technology initiatives will generate annual cost savings of
approximately $35 million. These cost savings are dependent upon the
selection and implementation of a unified production system and our ability
to
manage and execute these projects successfully within the time frame
indicated.
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, 2006 as filed with the Securities and Exchange
Commission. Actual results could differ from these
estimates.
Recent
Accounting Pronouncements
In
March 2007, the Financial Accounting
Standards Board (“FASB”) ratified Emerging Issues Task Force (“EITF”) Issue No.
06-10, Accounting for Collateral Assignment Split-Dollar Life Insurance
Arrangements (“EITF No. 06-10”). EITF No. 06-10 requires an
employer to recognize a liability for the postretirement benefit related
to a
collateral assignment split-dollar life insurance arrangement in accordance
with
either Statement of Financial Accounting Standards (“SFAS”) No. 106 or
Accounting Principles Board (“APB”) Opinion No. 12 if the employer has agreed to
maintain a life insurance policy during the employee’s retirement or provide the
employee with a death benefit. EITF No. 06-10 also requires an
employer to recognize and measure an asset based on the nature and substance
of
the collateral assignment split-dollar life insurance
arrangement. EITF No. 06-10 is effective for fiscal years beginning
after December 15, 2007 with early adoption permitted. We have
determined that the adoption of EITF No. 06-10 will not have a material effect
on our financial statements.
In
February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities - Including
an amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS
No. 159 provides companies with an option to report selected financial assets
and liabilities at fair value. Unrealized gains and losses on items
for which the fair value option has been elected are reported in
earnings. SFAS No. 159 is effective as of the beginning of an
entity’s first fiscal year that begins after November 15, 2007 with early
adoption permitted. We are evaluating the effect that the adoption of
SFAS No. 159 will have 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 and have been adopted. See Note 7, “Pensions and
Other Post-Retirement Benefits” of the Notes to Consolidated Financial
Statements in Part I, Item 1 of this report. The new measurement date
requirement applies for fiscal years ending after December 15, 2008 and has
not
yet been adopted.
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 effect that the adoption of SFAS
No. 157 will have on our financial statements.
Seasonality
The
residential title insurance
business tends to be seasonal. Residential buy/sell activity is
generally slower in the winter, when fewer families buy or sell homes, with
increased volumes in the spring and summer. Residential refinancing
activity is generally more uniform throughout the seasons, but is subject
to
interest rate variability. We typically report our lowest revenue
from agency and direct title operations in the first quarter, with such revenue
increasing into the second quarter. Due to the continued downturn in
the residential real estate environment, we did not experience the traditional
seasonal pickup in volume during second quarter 2007 as we have in the past
several years, causing our revenue to remain flat during second quarter 2007
over the first quarter of this year.
Results
of Operations
Operating
Revenue
The
following table
provides a summary of our operating revenue for the three and six
months ended June 30, 2007 and 2006:
|
|
Three
Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in millions)
|
|
Title
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
Operations
|
|
$ |
410.1
|
|
|
|
42.2 |
% |
|
$ |
376.7
|
|
|
|
38.8 |
% |
Agency
Operations
|
|
|
453.2
|
|
|
|
46.7
|
|
|
|
505.3
|
|
|
|
52.0
|
|
|
|
|
863.3
|
|
|
|
88.9
|
|
|
|
882.0
|
|
|
|
90.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lender
Services
|
|
|
68.9
|
|
|
|
7.1
|
|
|
|
59.7
|
|
|
|
6.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Services
|
|
|
0.2
|
|
|
|
-
|
|
|
|
0.3
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
and Other
|
|
|
39.1
|
|
|
|
4.0
|
|
|
|
29.1
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
971.5
|
|
|
|
100.0 |
% |
|
$ |
971.1
|
|
|
|
100.0 |
% |
|
|
Six
Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in millions)
|
|
Title
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
Operations
|
|
$ |
779.4
|
|
|
|
41.4 |
% |
|
$ |
717.5
|
|
|
|
38.3 |
% |
Agency
Operations
|
|
|
875.3
|
|
|
|
46.5
|
|
|
|
983.5
|
|
|
|
52.5
|
|
|
|
|
1,654.7
|
|
|
|
87.9
|
|
|
|
1,701.0
|
|
|
|
90.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lender
Services
|
|
|
151.8
|
|
|
|
8.1
|
|
|
|
117.5
|
|
|
|
6.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Services
|
|
|
0.4
|
|
|
|
-
|
|
|
|
0.5
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
and Other
|
|
|
75.9
|
|
|
|
4.0
|
|
|
|
54.4
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,882.8
|
|
|
|
100.0 |
% |
|
$ |
1,873.4
|
|
|
|
100.0 |
% |
Title
Operations - Operating
revenue from direct title operations increased by $33.4 million, or 8.9 percent,
in second quarter 2007 from second quarter 2006 and increased by $61.9
million, or 8.6 percent, in the first half of 2007 over the comparable period
in
2006. During second quarter and the first half of 2007, direct
operating revenue was positively affected by increased volume as a result
of the
merger with Capital Title and strong commercial revenues. These increases
were partially offset by overall weakness in the residential real estate
market.
Revenue
from direct title commercial operations was $127.5 million in second
quarter 2007, compared to $92.3 million in second quarter 2006,
an increase of 38.1 percent, and $219.7 million in the first half of 2007,
compared to $178.0 million in the first half of 2006, an increase of 23.4
percent.
Closed
orders from our direct title
operations were approximately 176,500 in second quarter 2007 and
approximately 180,700 in second quarter 2006, while direct revenue per direct
order closed increased approximately 9.5 percent, from approximately $2,100
in
second quarter 2006 to approximately $2,300 in second quarter
2007. Closed orders from direct title operations for the first half
of 2007 were approximately 346,000 compared to approximately 350,000 for
the first half of 2006, while direct revenue per direct order closed
increased approximately 10.0 percent, from approximately $2,000 in the first
half of 2006
to
approximately $2,200 in the first half of 2007.
