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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 1-13990
LANDAMERICA FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-1589611
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
6630 West Broad Street
Richmond, Virginia 23230
(Address of principal executive offices) (Zip Code)
(804) 281-6700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Securities Name of Exchange on Which Registered
Common Stock, no par value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
7% Series B Cumulative Convertible Preferred Stock
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ___
The aggregate market value of voting stock held by non-affiliates of
the registrant on March 16, 1998 was approximately $482,696,000. Executive
officers and directors of the registrant and beneficial owners of more than 10%
of the Common Stock are considered affiliates for purposes of this calculation
but should not necessarily be deemed affiliates for any other purpose.
The number of shares of Common Stock, without par value, outstanding on
March 16, 1998, was 15,044,593.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K. [ X ]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 1998 Annual Meeting
of Shareholders (to be filed) are incorporated by reference into Part III
hereof.
PART I
ITEM 1. BUSINESS
The Company
LandAmerica Financial Group, Inc. (formerly Lawyers Title Corporation)
(the "Company") is a holding company organized under the laws of the
Commonwealth of Virginia on June 24, 1991. The Company's principal subsidiary
during 1997, Lawyers Title Insurance Corporation ("Lawyers Title"), has been
engaged since 1925 primarily in the title insurance business through its network
of branches, service offices, subsidiaries and agencies. On February 27, 1998,
the Company acquired all of the issued and outstanding capital stock of
Commonwealth Land Title Insurance Company and Transnation Title Insurance
Company ("Commonwealth/Transnation"). See "Recent Acquisition" and "Business of
Commonwealth/Transnation" below. As a holding company, the Company has greater
flexibility in conducting certain operations, especially with regard to capital
transactions, while the operating title insurance subsidiaries remain subject to
regulation by the various states. See "Regulation" below.
Lawyers Title
Lawyers Title was founded in 1925 in Richmond, Virginia. It soon
expanded into other southeast states and by 1934 had become the largest title
insurance company in the South, with over 3,000 approved attorneys and agents.
Branches and agents were added gradually in other states, and the post-World War
II years promoted substantial growth of Lawyers Title. The business continued to
expand nationally and into U.S. possessions and Canada. By the early 1960s,
Lawyers Title's operations covered the entire country (with the exception of
Iowa, which does not recognize title insurance).
In the 1970s, Lawyers Title purchased two title underwriters, Mid-South
Title Insurance Corporation ("Mid-South Title"), headquartered in Memphis,
Tennessee, and Land Title Insurance Company ("Land Title"), headquartered in
California. In the 1980s, Lawyers Title combined its California operations,
improving its service and operations in the state which provides the single
largest source of premium revenue for the title insurance industry. California
World Financial Corporation and its wholly owned subsidiary, California - World
Title Company, merged into an entity then known as Continental Land Title
Company, which ultimately became a subsidiary of Lawyers Title, with operations
in California, Oregon and Arizona. In 1997, the name was changed from
"Continental Lawyers Title Company" to "Lawyers Title Company."
In 1994, Lawyers Title purchased two additional title underwriters,
Oregon Title Insurance Company ("Oregon Title"), headquartered in Portland,
Oregon, and Title Insurance Company of America ("TICA"), headquartered in
Dallas, Texas. Effective December 1, 1995, TICA was merged into Mid-South Title,
whose name was changed to Title Insurance Company of America (hereinafter "TICA"
refers to such surviving corporation).
Lawyers Title has its National Headquarters offices at 6630 West Broad
Street, Richmond, Virginia 23230. Its telephone number is (804) 281-6700. Unless
the context otherwise requires, Lawyers Title, as used herein, refers to Lawyers
Title and each of its branches, service offices, subsidiaries and agencies.
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General
Lawyers Title is engaged in the business of providing title insurance
and related services. In addition to writing title insurance, in some states
Lawyers Title furnishes certificates of title and abstracts of title. As an
incident to the issuance of title insurance, Lawyers Title also offers a closing
protection letter to lenders and owners who purchase title insurance, and in
some areas it also serves as an escrow agent in closing real estate
transactions.
Most title insurance policies sold by Lawyers Title and its
subsidiaries are underwritten by Lawyers Title; however, title insurance
policies are also underwritten by Oregon Title in Oregon, and TICA is licensed
and qualified to underwrite policies in Texas, Tennessee, Florida, Ohio,
Georgia, Louisiana, Alabama, Arkansas, Virginia, Michigan, Illinois, Colorado,
New Mexico, Indiana, Maryland, District of Columbia and Kentucky. Land Title
only reissues policies it has previously issued. Policies previously issued by
Mid-South Title remain in effect in Tennessee, Mississippi, Arkansas, Alabama,
Florida, Georgia and Louisiana.
Lawyers Title's business is conducted in 49 states and in the District
of Columbia, the territories of Puerto Rico and the U.S. Virgin Islands, the
Bahamas and a number of Canadian provinces. Geographical coverage is provided by
Lawyers Title's nationwide network of 14 National Division offices and
approximately 260 branch and closing/escrow offices. In addition, Lawyers Title
has approximately 3,800 independent agents and 36,000 approved attorneys.
Title insurance policies are written through and issued by branch
offices of Lawyers Title and its underwriting subsidiaries, by title insurance
agents or by some combination thereof. Agencies may be either independently
owned or subsidiaries of Lawyers Title. In the western states, Lawyers Title
operates primarily through independent agents and subsidiaries (Lawyers Title
Company, American Title Group, Inc., Lawyers Title of Arizona, Inc. and Oregon
Title), while its eastern operations are conducted through branch offices,
agents and approved attorneys. In the fiscal year ended December 31, 1997,
approximately 53.2% of total title insurance revenues were derived from direct
operations (company branches and wholly owned subsidiary agencies) and 46.8%
came from independent agents. As of December 31, 1997, no single independent
agent was the source of more than 5% of the title insurance revenues of Lawyers
Title.
Lawyers Title and its subsidiaries also provide escrow services to
customers in various areas of the country. Primarily in the western states, it
is a general practice, incident to the issuance of title insurance policies, to
hold funds and documents in escrow for delivery in real estate transactions upon
fulfillment of the conditions to such delivery. In the mid-western states,
Florida and some eastern cities, it is customary for the title company to close
the transaction and disburse the sale or loan proceeds. Fees for such escrow and
closing services are generally separate and distinct from the title insurance
premiums.
Lawyers Title has two wholly owned subsidiaries devoted to computer
automation of various aspects of the title insurance business, including on-line
title plants, policy issuance and closing documentation and support functions.
These are Datatrace Information Services Company, Inc. and Elliptus Software
Solutions, Inc. Another subsidiary, Lawyers Title Exchange Company, facilitates
tax-free property exchanges pursuant to Section 1031 of the Internal Revenue
Code by holding the sale proceeds from one transaction until a second
acquisition occurs, thereby assisting customers in deferring the recognition of
taxable income.
In 1996, Lawyers Title formed a new subsidiary, Lawyers Title Services
Company, Inc. ("LTSC") to coordinate residential real estate transactions for
national lenders and to provide other real estate related products and services
(such as appraisals, tax services, flood certification, surveys, and document
preparation) through a single source. LTSC is currently qualified in 22
states. Also in 1996, Lawyers Title, through a newly formed subsidiary, Global
Corporate Services, Inc. acquired a 50% ownership interest in Argonaut
Relocation Services, LLC ("Argonaut") a Michigan limited liability company.
Argonaut, which employs approximately 120 individuals, offers a full line of
employee relocation services to companies moving employees anywhere in the
world.
Title Insurance
In general, title insurance policies indemnify the insured from losses
resulting from certain outstanding liens, encumbrances and other defects in
title to real property that appear as matters of public record, and from certain
other matters not of public record. Many of the principal customers of title
insurance companies buy insurance for the accuracy and reliability of the title
search as well as for the indemnity features of the policy. The beneficiaries of
title insurance policies are generally owners or buyers of real property or
parties who make loans on the security of real property. An owner's policy
protects the named insured against title defects, liens and encumbrances
existing as of the date of the policy and not specifically excluded or excepted
from its provisions, while a lender's policy, in addition to the foregoing,
insures against the invalidity of the lien of the insured mortgage and insures
the priority of the lien as stated in the title policy.
Lawyers Title issues title insurance policies on the basis of a title
report, which is prepared pursuant to underwriting guidelines prescribed in
manuals published by Lawyers Title, after a search of the public records, maps
and documents to ascertain the existence of easements, restrictions, rights of
way, conditions, encumbrances, liens or other matters affecting the title to, or
use of, real property. In certain instances, a visual inspection of the property
is also made. Title examinations may be made by branch employees, agency
personnel or approved attorneys, whose reports are utilized by or rendered to a
branch or agent and are the basis for the issuance of policies by such branch or
agent.
In the case of difficult or unusual legal or underwriting issues
involving potential title risks, the branch office or agent is instructed to
consult with a supervising Lawyers Title office. Contracts with agencies require
that the agent seek prior approval of Lawyers Title in order to commit Lawyers
Title to assume a risk over a stated dollar limit. Pursuant to agency
agreements, Lawyers Title assumes all of the risks to the insured, in the
absence of certain types of misconduct by the agent, in return for a portion of
the premium received.
Lawyers Title owns a number of title plants and in some areas leases or
participates with other title insurance companies or agents in the cooperative
operating of such plants. Title plants are compilations of copies of public
records, maps and documents that are indexed to specific properties in an area,
and they serve to facilitate the preparation of title reports. In many of the
larger markets, the title plant and search procedures have been automated. To
maintain the value of the title plants, Lawyers Title continually updates its
records by regularly adding current information from the public records and
other sources. In this way, Lawyers Title maintains the ability to produce
quickly and at a reduced expense a statement of the instruments which constitute
the chain of title to a particular property.
The premium for title insurance is due in full when the title
transaction is closed, and the policy amount is usually based upon the purchase
price of the property or the amount of the loan secured by the property. While
most other forms of insurance provide for the assumption of risk of loss arising
out of unforeseen future events, title insurance serves to protect the
policyholder from the risk of loss from events that predate the issuance of the
policy. This distinction underlies the low claims loss experience of title
insurers as compared to other insurance underwriters. Losses generally result
either from judgment errors or mistakes made in the title search and examination
process or the escrow process or from hidden defects such as fraud,
-4-
forgery, incapacity or missing heirs. Operating expenses, on the other hand, are
higher for title insurance companies than for other companies in the insurance
industry. Most title insurers incur considerable costs relating to the personnel
required to process forms, search titles, collect information on specific
properties and prepare title insurance commitments and policies.
A title policy can be issued directly by a title insurer or indirectly
on behalf of a title insurer through agents which are not themselves licensed as
insurers. Where the policy is issued by a title insurer, the search is performed
by or at the direction of the title insurer, and the premium is collected and
retained by the title insurer. Where the policy is issued through an agent, the
agent generally performs the search (in some areas searches are performed by
approved attorneys), examines the title, collects the premium and retains a
portion of the premium. The remainder of the premium is remitted to the title
insurer as compensation for bearing the risk of loss in the event a claim is
made under the policy. The percentage of the premium retained by an agent varies
from region to region and is sometimes regulated by the states. A title insurer
is obligated to pay title claims in accordance with the terms of its policies,
regardless of whether it issued its policy directly or indirectly through an
agent.
Insured Risk on Policies in Force
The amount of the insured risk or "face amount" of insurance under a
title insurance policy is generally equal to either the purchase price of the
property or the amount of the loan secured by the property. The insurer is also
responsible for the cost of defending the insured title against covered claims.
The insurer's actual exposure at any time is significantly less than the total
face amount of policies in force because the risk on an owner's policy is often
reduced over time as a result of subsequent transfers of the property and the
reissuance of title insurance by other title insurance underwriters, and the
coverage of a lender's policy is reduced and eventually terminated as a result
of payment of the mortgage loan. Because of these factors, the total contingent
liability of a title underwriter on outstanding policies cannot be precisely
ascertained.
In the ordinary course of business, Lawyers Title and its underwriting
subsidiaries represent and defend the interests of their insureds, and provide
on the Company books for estimated losses and loss adjustment expenses. Title
insurers are sometimes subject to unusual claims (such as claims of Indian
tribes to land formerly inhabited by them) and to claims arising outside the
insurance contract, such as for alleged negligence in search, examination or
closing, alleged improper claims handling and alleged bad faith. The damages
alleged in such claims arising outside the insurance contract may often exceed
the stated liability limits of the policies involved. While Lawyers Title in the
ordinary course of its business has been subject from time to time to these
types of claims, Lawyers Title's losses to date on such claims have not been
significant in number or material in dollar amount to the Company's financial
condition. In recent years, Lawyers Title has also experienced several large
claims resulting from agent escrow defalcations, and as a result of experience
in those cases, has put in place more stringent agent qualification and audit
procedures.
Liabilities for estimated losses and loss adjustment expenses represent
the estimated ultimate net cost of all reported and unreported losses incurred
through December 31, 1997. The reserves for unpaid losses and loss adjustment
expenses are estimated using individual case-basis valuations and statistical
analyses. Those estimates are subject to the effects of trends in loss severity
and frequency. Although considerable variability is inherent in such estimates,
management believes that the reserves for losses and loss adjustment expenses
are adequate. The estimates are continually reviewed and adjusted as necessary
as experience develops or new information becomes known; such adjustments are
included in current operations. The provision for policy and contract claims as
a percentage of operating revenues for 1997 was 5.4%, for 1996 was 5.2%, and for
1995 was 5.2%. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Results of Operations."
-5-
Lawyers Title generally pays losses in cash; however, it sometimes
settles claims by purchasing the interest of the insured in the real property or
the interest of the claimant adverse to the insured. Assets acquired in this
manner are carried at the lower of cost or estimated realizable value, net of
any indebtedness thereon.
Lawyers Title places a high priority on maintaining effective quality
assurance and claims administration programs. Lawyers Title's quality assurance
program focuses on quality control, claims prevention and product risk
assessment in its branches, subsidiaries and independent agencies. The claims
administration program focuses on improving liability analysis, prompt, fair and
effective handling of claims, prompt evaluation of settlement or litigation with
first and third-party claimants and appropriate use of ADR (Alternative Dispute
Resolution) in claims processing. In addition, to reduce the incidence of agency
defalcations, Lawyers Title has strengthened its procedures for renewing
existing agents, has expanded its due diligence requirements in acquiring new
agents and has intensified its Agency Audit Program. The Company continues to
refine its systems for maintaining effective quality assurance and claims
administration programs.
