LandAmerica Financial Group (LFG)

TOP CONTRIBUTORS

Lawrence Tanzman

anshuman bhattacharjee

LandAmerica Financial Group (NYSE: LFG) is the third largest Title Insurer by revenue.^[1] 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.^[1] Title Insurance premiums contributed 88% of LandAmerica's 2007 revenue.^[2]

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.^[3] 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.^[3]

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.^[4] 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.^[2] First American (FAF) earned 26% of its 2007 revenue^[5] and Fidelity National Financial (FNF) earned 20% of its 2007 revenue from Lender and Closing services.^[6] 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.^[7] 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%.^[7]

Company Overview

LandAmerica Revenue and Income ^[8]

Business Financials

LandAmerica Revenue and Income ^[9]

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.^[10] Management claims that these decreases were due the declining residential real estate market.^[10] 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.^[10]

Business Segments

• Direct Operations (39% of sales) refer to title insurance policies that LandAmerica deals directly with policy buyers. LandAmerica negotiates over the premium paid and performs the search and inspection on the real estate title in question. Then, the company issues the insurance policy and is responsible for any future losses incurred. Direct Operations earn larger revenues per policy than Agency Operations because LandAmerica keeps all the revenue from a given policy. In 2007, LandAmerica had revenues of $1.38 billion from Direct Operations.^[9]
• Agency Operations (49% of sales) comes from LandAmerica using an insurance agent from outside the company to perform the search and inspection on the real estate title. LandAmerica then underwrites the insurance policy by assuming the risk of a defect in the title arising in the future. For Agency Operations, the agent earns part of the title insurance premium for their search and inspection service. The rest of the fee goes to LandAmerica for assuming the risk tied to the title. Agency Operations earn a smaller revenue per title because the agent takes a cut. In 2007, LandAmerica had revenues of $1.76 billion from Agency Operations.^[9]

Title Operations together contributed 34% of 2007 pre-tax income.^[11]

• Lender Services (8% of sales) Revenue from this segment comes from fees associated with transaction management, appraisal, flood zone, credit reporting, tax, and default services. Lender Services contributed -13% of 2007 pre-tax income.^[11]

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.^[11] Corporate and other contributed -143% of the company's 2007 pre-tax income.^[11] 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.

The following are operating metrics that describe measurements of performance specific to LandAmerica's industry:

• Average Premium per Direct Title Order is calculated as total revenue from Direct Operations divided by the number of Direct Title Orders Closed. This measures the revenue per closed order. The increase in this measure over the past three years reflects an appreciation of real estate prices because the premium earned is proportional to the value of the property in the title.
• Number of Direct Title Orders Closed is a measure of the volume of title orders processed. A title order is closed after the search and inspection of the title is complete and the real estate transaction involving the title is closed. The full title premium is not received until the order is closed.
• Claims Loss Provision is the amount of money that LandAmerica sets aside to cover claims on insurance policies. The money set aside in a given year is intended to cover not only claims from that year, but also claims from previous years.
• Title Premiums are the total revenues from premiums from both Direct and Agency operations. These premiums are the primary income for LandAmerica.
• Claims loss provision/Premiums is a percentage measure of how much money is set aside to cover claims relative to the total amount of premiums earned. This measure shows profitability because it measures how much LandAmerica's insurance policies are costing the company relative to how much revenue they generate.

2007 Title Premium Revenues by Location ^[17]

Key Trends and Forces

Declining Mortgage Originations adversely affect Title Revenues

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.^[10]

Government Regulations Set Title Premiums in many States

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.^[18] These rate cuts were estimated to reduce sales of Title Insurance in California by $1 billion,^[18] a state in which LandAmerica has a 14.22% market share.^[1]

Interest Rates affect the volume of mortgage refinances

The Federal Funds Rate remained low during 2003, floating between 1.00% and 1.25%.^[19] 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.^[19] As rates rose from 2005 to 2007, Direct Title Orders Closed decreased from 861,100 to 597,000.^[13]

Average Real Estate Prices affects the average revenue per policy

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.^[12]

Competition

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:

• First American (FAF) is a holding company and has earned at least 69% of its revenue from Title Insurance premiums over the past three years. First American has the largest market share in U.S. title insurance and competes directly with LandAmerica for premiums and Lender Service fees. First American also operates an Information Technology Segment, which provides Mortgage and Property Information.^[20]
• Fidelity National Financial (FNF) is the second largest title insurer in the US by revenue.^[1] Fidelity earned 70% of its 2007 revenue from Title Insurance.^[21] Fidelity also competes with LandAmerica for Lender Service fees tied to real estate transactions.
• Old Republic International (ORI) is an insurance underwriter operating in three segments: General Insurance, Mortgage Guaranty, and Title Insurance. Old Republic's primary source of revenue is its General Insurance segment, which earned nearly 60% of the company's 2007 revenue. The General Insurance segment provides property and liability insurance. Only 21.4% of the company's revenue came from Title Insurance.^[22] While Old Republic earned less revenue from Title Insurance than LandAmerica, Old Republic is not as susceptible to fluctuations in the real estate market.
• Stewart Information Services (STC) Stewart Information Services has two operating segments: Title Insurance and Real Estate Information. 94% of the company's 2007 revenue came from Title Operations.^[23]

Market Share

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.^[36] At this time, First American (FAF) was valued at $2.34 billion^[36] and Fidelity National Financial (FNF) was valued at $2.97 billion.^[36] LandAmerica has fewer employees, 11,050^[36], compared to market share leader First American (FAF), which has 37,354 employees.^[36].

References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4} 2007 Market Share by Family and State - DISTRIBUTION
2. ↑ ^{2.0 2.1} LFG 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 44
3. ↑ ^{3.0 3.1} LFG 2007 10-K, Item 7: Managment's Discussion and Analysis of Financial Condition and Results of Operations, page 34
4. ↑ Morningstar Analysis of LFG
5. ↑ FAF 2007 10-K, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 29
6. ↑ FNF 2007 10-K, Item 8: Financial Statements and Supplementary Data, page 58
7. ↑ ^{7.0 7.1} November 7, 2008 merger press release
8. ↑ LFG 2007 10-K, Item 8: Financial Statements and Supplementary Data, page 62
9. ↑ ^{9.0 9.1 9.2} LFG 2007 10-K, Item 7: Managment's Discussion and Analysis of Financial Condition and Results of Operations, page 44
10. ↑ ^{10.0 10.1 10.2 10.3} LFG 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 36
11. ↑ ^{11.0 11.1 11.2 11.3} LFG 2007 10-K, Item 8: Financial Statements and Supplementary Data, page 107
12. ↑ ^{12.0 12.1 12.2 12.3} LFG 2007 10-K, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 44
13. ↑ ^{13.0 13.1 13.2 13.3} LFG 2007 10-K, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 44
14. ↑ ^{14.0 14.1 14.2} LFG 2007 10-K, Item 8: Financial Statements and Supplementary Data, page 62
15. ↑ ^{15.0 15.1 15.2} LFG 2007 10-K, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 44
16. ↑ ^{16.0 16.1 16.2} LFG 2007 10-K, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 44
17. ↑ LFG 2007 10-K, Item 1: Business, page 8
18. ↑ ^{18.0 18.1} Cuts In Title Insurance Rates Sought, LA Times, July 20, 2006
19. ↑ ^{19.0 19.1} Historical Federal Funds Rates from moneycafe.com
20. ↑ FAF 2007 Annual Report, Item 1: Business, page 3
21. ↑ FNF 2007 10-K, Item 6: Selected Financial Data, page 42
22. ↑ ORI 2007 Annual Report, Item 1: Business, page 3
23. ↑ STC 2007 Annual Report, Item 6: Selected Financial Data, page 13
24. ↑ LFG 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 44
25. ↑ FAF 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 29
26. ↑ FNF 2007 10-K, Item 8: Financial Statements and Supplementary Data, pages 106
27. ↑ LFG 2007 10-K, Item 8: Financial Statements and Supplementary Data, page 83
28. ↑ FAF 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 34
29. ↑ FNF 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 36
30. ↑ LFG 2007 10-K, Item 8: Financial Statements and Supplementary Data, page 107
31. ↑ FAF 2007 10-K, Item 8: Financial Statements and Supplementary Data, page 46
32. ↑ FNF 2007 10-K, Item 8: Financial Statements and Supplementary Data, page 58
33. ↑ LFG 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 39
34. ↑ FAF 2007 10-K, Item 8: Financial Statements and Supplementary Data, Page 66
35. ↑ FNF 2007 10-K, Item 6: Selected Financial Data, page 27
36. ↑ ^{36.0 36.1 36.2 36.3 36.4} Yahoo Competitors for LFG