Operating
revenue from agency title operations in second quarter 2007 decreased
by $52.1 million, or 10.3 percent, from second quarter 2006, and
operating revenue from agency title operations for the first half of 2007
decreased by $108.2 million, or 11.0 percent, compared to the first half
of 2006
due to softer market conditions across most regions, particularly in certain
southeastern markets.
The
MBA
has forecasted that 2007 and 2008 residential mortgage originations will
be
lower than 2006 levels by approximately 9 percent and 19 percent,
respectively. We can provide no assurance that the effect of our
acquisitions, commercial revenues and direct operating revenue per direct
order
closed will offset the forecasted decline in the residential real estate
market.
Lender
Services - Operating
revenue for Lender Services increased by $9.2 million, or 15.4 percent, in
second quarter 2007 compared to second quarter 2006. Operating
revenue increased by $34.3 million, or 29.2 percent, for Lenders Services
for
the first half of 2007 compared to the first half of 2006. Revenue
for second quarter 2007 and for the first half of 2007 was positively
affected by increased business as a result of the merger with Capital Title
and
growth in default management services. Revenue in the first half of
2007 was also positively affected by the acceleration of deferred revenue
in the
loan servicing business in first quarter 2007. These increases were
offset in part by lower volumes in certain product lines in the mortgage
origination business and the loan servicing business due to a softer real
estate
market. The default management services business experienced growth
in volume in second quarter 2007 and in the first half of 2007 due to increased
demand for lien monitoring, broker price opinions and appraisals, foreclosures,
reconveyances and other related services during the downturn in the residential
real estate cycle.
Corporate
and Other - Operating
revenue for Corporate and Other increased by $10.0 million, or 34.4 percent,
in
second quarter 2007 over second quarter 2006 and increased by $21.5
million, or 39.5 percent in the first half of 2007 over the first half of
2006. The increase in operating revenue was primarily due to
continued strong commercial business that has benefited from a strong
pipeline and a recent acquisition. Revenue from commercial operations
was $24.6 million in second quarter 2007 compared to $14.5 million in second
quarter 2006. Revenue from commercial operations was $44.0 million in
the first half of 2007 compared to $26.8 million in the first half of
2006. Improvements in commercial operations in second quarter 2007
and in the first half of 2007 were offset in part by declines in the home
warranty and property inspections businesses.
Investment
and Other
Income
Investment
and other income decreased
by approximately 1 percent in second quarter 2007 over second quarter 2006
and
increased by approximately 1 percent in the first half of 2007 over the second
half of 2006. Investment and other income includes income generated
for our investment and loan portfolio and our equity in income generated
by our
unconsolidated affiliates. Income from our unconsolidated affiliates
has declined in the second quarter and first half of 2007 when compared with
the
second quarter and first half of 2006, respectively, following the overall
decline in the residential real estate market, and has offset increases in
investment income from a higher loan portfolio and a modest increase in interest
rates.
Net
Realized Investment Gains
(Losses)
Net
realized investment gains (losses)
were $1.4 million in second quarter 2007 compared to $(1.5) million in second
quarter 2006 and $8.4 million in the first half of 2007 compared to $(0.6)
million in the first half of 2006. The increase was primarily due to
gains from the repositioning of our REIT portfolio and the reclassification
of
unrealized net gains on trading investments from accumulated other comprehensive
income (loss). In addition, we recognized approximately $1.6 million
of realized losses in second quarter 2006 on fixed income securities that
were
deemed to be other-than-temporarily impaired. 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 six months ended
June
30, 2007 and 2006:
|
|
Three
Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Title
Operations
|
|
$ |
262.0
|
|
|
|
82.9 |
% |
|
$ |
240.6
|
|
|
|
83.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lender
Services
|
|
|
26.3
|
|
|
|
8.3
|
|
|
|
23.5
|
|
|
|
8.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Services
|
|
|
0.8
|
|
|
|
0.3
|
|
|
|
0.6
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
and Other
|
|
|
26.9
|
|
|
|
8.5
|
|
|
|
24.1
|
|
|
|
8.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
316.0
|
|
|
|
100.0 |
% |
|
$ |
288.8
|
|
|
|
100.0 |
% |
|
|
Six
Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Title
Operations
|
|
$ |
516.8
|
|
|
|
82.8 |
% |
|
$ |
468.8
|
|
|
|
82.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lender
Services
|
|
|
54.3
|
|
|
|
8.7
|
|
|
|
48.1
|
|
|
|
8.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Services
|
|
|
1.7
|
|
|
|
0.3
|
|
|
|
1.2
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
and Other
|
|
|
51.0
|
|
|
|
8.2
|
|
|
|
47.4
|
|
|
|
8.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
623.8
|
|
|
|
100.0 |
% |
|
$ |
565.5
|
|
|
|
100.0 |
% |
Title
Operations – Title
Operations salary and employee benefit costs increased by $21.4 million,
or 8.9
percent, in second quarter 2007 compared to second quarter 2006, and increased
by $48.0 million, or 10.2 percent in the first half of 2007 over the first
half
of 2006. Average Full Time Equivalent (“FTE”) counts for the Title
Operations segment were approximately 11,300 in second quarter 2007 versus
approximately 10,500 in second quarter 2006, or an increase of 7.6
percent. FTE counts for the Title Operations segment increased to
approximately 11,400 in the first half of 2007 from approximately 10,600
in the
first half of 2006, or an increase of 7.5 percent. Salary and
employee benefit costs and FTE counts increased primarily to service additional
business from the merger with Capital Title (approximately 1,400 FTE counts
and
1,500 FTE counts in the second quarter and first half of 2007, respectively)
and
the increase in commercial business. These increases were offset in
part by declines in staffing levels in the agency and direct title operations
in
response to declines in the residential real estate market.
