LandAmerica Financial Group Inc. has filed for Chapter 11 bankruptcy protection and plans to sell its title insurance underwriting subsidiaries to companies under the umbrella of rival Fidelity National Financial Inc., a week after Fidelity backed out of a planned merger of the companies.
Fidelity subsidiaries Fidelity National Title Insurance Co. and Chicago Title Insurance Co. have agreed to pay $298 million to acquire LandAmerica subsidiaries Lawyers Title Insurance Corp., Commonwealth Land Title Insurance Co., and United Capital Title Insurance Co., LandAmerica said.
That’s more than twice the price tag of a previous plan for Fidelity to acquire LandAmerica and its subsidiaries in an all-stock deal originally valued at about $128 million. Fidelity announced on Nov. 21 that it was exercising its right to back out of the deal during a due diligence period (see story).
If the latest deal is approved by the bankruptcy court and regulators, Fidelity would be acquiring the three companies that account for 85 percent to 90 percent of LandAmerica’s annual revenue, without taking on all of the parent company’s liabilities, which exceed $650 million, LandAmerica said in a bankruptcy court filing.
Although Nebraska regulators have determined that Commonwealth and Lawyers’ dwindling surpluses represent a "hazardous financial condition" and are seeking to place the underwriting companies in receivership today, they will be allowed to continue to write new business as their planned sale moves forward.
With Lawyers, Commonwealth and United Capital under its umbrella, Fidelity would become the nation’s largest title insurance underwriter, controlling about 45 percent of the U.S. title insurance business, based on 2007 market share. The nation’s largest title insurance underwriter, First American Corp., had a 30 percent market share in 2007.
LandAmerica is a holding company, and a cash crunch stemming from investments by its 1031 exchange subsidiary has left it unable to pay creditors, Chief Financial Officer G. William Evans said in a bankruptcy court affidavit.
Only LandAmerica and subsidiary LandAmerica 1031 Exchange Services Inc. are seeking bankruptcy protection, the company said — not dozens of other businesses under the company’s umbrella. Unlike a Chapter 7 bankruptcy filing, in which a company seeks to liquidate assets, the Chapter 11 process is intended to give companies some relief from creditors while they reorganize.
Other LandAmerica subsidiaries provide appraisals, home inspections and warranties for residential real estate transactions, and perform services for mortgage lenders including real estate tax processing, flood zone determinations, consumer mortgage credit reporting, default management services, and mortgage loan subservicing.
Frozen investments
LandAmerica established the 1031 exchange company in 1990 to facilitate tax-deferred exchanges of business or investment properties. The company would take the proceeds of sales of clients’ properties and invest them until another "like kind" property is located.
Since 2002, LandAmerica 1031 Exchange Services has been investing some of those funds in auction-rate securities backed by federally guaranteed student loans, Evans said.
"Until earlier this year, banks pitched (auction-rate securities) to corporations and wealthy individuals as highly liquid and safe alternatives to cash," Evans said. The company’s goal was "to maintain the full liquidity necessary to meet customer claims."
The par value of those auction-rate securities is $201.7 million, Evans said, and the company has another $46 million invested in Treasuries to satisfy claims of 400 customers owed $191.7 million.
But after the market for auction-rate securities became frozen this year, LandAmerica 1031 Exchange Services has been unable to sell those investments "at any price near their par value," Evans said.
LandAmerica Financial Group advanced $65 million to its 1031 exchange company to honor customer claims, but Evans said given the "severe liquidity constraints also confronting (the parent company), it was not in a position" to lend its subsidiary any more money.
As of today’s bankruptcy filing, Evans said, LandAmerica Financial Group had liabilities "in excess of $650 million" including a $100 million revolving credit facility, senior notes totaling $150 million, and $225 million in convertible notes.
Evans said the housing downturn has reduced LandAmerica’s revenue by more than 40 percent since the end of 2006, while provisions for title insurance policy losses increased from 5.2 percent of operating revenue to 21.1 percent.
Search for a suitor
In his affidavit, Evans also outlined the company’s attempts to avoid bankruptcy, which included discussions with Fidelity and four other potential suitors.
In September, LandAmerica’s board of directors decided to pursue "various strategic alternatives" including a sale of the company and hiring JP Morgan as a financial advisor, Evans said.
After considering "a large number of potential strategic and financial suitors," LandAmerica signed nondisclosure agreements with five potential partners. The company made "extensive due diligence materials" available to the parties, including a comprehensive electronic data room containing more than 2,700 documents.
In the end, Fidelity emerged as "the only suitor with the ability to engage in a strategic transaction" and provide the necessary liquidity to LandAmerica and its subsidiaries, Evans said. After two weeks of negotiations, on Nov. 7 LandAmerica executed a merger agreement with Fidelity (see story).
After Fidelity backed out of the merger Friday, LandAmerica entered into "fragile and complicated" negotiations to sell its title insurance underwriting subsidiaries to Fidelity. In a statement, Fidelity said Chicago Title will acquire Commonwealth for $158.6 million, and Fidelity National Title will acquire Lawyers and United for $139.4 million. The deal is expected to close as early as late December, the company said.
Evans said the negotiations were complicated by recent action by the Nebraska Department of Insurance, the regulator of Lawyers and Commonwealth. On Nov. 18, he said, the Department of Insurance determined that the companies’ reduced capital surplus placed them in a "hazardous financial condition."
That determination allowed the Department of Insurance to file court petitions that seek to place Lawyers and Commonwealth in receivership and give Director Ann Frohman some control over their operation. Hearings on the "petitions for rehabilitation" are scheduled for today.
LandAmerica expects the orders will be entered quickly and serve as a "temporary administrative step" to facilitate the sale of the companies. Lawyers Title and Commonwealth will continue to operate and serve customers during the completion of the sale, LandAmerica said in a statement, and both underwriters are "entirely solvent."
Analysts at Fitch Ratings on Monday downgraded the insurer financial strength ratings of LandAmerica’s title insurance underwriters, noting that the statutory surplus at the companies fell from $426 million at the end of 2007 to $300 million at the end of September. The new "BB" insurer financial strength ratings "reflect the potential vulnerability" of the title insurance subsidiaries’ obligations, Fitch analysts said (see story).
Open for business
Janette Adair, legal counsel for the Nebraska Department of Insurance, said Frohman "believes there is a lot of value in the underwriting companies," and that the director is allowing them to continue to write new business.
Adair said there are three levels of receivership — supervision, rehabilitation and liquidation — and that the goal of rehabilitation is to give companies time to get back on their feet. Typically, the Department of Insurance appoints a deputy special receiver to work with the company in managing a company’s affairs.
"Once you have an order of rehabilitation, the big decisions (about the companies’ operations) would be approved by the court," in Lancaster County, Adair said.
The United States Bankruptcy Court for the Eastern District of Virginia must also sign off on the deal, and the Federal Trade Commission could object to the extent of consolidation that would result.
If Fidelity does acquire LandAmerica’s title insurance subsidiaries, it and First American would together control approximately 75 percent of the title insurance business.
But Fidelity Chairman William Foley has said antitrust review of title industry consolidation usually concerns control of real estate information and data at the county level. Because LandAmerica has relied on First American’s title records, only a small percentage of the companies’ subsidiaries have their own title plants, and Fidelity does not expect antitrust issues.
When Fidelity was planning to merge with LandAmerica rather than acquire its title insurance subsidiaries, it envisioned $150 million in "synergies" by eliminating redundancies in corporate and administrative overhead, direct and agency operations, and claims management and processing.
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