Reinsurance and Coinsurance
Lawyers Title distributes large title insurance risks through the
mechanisms of reinsurance and coinsurance. In reinsurance agreements, the
reinsurer accepts that part of the risk which the primary insurer (the "ceding
company" or "ceder") decides not to retain, in consideration for a portion of
the premium. A number of factors may enter into a company's decision to
reinsure, including retention limits imposed by state law, customer demands and
the risk retention philosophy of the company. The ceder, however, remains liable
to the insured for the total risk, whether or not the reinsurer meets its
obligation. As a general rule, when Lawyers Title purchases reinsurance on a
particular risk it will retain a primary risk of $5.0 million and may
participate with reinsurers on liability amounts above the primary level on a
secondary level. In the absence of specific approval by management, reinsurance
generally is purchased if the risk is greater than $35.0 million.
Lawyers Title also assumes reinsurance from other title insurance
underwriters pursuant to a standard reinsurance agreement concerning specific
title insurance risks for properties on which it assumes a portion of the
liability. Lawyers Title has entered into numerous reinsurance agreements with
other title insurance underwriters on specific transactions. Lawyers Title's
exposure on all reinsurance assumed is reduced due to retention by the ceding
company of a substantial primary risk level. In addition, exposure under these
agreements generally ceases upon a transfer of the insured properties and, with
respect to insured loans, is decreased by reductions in mortgage loan balances.
Because of this, the actual exposure is much less than the total reinsurance
which Lawyers Title has assumed. Lawyers Title provides loss reserves on assumed
reinsurance business on a basis consistent with reserves for direct business.
Lawyers Title also utilizes coinsurance to enable it to provide
coverage in amounts greater than it would be willing or able to undertake
individually. Under coinsurance transactions, each individual underwriting
company issues its individual policy and assumes a fraction of the overall total
risk. There is liability for each participating company for the particular
fraction of the risk it assumes.
Lawyers Title enters into reinsurance and coinsurance arrangements with
most of the larger participants in the title insurance market and such
arrangements are not materially concentrated with any single title insurance
company. Revenues and claims from reinsurance are not material to Lawyers
Title's business as a whole.
-6-
Title Insurance Premium Revenues
In the years ended December 31, 1997, 1996 and 1995, premiums from the
issuance of title policies represented 78.9%, 76.8% and 79.9%, respectively, of
the Company's consolidated revenues.
The table below sets forth, for the years ended December 31, 1997, 1996
and 1995, the approximate dollars and percentages of the Company's title
insurance premium revenues for the ten states representing the largest
percentages of such revenues and for all other states combined:
Lawyers Title
Title Insurance Premiums by State
(Dollars in thousands)
Years Ended December 31,
1997 1996 1995
-------------------- -------------------- -------------------
Amount % Amount % Amount %
Texas ........ $111,252 22.1 $ 98,762 21.6 $ 82,604 21.4
Florida ...... 38,163 7.6 33,340 7.3 26,852 7.0
California ... 36,438 7.2 32,148 7.0 28,530 7.4
Pennsylvania . 36,034 7.2 30,223 6.6 29,468 7.6
New York ..... 26,810 5.3 24,318 5.3 17,396 4.5
Michigan ..... 25,342 5.0 23,067 5.1 20,625 5.3
Virginia ..... 21,486 4.3 20,613 4.5 19,968 5.2
Ohio ......... 19,356 3.8 18,130 4.0 14,503 3.8
New Jersey ... 16,844 3.3 15,391 3.4 14,123 3.7
Massachusetts. 13,802 2.7 13,356 2.9 11,187 2.9
All Others ... 158,497 31.5 147,029 32.3 120,615 31.2
------- ---- ------- ---- ------- ----
Totals .. $504,024 100.0 $456,377 100.0 $385,871 100.0
======== ===== ======== ===== ======== =====
Sales and Marketing
Although Lawyers Title enhances its business development through
general advertising, it believes its primary source of business is from the real
estate community, such as attorneys, real estate brokers and developers,
financial institutions, mortgage brokers and independent escrow agents. Lawyers
Title's business results from construction and sale of new housing, resales and
refinancings of residential real estate and from commercial real estate
activity. In the 1990s Lawyers Title has placed a renewed emphasis on
residential real estate activity while maintaining a leadership position in
insuring commercial real estate transactions. Although precise data are not
available to compare the percentage of total premium revenues of Lawyers Title
derived from commercial versus residential real estate activities, approximately
80% of such revenues in 1997 resulted from policies providing coverage of $1.0
million or less (which tend to be residential) and approximately 20% of such
revenues resulted from policies providing coverage in excess of $1.0 million.
Regional differences exist in Lawyers Title's sales and marketing
emphasis. In eastern metropolitan areas, for instance, Lawyers Title has
emphasized the marketing of title insurance for commercial real estate
transactions. In the western states, primarily California, the principal source
of business has been resales and refinancings of residential real estate and
construction and sales of new housing.
-7-
To increase profits and improve margins, Lawyers Title is expanding its
direct operations in markets with projected growth, attractive title insurance
rates and favorable claims experience. Since 1992, Lawyers Title has acquired
title operations in Texas, North Carolina, Oregon, Florida, Virginia, Maryland,
District of Columbia, Ohio, Maine, Michigan, New Mexico, New Jersey,
Pennsylvania and Wisconsin. In addition, within the last four years Lawyers
Title has added closing/escrow offices and sales representatives in many
markets.
Lawyers Title has gained a favorable reputation for its National
Division offices which specialize in the sale and servicing of title insurance
for complex commercial and multi-property transactions. Lawyers Title has 14
such offices located in strategic metropolitan areas throughout the country.
Each of these National Division offices markets title insurance products and
services to large commercial customers in its areas and serves the customer's
title insurance needs throughout the country.
LTSC, located at Lawyers Title's National Headquarters, also services
national lenders which seek to obtain title insurance products and services as
well as a variety of other real estate related products and services such as
appraisals, tax services, flood certifications, surveys and document preparation
through a single source. LTSC is able to offer lenders one stop shopping for
such products and services based on the internal capabilities of Lawyers Title
and strategic alliances with other providers.
Customers
Lawyers Title is not dependent upon any single customer or any single
group of customers. The loss of any one customer would not have a material
adverse effect on Lawyers Title.
Competition
The title insurance business is very competitive. Competition is based
primarily on price, service and expertise. The size and financial strength of
the insurer are also important factors, particularly for larger commercial
customers. Title insurance underwriters also compete for agents on the basis of
service and commission levels.
Lawyers Title is one of the largest title insurance underwriters in the
United States based on gross title revenues. Its principal competitors are other
major title insurance underwriters and their agency networks. In 1997, these
included Chicago Title Insurance Company, First American Title Insurance
Company, Commonwealth/Transnation (acquired by the Company on February 27,
1998), Stewart Title Guaranty Company, Old Republic National Title Insurance
Company and Fidelity National Title Insurance Company. Of the more than one
hundred title insurance underwriting companies licensed in the United States,
the top seven companies account for approximately 89% of the title insurance
market.
The Company's title insurance subsidiaries are subject to regulation by
the insurance authorities of the states in which they do business. See
"Regulation." Within this regulatory framework, the Company competes with
respect to premium rates, coverage, risk evaluation, service and business
development.
State regulatory authorities impose underwriting limits on title
insurers based primarily on levels of available capital and surplus. While such
limits may theoretically hinder the Company's title insurance subsidiaries'
assumption of a particular large underwriting liability, in practice the Company
has established its own internal risk limits at levels substantially lower than
those allowed by state law. Therefore, statutory capital-based risk limits are
not considered by the Company to be a significant factor in the amount or size
of underwriting it may undertake.
-8-
Regulation
The title insurance business is regulated by state regulatory
authorities who possess broad powers relating to the granting and revoking of
licenses, and the type and amount of investments which Lawyers Title and its
insurance subsidiaries may make. These state authorities also regulate insurance
rates, forms of policies and the form and content of required annual statements,
and have the power to audit and examine the financial records of these
companies. Under state laws, certain levels of capital and surplus must be
maintained and certain amounts of portfolio securities must be segregated or
deposited with appropriate state officials. State regulatory policies also
restrict the amount of dividends which insurance companies may pay without prior
regulatory approval.
The National Association of Insurance Commissioners has adopted model
legislation which if enacted would regulate title insurers and agents nationally
and change certain statutory reporting requirements. The proposed legislation
also would require title insurers to audit agents periodically and require
licensed agents to maintain professional liability insurance. The Company cannot
predict whether the proposed legislation or any provision thereof will be
adopted in Virginia or any other state. In 1996, Virginia enacted legislation
requiring an annual certification of reserve adequacy by a qualified actuary to
comply with the new statutory reporting requirements.
A substantial portion of the assets of Lawyers Title and its
underwriting subsidiaries consists of their portfolios of investment securities.
As a title insurance company domiciled in Virginia, Lawyers Title is required by
state statute to maintain assets of a statutorily defined quality in an amount
equal to its total liabilities determined on a statutory basis plus 50% of
statutory equity. For statutory purposes, the insurer's total liabilities
include a statutory premium reserve, reserves established for losses in the
course of settlement ("case reserves") and other liabilities related to
operations.
The statutorily required assets are maintained by Lawyers Title in
investment-grade corporate securities and United States, state and local
obligations. In addition to these investments, Lawyers Title maintains
portfolios of cash and cash-equivalents. The investment portfolios are managed
by professional investment advisors whose work is reviewed by the Pension and
Portfolio Committee of the Company's Board of Directors.
Land Title, TICA and Oregon Title, domiciled in California, Tennessee
and Oregon, respectively, are similarly required to maintain certain levels and
qualities of assets.
Many state insurance regulatory laws intended primarily for the
protection of policyholders contain provisions that require advance approval by
state agencies of any change in control of an insurance company or insurance
holding company that is domiciled (or, in some cases, doing business) in that
state. Under such current laws, any future transaction that would constitute a
change in control of the Company would generally require approval by the state
insurance departments of Virginia, California, Tennessee, Texas, Ohio, Oregon,
Pennsylvania, Arizona, New Jersey, New York, Florida, Alabama and Maryland. Such
requirement could have the effect of delaying or preventing certain transactions
affecting the control of the Company or the ownership of the Company's Common
Stock, including transactions that could be advantageous to the shareholders of
the Company.
-9-
Investment Policies
The Company earns investment income from its portfolio of securities.
Historically, as a general policy, Lawyers Title limited its investments in
equity securities to approximately 50% of its statutory surplus. In 1996, the
Company changed its strategy for insurance company portfolios by shifting away
from investments in equity securities and into fixed-maturity securities. The
Company believes that the effect on future operations will be to replace the
lower dividend yields and variable capital gains experience of the equity
securities with the more steady and predictable stream of interest income from
fixed-maturity securities. The fixed-maturity portfolio consists of investment
grade securities and is designed to comply with the various state regulatory
requirements while maximizing yield. The Company regularly re-examines its
portfolio strategies in light of changing earnings or tax situations. See Note 3
to the Consolidated Financial Statements and the General section of Management's
Discussion and Analysis for the major categories of investments, contractual
maturities and income received.
Seasonality, Backlog and Cyclicality
The title insurance business is closely related to overall levels of
real estate activity. Historically, real estate activity has been generally
slower in the winter months with volumes showing significant improvements in the
spring and summer months. The percentage of title orders closed to title orders
opened is typically lower in the first six months than at year end because of
this seasonal variance. In addition, the title insurance business is cyclical
due to the effect of interest rate fluctuations on the level of real estate
activity. Periods of high interest rates adversely affect real estate activity
and therefore premium revenues.
Employees
As of December 31, 1997, the Company had 4,027 employees. The Company's
relationship with its employees is good. No employees are currently covered by
any collective bargaining agreements, and the Company is not aware of any union
organizing activity relating to its employees.
Environmental Matters
Recent title insurance policies specifically exclude any liability for
environmental risks or contamination. Older policies, while not specifically
addressing environmental risks, are not considered to provide any coverage for
such matters, and the Company does not expect any significant expenses related
to environmental claims.
Lawyers Title sometimes acts as a temporary title holder to real estate
under a nominee holding agreement and Lawyers Title, through its subsidiaries,
sometimes participates in holding agreements involving tax-deferred exchanges.
Lawyers Title's customers in such situations generally are financially strong
entities from whom it secures indemnification for potential environmental and
other claims. In other situations where Lawyers Title might acquire title to
real estate, it will generally require that an appropriate environmental
assessment be made to evaluate and avoid any potential liability.
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Recent Acquisition
The strategic focus of the Company has been on growth through carefully
selected acquisitions. Prior to 1997, the Company's acquisitions consisted
primarily of small to medium-size title insurance agencies and underwriters.
On August 20, 1997, the Company agreed to acquire all of the issued and
outstanding capital stock of Commonwealth Land Title Insurance Company
("Commonwealth") and Transnation Title Insurance Company ("Transnation")
(collectively, the "Acquisition") pursuant to a Stock Purchase Agreement, dated
August 20, 1997, by and among the Company, Lawyers Title, Reliance Group
Holdings, Inc. ("Reliance") and Reliance Insurance Company ("RIC"), as amended
and restated by an Amended and Restated Stock Purchase Agreement, dated December
11, 1997, among such parties (the "Stock Purchase Agreement"). Commonwealth and
Transnation together comprise the third largest title insurance operation in the
United States based upon total premiums and fees in 1996. As a result of the
Acquisition, Commonwealth and Transnation each became wholly owned subsidiaries
of the Company.
The purchase price paid by the Company in connection with the
Acquisition consisted of (i) approximately $200.7 million in cash funded by a
Revolving Credit Agreement, dated November 7, 1997, between the Company and Bank
of America National Trust and Savings Association, individually and as
Administrative Agent for a syndicate of 11 other financial institutions, (ii)
the issuance to RIC of 4,039,473 shares of the Company's Common Stock, (iii) the
issuance to RIC of 2,200,000 shares of the Company's 7% Series B Cumulative
Convertible Preferred Stock (the "Series B Preferred Stock"), which is initially
convertible into 4,824,561 shares of Common Stock, and (iv) $65.9 million in
cash, representing the net proceeds from the sale of 1,750,000 shares of Common
Stock offered to the public by the Company. The various components of the
purchase price were determined by arms-length negotiations between the parties.
Based upon a value for the 4,039,473 shares of Common Stock of $175.0 million
and an estimated value for the 2,200,000 shares of Series B Preferred Stock of
$224.8 million, the aggregate purchase price paid by the Company to RIC at the
closing of the Acquisition was approximately $666.4 million.
The Company also changed its name from "Lawyers Title Corporation" to
"LandAmerica Financial Group, Inc." effective as of February 27, 1998. The
change in name for the Company is intended to signify, among other things, an
expansion of the products and services beyond traditional title insurance to be
developed and offered by the combined company following the Acquisition. LTIC,
Commonwealth and Transnation will continue to operate under their current names
for the foreseeable future.