Lender
Services – Lender
Services salary and employee benefit costs increased by $2.8 million, or
11.9
percent, in second quarter 2007 compared to second quarter 2006, and increased
by $6.2 million, or 12.9 percent, in the first half of 2007 compared to the
first half of 2006. FTE counts for the Lender Services segment were
approximately 1,800 in second quarter 2007 and in the first half of 2007
versus
approximately 1,500 in second quarter 2006 and in the first half of 2006,
or an
increase of 20.0 percent. Salary and employee benefit costs and
FTE counts increased primarily to service increased business as the result
of
the merger with Capital Title and other acquisitions. These increases
were offset in part by reductions in FTE counts in certain product lines
in the
loan servicing business and in the mortgage origination business to adjust
to
lower business volume.
Corporate
and Other –
Corporate and Other salary and employee benefit costs increased by $2.8
million,
or 11.6 percent, in second quarter 2007 over second quarter 2006 and by $3.6
million, or 7.6 percent, in the first half of 2007 over the first half of
2006. Salary and employee benefit costs increased primarily to
support strong commercial business included in the
Corporate
and Other category. These increases were offset in part by reductions
in FTE counts in the property inspections business to adjust to lower business
volumes.
Provision
for Policy and Contract
Claims
Based
on our quarterly review of the
underlying claims data and trends therein, we have provided for claims losses
using approximately 9.3 percent and 5.3 percent of operating revenue from
the
Title Operations segment for the second quarters of 2007 and 2006, respectively,
and approximately 7.9 percent and 5.4 percent of operating revenue from the
Title Operations segment for the first half of 2007 and 2006,
respectively. The increase in the claims provision ratio was
primarily due to an increase in the frequency and severity of claims reported
for policy years 2004 through 2006 which resulted in upward development for
those policy years. The claims provision increased by $33.6 million,
or $21.8 million after taxes, in second quarter 2007 compared to second quarter
2006. Since we are subject to liability on claims for an extended
period of time, slight changes in current claims experience can have a
significant effect on 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 June 30, 2007 based on
the
results of the actuarial evaluation and evaluation of any known
trend. For further details, see Note 6, “Policy and Contract Claims”
of the Notes to Consolidated Financial Statements in Part I, Item 1 of this
report.
|
Impairment
of Intangible and Other Long-Lived
Assets
|
In
first quarter 2007, we recorded an
impairment of $20.8 million related to our customer relationship intangible
asset of our tax and flood business in the Lender Services
segment. The effect
of
the impairment is expected to reduce amortization expense by approximately
$3.2
million on an annual basis. In first quarter 2006, we wrote down our
existing building and related assets to fair value less cost to sell by
approximately $9.7 million in connection with the relocation and
consolidation of our corporate offices and shared resources
operations. No impairments were recorded in second quarter 2007 or in
second quarter 2006. For further details, see Note 10, “Impairment 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 $1.0
million in second quarter 2007 compared to second quarter 2006 and decreased
by
$1.3 million in the first half of 2007 compared to the first half of
2006. These declines were primarily due to the impairment of a
customer relationship intangible asset in the tax and flood business of our
Lender Services segment. For further details, see Note 10,
“Impairment of Intangible and Other Long-lived Assets” of the Notes to
Consolidated Financial Statements in Part I, Item 1 of this report.
Interest
Expense
Interest
expense is comprised of
interest paid on long-term debt primarily in the Corporate and Other category,
and interest paid to holders of demand deposits in the Financial Services
segment. Interest expense increased by $1.9 million in second quarter
2007 compared to second quarter 2006 primarily due to interest on our senior
notes that were used to pay a portion of the purchase price for Capital
Title. Interest expense increased by $5.0 million in the first half
of 2007 compared to the first half of 2006 primarily due to interest on our
senior notes and credit facility that were used to pay a portion of the purchase
price for Capital Title. See “Liquidity and Capital Resources” for
further details.
General,
Administrative, and
Other
The
following table provides a summary
of our general, administrative, and other costs for the three and six months
ended June 30, 2007 and 2006:
|
|
Three
Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Title
Operations
|
|
$ |
130.7
|
|
|
|
65.4 |
% |
|
$ |
121.2
|
|
|
|
69.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lender
Services
|
|
|
38.1
|
|
|
|
19.1
|
|
|
|
26.8
|
|
|
|
15.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Services
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
0.4
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
and Other
|
|
|
30.9
|
|
|
|
15.4
|
|
|
|
24.9
|
|
|
|
14.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
199.9
|
|
|
|
100.0 |
% |
|
$ |
173.3
|
|
|
|
100.0 |
% |
|
|
Six
Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Title
Operations
|
|
$ |
252.7
|
|
|
|
65.3 |
% |
|
$ |
237.0
|
|
|
|
69.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lender
Services
|
|
|
76.8
|
|
|
|
19.8
|
|
|
|
54.7
|
|
|
|
16.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Services
|
|
|
0.5
|
|
|
|
0.1
|
|
|
|
0.6
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
and Other
|
|
|
57.4
|
|
|
|
14.8
|
|
|
|
49.2
|
|
|
|
14.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
387.4
|
|
|
|
100.0 |
% |
|
$ |
341.5
|
|
|
|
100.0 |
% |
Title
Operations – Title
Operations general and administrative expenses increased by $9.5 million,
or 7.8
percent, in second quarter 2007 from second quarter 2006 and increased by
$15.7
million, or 6.6 percent, in the first half of 2007 from the first half of
2006. General and administrative expenses increased primarily to
support increased market share as a result of the merger with Capital Title
and increased commercial business and was partially offset by cost reductions
to
match declines in residential business volume.
Lender
Services – Lender
Services general and administrative expenses increased by $11.3 million,
or 42.2
percent, in second quarter 2007 from second quarter 2006 and increased by
$22.1
million, or 40.4 percent, in the first half of 2007 from the comparable period
in 2006. The increase in general and administrative expenses was
primarily due to the merger with Capital Title and other acquisitions and
to
support growth in the default management services line within the loan servicing
business. These increases were offset in part by declines in certain
lines of the loan servicing and mortgage originations businesses to match
declines in business volume.
Corporate
and Other– Corporate
and Other general and administrative expenses increased by $6.0 million,
or 24.1
percent, in second quarter 2007 from second quarter 2006 and increased by
$8.2
million, or 16.7 percent, in the first half of 2007 from the first half
2006. The increase in general and administrative expenses was
primarily to support increased commercial business.
