|This company has recently filed for protection under Chapter 11 of the U.S. Bankruptcy Code.|
LandAmerica Financial Group (NYSE: LFG) is the third largest Title Insurer by revenue. Title Insurance protects buyers and lenders in a real estate transaction by insuring against defects in a real estate title, such as unknown claims to the property or restrictions on what the owner can do with the property. In 2007, LandAmerica and its subsidiaries earned 19.34% of the US title premiums by revenue. Title Insurance premiums contributed 88% of LandAmerica's 2007 revenue.
LandAmerica's revenue and profitability are tied to the real estate market. Title Premiums are earned at real estate closings or mortgage refinancings. Therefore, more real estate sales or advantageous refinancing conditions generate more revenue for LandAmerica. As total mortgage originations decreased from $3 trillion in 2005 to $2.3 trillion in 2007, the entire title insurance industry came under pressure. Management comments that 30.8% (a larger percentage stake than its top two competitors) of the company's 2007 revenue came from commercial real estate titles, which were not as negatively affected by the slump as the residential title operations.
LandAmerica benefits from its operations with commercial properties. The company's commercial operations typically earn 15% more than the company's residential operations. However, the company has not been increasing its investment in its non-residential operations and has fallen behind its main competitors in the area. While LandAmerica benefits from its operations with commercial titles, the company falls behind competitors Fidelity National Financial (FNF) and First American (FAF) in terms of revenues from lender services and closing services. In 2007, only 8% of LandAmerica's revenue came from Lender Services. First American (FAF) earned 26% of its 2007 revenue and Fidelity National Financial (FNF) earned 20% of its 2007 revenue from Lender and Closing services. This means that LandAmerica is less diversified than its competitors, since nearly 90% of the company's revenue comes from title insurance.
On November 7, 2008, LandAmerica announced that it signed a definitive agreement with Fidelity National Financial (FNF) to be acquired for 0.993 shares of Fidelity per share of LandAmerica. The merger is pending regulatory approval, for under this agreement, Fidelity National Financial (FNF) would become the largest Title Insurer by market share with a market share of 46.3%.
LandAmerica's profit margin, based on pre-tax income, decreased from 9.2% in 2005 to 6.3% in 2006 and then 0.9% in 2007. Management claims that these decreases were due the declining residential real estate market. LandAmerica has been increasing its provisions for claims losses over the past three years. The provision as a percentage of title premiums in 2007 was 8.6% of title revenues compared to 6.1% in 2006 due to higher claims rates and claims from previous years.
Title Operations together contributed 34% of 2007 pre-tax income.
While not earning more than 5% of the revenue, the Financial Services and Corporate operations influenced pre-tax income. Financial services contributed 22% of the company's 2007 pre-tax income. Corporate and other contributed -143% of the company's 2007 pre-tax income. Although Corporate and Other includes revenues from the firms higher margin Commercial Operations, the segment lost money because of fees associated with acquisitions and administrative costs that are accounted for in the Corporate and Other Segment.
|Average Premium per Direct Title Order||$1,770||$2,090||$2,320|
|Number of Direct Title Orders Closed (thousands)||861||731||597|
|Claims loss provision (millions)||$197||$231||$289|
|Title Premiums (millions)||$3,480||$3,510||$3,150|
|Claims loss provision/Premiums||4.9%||8.0%||12.9% |
The following are operating metrics that describe measurements of performance specific to LandAmerica's industry:
Nearly every mortgage is issued along with a title insurance policy. Therefore, when fewer mortgages are issued, there are fewer title insurance policies issued. Management cites the declining residential real estate market as the reason that the company's profit margin, based on pre-tax income, decreased from 9.2% in 2005 to 6.3% in 2006 and further to 0.9% in 2007.
Title Insurance is heavily regulated in the United States. The rates which Title Insurance Companies is allowed to charge for a policy are often set by the state or county. For example, in 2006 California moved to slash the rates Title Insurance Companies can charge for insurance for real estate closings, mortgage refinancings, and escrow services by 23%, 16%, and 27%, respectively. These rate cuts were estimated to reduce sales of Title Insurance in California by $1 billion, a state in which LandAmerica has a 14.22% market share.
The Federal Funds Rate remained low during 2003, floating between 1.00% and 1.25%. During periods of low interest, mortgage refinance volumes grow because property owners can pay off their old mortgage and get a new, cheaper one. More refinances mean more Title Insurance policies, because a new policy is issued along with each refinance. The reverse occurs when the Fed raises its rate, as it did from 2003 until September of 2007. As rates rose from 2005 to 2007, Direct Title Orders Closed decreased from 861,100 to 597,000.
Title premiums are based on the value of the property underlying the Title Policy. Therefore, as average real estate prices increase, the Average Premium per Direct Title Order increases. The opposite occurs when real estate prices decrease. As real estate prices increased, primarily on commercial properties for LandAmerica, average premium per direct title order closed increased from $1,770 to $2,320.
LandAmerica competes with other Title Insurers and with companies offering lender services for real estate transactions. The following are LandAmerica's four largest competitors in these industries:
|Competition||LandAmerica Financial Group||First American||Fidelity National Financial|
|Total Title Insurance Premiums (millions)||$3,145 ||$5,516 ||$3,800 |
|Claims loss provision (millions)||$288.5 ||$893.9 ||$502.3 |
|Total Revenue (millions)||$3,569 ||$8,196 ||$5,524 |
|Claims loss provision/Premiums||8.6% ||12.9% ||13.2% |
|1||First American (FAF)||30.04%|
|2||Fidelity National Financial (FNF)||26.4%|
|3||LandAmerica Financial Group||19.34%|
|4||Stewart Information Services (STC)||11.73%|
|5||Old Republic International (ORI)||5.48%|
LandAmerica has a small market capitalization compared to competitors First American (FAF) and Fidelity National Financial (FNF). As of the end of August, 2008, the market capitalization of LandAmerica was $265.34 million. At this time, First American (FAF) was valued at $2.34 billion and Fidelity National Financial (FNF) was valued at $2.97 billion. LandAmerica has fewer employees, 11,050, compared to market share leader First American (FAF), which has 37,354 employees..