In connection with the consummation of the Acquisition, the Company
amended its Articles of Incorporation to establish the Series B Preferred Stock.
The provisions of the Series B Preferred Stock provide, among other things,
that, in the event of certain defaults related primarily to the Company's
combined ratio as it compares to comparable title insurance companies and the
Company's claims-paying ability ratings, the size of the Company's Board of
Directors will be increased by three directors and RIC will be entitled to
designate three additional directors to fill the newly created seats. In
addition, in the event of certain defaults related primarily to dividend
payments on the shares of Series B Preferred Stock, the size of the Company's
Board of Directors will be increased by three directors and RIC will be entitled
to designate three additional directors to fill the newly created seats.
Furthermore, if the Company defaults on any of its material debt obligations in
excess of $15.0 million or the Company fails to pay the stated dividend on the
Series B Preferred Stock on three occasions, whether or not consecutive, the
Company must increase the size of the Board of Directors to allow additional
directors to be designated by RIC such that the total number of directors
designated by RIC will constitute a majority of the Board of Directors.
-11-
In addition, the Company, RIC and Reliance entered into a Voting and
Standstill Agreement dated February 27, 1998. The Voting and Standstill
Agreement, among other things, (i) provides for the designation by RIC of three
directors to be nominated and recommended for election to the Company's Board of
Directors, (ii) prohibits RIC and Reliance and their affiliates from acquiring
any additional shares of Common Stock or Series B Preferred Stock (except as
permitted under the Voting and Standstill Agreement), (iii) requires that RIC
and Reliance and their affiliates vote their shares of Common Stock in a certain
manner depending upon the matter that is subject to a vote of the Company's
shareholders, (iv) requires the sale of the 4,039,473 shares of Common Stock
acquired by RIC within 6 1/2 years after the effective date of the resale
registration statement for such shares (subject to extension as provided in the
Voting and Standstill Agreement), (v) requires RIC, with respect to the
2,200,000 shares of Series B Preferred Stock received by RIC in the Acquisition
and any shares of Common Stock received upon conversion of such shares of Series
B Preferred Stock, to sell so many of the shares of Series B Preferred Stock or
shares of Common Stock received upon conversion thereof held by it or its
affiliates as is necessary to reduce the RIC Ownership Percentage (as defined
below) to less than 20% of the Adjusted Outstanding Shares (as defined below) by
not later than 8 1/2 years after the effective date of the registration
statement for such shares (subject to extension as provided in the Voting and
Standstill Agreement), (vi) restricts the ability of RIC and its affiliates to
convert the shares of Series B Preferred Stock then held by them until all of
the 4,039,473 shares of Common Stock (and certain additional shares that may be
issued with respect to such shares) have been sold to persons that are not, at
the time of the sale, conveyance or transfer, an affiliate of RIC, provided that
such restriction shall not apply upon the occurrence of certain specified events
set forth in the Voting and Standstill Agreement, and (vii) prohibits the
knowing transfer of any of the Acquisition Shares to any person or group if, as
a result of such transfer, such person or group would have beneficial ownership
of Common Stock representing in the aggregate more than 9.9% of the issued and
outstanding shares of Common Stock (subject to exceptions set forth in the
Voting and Standstill Agreement). On February 27, 1998, the Company increased
the size of the Board of Directors from 10 to 14 and elected Herbert Wender,
Robert M. Steinberg, Lowell C. Freiberg and George E. Bello as directors of the
Company.
"RIC Ownership Percentage" means, at any time, the percentage of the
Adjusted Outstanding Shares that is beneficially owned in the aggregate by RIC
and its affiliates. "Adjusted Outstanding Shares" means, at any time and with
respect to the determination of the RIC Ownership Percentage as it relates to
RIC and its affiliates, the total number of shares of Common Stock then issued
and outstanding together with the total number of shares of Common Stock not
then issued and outstanding that would be outstanding if (x) all then existing
shares of Series B Preferred Stock had been converted and (y) all then existing
warrants and options exercisable into shares of Common Stock had been exercised
(other than underwriters' over-allotment options and stock options granted under
benefit plans of the Company or any of its affiliates), but excluding any rights
that may be exercisable under the Company's shareholder rights plan. As of
February 27, 1998, the 4,039,473 shares of Common Stock acquired by RIC at the
closing of the Acquisition represented approximately 26.8% of the issued and
outstanding shares of Common Stock as of that date, the RIC Ownership Percentage
was 44.6%, the Adjusted Outstanding Shares was 19,869,154 and the total number
of shares of Common Stock issued and outstanding was 15,044,593.
Finally, the Company and RIC entered into a Registration Rights
Agreement on February 27, 1998. Pursuant to the Registration Rights Agreement,
the Company filed two registration statements with the Securities and Exchange
Commission (the "Commission") to register, under the Securities Act of 1933, as
amended, the resale of (i) the 4,039,473 shares of the Company's Common Stock
issued to RIC in the Acquisition, (ii) the 2,200,000 shares of the Series B
Preferred Stock issued to RIC in the Acquisition and (iii) the 4,824,561 shares
of Common Stock that RIC may acquire upon conversion of the Series B Preferred
Stock. Such registration
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statements became effective on February 27, 1998. The Registration Rights
Agreement requires the Company to use its best efforts to maintain the
effectiveness of such registration statements for specified time periods.
A copy of the Series B Preferred Stock designation was included as an
exhibit to the Company's Form 8-A registration statement filed with the
Commission on February 27, 1998. Copies of the Voting and Standstill Agreement
and the Registration Rights Agreement are filed herewith as exhibits to this
Annual Report on Form 10-K.
The Company continually assesses the growth potential for its business
in its existing markets as well as those markets in which it is not currently
participating. The Company expects that it will continue to evaluate
acquisitions of small to medium-size title insurance agencies and underwriters.
Through acquisitions of independent agencies with a track record of
profitability and the prospect of growth in the future, the Company can expand
revenues while increasing its profit margins and control over the acquired
agencies. In assessing the acquisition of an underwriter, the Company reviews,
among other factors, the underwriter's profitability, location, growth potential
in its existing market, claims experience and adequacy of its reserves.
Business of Commonwealth/Transnation
General. Commonwealth was founded as a title insurance company in 1876
and was incorporated in the Commonwealth of Pennsylvania on April 1, 1944.
Commonwealth is licensed by the insurance departments of 49 states, the District
of Columbia, Puerto Rico and the U.S. Virgin Islands. Transnation was
incorporated as an insurance company in the State of Arizona on September 15,
1992. Transnation is the successor by merger to Transamerica Title Insurance
Company, a California corporation incorporated on March 26, 1910. The current
name of the corporation was adopted on September 20, 1995. Transnation is
licensed by the insurance departments of 40 states and the District of Columbia.
Commonwealth and Transnation, and their respective subsidiaries and
divisions, provide a complete range of title and closing services through an
extensive network of more than 4,000 policy-issuing locations nationwide,
including branch offices, independent agents, and approved attorneys. The
National Title Services division of Commonwealth/Transnation provides
specialized title services for large and multi-state commercial transactions. In
addition to its nationwide title insurance operations, Commonwealth/Transnation
offers a full range of residential real estate services to the national mortgage
lending community through its Commonwealth OneStop(R) network. Commonwealth
OneStop(R) provides (i) appraisal management services through the CLT Appraisal
Services, Inc. subsidiary, (ii) title insurance services through the National
Residential Title Services division, (iii) employee relocation and property
disposition services through Commonwealth Relocation Services, Inc., (iv)
appraisal information systems through the Day One, Inc. subsidiary and (v)
additional services through independent service providers.
National Title Services Division. The National Title Services division
of Commonwealth/Transnation, with thirteen (13) offices located in major
metropolitan areas nationwide, delivers complete customized title insurance
packages for large commercial, multi-site and interstate real estate
transactions. The division consists of numerous title insurance and real estate
professionals that comprise an entire network of national branch offices and
agents. Expertise on the local level provides the division with a full
understanding of varying real estate customs and requirements.
Commonwealth OneStop(R). Through the Commonwealth OneStop(R) operation,
based in Wayne, Pennsylvania, Commonwealth/Transnation provides national and
regional lenders with a full range of residential closing services. Lenders can
obtain all of the services necessary to
-13-
complete residential real estate transactions through a single point of contact.
Such services are easily accessible through Electronic Data Interchange ("EDI"),
by facsimile or through COSMOS - Commonwealth/Transnation's electronic mail
ordering system. COSMOS offers lenders that have not yet converted to the EDI
standard an opportunity to place their orders electronically. The key services
on the Commonwealth OneStop(R) network are appraisal management services through
CLT Appraisal Services, Inc. and title insurance services through the National
Residential Title Services division.
CLT Appraisal Services, Inc. CLT Appraisal Services, Inc. provides the
mortgage lending industry with appraisal services through state-of-the-art
technology. A nationwide network of independent licensed or certified fee
appraisers provides unbiased, third-party opinions from experienced
professionals with knowledge of their local markets. Through a customized
computer interface, telephone or facsimile, branch offices can communicate with
the national processing center in Wayne, Pennsylvania, which handles all aspects
of the process from order placement to status reporting and delivery. Appraisers
are screened before being admitted to the network, and they must meet certain
standards in education, training, licensing and experience.
National Residential Title Services Division. In connection with
technological advancements that allow real estate transactions to close quickly,
the National Residential Title Services division provides lenders with a single
point of contact for a full range of residential title services. The service of
this division extends to Commonwealth/Transnation's entire network of more than
4,000 policy-issuing locations nationwide, including branch offices, independent
agents and approved attorneys. National Residential Title Services provides
lenders with the convenience of one-stop shopping and the flexibility of setting
up procedures that meet with their individual requirements.
Commonwealth Relocation Services, Inc. Commonwealth Relocation
Services, Inc. ("CRS") is a full-service national relocation management company.
CRS provides complete, diversified services that seek to keep relocation
activities and costs under control. Founded in 1967, CRS is one of the oldest
firms in the relocation business.
Day One, Inc. Day One, Inc. is a supplier of software for the appraisal
and property inspection industry.
The National 1031 Exchange Corporation. The National 1031 Exchange
Corporation serves as an independent, third party advisor to facilitate
tax-deferred real property exchanges under Section 1031 of the Code.
ITEM 2. PROPERTIES
The Company conducts its business operations primarily in leased office
space. Lawyers Title leases approximately 83,300 square feet of office space for
its corporate headquarters in Richmond, Virginia. This lease expires on
September 30, 2000. At December 31, 1997, the Company has numerous other leases
for its branch offices and subsidiaries throughout the states in which it
operates. In addition, it owns several properties which in aggregate are not
material to its business taken as a whole.
The Company's title plants constitute a principal asset. Such plants
comprise copies of public records, maps, documents, previous reports and
policies which are indexed to specific properties in an area. The plants are
generally located at the office which serves a particular locality. They enable
title personnel to examine title matters relating to a specific parcel of real
property as reflected in the title plant, and eliminate or reduce the need for a
separate search of
-14-
the public records. They contain material dating back a number of years and are
kept current on a daily or other frequent basis by the addition of copies of
documents filed of record which affect real property. The Company maintains
title plants covering many of the areas in which it operates, although certain
offices utilize jointly owned and maintained plants. The Company capitalizes
only the initial cost of title plants. The cost of maintaining such plants is
charged to expense as incurred.
The title plants and title examination procedures have been automated
and computerized to a large extent in many areas. To protect against casualty
loss, the Company's offices maintain duplicate files and backups of all title
plants.
On February 23, 1998, the Company entered into an Agreement Containing
Consent Order (the "Consent Order") with the Federal Trade Commission (the
"FTC"). The Consent Order requires that the Company divest, within six months
from the date of the Consent Order, either the rights, title and interest held
by the Company prior to consummation of the Acquisition or the rights, title and
interest held by Reliance prior to consummation of the Acquisition of all title
plants serving each of 12 localities named in the Consent Order. Seven of such
localities are in Florida, three are in Michigan, and one each is in Washington,
D.C., and St. Louis, Missouri. The Consent Order further requires that the
Company divest all user or access agreements pertaining to each divested title
plant. In addition, the Company cannot acquire, without prior notice to the FTC,
any interest in a title plant in any of the named localities for a period of 10
years following the date of the Consent Order. The Company believes that the
divestitures will not result in a material loss nor will such divestitures have
a material effect on future operations due to the Company's access to other
title plants in these markets.
The Company believes that its properties are maintained in good
operating condition and are suitable and adequate for its purposes at current
sales levels.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in certain litigation
arising in the course of their businesses, some of which involve claims of
substantial amounts. Although the ultimate outcome of these matters cannot be
ascertained at this time, and the results of legal proceedings cannot be
predicted with certainty, the Company believes, based on current knowledge, that
the resolution of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1997.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the persons who serve as executive officers of the
registrant, their ages and positions as of March 16, 1998, and their business
experience during the prior five years. There are no family relationships
between any of such persons and any director, executive officer, or person
nominated to become a director or executive officer.
Name Age Office and Experience
---- --- ---------------------
Charles H. Foster, Jr. 55 Chairman and Chief Executive Officer of the Company since
October 1991. Mr. Foster also serves as Chairman and Chief
Executive Officer of Lawyers Title, a position he has held for
more than five years.
Herbert Wender 60 Vice - Chairman and Chief Operating Officer of the Company since
February 27, 1998. Mr. Wender also serves as Chairman and
Chief Executive Officer of Commonwealth and Transnation,
positions he has held for more than five years.
Janet A. Alpert 51 President of the Company since January 1993. Ms. Alpert served
as Chief Operating Officer of the Company from January 1993 to
February 1998. She also serves as President and Chief
Operating Officer of Lawyers Title, a position she has held
for more than five years.
Jeffrey A. Tischler 41 Executive Vice President, Chief Financial Officer and
Treasurer of the Company since February 27, 1998. Mr. Tischler
also serves as Executive Vice President, Chief Financial
Officer and Administrative Officer of Commonwealth and
Transnation, positions he has held since May 1997. Mr.
Tischler served as Senior Vice President and Chief Financial
Officer of Commonwealth and Transnation from January 1994 to
April 1997, and as Vice President - Financial Planning and
Analysis of Reliance Group Holdings, Inc. from September 1993
to January 1994.
John M. Carter 42 Executive Vice President - Law and Employee Relations of the
Company since February 27, 1998. Mr. Carter served as Assistant
Secretary of the Company from February 1995 to February 1998.