Income
Taxes
Our
effective income tax rate, which
includes a provision for state income and franchise taxes for non-insurance
subsidiaries, was 33.5 percent for the first half of 2007 and 35.0 percent
for
the first half of 2006. The difference in the effective tax rate was
due to favorable permanent differences and the mix of state taxes related
to our
non-insurance subsidiaries.
Net
Income
Our
reported net income was $7.9
million or $0.42 per common share on a diluted basis for second quarter 2007
compared to net income of $35.6 million or $2.06 per common share on a diluted
basis for second quarter 2006. Net income for second quarter 2007
reflected the weakness in the residential housing market and the increase
in the
claims provision of $34.3 million, or $22.3 million after
taxes. These decreases were offset in part by continued strength in
the commercial market. Our reported net income was $12.6 million or
$0.68 per common share on a diluted basis for the first half of 2007 compared
to
net income of $49.3 million or $2.82 per common share on a diluted basis
for the
first half of 2006. Net income for the first half of 2007 reflected
an impairment charge in first quarter 2007 for a customer relationship
intangible asset in the Lender Services segment of $20.8 million, or $12.5
million net of taxes, and a higher claims provision ratio. Net income
for the first half of 2006 included the write down of the corporate offices
in
first quarter 2006 to fair value less cost to sell of $9.7 million, or $6.3
million net of taxes. Due to an increase in our stock price, the
effect of convertible debt on dilutive common shares increased from 0.5 million
shares for the three months ended June 30, 2006 to 2.1 million shares for
the
three months ended June 30, 2007 and increased from 0.5 million
shares
for the six months ended June 30, 2006 to 1.5 million shares for the six
months
ended June 30, 2007. For further details, see Note 6, “Policy and
Contract Claims,” Note 10, “Impairment of Intangible and Other Long-Lived
Assets,” and Note 9, “Shareholders’ Equity” of the Notes to Consolidated
Financial Statements in Part I, Item 1 of this report.
Liquidity
and Capital Resources
Consolidated
Cash
provided by operating activities
was $112.7 million for the first half of 2007 compared to $29.4 million for
the
first half of 2006. The increase in cash provided by operating
activities was due to the timing of income tax payments. Cash
provided by investing activities was $182.4 million for the first half of
2007
compared to cash used in investing activities of $(35.8) million for the
first
half of 2006. The increase in cash provided by investing activities
was due primarily to proceeds from the sale of short-term investments, proceeds
from the sale or maturity of fixed-maturity and equity securities, and declines
in investments in federal funds sold. This increase was offset in
part by the cost of additions to the investment portfolio and increases in
loans
receivable. Cash used in financing activities was $(291.2) million
for the first half of 2007 compared to $(1.8) million for the first half
of
2006. The increase in cash used in financing activities was due
primarily to the repayment of debt, common stock repurchases, and the decline
in
escrow deposits held by Centennial Bank which trended with the general decline
in the real estate market. At June 30, 2007, we held cash of $86.4
million and investments of $1,583.6 million.
Parent
Company
For
the six months ended June 30, 2007,
our primary uses of funds at the holding company level included pay down
of the
credit arrangement that was used to fund, in part, the merger with Capital
Title, share repurchases, funding the working capital needs of our subsidiaries,
and payment of dividends on our common stock. At June 30, 2007, there
was approximately $105.0 million of cash, short-term investments and marketable
securities at the holding company level available for general corporate
purposes, payment of dividends, and share repurchases. The holding
company’s principal source of funds is dividends from its title insurance
subsidiaries.
Regulatory
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 $152.0 million of the net assets of our consolidated insurance
subsidiaries are available during the remainder of 2007 for
ordinary
dividends,
loans or advances to us. The redomestication of these subsidiaries is
expected to increase the net income and the cumulative amount of surplus
that is
available to pay dividends to the holding company by the aggregate amount
that
these subsidiaries’ total statutory reserves exceed GAAP claims reserves,
subject to certain annual limitations and any approval that may be required
by
the Nebraska Department of Insurance. We received approximately $15
million and $85 million in dividends from our three principal title insurance
subsidiaries during the second quarter and the first half of 2007,
respectively.
Investment
Strategy
During
first quarter 2007, we
transferred $142.6 million of our fixed-maturity securities from
available-for-sale securities to trading securities. We did not
transfer any of our securities between investment categories during second
quarter 2007. For further details, see Note 4, “Investments” of the
Notes to Consolidated Financial Statements in Part I, Item 1 of this
report.
Mergers
and Acquisitions
On
September 8, 2006, we completed the
merger with Capital Title which consists of a title insurance underwriter,
several title and escrow agency operations, a property appraisal company,
a
settlement services provider and other related companies. Capital
Title services customers primarily in Arizona, California and Nevada in addition
to providing lender services on a national basis. We believe that our
merger with Capital Title has strengthened our presence in key western states
and added scale to our Lender Services platform. We acquired 100
percent of Capital Title’s common stock for approximately $252.6 million, which
consisted of $202.9 million of cash, including direct transaction costs of
$3.6
million, and $49.7 million of our common stock, which represented 775,576
shares. Capital Title has been integrated into the Title Operations
and Lender Services segments as of the merger date. As of June 30,
2007, we have achieved annualized pretax cost savings of approximately $11
million. We expect that by the end of 2007, synergies will produce
annualized pretax cost savings of approximately $16 million. For
further details, see Note 3, “Mergers and Acquisitions” of the Notes to
Consolidated Financial Statements in Part I, Item 1 of this report.
Shareholders’
Equity
In
October 2005, the Board of Directors
approved a share repurchase program expiring in July 2007 (the “2005 Program”)
that authorized us to repurchase 1.25 million shares of our common
stock. Under the 2005 Program, we repurchased 375,000 shares during
the first six months of 2006 for $24.6 million, at an average cost of $65.49
per
share; we repurchased 243,000 shares during the second half of 2006 for $15.6
million, at an average cost of $64.06 per share. During the first
three months of 2007, we repurchased 569,000 shares for $39.9 million, at
an
average cost of $70.18 per share. As of March 31, 2007, there were no
authorized shares remaining under the 2005 Program.
In
February 2007, the Board of
Directors approved a share repurchase program expiring in October 2008 (the
“2007 Program”) that authorized us to repurchase 1.5 million shares of
our
common
stock. Under the 2007 Program, we repurchased 474,000 shares during
second quarter 2007 for $42.0 million, at an average cost of $88.54 per
share. No shares were repurchased under this program in first quarter
2007. At June 30, 2007, there were approximately 1,026,000 shares
remaining under the 2007 Program.
Effective
April 1, 2007, our 3.25 percent convertible senior debentures due 2034 (“2004
debentures”) became convertible to common stock during second quarter 2007
through and including June 30, 2007. These debentures are also
convertible during third quarter 2007 through and including September 30,
2007. For further details, see Note 9, “Shareholders’ Equity” of the
Notes to Consolidated Financial Statements in Part I, Item 1 of this
report.
Effective
July 1, 2007, our 3.125
percent convertible senior debentures due 2033 became convertible to common
stock during third quarter 2007 through and including September 30,
2007. These debentures are also convertible during third quarter 2007
through and including September 30, 2007. For further details, see
Note 9, “Shareholders’ Equity” of the Notes to Consolidated Financial Statements
I Part I, Item 1 of this report.
In
connection with the issuance of the
2004 debentures, we entered into a call option designed to mitigate the
potential dilution from the conversion of the 2004 debentures. Under
the ten-year term of the call option, we may require a counterparty to deliver
approximately 2.3 million shares of our common stock to us at a price which
approximates the conversion price of the 2004 debentures. For further
details, see Note 2, “Earnings Per Share” of the Notes to Consolidated Financial
Statements in Part I, Item 1 of this report.
Summary
We
believe our revolving credit
facilities and anticipated cash flows from operations will provide us with
sufficient liquidity to meet our operating requirements for the foreseeable
future. For further information about our borrowings, see our Annual
Report on Form 10-K for the year ended December 31, 2006.
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. and LandAmerica
Financial Group, Inc. (collectively, “Gateway 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,
“Gateway Defendants”). The lawsuit claimed substantial monetary and
punitive damages for unfair competitive business practices in conjunction
with
Gateway Plaintiffs’ loss of over 300 employees in California, most of which
appears to have occurred within an approximately twenty-four month
period. 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, which Gateway Plaintiffs
disputed. After completion of discovery, a jury trial began in early
May 2006 and resulted in a verdict for Gateway of approximately $8.3
million. Judgment was not entered pending resolution of the
Cross-Complaints.
On
January 14, 2005, First California
Title Company, New Century Title Company (“New Century”) and United Title
Company (collectively, “Capital Title Plaintiffs”) filed a Complaint in the
Superior Court of the State of California, County of Los Angeles, against
Financial Title Company, Mercury Companies, Inc. (“Mercury”), Stacy Neves,
Stephanie Howard, George Willard and Tony Becker (Case No. BC 327332)
(collectively, “Capital Title Defendants”). The lawsuit claimed
substantial monetary and punitive damages for unfair competitive business
practices in conjunction with Capital Title Plaintiffs’ loss of approximately 80
employees in California to Capital Title Defendants over an approximately
eight
month period. The complaint was later amended to include Alliance
Title Company and Christine De’Martini as named defendants. On
September 8, 2006, we completed a merger in which Capital Title Plaintiffs
became affiliated companies. A jury trial began on October 17,
2006. On December 28, 2006, the jury returned its verdict for Capital
Title Plaintiffs in the approximate amount of $2 million. The
punitive damages phase of the bifurcated trial was held on January 2, 2007
and
resulted in a punitive damages award for Capital Title Plaintiffs in the
approximate amount of $14.6 million. Judgment was entered on March 8,
2007. Capital Title Defendants filed several post-trial motions including
motions for a new trial on the issue of punitive damages. On March
22, 2007, the trial court granted Mercury’s motion for new trial on the issue of
punitive damages. Having found that the punitive damages awarded by
the jury in favor of plaintiff New Century violated due process, the trial
court
reduced the amount of the punitive damages awarded against Mercury from $11.6
million to $2.9 million. On April 18, 2007, the trial court issued a
Minute Order modifying the previous judgment entered in favor of New Century
to
reflect this reduction of punitive damages. The trial court denied
similar motions for new trial brought by other Capital Title
Defendants. Accordingly, the total amount of punitive damages awarded
against Capital Title Defendants, after the March 22, 2007 order, is $5.9
million.
Voluntary
mediation beginning on April
4, 2007 led the parties in both cases to a settlement in July 2007, providing
for a payment in the amount of $12.5 million by Mercury to LandAmerica and
the
resolution of all claims, including but not limited to cross claims,
post-trial
motions
and appeals, thus eliminating the necessity for later scheduled trials,
including the trial on the Cross Complaints, and appeal deadlines.
On
January 25, 2002, Miles R. Henderson
and Patricia A. Henderson (“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 Plaintiffs in the Henderson
Suit
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 (“Plaintiffs in the Simon
Suit”) in the Court of Common Pleas for Cuyahoga County, Ohio on March 5, 2003.
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, 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 court has set a class certification hearing
date of December 6-7, 2007. 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. 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.
On
September 20, 2004, Kenneth and
Deette Higgins (“Plaintiffs in the Higgins Suit”) filed a putative class action
suit (the “Higgins Suit”) against Commonwealth Land Title Insurance Company
(“Commonwealth”) in the Circuit Court of Nassau County, Florida. On
February 3, 2005, Plaintiffs in the Higgins Suit filed an Amended Class Action
Complaint. Plaintiffs in the Higgins Suit allege that Commonwealth
had a practice of charging refinance borrowers higher basic rates for title
insurance, rather than the lower reissue rates for which they are alleged
to
have qualified, and of failing to disclose the potential availability of
the
lower rates. Plaintiffs in the Higgins Suit seek to have the case
certified as a class action on behalf of all Florida persons or entities
who
refinanced their mortgages or fee interests on the identical premises from
July
1, 1999 to the present where there was no change in the fee ownership and
who
were charged a premium in excess of the reissue premium. Plaintiffs
in the Higgins Suit have demanded an unspecified amount of compensatory damages,
declaratory relief, attorneys’ fees, costs and pre-judgment
interest. This case is in the early stages, there has been no class
certification, and Commonwealth believes it has 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.