He also serves as Senior Vice President - Law and Employee
Relations of Lawyers Title, a position he has held since April
1997. Mr. Carter served as Vice President, General Corporate
Counsel and Secretary of Lawyers Title from 1994 to April
1997, and as Vice President, Corporate Counsel and Secretary
of Lawyers Title from 1992 to 1994.
-16-
Name Age Office and Experience
---- --- ---------------------
George William Evans 43 Executive Vice President - Information Technology of the Company
since February 27, 1998. Mr. Evans served as Vice President
and Treasurer of the Company from October 1991 to February
1998. He also serves as Senior Vice President, Chief
Financial Officer and Treasurer of Lawyers Title, a position
he has held for more than five years.
Russell W. Jordan, III 57 Senior Vice President, General Counsel and Secretary of the
Company since February 27, 1998. Mr. Jordan served as
Secretary and General Counsel of the Company from October 1991
to February 1998. He also serves as Senior Vice President and
General Counsel of Lawyers Title, a position he has held for
more than five years.
John R. Blanchard 49 Senior Vice President - Corporate Controller of the Company
since February 27, 1998. Mr. Blanchard served as Controller of
the Company from February 1992 to February 1998. He also serves
as Senior Vice President - Controller of Lawyers Title, a
position he has held for more than five years.
Christopher L. Rosati 38 Senior Vice President - Operations Controller of the Company
since February 27, 1998. Mr. Rosati also serves as Vice
President and Controller of Commonwealth and Transnation,
positions he has held since March 1996. Mr. Rosati served as
Vice President and Assistant Controller of Commonwealth and
Transnation from 1992 to March 1996.
H. Randolph Farmer 59 Senior Vice President - Corporate Communications of the
Company since February 27, 1998. Mr. Farmer also serves as
Senior Vice President - Communications and Advertising of
Lawyers Title, a position he has held for more than five years.
-17-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
Effective March 2, 1998, the Common Stock of the Company began trading
on the New York Stock Exchange ("NYSE") under the symbol "LFG." From October
1995 through February 1998, the Common Stock traded on the NYSE under the symbol
"LTI."
The following table sets forth the reported high and low sales prices
per share of the Common Stock on the NYSE Composite Tape, based on published
financial sources, and the dividends per share declared on the Common Stock for
the calendar quarter indicated.
Market Price Dividends
------------ ---------
High Low
---- ---
Year Ended December 31, 1996
First quarter $19.13 $16.63 $0.05
Second quarter 19.88 16.00 0.05
Third quarter 22.38 17.38 0.05
Fourth quarter 21.75 17.63 0.05
Year Ended December 31, 1997
First quarter $23.75 $19.00 $0.05
Second quarter 21.13 16.75 0.05
Third quarter 33.69 18.00 0.05
Fourth quarter 33.38 29.13 0.05
As of March 16, 1998, there were approximately 2,472 shareholders of
record of the Company's Common Stock.
The Company's current dividend policy anticipates the payment of
quarterly dividends in the future. The declaration and payment of dividends to
holders of Common Stock will be in the discretion of the Board of Directors,
will be subject to contractual restrictions contained in a Company loan
agreement, as described below, and will be dependent upon the future earnings,
financial condition and capital requirements of the Company and other factors.
Because the Company is a holding company, its ability to pay dividends
will depend largely on the earnings of, and cash flow available from, its
subsidiaries. In a number of states, certain of the Company's insurance
subsidiaries are subject to regulations that require minimum amounts of
statutory surplus. Under these and other such statutory regulations, the net
assets of the Company's consolidated subsidiaries at December 31, 1997
aggregating approximately $276.0 million were not available for dividends, loans
or advances to the Company at that date.
Certain of the Company's insurance subsidiaries are also subject to
state regulations that require that the payment of any extraordinary dividends
receive prior approval of the insurance regulators of such states. Specifically,
the insurance regulations of Virginia restrict the amount of dividends that
Lawyers Title can distribute to the Company in any twelve month period without
prior approval. Under Virginia law, payment of dividends or distributions by a
domestic insurer in any twelve month period without the prior approval of the
Virginia Bureau of Insurance is limited to the lesser of: (i) 10% of such
insurer's surplus as of the preceding December 31; or (ii) the net income, not
including realized capital gains, of such insurer for the preceding calendar
year. Accordingly, based on statutory financial results for the year ended
-18-
December 31, 1997, the payment of dividends by Lawyers Title to the Company over
any twelve month period that ends in calendar year 1998 is limited to $16.4
million without prior approval. Based on the amounts that had been distributed
in the preceding twelve month period, as of December 31, 1997, approximately
$14.1 million was available for the payment of dividends by Lawyers Title
pursuant to the insurance regulations of Virginia.
In a number of states, Commonwealth and Transnation are subject to
regulations that require minimum amounts of statutory surplus. Under these and
other such statutory regulations, the net assets of Commonwealth and Transnation
on a combined basis at December 31, 1997 aggregating approximately $242.5
million were not available for dividends, loans or advances.
Commonwealth and Transnation are subject also to state regulations that
require that the payment of any extraordinary dividends receive prior approval
of the insurance regulators of such states. Specifically, the insurance
regulations of Arizona and Pennsylvania restrict the amount of dividends that
Transnation and Commonwealth, respectively, can distribute to the Company in any
twelve month period without prior approval. Under Arizona law, payment of
dividends or distributions by a domestic insurer in any twelve month period
without prior approval of the Arizona Department of Insurance is limited to the
lesser of : (i) 10% of such insurer's surplus as of the preceding December 31;
or (ii) such insurer's net investment income for the preceding calendar year.
Under Pennsylvania law, payment of dividends or distributions by a domestic
insurer in any twelve month period without the prior approval of the
Pennsylvania Department of Insurance may not exceed the greater of: (i) 10% of
such insurer's surplus as of the preceding year end; or (ii) the net income of
such insurer for such preceding year. Accordingly, based on statutory financial
results for the year ended December 31, 1997, payment of dividends by
Commonwealth and Transnation to the Company over any twelve month period that
ends in calendar year 1998 is limited to an aggregate amount of $39.4 million
without prior approval. Based on the amounts that had been distributed in the
preceding twelve month period, as of December 31, 1997, no additional amounts
were currently available for the payment of dividends by Commonwealth or
Transnation without prior regulatory approval.
In addition to regulatory restrictions, the Company's ability to
declare dividends is subject to restrictions under a Revolving Credit Agreement,
dated as of November 7, 1997, between the Company and Bank of America National
Trust and Savings Association, which generally limits the aggregate amount of
all cash dividends and stock repurchases by the Company to 25% of its cumulative
consolidated net income arising after December 31, 1996. As of December 31,
1997, approximately $6.5 million was available for the payment of dividends by
the Company under the Revolving Credit Agreement. Management does not believe
that the restrictions contained in the Revolving Credit Agreement will, in the
foreseeable future, adversely affect the Company's ability to pay cash dividends
at the current dividend rate.
ITEM 6. SELECTED FINANCIAL DATA
On February 25, 1993, the Company's Board of Directors declared a
three-for-two split of its Common Stock to all shareholders of record on April
15, 1993. Accordingly, all common share, per common share and stock option data
have been restated to reflect the stock split.
The information set forth in the following table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto.
-19-
For the year ended
December 31: 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands of dollars, except per common share amounts)
Revenues............... $639,099 $594,182 $482,832 $501,200 $504,109
Net income............. 26,157 36,519 17,051 6,814 28,965
Net income per
common share........... 2.93 4.11 1.92 0.80 4.31
Net income per
common share
assuming dilution...... 2.84 4.01 1.89 0.79 4.22
Dividends per
common share........... 0.20 0.20 0.18 0.12 .06
At December 31:
Total assets........... 554,693 520,968 475,843 453,259 438,140
Shareholders'
equity................. 292,404 262,168 238,385 203,323 201,161
The earnings per share amounts prior to 1997 have been restated as
required to comply with Statement of Financial Accounting Standards No. 128,
Earnings Per Share. For further discussion of earnings per share and the impact
of Statement No. 128, see the Notes to the Consolidated Financial Statements
beginning on page F-7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Overview
The Company reported improved operating earnings in 1997 and 1996. The
Company's primary business is the insurance of titles to real property, which is
greatly influenced by the real estate economy. During the three year period from
1995 to 1997, the Company benefited from the execution of three distinct
portions of its business strategy. Operations were expanded through the
acquisition of title insurance agents and underwriters, expenses were tightly
monitored and controlled, and claims experience improved due to quality control
efforts and an improved claims environment.
Revenues
The Company's operating revenues are dependent on overall levels of
real estate activity, which are influenced by a number of factors including
interest rates, access to capital, housing starts, housing resales and the
general state of the economy. In addition, the Company's revenues are affected
by the Company's sales and marketing efforts, its acquisition program and its
strategic decisions based on the rate structure and claims environment in
particular markets.
-20-
Premiums and related fees are determined both by competition and by
state regulation. Operating revenues from direct title operations are recognized
at the time real estate transactions close, which is generally 60 to 90 days
after the opening of a title order. Operating revenues from agents are
recognized when the issuance of a policy is reported to the Company by an agent.
Although agents generally report the issuance of policies on a monthly basis,
heightened levels of real estate activity may slow this reporting process. This
typically results in delays of 30 to 60 days from the closing of real estate
transactions until the recognition of revenues from agents. As a result, there
can be a significant lag between changes in general real estate activity and
their impact on the Company's revenues.
In addition to the premiums and related fees, the Company earns
investment income from its portfolio of fixed-maturity and equity securities.
Investment income includes dividends and interest as well as realized capital
gains or losses on the portfolio. The Company regularly reexamines its portfolio
strategies in light of changing earnings or tax situations. In the fourth
quarter of 1996 the Company shifted its investment strategy, eliminating its
investment in equity securities and beginning to move the majority of its
investment portfolio into fixed-maturity securities. The repositioning of the
portfolio eliminated the exposure of the regulated surplus of the Company's
insurance subsidiaries to market fluctuations inherent in equity portfolios.
Additionally, the commensurate increase in fixed-maturity securities increased
the level of more stable, predictable interest income earned.
Factors Affecting Profit Margins and Pre-Tax Profits
The Company's profit margins are affected by several factors, including
the volume of real estate activity, policy amount and the nature of real estate
transactions. Volume is an important determinant of profitability because the
Company, like any other title insurance company, has a significant level of
fixed costs arising from personnel, occupancy costs and maintenance of title
plants. Because premiums are based on the face amount of the policy, larger
policies generate higher premiums although expenses of issuance do not
necessarily increase in proportion to policy size. Profit margins are lower on
refinancings than on sales due to premium discounts and higher cancellation
rates generally experienced on refinancings. Cancellations affect profitability
because costs incurred both in opening and in processing orders typically are
not offset by fees.
The Company's principal variable expense is commissions paid to
independent agents. The Company regularly reviews the profitability of its
agency revenues, adjusting commission levels or cancelling certain agents where
profitability objectives are not being met and expanding operations where
acceptable levels of profitability are available. The Company continually
monitors its expense ratio (net of interest and goodwill), which is the sum of
salaries and employee benefits, agency commissions and other expenses expressed
as a percentage of operating revenues.
Claims
Generally, title insurance claim rates are lower than for other types
of insurance because title insurance policies insure against prior events
affecting the quality of real estate titles, rather than against unforeseen, and
therefore less predictable, future events. A provision is made for estimated
future claim payments at the time revenue is recognized. Both the Company's
experience and industry data indicate that claims activity continues through 20
years after the policy is issued. Management uses actuarial techniques to
estimate future claims by analyzing past claim payment patterns. Management has
continued to emphasize and strengthen claims prevention and product quality
programs.
-21-
In the fourth quarter of 1996 the Company made a change from reporting
policy and contract claims on a discounted to an undiscounted basis. This change
was made to conform with industry practice and because it is considered
preferable by rating agencies and investment analysts. The effect of the change
for 1996 was to increase the provision for policy and contract claims by $76.0
million and decrease net income by $49.0 million and net income per share by
$5.51 and net income per share assuming dilution by $5.38.
In addition, during the fourth quarter of 1996 the Company changed its
estimate of the ultimate net cost of all reported and unreported losses incurred
through September 30, 1996 to reflect favorable experience. Under the Company's
reserving methodology, the provision for losses on policies issued in each year
is based on historical experience determined over a period of years. As a
result, the very high incidence of losses on policies issued in the 1980's had
the effect of pushing up the rate at which losses were provided in the 1990's.
The early 1990's were also affected by a high volume of residential refinance
business which time has proven is experiencing a lower incidence of losses. The
Company began to see favorable development indications on the 1991-1994 policy
years as those years began to develop some meaningful experience, i.e., 3-4
years. However, because title losses are paid over a long period of time and
experience has shown that significant losses can be reported and paid more than
20 years out, the Company chose to proceed cautiously with respect to projecting
its favorable experience over these early years to the projected ultimate losses
for the subject policy years. The Company monitored development of these years
very closely through 1995 and the first three quarters of 1996 and, while
indications continued to be favorable for the 1991-1994 policy years, the
Company as of September 30, 1996 did not believe that the limited development of
those years was sufficient to justify a significant reduction in the projected
ultimate losses for those years.
In the fourth quarter of 1996, in connection with the performance of
initial due diligence procedures related to the negotiation of the acquisition
of Commonwealth and Transnation, the Company had the opportunity to see how the
experience of these two major title underwriters compared to its own experience.
The information gained from this experience along with extensive actuarial
studies of the Company's book of business resulted in a determination that the
projected ultimate losses for certain policy year business should be reduced to
give greater weight to the favorable development on those years through December
31, 1996. The effect of the change in estimate was to decrease the provision for
policy and contract claims by $78.0 million and increase net income by $50.7
million and net income per share by $5.70 and net income per share assuming
dilution by $5.57.
Both the change in reserve estimate and the change from discounting to
not discounting reserves were contemplated by the Company as a result of the
shift in the business that now reflects a higher amount of refinance
transactions and an increase in frequency of housing resales.
Because the change in accounting principle to no longer discount policy
and contract claims is inseparable from the change in estimate, both have been
accounted for as a change in estimate. Accordingly, the net effect of the two
changes, a decrease of $2.0 million in the provision for policy and contract
claims, has been included in operations for the fourth quarter of 1996. The
above changes were both made to conform with general industry practice. The
changes are included in the provision for policy and contract claims, and no
prior amounts have been restated.
Other Expenses
The most significant components of other expenses are rent for office
space, outside costs of title production, travel, communications and taxes
levied by states on premiums.