On
July 24, 2006, A. D. Alberton
(“Plaintiff in the Alberton Suit”) filed a putative class action suit (the
“Alberton Suit”) against Commonwealth which is currently pending in the United
States District Court for the Eastern District of Pennsylvania. A
similar putative class action suit was filed against Lawyers Title by Shariee
L.
De Cooman (“Plaintiff in the De Cooman Suit”) in the Court of Common Pleas of
Allegheny County, Pennsylvania on or about August 12, 2005. On
November 1, 2005, Plaintiff in the De Cooman Suit filed an Amended
Complaint. Plaintiff in the Alberton Suit alleges that
Commonwealth charged rates for title insurance in excess of statutorily mandated
rates and/or failed to disclose to consumers that they were entitled to reduced
title insurance premiums and seeks to certify a class on behalf of all consumers
who paid premiums for the purchase of title insurance on Pennsylvania properties
from Commonwealth at any time during the year 2000 until August 2005 and
qualified for a discounted refinance or reissue rate discount and did not
receive such discount. Plaintiff in the De Cooman Suit alleges that
Lawyers Title charged the basic rate rather than a reissue or discounted
rate to
certain consumers and seeks to certify a class on behalf of all owners of
residential real estate in Pennsylvania who, at any time during the ten years
prior to August 12, 2005 paid premiums for the purchase of title insurance
from
Lawyers Title, qualified for a reissue or other discounted rate, and did
not
receive such rate. The court in the Alberton Suit has set a class
certification hearing date of October 16, 2007. The trial is
currently scheduled to commence on January 14, 2008. The court in the De
Cooman
Suit has set a class certification hearing date of October 9,
2007. Plaintiff in the Alberton Suit has demanded an unspecified
amount of compensatory damages, declaratory relief, triple damages, restitution,
pre-judgment and post-judgment interest and expert fees, attorneys’ fees and
costs. Plaintiff in the De Cooman Suit has demanded an unspecified
amount of compensatory damages, punitive damages, triple damages, prejudgment
interest, and attorneys’ fees, litigation expenses and costs. These
cases are in the early stages, there has been no class certification, and
defendants believe 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
Proceedings
We
have
received certain information requests and subpoenas from various regulatory
authorities relating to our business practices and those of the title insurance
industry.
The
Government Accountability Office
released its final report on the title insurance industry on April 17, 2007
(the
“Report”). The Report makes recommendations regarding federal and
state oversight of the title insurance industry, including but not limited
to,
better consumer information, consideration of the need for modification to
the
Real Estate Settlement Procedures Act and increased cooperation among
regulators.
Various
states are studying the title
insurance product, market, pricing, business practices, and potential regulatory
and legislative changes. Multiple states, including California,
Florida, Nevada, New Mexico, New York, Texas, and Washington, are examining
pricing levels and/or title insurance regulations. If it is
determined that prices are not justified, rate changes may be implemented,
including potential reductions.
Some
of
the pricing examinations, like those conducted in Texas and New Mexico, are
conducted annually or biannually and usually result in adjustments to the
prices
we can charge. Subsequent to the 2004 Texas Title Insurance Biennial
Hearings in August 2006, the Texas Commissioner of Insurance ordered a rate
reduction of 3.2 percent effective February 1, 2007. The Texas
Department of Insurance has noticed the 2006 Texas Title Insurance Biennial
Hearings with the rulemaking phase to begin on September 5, 2007 and the
ratemaking phase to begin on October 16, 2007. Subsequent to a
hearing of the New Mexico title rate case concluded on January 18, 2007,
on July
20, 2007, the New Mexico Superintendent of Insurance ordered a rate reduction
of
6.36 percent and a change in the agent/underwriter split from 80/20 to 84.2/15.8
effective September 1, 2007. It is expected that a motion for
rehearing will be filed by the New Mexico Land Title Association to request
the
Superintendent to reconsider the order. If the Superintendent denies
the motion for rehearing, the rate order can then be appealed to the New
Mexico
Public Regulatory Commission. If the New Mexico Public Regulatory
Commission upholds the rate order, it can then be appealed to a New Mexico
district court, with further appellate review available up to the New Mexico
Supreme Court.
The
California Department of Insurance
(“CA DOI”) submitted to the Office of Administrative Law (“OAL”) proposed
regulations governing the rating of title insurance and related services
that
could impose future rate reductions and filing of mandated statistical plans
that impose substantially higher costs on title insurance operations in
California. On February 21, 2007, OAL disapproved the regulatory
action for failure to comply with certain standards and requirements and
on
February 28, 2007 issued a written decision detailing the reasons for
disapproval. On June 28, 2007, CA DOI submitted revised regulations to OAL
that
would become effective January 1, 2009, and OAL approved the regulations
on July
25, 2007 and sent them to the California Secretary of
State. LandAmerica and other title companies doing business in the
California market continue to engage in discussions with the CA DOI regarding
alternative approaches to the regulations but may pursue an appeal if such
discussions are unsuccessful.
In
addition, a number of state inquiries have focused on captive
reinsurance. 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. We settled these investigations with six states, representing
approximately 81.4 percent of our captive reinsurance business, without
admitting any liability.
In
June
2005, we established reserves of $19.0 million to cover anticipated exposure
to
regulatory matters nationwide, an amount which includes settlements with
the
California, Arizona, Nevada, Virginia, Colorado, and North Carolina departments
of insurance. Based on these settlements and the status of inquiries,
we released $6.7 million of this reserve back into earnings in fiscal year
2005
and $0.8 million in fiscal year 2006. The remaining reserve at June
30, 2007 was approximately $1.9 million.
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, or the market’s response thereto. However, any material
change in our business practices, pricing levels, or regulatory environment
may
have an adverse effect on our business, operating results and financial
condition.
Forward-Looking
and Cautionary Statements
This
Quarterly Report on Form 10-Q
contains “forward-looking statements” within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934.
Among other things, these statements relate to our financial condition, results
of operations and future business plans, operations, opportunities and
prospects. In addition, we and our representatives may from time to time
make
written or oral forward-looking statements, including statements contained
in
other filings with the Securities and Exchange Commission and in our reports
to
shareholders. These forward-looking statements are generally identified by
the
use of words such as we “expect,” “believe,” “anticipate,” “could,” “should,”
“may,” “plan,” “will,” “predict,” “estimate” and similar expressions or words of
similar import. These forward-looking statements are based upon our current
knowledge and assumptions about future events and involve risks and
uncertainties that could cause our actual results, prospects, performance
or
achievements to be materially different from any anticipated results, prospects,
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
any future resulting reductions in 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) our claims experience may require
us
to increase our provision for title losses or to record additional reserves,
either of which may adversely affect our earnings; (xii) key accounting and
essential product delivery systems are concentrated in a few locations; (xiii)
provisions of our articles of incorporation and bylaws, 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; (xiv)
our
future success depends on our ability to continue to attract and retain
qualified employees; (xv) 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;
and
(xvi) various external factors including general market conditions, governmental
actions, economic reports and shareholder activism may affect the trading
volatility and price of our common stock. For a description of 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, 2006,
and
other reports from time to time filed with or furnished to the Securities
and
Exchange Commission. We caution investors not to place undue reliance on
any
forward-looking statements as these statements speak only as of the date
when
made. We undertake no obligation to update any forward-looking statements
made
in this report.
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Our
primary exposure to market risk
relates to interest rate risk and equity price risk. Interest rate
risk is generally related to certain investment securities, loans receivable,
debt and certain deposits. We are also subject to equity price risk
through various portfolios of equity securities. We have operations
in certain foreign countries, but these operations, in the aggregate, are
not
material to our financial condition or results of operations.
The
following table provides information about our financial instruments that
are
sensitive to changes in interest rates. Values in the table present
principal cash flows and related weighted-average interest rates by expected
maturity dates. Actual cash flows could differ from the expected
amounts.
Principal
Amount by Expected Maturity
|
|
Average
Interest Rate
|
|
|
|
(Dollars
in millions)
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
and
after
|
|
|
Total
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book
value
|
|
$ |
28.4
|
|
|
|
33.7
|
|
|
|
39.7
|
|
|
|
30.1
|
|
|
|
54.1
|
|
|
|
423.0
|
|
|
$ |
609.0
|
|
|
$ |
600.9
|
|
Average
yield
|
|
|
5.4 |
% |
|
|
4.7 |
% |
|
|
5.1 |
% |
|
|
5.0 |
% |
|
|
5.4 |
% |
|
|
5.4 |
% |
|
|
5.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-taxable
available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book
value
|
|
$ |
2.0
|
|
|
|
20.7
|
|
|
|
18.0
|
|
|
|
30.2
|
|
|
|
34.0
|
|
|
|
366.4
|
|
|
$ |
471.3
|
|
|
$ |
472.0
|
|
Average
yield
|
|
|
4.6 |
% |
|
|
4.4 |
% |
|
|
4.0 |
% |
|
|
4.0 |
% |
|
|
4.2 |
% |
|
|
4.2 |
% |
|
|
4.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
trading securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book
value
|
|
$ |
0.3
|
|
|
|
1.5
|
|
|
|
2.5
|
|
|
|
2.9
|
|
|
|
6.7
|
|
|
|
81.0
|
|
|
$ |
94.9
|
|
|
$ |
94.9
|
|
Average
yield
|
|
|
5.7 |
% |
|
|
5.1 |
% |
|
|
6.0 |
% |
|
|
5.2 |
% |
|
|
4.7 |
% |
|
|
5.4 |
% |
|
|
5.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-taxable
trading securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book
value
|
|
$ |
0.5
|
|
|
|
-
|
|
|
|
2.9
|
|
|
|
0.5
|
|
|
|
3.6
|
|
|
|
36.1
|
|
|
$ |
43.6
|
|
|
$ |
43.6
|
|
Average
yield
|
|
|
3.6 |
% |
|
|
-
|
|
|
|
4.3 |
% |
|
|
3.6 |
% |
|
|
3.8 |
% |
|
|
4.2 |
% |
|
|
4.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book
value
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$ |
10.1
|
|
|
$ |
10.1
|
|
|
$ |
10.0
|
|
Average
yield
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3.6 |
% |
|
|
3.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
receivable, excluding reserves, discounts and other costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book
value
|
|
|
-
|
|
|
$ |
1.0
|
|
|
|
3.0
|
|
|
|
1.4
|
|
|
|
8.4
|
|
|
|
574.7
|
|
|
$ |
588.5
|
|
|
$ |
589.3
|
|
Average
yield
|
|
|
-
|
|
|
|
8.6 |
% |
|
|
7.6 |
% |
|
|
7.4 |
% |
|
|
7.1 |
% |
|
|
7.0 |
% |
|
|
7.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing passbook liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book
value
|
|
$ |
104.4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$ |
104.4
|
|
|
$ |
104.4
|
|
Average
yield
|
|
|
5.0 |
% |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing certificate of deposit liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book
value
|
|
$ |
68.2
|
|
|
|
101.8
|
|
|
|
36.9
|
|
|
|
20.4
|
|
|
|
5.1
|
|
|
|
1.6
|
|
|
$ |
234.0
|
|
|
$ |
247.0
|
|
Average
yield
|
|
|
5.2 |
% |
|
|
5.1 |
% |
|
|
4.6 |
% |
|
|
4.7 |
% |
|
|
5.2 |
% |
|
|
5.0 |
% |
|
|
5.0 |
% |
|
|
|
|
Changes
in maturities and yields from
December 31, 2006 to June 30, 2007 primarily relate to timing of purchases
and
sales of securities and the effect that the securities sold or purchased
have on
the average portfolio yield, timing of payments received from, and the extension
of loans to, customers in the commercial real estate market and timing of
amounts held for customers.