-22-
Seasonality
Historically, real estate activity has been generally slower in the
winter months with volumes showing significant improvements in the spring and
summer months. The percentage of title orders closed to title orders opened is
typically lower in the first six months than at year end because of this
seasonal variance. See "Business - Seasonality, Backlog and Cyclicality." In
recent years low levels of mortgage interest rates have caused fluctuations in
real estate activity levels outside of the usual, seasonal pattern. The Company
cannot predict whether or when the historical seasonal pattern of real estate
activity will resume.
Contingencies
See "Item 3 - Legal Proceedings" for a discussion of pending legal
proceedings.
Results of Operations
Comparison of Years Ended December 31, 1997,
December 31, 1996 and December 31, 1995
Net Income
Net income was $26.2 million in 1997, $36.5 million in 1996 and $17.1
million in 1995. The 1996 net income increase was attributable in part to
capital gains resulting from a shift in the Company's investment portfolio from
equities to fixed income securities, as discussed under "Investment Income"
below. Net operating income (which excludes realized investment gains) was $26.3
million, $21.3 million, and $15.1 million in the fiscal years ended December 31,
1997, 1996 and 1995, respectively. The 1997 and 1996 increases reflected
improved results from operations.
Operating Revenues
Operating revenues improved 11.7% to $622.8 million in 1997, compared
to $557.8 million in 1996. This 1996 level was a 19.3% increase over the 1995
amount.
The 1997 and 1996 results benefited from a favorable economic
environment. The monthly average mortgage rate was 7.6% and 7.8% in 1997 and
1996, respectively, and this favorable economic environment led to increased
levels of housing starts and housing resales in 1997 and 1996 compared to 1995.
Business volumes for direct and agency business improved approximately 18% from
670,000 transactions in 1995 to 790,000 in 1996 and improved approximately 8%
from 790,000 to 855,000 in 1997.
The volume of orders for title insurance opened in the Company's direct
operations increased 4.6% in 1997 and 14.2% in 1996 compared to the previous
years.
Investment Income
Investment income decreased significantly to $16.3 million in 1997,
compared to $36.4 million in 1996 after increasing from $15.5 million in 1995 to
$36.4 million in 1996. The high level of investment income in 1996 was due
primarily to capital gains of $23.4 million. Excluding these gains, the
remaining components of investment income (dividends and interest) amounted to
$17.1 million, $14.2 million and $14.0 million in 1997, 1996 and 1995,
respectively.
-23-
In the fourth quarter of 1996, the Company changed its investment
strategy, selling a majority of its equity portfolio and beginning to move the
proceeds into fixed-maturity securities. This sale resulted in capital gains of
$17.4 million.
Expenses
Salaries and Employee Benefits. Personnel related expenses are a
significant portion of total operating expenses in the title insurance industry.
These expenses require management through the often rapidly changing conditions
in the real estate economy. Salaries and employee benefits increased 8.8% in
1997 compared to 1996. This increase was largely tied to higher business
volumes, which necessitated increased staffing levels to meet customer service
demands, incentive increases and normal merit raises. The expense ratio improved
in 1997 to 90.4% from 91.0% in 1996. Salaries and employee benefits increased
18.2% in 1996 over 1995, and the 1996 expense ratio decreased to 91.0% from
92.5% in 1995. In the fourth quarter of 1994, in response to a severe fall in
order counts, a special staff and salary reduction program was implemented that
lasted through the second quarter of 1995. On a same store basis, the Company
reduced its overall headcount by approximately 24% from its peak level.
Additionally, the Company effected salary reductions of up to 10% for a period
of approximately six months. Operating revenue net of agents' commissions
improved on a per employee basis to $105,000 in 1997 from $99,000 in 1996 and
$87,000 in 1995.
Agents' Commissions. Commissions paid to title insurance agents are the
largest single expense incurred by the Company. The commission rate varies by
geographic area in which the commission was earned. Commissions as a percentage
of agency revenue were 75.0%, 74.2% and 73.9% in 1997, 1996 and 1995,
respectively.
General, Administrative and Other Expenses. The most significant
components of other expenses are rent for office space, outside costs of title
production, travel, communications and taxes levied by states on premiums.
Portions of these expenses vary with the volume of business transacted by the
Company.
Provision for Policy and Contract Claims. The Company's claims
experience has shown improvement in recent years. The loss ratio was 5.4%, 5.2%
and 5.2% in 1997, 1996 and 1995, respectively. As previously discussed, the
Company changed its method of reporting policy and contract claims in the fourth
quarter of 1996. Claims paid as a percentage of operating revenues were 4.4%,
4.8% and 6.5% in 1997, 1996 and 1995, respectively.
Income Taxes
The Company pays U.S. federal and state income taxes based on laws in
the jurisdictions in which it operates. The effective tax rates reflected in the
income statement for 1997, 1996 and 1995 differ from the U.S. federal statutory
rate principally due to non-taxable interest, dividend deductions, travel and
entertainment and company-owned life insurance.
At December 31, 1997 the Company had recorded gross deferred tax assets
of $32.1 million related primarily to policy and contract claims and employee
benefit plans. Substantially all of this deferred tax asset balance could be
realized in the future through the reversal of existing temporary taxable
differences. Accordingly, it is more likely than not that the income tax
benefits will be realized for all of the temporary deductible differences
existing at December 31, 1997.
The Company reassesses the realization of deferred assets quarterly
and, if necessary, adjusts its valuation allowance accordingly.
-24-
Liquidity and Capital Resources
Cash provided by operating activities was $18.8 million, $33.2 million
and $18.3 million for the fiscal years ended December 31, 1997, 1996 and 1995,
respectively. In addition to $70.0 million of cash and invested cash on hand and
$261.1 million of fixed-maturity securities at December 31, 1997, the Company
had no long-term debt and maintained a $237.5 million working credit facility,
of which $4.0 million was used at December 31, 1997.
Historically, the Company has not maintained significant levels of
debt. Upon closing the Acquisition (as described in Note 16 of the Notes to
Consolidated Financial Statements), the Company incurred debt of $200.7 million
under the credit facility and issued 2.2 million shares of Series B Preferred
Stock. The Company estimates that servicing the debt and preferred stock will
require approximately $20.0 million per year, which management expects to be
funded largely from increased cash flow from operations resulting from the
Acquisition. Additionally, management believes that these cash requirements will
be partially offset by approximately $15.0 million of federal income tax
benefits related to the tax deductibility of both interest expense, amortization
of intangibles and amortization of tax reserve discount. In view of the
historical ability of the Company and Commonwealth/Transnation to generate
strong, positive cash flows, and the projected strong cash position and
relatively conservative capitalization structure of the Company following
consummation of the Acquisition, the Company believes that the Company will have
sufficient liquidity and adequate capital resources to meet both its short- and
long-term capital needs. Further, the Company expects to maintain approximately
$30.0 million in unused credit facilities.
Emerging Issues
Many existing computer programs use only two digits to identify a year
in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not corrected,
many computer applications could fail or create erroneous results by or in the
year 2000. The potential costs and uncertainties to companies in addressing this
issue (the "Year 2000 issue") will depend on a number of factors, including
their software and hardware and the nature of their industries. Companies must
also coordinate with other entities with which they electronically interact,
both domestically and globally, including suppliers, customers, creditors,
borrowers and financial service organizations.
The Company has closely examined the Year 2000 issue and the potential
costs and consequences to the Company in addressing this issue. As part of its
business and growth strategy, the Company is currently investing in new
information technology, including the replacement of multiple independent
personal computer systems throughout its direct operations with an upgraded
centralized system, that is "Year 2000" compliant. The software for such new
centralized system is being developed by Elliptus Software Solutions, Inc., a
Lawyers Title subsidiary that develops and markets title and escrow production
software. As development of such software is nearly complete, management
believes that the remaining software development costs will not be material.
Management estimates that the Company's investment in hardware for the project
will total approximately $12.5 million over the next eighteen months. The
Company is also communicating with third parties with which it does business to
coordinate further action with respect to the Year 2000 issue. As a result,
management believes that, with the replacement of certain computer systems as
described above, the Year 2000 issue is not expected to have a material impact
on the Company's operations and that the cost of the Company's addressing the
Year 2000 issue is not a material event or uncertainty that would cause its
reported financial information not to be necessarily indicative of future
operating results or financial condition.
-25-
Forward-Looking and Cautionary Statements
Certain information contained in this Annual Report on Form 10-K
includes "forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. Among other things, these
statements relate to the financial condition, results of operation and business
of the Company. In addition, the Company and its 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
its reports to shareholders. These forward-looking statements are generally
identified by phrases such as "the Company expects," "the Company believes" or
words of similar import. These forward-looking statements involve certain risks
and uncertainties and other factors that may cause the actual results,
performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Further, any such statement is specifically qualified in its
entirety by the following cautionary statements.
In connection with the title insurance industry in general, factors
that may cause actual results to differ materially from those contemplated by
such forward-looking statements include the following: (i) the costs of
producing title evidence are relatively high, whereas premium revenues are
subject to regulatory and competitive restraints; (ii) the amount of title
insurance business available is influenced by housing starts, housing resales
and commercial real estate transactions; (iii) real estate activity levels have
historically been cyclical and are influenced by such factors as interest rates
and the condition of the overall economy; (iv) the value of the Company's
investment portfolio is subject to fluctuation based on similar factors; (v) the
title insurance industry may be exposed to substantial claims by large classes
of claimants; and (vi) the industry is regulated by state laws that require the
maintenance of minimum levels of capital and surplus and that restrict the
amount of dividends that may be paid by the Company's insurance subsidiaries
without prior regulatory approval.
The Company cautions that the foregoing list of important factors is
not exclusive. The Company does not undertake to update any forward-looking
statement that may be made from time to time by or on behalf of the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market capitalization on January 28, 1997 was less than
$2.5 billion and therefore, pursuant to General Instruction 1 to Item 305 of
Regulation S-K, the information otherwise required by this Item has not been
included in this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item is submitted in a separate section of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in the Company's independent accountants and
no disagreements on accounting and financial disclosure that are required to be
reported hereunder.
-26-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except as to certain information regarding executive officers included
in Part I, the definitive proxy statement for the 1998 Annual Meeting of
Shareholders to be filed within 120 days after the end of the last fiscal year
is incorporated herein by reference for the information required by this item.
ITEM 11. EXECUTIVE COMPENSATION
The definitive proxy statement for the 1998 Annual Meeting of the
Shareholders to be filed within 120 days after the end of the last fiscal year
is incorporated herein by reference for the information required by this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The definitive proxy statement for the 1998 Annual meeting of
Shareholders to be filed within 120 days after the end of the last fiscal year
is incorporated herein by reference for the information required by this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The definitive proxy statement for the 1998 Annual Meeting of
Shareholders to be filed within 120 days after the end of the last fiscal year
is incorporated herein by reference for the information required by this item.
-27-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) (1), (2) and (3). The response to this portion of Item 14 is
submitted as a separate section of this report.
(b) Reports on Form 8-K
Item 5
On November 20, 1997, the Registrant filed a Current Report on
Form 8-K, dated November 17, 1997, reporting under Item 5 that
the Company had entered into a Revolving Credit Agreement,
dated November 7, 1997, with Bank of America National Trust
and Savings Association, individually and as Administrative
Agent for a syndicate of 11 other financial institutions, in
an aggregate principal amount of up to $237.5 million, to
finance the cash portion of the purchase price relating to the
acquisition of Commonwealth and Transnation and for general
corporate purposes.
On December 23, 1997, the Registrant filed a Current Report on
Form 8-K, dated December 23, 1997, reporting under Item 5 that
the Company had entered into an Amended and Restated Stock
Purchase Agreement, dated December 11, 1997, with Lawyers
Title, Reliance and RIC, and that in connection therewith the
Company also had entered into a First Amendment to Amended and
Restated Rights Agreement, dated December 11, 1997, with
Wachovia Bank, N.A., as Rights Agent.
(c) Exhibits - The response to this portion of Item 14 is
submitted as a separate section of this report.
(d) Financial Statement Schedules - The response to this portion
of Item 14 is submitted as a separate section of this report.
-28-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
LANDAMERICA FINANCIAL GROUP, INC.
By: /s/ Charles H. Foster, Jr.
------------------------------------
Charles H. Foster, Jr.
March 27, 1998 Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Charles H. Foster, Jr. Chairman and Chief Executive March 27, 1998
- ------------------------------------------- Officer and Director
Charles H. Foster, Jr. (Principal Executive Officer)
/s/ Herbert Wender Vice-Chairman and Chief Operating Officer March 27, 1998
- ------------------------------------------- and Director
Herbert Wender
/s/ Janet A. Alpert President and Director March 27, 1998
- -------------------------------------------
Janet A. Alpert
/s/ Jeffrey A. Tischler Executive Vice President and Chief March 27, 1998
- ------------------------------------------- Financial Officer
Jeffrey A. Tischler (Principal Financial Officer)
/s/ John R. Blanchard Senior Vice President - Corporate March 27, 1998
- ------------------------------------------- Controller
John R. Blanchard (Principal Accounting Officer)
/s/ Theodore L. Chandler, Jr. Director March 27, 1998
- -------------------------------------------
Theodore L. Chandler, Jr.
-29-
/s/ Michael Dinkins Director March 27, 1998
- -------------------------------------------
Michael Dinkins
/s/ James Ermer Director March 27, 1998
- -------------------------------------------
James Ermer
/s/ John P. McCann Director March 27, 1998
- -------------------------------------------
John P. McCann
/s/ John Garnett Nelson Director March 27, 1998
- -------------------------------------------
John Garnett Nelson
/s/ Robert F. Norfleet, Jr. Director March 27, 1998
- -------------------------------------------
Robert F. Norfleet, Jr.
/s/ Eugene P. Trani Director March 27, 1998
- -------------------------------------------
Eugene P. Trani
/s/ Marshall B. Wishnack Director March 27, 1998
- -------------------------------------------
Marshall B. Wishnack
/s/ Robert M. Steinberg Director March 27, 1998
- -------------------------------------------
Robert M. Steinberg
/s/ Lowell C. Freiberg Director March 27, 1998
- -------------------------------------------
Lowell C. Freiberg
/s/ George E. Bello Director March 27, 1998
- -------------------------------------------
George E. Bello
-30-
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEMS 14 (a)(1), (2) AND (3), (c) AND (d)
INDEX OF FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENT SCHEDULES
CERTAIN EXHIBITS
YEAR ENDED DECEMBER 31, 1997
LANDAMERICA FINANCIAL GROUP, INC.