We
also have non-interest bearing
passbook deposit liabilities related to escrow balances of $185.8
million. In addition, during first quarter 2007, we transferred
$142.6 million of our
fixed-maturity
securities from available-for-sale securities to trading
securities. This transfer introduced incremental interest rate risk
into our business. We do not expect the incremental interest rate
risk to have a material affect on our financial statements. For
further details, see Note 4, “Investments” of the Notes to Consolidated
Financial Statements in Part I, Item 1 of this report.
There
have been no material changes in
other market risks that affect us since the filing of our Form 10-K for the
year
ended December 31, 2006.
ITEM
4.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and
procedures that are designed to provide assurances that information required
to
be disclosed by us in the reports that we file or submit under the Securities
Exchange Act of 1934 (the “Exchange Act”), as amended, is recorded, processed,
summarized and reported within the time periods required by the Securities
and
Exchange Commission.
Our
management, under the direction of
our Chief Executive Officer and our Chief Financial Officer, has evaluated
the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e))
as of
June 30, 2007. Based upon this evaluation our management, including
our Chief Executive Officer and our Chief Financial Officer, has concluded
that
our disclosure controls and procedures were effective as of June 30,
2007.
Changes
in Internal Controls
There
were no changes in our internal
controls over financial reporting that occurred during the quarter ended
June
30, 2007 that have materially affected, or are reasonably likely to materially
affect, our internal controls 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 Form 10-K for the fiscal year
ended
December 31, 2006 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.
The
trading volatility and price of our common stock may be affected by various
external factors.
The
volatility and price of our common stock are subject to various factors over
which we have no control, such as general market conditions and governmental
actions or reports about economic activity that may have a market-moving
impact,
regardless of whether the action or activity directly relates to our business.
In addition, shareholder activism that seeks to influence corporate policies
or
affect our business strategies may lead to speculative trading activity in
our
common stock. Any substantial trading activity, whether due to
speculation or otherwise, has the potential to affect the market price and
volatility of our stock. We cannot predict the timing or impact of
these factors on the volatility or price of our common stock.
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 second quarter 2007:
Period
|
|
Total
Number
of
Shares
Purchased
|
|
|
Average
Price
Paid
per Share
|
|
|
Total
Number of Shares
Purchased
as Part of
Publicly
Announced
Plans
or Programs
|
|
|
Maximum
Number of
Shares
that May Yet
Be
Purchased Under
the
Plans or Programs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April
1 through April 30, 2007
|
|
|
124,299
|
|
|
$ |
78.99
|
|
|
|
114,000
|
|
|
|
1,944,290
|
|
May
1 through May 31, 2007
|
|
|
276,830
|
|
|
$ |
87.63
|
|
|
|
276,000
|
|
|
|
1,667,460
|
|
June
1 through June 30, 2007
|
|
|
84,815
|
|
|
$ |
104.00
|
|
|
|
84,000
|
|
|
|
1,582,645
|
|
|
(1)
|
A
total of 11,944 shares of our common stock were purchased in connection
with two employee benefit plans during the second quarter
2007. 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)
|
In
February 2007, we announced an additional share repurchase plan
providing
for the purchase of up to 1,500,000 shares of our common stock
expiring at
the end of October 2008. During second quarter 2007, we
repurchased 474,000 shares under this purchase
plan.
|
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The
Annual Meeting of Shareholders of the Company (the “Meeting”) was held on May
15, 2007.
b) At
the Meeting, the shareholders elected five directors to serve three-year
terms. The voting with respect to each nominee was as
follows:
Nominee
|
|
Votes
For
|
|
Votes
Withheld
|
|
|
|
|
|
Theodore
L. Chandler, Jr.
|
|
13,899,648
|
|
434,796
|
Charles
H. Foster, Jr.
|
|
13,776,941
|
|
557,503
|
Dianne
M. Neal
|
|
14,030,269
|
|
304,175
|
Robert
T. Skunda
|
|
13,998,260
|
|
336,184
|
Marshall
B. Wishnack
|
|
13,715,539
|
|
618,905
|
The
terms of office for the following
directors continued after the meeting: Janet A. Alpert, Gale K.
Caruso, Michael Dinkins, John P. McCann, Robert F. Norfleet, Jr., Julious
P.
Smith, Jr., Thomas G. Snead, Jr. and Eugene P. Trani.
c) The
shareholders also approved an amendment to the Company’s Articles of
Incorporation to revise the Article pertaining to shareholder approval as
noted
below:
Article
Pertaining to Shareholder Approval
|
|
|
|
Votes
For
|
|
11,529,091
|
Votes
Against
|
|
1,808,120
|
Abstain
|
|
68,096
|
Non
Votes (1)
|
|
929,137
|
|
|
|
(1) A
non vote occurs
when a broker or other nominee holding shares for a beneficial
owner
indicates a vote on one or more proposals, but does not indicate
a vote on
other proposals because the broker or other nominee does not have
discretionary voting power as to such proposals and has not received
voting instructions from the beneficial owner as to such
proposals.
|
d) Finally,
at the Meeting the shareholders ratified Ernst & Young LLP as the Company’s
independent registered public accounting firm for the 2007 fiscal year as
noted
below:
Appointment
of Independent Registered Public Accountants
|
|
|
|
Votes
For
|
|
14,198,374
|
Votes
Against
|
|
92,093
|
Abstain
|
|
43,977
|
No.
|
Description
|
|
|
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:August
1, 2007
|
|
/s/
Christine R. Vlahcevic
|
|
|
|
Christine
R. Vlahcevic
|
|
|
|
Senior
Vice President-
|
|
|
|
Corporate
Controller
|
|
|
|
(Principal
Accounting Officer)
|
|
EXHIBIT
INDEX
No.
|
Description
|
|
|
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.