RICHMOND, VIRGINIA
-31-
FORM 10-K ITEM 14 (a)(1), (2) AND (3)
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of LandAmerica Financial Group,
Inc. and subsidiaries are included in Item 8:
Page
----
Report of Independent Auditors...............................................F-1
Consolidated Balance Sheets, December 31, 1997 and 1996......................F-2
Consolidated Statements of Operations,
Years Ended December 31, 1997, 1996 and 1995...............................F-4
Consolidated Statements of Cash Flows,
Years Ended December 31, 1997, 1996 and 1995...............................F-5
Consolidated Statements of Changes in Shareholders'
Equity, Years Ended December 31, 1997, 1996
and 1995...................................................................F-6
Notes to Consolidated Financial Statements,
December 31, 1997, 1996 and 1995...........................................F-7
The following consolidated financial statement schedules of LandAmerica
Financial Group, Inc. and subsidiaries are included in Item 14(d):
Schedule I Summary of Investments......................F-29
Schedule II Condensed Financial Information of
Registrant ...............................F-30
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore, have been omitted.
-32-
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
LandAmerica Financial Group, Inc.
We have audited the accompanying consolidated balance sheets of LandAmerica
Financial Group, Inc. (formerly Lawyers Title Corporation) and subsidiaries as
of December 31, 1997, and 1996, and the related consolidated statements of
operations, changes in shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. Our audits also included the
financial statement schedules listed in the Index at Item 14(a). These financial
statements and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
LandAmerica Financial Group, Inc. and subsidiaries at December 31, 1997, and
1996, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
As discussed in Note 2 to the financial statements, in 1996 the Company changed
its method of accounting for policy and contract claims.
/s/ ERNST & YOUNG LLP
Richmond, Virginia
March 5, 1998
F-1
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, DECEMBER 31
(In thousands of dollars)
ASSETS 1997 1996
- ------ ---- ----
INVESTMENTS (Note 3):
Fixed maturities available-for-sale
- at fair value (amortized cost:
1997 - $250,295; 1996 - $214,875) $261,112 $218,224
Equity securities - at fair value
(cost: 1997 - $887; 1996 - $930) 1,664 1,725
Mortgage loans (less allowance for
doubtful accounts: 1997 and
1996 - $150) 448 480
Invested cash 34,420 71,626
------ ------
Total investments 297,644 292,055
CASH 35,629 23,997
NOTES AND ACCOUNTS RECEIVABLE:
Notes (less allowance for
doubtful accounts: 1997 - $1,083;
1996 - $1,008) 5,911 6,657
Premiums (less allowance for
doubtful accounts: 1997 - $2,693;
1996 - $2,197) 28,659 20,003
Income tax recoverable 2,392 -
------ ------
Total notes and accounts receivable 36,962 26,660
PROPERTY AND EQUIPMENT - at cost (less
accumulated depreciation and amortiza-
tion: 1997 - $51,775; 1996 - $44,670) 21,896 21,959
TITLE PLANTS 48,984 48,536
GOODWILL (less accumulated amortiza-
tion: 1997 - $14,507; 1996 - $12,393) 57,687 59,669
DEFERRED INCOME TAXES (Note 8) 21,610 23,435
OTHER ASSETS 34,281 24,657
------ ------
$554,693 $520,968
======== ========
F-2
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, DECEMBER 31
(In thousands of dollars)
LIABILITIES 1997 1996
---- ----
POLICY AND CONTRACT CLAIMS
(Notes 2 and 4) $202,477 $196,285
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 47,922 47,211
FEDERAL INCOME TAXES - 5,721
NOTES PAYABLE 6,994 5,036
OTHER 4,896 4,547
-------- --------
Total liabilities 262,289 258,800
-------- --------
COMMITMENTS AND CONTINGENCIES
(Notes 11, 12 and 13)
SHAREHOLDERS' EQUITY (Notes 6 and 7)
Preferred stock, no par value,
authorized 5,000,000 shares, none
issued or outstanding - -
Common stock, no par value, authorized
45,000,000 shares, issued and
outstanding, 8,964,633 in 1997 and
8,889,791 in 1996 168,066 167,044
Unrealized investment gains (less
related deferred income tax
expense of $4,058 in 1997 and
$1,450 in 1996) 7,536 2,694
Retained earnings 116,802 92,430
--------- ----------
Total shareholders' equity 292,404 262,168
--------- ---------
$554,693 $520,968
======== ========
See Notes to Consolidated Financial Statements.
F-3
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31
(In thousands of dollars except per common share amounts)
1997 1996 1995
---- ---- ----
REVENUES
Premiums (Note 5) $ 504,024 $ 456,377 $ 385,871
Title search and escrow 118,757 101,381 81,490
Investment income - net
(Note 3) 16,318 36,424 15,471
----------- ----------- ----------
639,099 594,182 482,832
----------- ----------- ----------
EXPENSES (Notes 4, 10 and 11)
Salaries and employee
benefits 200,488 184,274 155,920
Agents' commissions 218,358 192,590 167,031
Provision for policy and
contract claims 33,749 29,211 24,297
General, administrative and
other 146,035 132,567 111,724
----------- ----------- ----------
598,630 538,642 458,972
----------- ----------- ----------
INCOME BEFORE INCOME TAXES 40,469 55,540 23,860
INCOME TAX EXPENSE (BENEFIT)
(Note 8)
Current 15,316 20,320 3,628
Deferred (1,004) (1,299) 3,181
----------- ----------- ----------
14,312 19,021 6,809
----------- ----------- ----------
NET INCOME $ 26,157 $ 36,519 $ 17,051
=========== =========== ==========
NET INCOME PER COMMON SHARE $ 2.93 $ 4.11 $ 1.92
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 8,924,013 8,888,310 8,885,191
NET INCOME PER COMMON SHARE
ASSUMING DILUTION $ 2.84 $ 4.01 $ 1.89
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
ASSUMING DILUTION 9,223,670 9,101,930 9,038,948
See Notes to Consolidated Financial Statements.
F-4
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
(In thousands of dollars)
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income $ 26,157 $ 36,519 $ 17,051
Depreciation & amortization 10,527 9,927 8,108
Amortization of bond premium 507 722 1,087
Realized investment gains (127) (23,430) (2,966)
Deferred income tax (1,004) (1,299) 3,181
Change in assets & liabilities, net
of businesses acquired:
Notes receivable 746 - -
Premiums receivable (8,656) (1,419) (620)
Income taxes receivable/payable (8,113) 6,061 3,810
Policy & contract claims 6,192 2,494 (5,905)
Accounts payable and accrued
expenses 711 5,772 (3,043)
Cash surrender value of life
insurance (9,877) (3,148) (3,231)
Other 1,757 1,013 811
-------- --------- --------
Net cash provided by
operating activities 18,820 33,212 18,283
-------- --------- --------
Cash flows from investing activities:
Purchase of property & equipment, net (8,892) (8,612) (5,369)
Purchase of businesses, net of
cash acquired - (2,320) (8,026)
Cost of investments acquired:
Fixed maturities - available-for-sale (96,634) (115,731) (76,131)
Equity securities - (34,815) (40,103)
Proceeds from investment sales or maturities:
Fixed maturities - available-for-sale 60,884 79,324 75,985
Equity securities 43 100,533 45,975
Other 32 1,443 206
-------- --------- --------
Net cash provided by (used in) investing
activities (44,567) 19,822 (7,463)
-------- --------- --------
Cash flows from financing activities:
Proceeds of cash surrender value loan - 3,891 3,673
Dividends paid (1,785) (1,778) (1,599)
Increase (decrease) in notes payable 1,958 (171) (4,236)
-------- --------- --------
Net cash provided by (used in)
financing activities 173 1,942 (2,162)
-------- --------- --------
Net increase (decrease) in cash and
invested cash (25,574) 54,976 8,658
Cash and invested cash at beginning of year 95,623 40,647 31,989
-------- --------- --------
Cash and invested cash at end of year $ 70,049 $ 95,623 $ 40,647
======== ========= ========
See Notes to Consolidated Financial Statements
F-5
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(In thousands of dollars)
Receivable
Net from Total
Unrealized Retained Employee Share-
Common Stock Gains Earnings Benefit holders'
Shares Amount (Losses) (Deficit) Plan Equity
------ ------ -------- --------- ---- ------
BALANCE - December 31, 1994 8,884,511 $166,991 $ (4,898) $ 42,237 $(1,007) $ 203,323
Net Income - - - 17,051 - 17,051
Stock options and incentive plans (Note 6) 1,500 15 - - - 15
Repayment from employee benefit plan - - - - 852 852
Net unrealized gains - - 18,743 - - 18,743
Dividends ($.18/share) - - - (1,599) - (1,599)
Other (20) - - - - -
---------- -------- -------- --------- ------- ---------
BALANCE - December 31, 1995 8,885,991 167,006 13,845 57,689 (155) 238,385
Net Income - - - 36,519 - 36,519
Stock option and incentive plans (Note 6) 3,800 38 - - - 38
Repayment from employee benefit plan - - - - 155 155
Net unrealized losses - - (11,151) - - (11,151)
Dividends ($.20/share) - - - (1,778) - (1,778)
---------- -------- -------- --------- ------- ---------
BALANCE - December 31, 1996 8,889,791 167,044 2,694 92,430 - 262,168
Net Income - - - 26,157 - 26,157
Stock option and incentive plans (Note 6) 74,842 1,022 - - - 1,022
Net unrealized gains - - 4,842 - - 4,842
Dividends ($.20/share) - - - (1,785) - (1,785)
---------- -------- -------- --------- ------- ---------
BALANCE - December 31, 1997 8,964,633 $168,066 $ 7,536 $ 116,802 $ - $ 292,404
========== ======== ======== ========= ======= =========
See Notes to Consolidated Financial Statements.
F-6
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(In thousands of dollars except per common share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements of LandAmerica
Financial Group, Inc. (formerly Lawyers Title Corporation) (the
"Company") and its wholly owned subsidiaries have been prepared in
conformity with generally accepted accounting principles ("GAAP")
which, as to the insurance company subsidiaries, differ from statutory
accounting practices prescribed or permitted by regulatory authorities.
Organization
The Company is engaged principally in the title insurance business.
Title insurance policies are insured statements of the condition of
title to real property, showing ownership as indicated by public
records, as well as outstanding liens, encumbrances and other matters
of record and certain other matters not of public record. Lawyers
Title's business results from commercial real estate activity, resales
and refinancings of residential real estate and construction and sale
of new housing. The Company conducts its business on a national basis
through a network of branch and agency offices with approximately 44.0%
of consolidated premium revenue generated in the states of Texas,
Florida, California and Pennsylvania.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
and operations, after intercompany eliminations, of LandAmerica
Financial Group, Inc., and its wholly owned subsidiaries, principally
Lawyers Title Insurance Corporation.
Investments
As required by SFAS No. 115, the Company records its fixed-maturity
investments which are classified as available-for-sale at fair value
and reports the change in the unrealized appreciation and depreciation
as a separate component of shareholders' equity. The amortized cost of
fixed-maturity investments classified as available-for-sale is adjusted
for amortization of premiums and accretion of discounts. That
amortization or accretion is included in net investment income.
Realized gains and losses on sales of investments, and declines in
value considered to be other than temporary, are recognized in
operations on the specific identification basis.
F-7
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(In thousands of dollars except per common share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Title Plants
Title plants consist of title records relating to a particular region
and are generally stated at cost. Expenses associated with current
maintenance, such as salaries and supplies, are charged to expense in
the year incurred. The costs of acquired title plants and the building
of new title plants, prior to the time that a plant is put into
operation, are capitalized. Properly maintained title plants are not
amortized because there is no indication of diminution in their value.
Goodwill
The excess of cost over fair value of net assets of businesses acquired
(goodwill) is amortized on a straight-line basis over 40 years.
Long-Lived Assets
In accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, the
Company reviews identifiable intangibles, including goodwill, for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. If indicators
of impairment are present, the Company estimates the future cash flows
expected to be generated from the use of those assets and their
eventual disposal. The Company would recognize an impairment loss if
the future cash flows were less than the carrying amount.
Depreciation
Property and equipment is depreciated principally on the straight-line
method over the useful lives of the various assets, which range from
three to 40 years.
Revenue Recognition
Premiums on title insurance written by the Company's employees are
recognized as revenue when the Company is legally or contractually
entitled to collect the premium. Premiums on insurance written by
agents are generally recognized when reported by the agent and recorded
on a "gross" versus "net" basis. Title search and escrow fees are
recorded as revenue when an order is closed.
F-8
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(In thousands of dollars except per common share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Policy and Contract Claims
Liabilities for estimated losses and loss adjustment expenses represent
the estimated ultimate net cost of all reported and unreported losses
incurred through December 31, 1997. The reserves for unpaid losses and
loss adjustment expenses are estimated using individual case-basis
valuations and statistical analyses. Those estimates are subject to the
effects of trends in loss severity and frequency. Although considerable
variability is inherent in such estimates, management believes that the
reserves for losses and loss adjustment expenses are adequate. The
estimates are continually reviewed and adjusted as necessary as
experience develops or new information becomes known; such adjustments
are included in current operations.
Income Taxes
Deferred income taxes reflect the tax consequences on future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts. Future tax benefits are recognized to the
extent that realization of such benefits are more likely than not.
Escrow and Trust Deposits
As a service to its customers, the Company administers escrow and trust
deposits which amounted to approximately $436,000 and $444,000 at
December 31, 1997 and 1996, respectively, representing undisbursed
amounts received for settlements of mortgage loans and indemnities
against specific title risks. These funds are not considered assets of
the Company and, therefore, are excluded from the accompanying
consolidated balance sheets.
Deferred Land Exchanges
Through several non-insurance subsidiaries the Company facilitates
tax-free property exchanges for customers pursuant to Section 1031 of
the Internal Revenue Code. Acting as a qualified intermediary, the
Company holds the sale proceeds from sales transactions until a
qualifying acquisition occurs, thereby assisting its customers in
deferring the recognition of taxable income. At December 31, 1997 and
1996, the Company was holding $167,000 and $261,000, respectively, of
such proceeds which are not considered assets of the Company and are,
therefore, excluded from the accompanying consolidated balance sheets.
Statement of Cash Flows
For purposes of the statement of cash flows, invested cash is
considered a cash equivalent. Invested cash includes all highly liquid
investments with a maturity of three months or less when purchased.
F-9
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(In thousands of dollars except per common share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings per Common Share
In 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share. Statement 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to
the previously reported fully diluted earnings per share. All earnings
per share amounts for all periods have been presented, and where
appropriate, restated to conform to the Statement 128 requirements.
Fair Values of Financial Instruments
The carrying amounts reported in the balance sheet for invested cash
and short-term investments approximate those assets' fair values. Fair
values for investment securities are based on quoted market prices. The
Company has no other material financial instruments.
Stock Based Compensation
The Company grants stock options for a fixed number of shares to
employees with an exercise price equal to the fair value of the shares
at the date of grant. The Company accounts for stock option grants in
accordance with APB Opinion No. 25, Accounting for Stock Issued to
Employees, and accordingly, recognizes no compensation expense for the
stock option grants.
Reclassifications
Certain 1996 and 1995 amounts have been reclassified to conform to the
1997 presentation.
2. ACCOUNTING CHANGE
In the fourth quarter of 1996 the Company made a change from reporting
policy and contract claims on a discounted to an undiscounted basis.
This change was made to conform with industry practice and because it
is considered preferable by rating agencies and analysts. The effect of
the change for 1996 was to increase the provision for policy and
contract claims by $76 million and decrease net income by $49 million
and net income per share by $5.51 and net income per share assuming
dilution by $5.38.
In addition, during the fourth quarter of 1996 the Company determined
that the trend of favorable loss experience which has emerged over the
past few years could be relied upon and the Company changed its
estimate of the ultimate net cost of all reported and unreported losses
incurred through September 30, 1996 to reflect this favorable
experience. The effect of the change in estimate was to decrease the
provision for policy and contract claims by $78 million and to increase
net income by $50.7 million and net income per share by $5.70 and net
income per share assuming dilution by $5.57.
F-10
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(In thousands of dollars except per common share amounts)
2. ACCOUNTING CHANGE (Continued)
Because the change in accounting principal to no longer discount policy
and contract claims is inseparable from the change in estimate, both
have been accounted for as a change in estimate. Accordingly, the net
effect of the two changes, a decrease of $2.0 million in the provision
for policy and contract claims, was included in operations for the
fourth quarter of 1996 and no prior amounts have been restated. The
above changes were both made to conform with general industry practice.
3. INVESTMENTS
The amortized cost and estimated fair value of investments in fixed
maturities at December 31, 1997, and 1996 were as follows:
1997
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
U.S. Treasury
securities and
obligations of
U.S. Government
corporations
and agencies $ 55,359 $ 4,241 $ 8 $ 59,592
Obligations of
states and
political
subdivisions 96,493 3,737 7 100,223
Fixed maturities
issued by foreign
governments 347 40 - 387
Public utilities 4,586 95 - 4,681
Corporate
securities 73,814 2,165 38 75,941
Mortgage backed
securities 19,696 598 6 20,288
------ --- - ------
Fixed maturities
available-for-sale $250,295 $10,876 $59 $261,112
======== ======= === ========
F-11
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(In thousands of dollars except per common share amounts)
3. INVESTMENTS (Continued)
1996
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
U.S. Treasury
securities and
obligations of
U.S. Government
corporations
and agencies $ 62,206 $1,709 $547 $ 63,368
Obligations of
states and
political
subdivisions 76,203 1,065 143 77,125
Fixed maturities
issued by foreign
governments 345 38 - 383
Public utilities 4,550 24 17 4,557
Corporate
securities 61,195 1,364 147 62,412
Mortgage backed
securities 10,376 79 76 10,379
--------- -------- ------ ----------
Fixed maturities
available-for-sale $214,875 $4,279 $930 $218,224
======== ====== ==== ========
The amortized cost and estimated fair value of fixed-maturity
securities at December 31, 1997 by contractual maturity, are shown
below. Actual maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations.
F-12
3. INVESTMENTS (Continued)
Estimated
Amortized Fair
Cost Value
---- -----
Due in one year or less $ 5,069 $ 5,071
Due after one year through
five years 72,363 74,058
Due after five years through
ten years 97,130 100,925
Due after ten years 56,037 60,770
Mortgage backed securities 19,696 20,288
-------- --------
$250,295 $261,112
======== ========
Earnings on investments and net realized gains for the three years
ended December 31, follow:
1997 1996 1995
-------- -------- --------
Fixed maturities $ 15,572 $ 12,453 $ 11,283
Equity securities 2 692 916
Invested cash and other
short-term investments 1,503 979 1,587
Mortgage loans 18 88 170
Net realized gains (236) 23,371 2,970
-------- -------- --------
Total investment income 16,859 37,583 16,926
Investment expenses (541) (1,159) (1,455)
-------- -------- --------
Net investment income $ 16,318 $ 36,424 $ 15,471
======== ======== ========
Realized and unrealized gains (losses) representing the change in
difference between fair value and cost (principally amortized cost for
fixed maturities) on fixed maturities and equity securities for the
three years ended December 31, are summarized below:
F-13
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(In thousands of dollars except per common share amounts)
3. INVESTMENTS (Continued)
Change in
Realized Unrealized
1997
Fixed maturities $ 127 $ 7,468
Equity securities (363) (18)
-------- --------
$ (236) $ 7,450
======== ========
1996
Fixed maturities $ (50) $( 4,739)
Equity securities 23,421 (12,418)
-------- --------
$ 23,371 $(17,157)
======== ========
1995
Fixed maturities $ (120) $ 16,920
Equity securities 3,090 11,916
-------- --------
$ 2,970 $ 28,836
======== ========
Gross unrealized gains and (losses) relating to investments in equity
securities were $830 and $(53) at December 31, 1997.
Proceeds from sales of investments in fixed maturities, net of calls or
maturities during 1997, 1996 and 1995 were $58,360, $67,425 and
$73,339, respectively. Gross gains of $265, $502 and $422 in 1997, 1996
and 1995, respectively, and gross losses of $137, $552 and $542 in
1997, 1996 and 1995, respectively, were realized on those sales.
Proceeds from sales of investments in equity securities during 1997,
1996 and 1995 were $43, $100,533 and $45,975, respectively. Gross gains
of $47, $25,857 and $5,220 in 1997, 1996 and 1995, respectively, and
gross losses of $410, $2,436 and $2,130 in 1997, 1996 and 1995,
respectively, were realized on those sales.
4. POLICY AND CONTRACT CLAIMS
The Company's estimate of net costs to settle reported claims and
claims incurred but not reported has not been discounted at December
31, 1997 and 1996. Such estimates were discounted at a weighted-average
rate of 7.5% at December 31, 1995. The rates used for discounting loss
reserves on 1995 issues were determined at the beginning of that year.
The discount rate established for 1995 issues was 7.5%. If the estimate
had not been discounted at December 31, 1995, reserves would have been
increased by $80,000.
F-14
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(In thousands of dollars except per common share amounts)
4. POLICY AND CONTRACT CLAIMS (Continued)
Activity in the liability for unpaid claims and claim adjustment
expenses is summarized as follows:
1997 1996 1995
---- ---- ----
Balance at January 1 $196,285 $193,791 $198,906
Incurred related to:
Current year 38,301 28,930 44,322
Prior years (4,552) 281 (20,025)
---------- ---------- ---------
Total incurred 33,749 29,211 24,297
---------- ---------- ---------
Paid related to:
Current year 3,216 1,549 1,797
Prior years 24,341 25,168 28,562
---------- ---------- ---------
Total paid 27,557 26,717 30,359
---------- ---------- ---------
Amounts related to
purchase of
subsidiaries - - 947
---------- ---------- ---------
Balance at December 31 $202,477 $196,285 $193,791
======== ======== ========
Balances at January 1, 1996 and 1995 and the balance at December 31,
1995 are reported on a discounted basis. The balance at January 1, 1997
and the balances at December 31, 1996 and 1997 are reported on an
undiscounted basis. Losses incurred in 1996 include the effects of the
accounting changes discussed in Note 2.
The favorable development on 1994 and prior year loss reserves during
1995 was attributable to successful recovery efforts, development on
previously reserved large claims and lower than expected payment levels
on the 1992 and 1993 issue years which included a high proportion of
refinance business.
5. REINSURANCE
The Company cedes and assumes title policy risks to and from other
insurance companies in order to limit and diversify its risk. The
Company cedes insurance on risks in excess of certain underwriting
limits which provides for recovery of a portion of losses. The Company
remains contingently liable to the extent that reinsuring companies
cannot meet their obligations under reinsurance agreements.
F-15
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(In thousands of dollars except per common share amounts)
5. REINSURANCE (Continued)
The Company has not paid or recovered any reinsured losses during the
three years ended December 31, 1997. The total amount of premiums for
assumed and ceded risks was less than 1.0% of title premiums in each of
the last three years.
6. SHAREHOLDERS' EQUITY
Rights Agreement
The Company has issued one preferred share purchase right (a "Right"
for each outstanding share of Common Stock. In 1997, in connection with
its acquisition of Commonwealth Land Title Insurance Company and
Transnation Title Insurance Company, the Company amended and restated
its Rights Agreement with Wachovia Bank, N.A. Each Right entitles the
holder to purchase one one-hundredth of a share of Series A Junior
Participating Preferred Stock ("Junior Preferred Stock") at an exercise
price of $85, subject to adjustment. Generally, the Rights will become
exercisable if a person or group acquires or announces a tender offer
for 20% or more of the outstanding Common Stock. Under certain
circumstances, the Board of Directors may reduce this threshold
percentage to not less than 10%. If a person or group acquires the
threshold percentage of Common Stock, each Right will entitle the
holder, other than such acquiring person or group, to buy shares of
Common Stock or Junior Preferred Stock having a total market value of
twice the exercise price. If the Company is acquired in a merger or
other business combination, each Right will entitle the holder, other
than such acquiring person or group, to purchase securities of the
surviving company having a total market value equal to twice the
exercise price of the Rights. The Rights will expire on August 20,
2007, and may be redeemed by the Company at a price of one cent per
Right at any time before they become exercisable. Until the Rights
become exercisable, they are evidenced by the Common Stock certificates
and are transferred with and only with such certificates.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees ("APB 25"), and
related Interpretations in accounting for its employee stock options
because, as discussed below, the alternative fair value accounting
provided under FASB Statement No. 123, Accounting for Stock-Based
Compensation ("Statement 123"), requires use of option valuation models
that were not developed for use in valuing employee stock options.
Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Under the Company's 1991 Stock Incentive Plan, as amended (the
"Incentive Plan"), officers, directors and key employees of the Company
and its subsidiaries may receive grants and/or awards of common stock,
restricted stock, phantom stock, incentive stock options, non-qualified
stock options and stock appreciation rights. As amended in 1995,
commencing January 1, 1996, the maximum number of shares of common
stock available
F-16
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(In thousands of dollars except per common share amounts)
6. SHAREHOLDERS' EQUITY (Continued)
for grants and awards under the Incentive Plan in each calendar year is
equal to 1.5% of the shares of common stock outstanding as of the first
business day of that year, plus the number of shares available for
grants and awards in prior years but not covered by grants and awards
in those years and any shares of common stock as to which grants and
awards have been terminated or forfeited.
Pursuant to the 1992 Stock Option Plan for Non-Employee Directors (the
"Directors' Plan"), each non-employee director is granted an option to
purchase 1,500 shares of common stock of the Company on the first
business day following the annual meeting of shareholders. Up to 60,000
shares of the Company's common stock may be issued under the Directors'
Plan. At December 31, 1997, the Company had granted options covering
all 60,000 shares of common stock authorized by the Directors' Plan.
All options which have been granted under the Incentive Plan and the
Directors' Plan are non-qualified stock options with an exercise price
equal to the fair market value of a share of the Company's common stock
on the date of grant. Options granted in 1992 under the Incentive Plan
and all options granted under the Directors' Plan expire ten years from
the date of grant. All other options which have been granted under the
Incentive Plan expire seven years from the date of grant. Options
generally vest ratably over a four-year period. At December 31, 1997,
there were 56,702 options available for future grant under the
Incentive Plan.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company
had accounted for its employee stock options under the fair value
method of that Statement. The fair value of these options was estimated
at the date of grant using the Black-Scholes option pricing model with
the following weighted-average assumptions for 1997: risk-free interest
rate of 6.17%, dividend yield of 1.00%, volatility factor of the
expected market price of the Company's common stock of .30 and a
weighted-average expected life of the options of approximately 5 years.
The effects of applying Statement 123 on a pro forma basis for 1997,
1996 and 1995 options are not likely to be representative of the
effects on reported pro forma net income in future years.
The Black-Scholes option valuation method was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including
the expected stock price volatility. Because the Company's employee
stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock
options.
F-17
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(In thousands of dollars except per common share amounts)
6. SHAREHOLDERS' EQUITY (Continued)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows (in thousands except for
earnings per share information):
1997 1996 1995
---- ---- ----
Pro forma net income $25,700 $36,187 $16,922
Pro forma earnings
per common share $2.88 $4.07 $1.90
Pro forma diluted
earnings per share $2.79 $3.98 $1.87
A summary of the Company's stock option activity and related
information for the years ended December 31 follows:
Weighted Weighted
Number Average Average
of Shares Exercise Price Fair Value
--------- -------------- ----------
Options outstanding,
December 31, 1994 421,576 $12
Granted 112,000 11 $4.77
Exercised 1,500 10
Forfeited 8,500 22
Options outstanding,
December 31, 1995 523,576 11
(278,651 exercisable)
Granted 178,000 19 7.38
Exercised 3,800 10
Forfeited 6,050 16
Options outstanding,
December 31, 1996 691,726 13
(380,231 exercisable)
Granted 117,000 21 $7.45
Exercised 57,342 11
Forfeited 2,000 20
Options outstanding,
December 31, 1997 749,384 $15
(452,534 exercisable)
F-18
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(In thousands of dollars except per common share amounts)
6. SHAREHOLDERS' EQUITY (Continued)
The following table summarizes information about stock options
outstanding at December 31, 1997:
Weighted Weighted Weighted
Range of Number Average Average Number Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/97 Life Price at 12/31/97 Price
------ ----------- ---- ----- ----------- -----
$3 to $10 215,234 2.9 $ 7 215,234 $ 7
$11 to $15 116,400 4.5 11 68,750 11
$16 to $22 417,750 4.9 19 168,550 18
------- -------
$3 to $22 749,384 4.3 $15 452,534 $12
======= =======
Savings and Stock Ownership Plan
The Company has registered 1,500,000 shares of common stock for use in
connection with the Lawyers Title Insurance Corporation Savings and
Stock Ownership Plan. Substantially all of the employees of the Company
are eligible to participate in the Plan. On July 1, 1992, the Company
issued 323,400 shares of such stock to the Plan in exchange for a
$2,156 promissory note bearing interest at 8.0%. These shares were used
for matching contributions for plan participants through June of 1996
and were allocated to participants quarterly in the same proportion
that the quarterly principal and interest payments on the note bore to
the total principal and interest payments over the life of the note.
Subsequent to June 1996, the Plan Trustee purchased shares on the open
market to use in matching employee contributions. The level of
contributions to the Plan is discretionary and set by the Board of
Directors annually. In 1996 and 1995, 38,997 and 94,096 shares were
allocated to participants at a cost of $143 and $631, respectively, to
the Company. Additionally, 125,095 and 100,502 shares were purchased at
a cost of $3,432 and $1,851 and allocated to employees in 1997 and
1996, respectively.
7. STATUTORY FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The accompanying consolidated financial statements have been prepared
in conformity with generally accepted accounting principles (GAAP)
which differ in some respects from statutory accounting practices
prescribed or permitted in the preparation of financial statements for
submission to insurance regulatory authorities. Unconsolidated
statutory equity of Lawyers Title was $164,376 and $140,973 at December
31, 1997 and 1996, respectively. The difference between statutory
equity and equity determined on the basis of GAAP is primarily due to
differences between the provision for policy and contract claims
included in the accompanying financial statements and the statutory
unearned premium reserve, which is calculated in accordance with
statutory requirements, and statutory regulations that preclude the
recognition of certain assets including goodwill and deferred income
tax assets. Unconsolidated statutory net income of Lawyers Title was
$19,999, $38,473 and $18,516 for the years ended December 31, 1997,
1996 and 1995, respectively.
F-19
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(In thousands of dollars except per common share amounts)
7. STATUTORY FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
In a number of states, Lawyers Title is subject to regulations which
require minimum amounts of statutory equity and which require that the
payment of any extraordinary dividends receive prior approval of the
Insurance Commissioners of these states. An extraordinary dividend is
generally defined as one which, when added to other dividends paid in
the preceding twelve months, would exceed the lesser of 10.0% of
statutory equity accounts as of the preceding year end or statutory net
income excluding realized capital gains for the preceding year. Under
such statutory regulations, net assets of consolidated subsidiaries
aggregating $275,966 were not available for dividends, loans or
advances to the Company at December 31, 1997.
8. INCOME TAXES
The Company files a consolidated federal income tax return with its
subsidiaries. Significant components of the Company's deferred tax
assets and liabilities at December 31, 1997 and 1996 are as follows:
1997 1996
---- ----
Deferred tax assets:
Policy and contract claims $23,754 $24,430
Pension liability 712 -
Employee benefit plans 5,983 6,235
Other 1,621 1,499
------- -------
32,070 32,164
------- -------
Deferred tax liabilities:
Pension - 530
Title plant basis differences 4,961 4,961
Unrealized gains 4,058 1,451
Other 1,441 1,787
------- -------
10,460 8,729
------- -------
Net deferred tax asset $21,610 $23,435
======= =======
The Company is required to establish a "valuation allowance" for any
portion of the deferred tax asset that management believes will not be
realized. In the opinion of management, it is more likely than not that
the Company will realize the benefit of the net deferred tax asset,
and, therefore, no such valuation allowance has been established at
December 31, 1997 and 1996.
The provision for income tax differs from the amount of income tax
determined by applying the applicable U.S. statutory income tax rate
(35%) to pre-tax income as a result of the following:
F-20
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(In thousands of dollars except per common share amounts)
8. INCOME TAXES (Continued)
1997 1996 1995
---- ---- ----
Computed expected expense
at statutory rate $14,164 $19,439 $8,351
Non-taxable interest (1,397) (932) (828)
Dividend deductions (1) (146) (187)
Company-owned life insurance (574) (575) (645)
Travel and entertainment 948 709 421
State income taxes 898 - -
Other 274 526 (303)
------- ------- -------
Income tax expense $14,312 $19,021 $6,809
======= ======= ======
Taxes (recovered) paid were $23,301 in 1997, $14,542 in 1996 and $(252)
in 1995.
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the years ended December 31:
1997 1996 1995
---- ---- ----
Numerator:
Net income - numerator
for both basic and
diluted earnings
per share $26,157 $36,519 $17,051
======= ======= =======
Denominator:
Weighted average shares -
denominator for basic
earnings per share 8,924 8,888 8,885
Effect of dilutive securities:
Employee stock options 300 214 154
------- ------ -------
Denominator for
diluted earnings
per share 9,224 9,102 9,039
========= ========= =========
Basic earnings per
common share $2.93 $4.11 $1.92
Diluted earnings per
common share $2.84 $4.01 $1.89
F-21
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(In thousands of dollars except per common share amounts)
10. PENSION PLAN AND POSTRETIREMENT BENEFITS
The Company has a noncontributory defined benefit retirement plan which
covers substantially all employees. Benefits are based on salary and
years of service. The Company's funding policy is to annually
contribute the statutory required minimum. Plan assets include
marketable equity securities, U.S. government and corporate obligations
and cash equivalents. Prior service costs are amortized equally over
the average remaining service period of employees.
The following table sets forth the plan's funded status as of the
September 30 measurement dates:
1997 1996
---- ----
Actuarial present value of
benefit obligations:
Vested $101,603 $ 93,545
Nonvested 8,049 6,743
-------- --------
Total accumulated benefit
obligations $109,652 $100,288
======== ========
Plan assets at fair value $131,526 $112,684
Projected benefit obligations 127,249 115,606
-------- --------
Plan assets in excess of (less
than) projected benefit
obligations 4,277 (2,922)
Unrecognized net asset from
transition (73) (162)
Unrecognized prior service costs 99 172
Unrecognized net (gain) loss (4,293) 6,156
-------- --------
Prepaid pension asset at
December 31 $ 10 $ 3,244
======== ========
The weighted-average discount rate used in determining the actuarial
present value of the projected benefit obligations was 7.5% in 1997 and
7.75% in 1996. The average rate of increase in future compensation
levels used was 4.3% in 1997 and 1996. The expected long-term rate of
return on plan assets was 9.25% for 1997 and 8.75% for 1996 and 1995.
F-22
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(In thousands of dollars except per common share amounts)
10. PENSION PLAN AND POSTRETIREMENT BENEFITS (Continued)
The components of pension cost include the following:
1997 1996 1995
---- ---- ----
Benefits earned during
the year $ 3,254 $ 3,124 $ 2,795
Interest cost on projected
benefit obligations 8,722 7,834 6,985
Actual return on plan assets (24,684) (13,854) (16,125)
Net amortization and
deferral 15,941 3,684 6,337
-------- --------- ---------
Pension cost $ 3,233 $ 788 $ (8)
======== ========= ==========
The Company sponsors defined benefit life and health care plans that
provide postretirement medical, dental and life insurance benefits to
fulltime employees who have attained age 55 and have ten years of
service after age 40. The plans are contributory, with contributions
adjusted annually, and contain other cost-sharing features such as
deductibles and coinsurance. Currently, the Company does not require
contributions from employees who retired prior to 1991. Medical
benefits are funded as claims are incurred. Contributions are made to a
premium deposit fund with a life insurance company for retired
participants upon reaching age 65.
The following table presents the plan's funded status reconciled with
amounts recognized in the Company's consolidated balance sheet:
F-23
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(In thousands of dollars except per common share amounts)
10. PENSION PLAN AND POSTRETIREMENT BENEFITS (Continued)
December 31, 1997 December 31, 1996
Medical/ Medical/
Dental Life Dental Life
------ ---- ------ ----
Accumulated postretirement benefit obligation:
Retirees $ 12,397 $ 5,428 $ 11,878 $5,414
Fully eligible active
plan participants 2,872 970 2,448 980
Other active plan
participants 3,921 906 3,340 1,079
-------- ------- -------- ------
19,190 7,304 17,666 7,473
Plan assets invested in
a premium deposit fund,
at fair value - 2,252 - 2,244
-------- ------- -------- ------
Accumulated postretirement
benefit obligation in
excess of plan assets 19,190 5,052 17,666 5,229
Unrecognized net (gain)
or loss (5,085) 996 (5,961) 1,582
Unrecognized transition
obligation 15,286 2,317 16,305 2,471
-------- ------- -------- ------
Accrued postretirement
benefit cost $ 8,989 $ 1,739 $ 7,322 $1,176
======== ======= ======== ======
Net periodic postretirement benefit cost included the following
components:
December 31, 1997 December 31, 1996 December 31, 1995
----------------- ----------------- -----------------
Medical/ Medical/ Medical/
Dental Life Dental Life Dental Life
------ ---- ------ ---- ------ ----
Service cost $ 597 $ 156 $ 532 $ 170 $ 476 $ 168
Interest 1,329 562 1,238 548 1,795 535
Actual return on
plan assets - (196) - (200) - (183)
Amortization of net
(gain) loss (374) 207 (256) 52 - -
Amortization of
transition obliga-
tion over 20 years 1,019 155 1,019 155 1,019 155
------- ----- ------- ----- ------ -----
Net periodic post-
retirement benefit
cost $ 2,571 $ 884 $ 2,533 $ 725 $3,290 $ 675
======= ===== ======= ===== ====== =====
F-24
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(In thousands of dollars except per common share amounts)
10. PENSION PLAN AND POSTRETIREMENT BENEFITS (Continued)
The assumed health care cost trend rate used to measure the expected
cost of benefits covered by the plan is 9.5% for 1998 and 9.0% for
1999, and is assumed to decrease approximately 0.5% per year until 2004
and remain level at 6.25% thereafter. The health care cost trend rate
assumption has a significant effect on the amounts reported. For
example, a 1.0% increase in the annual health care cost trend rate
would increase the accumulated postretirement benefit obligation as of
December 31, 1997 and 1996 by $873 and $854, respectively, and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for 1997 by $66.
The weighted-average discount rate used to estimate the accumulated
postretirement benefit was 7.5 % at December 31, 1997 and 7.75% at
December 31, 1996. The average rate of increase in future compensation
levels used was 4.3% in 1997 and 1996.
11. LEASE COMMITMENTS
The Company conducts a major portion of its operations from leased
office facilities under operating leases that expire over the next 10
years. Additionally, the Company leases data processing and other
equipment under operating leases expiring over the next five years.
Following is a schedule of future minimum rental payments required
under operating leases that have initial or remaining non-cancelable
lease terms in excess of one year as of December 31, 1997.
1998 $19,380
1999 14,763
2000 8,606
2001 4,238
2002 1,641
2003 and subsequent 820
---------
$49,448
Rent expense was $23,961, $22,551 and $22,649 for the years ended
December 31, 1997, 1996 and 1995, respectively.
F-25
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(In thousands of dollars except per common share amounts)
12. CREDIT ARRANGEMENTS
On November 7, 1997, the Company entered into a credit agreement with
Bank of America, individually and as administrative agent for a
syndicate of eleven other banks, pursuant to which a credit facility,
in an aggregate principal amount of up to $237.5 million, was available
to finance the acquisition of Commonwealth Land Title Insurance Company
and Transnation Title Insurance Company (see Note 16) and provide up to
$30.0 million for general corporate purposes. At December 31, 1997, the
Company had an aggregate amount of $4.0 million in loans outstanding
under the credit facility.
13. PENDING LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in certain litigation
arising in the course of their businesses, some of which involve claims
of substantial amounts. Although the ultimate results of these matters
cannot be predicted with certainty, management does not currently
expect that the resolution of these matters will have a material
adverse effect on the Company's financial position or results of
operations.
14. ACQUISITIONS
During the year ended December 31, 1996, the Company acquired three
title insurance agencies and an ancillary service business at an
aggregate cost of $7,900 of which $3,000 was paid in cash with the
balance payable in future periods. These acquisitions were not material
to the Company's operations.
F-26
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(In thousands of dollars except per common share amounts)
15. UNAUDITED QUARTERLY FINANCIAL DATA
Selected quarterly financial information follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1997
----
Premiums, title
search, escrow
and other $127,170 $152,018 $160,356 $183,237
Net investment
income 4,136 4,247 4,036 3,899
Income before
income taxes 1,084 12,394 13,041 13,950
Net income 847 8,011 8,441 8,858
Net income per
common share $.10 $.90 $.95 $.99
Net income per
common share -
assuming
dilution $.09 $.88 $.91 $.95
1996
----
Premiums, title
search, escrow
and other $117,469 $143,793 $141,679 $154,817
Net investment
income 5,345 5,500 4,593 20,986
Income before
income taxes 6,717 13,798 9,150 25,875
Net income 4,521 9,044 6,054 16,900
Income per common
share $.51 $1.02 $.68 $1.90
Net income per
common share -
assuming
dilution $.50 $1.00 $.66 $1.85
In the fourth quarter of 1996 the Company changed its investment
strategy by selling all of its equity portfolio and began to move the
proceeds into fixed-maturity securities. This sale resulted in capital
gains of $17.4 million in the quarter.
The 1996 and first three quarters of 1997 earnings per share amounts
have been restated as required to comply with Statement of Financial
Accounting Standards No. 128, Earnings Per Share.
F-27
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(In thousands of dollars except per common share amounts)
16. SUBSEQUENT EVENT
On February 27, 1998 the Company acquired all of the outstanding shares
of Commonwealth Land Title Insurance Company and Transnation Title
Insurance Company (Commonwealth/Transnation) from Reliance Insurance
Company, a subsidiary of Reliance Group Holdings, Inc. Together they
represented the third largest title insurance underwriting group in the
United States based on 1996 premium and fee revenue. The shares were
acquired in exchange for 4,039,473 shares of the Company's common stock
(book value, net of offering costs - $130,728); 2,200,000 shares of the
Company's 7% Series B Cumulative Convertible Preferred Stock, which are
the equivalent of 4,824,561 shares of common stock (book value -
$175,700); the net proceeds of an offering of 1,750,000 shares of
common stock ($65,921); and cash financed with bank debt ($200,681).
Estimated integration and capitalized costs are $15,000. The
Acquisition will be accounted for by the Company using the "purchase"
method of accounting. The assets and liabilities of
Commonwealth/Transnation will be revalued to their respective fair
market values. The financial statements of the Company will reflect the
combined operations of the Company and Commonwealth/Transnation from
the closing date of the Acquisition.
The following unaudited pro forma results of operations of the Company
give effect to the acquisition of Commonwealth/ Transnation as though
the transaction had occurred on January 1, 1997.
Gross revenues $1,535,431
Net income 55,803
Less: preferred dividends 7,700
Net income available to common
shareholders 48,103
Net income per common share 3.21
Net income per common share assuming
dilution 2.78
Weighted number of average common shares
outstanding 14,976
Weighted number of average common shares
outstanding assuming dilution 20,100
F-28
Schedule I
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
DECEMBER 31, 1997
(In thousands of dollars)
Column A Column B Column C Column D
-------- -------- -------- --------
Amount at
which shown
Fair in the
Type of investment Cost Value balance sheet
------------------ ---- ----- -------------
Fixed maturities:
Bonds:
Available-for-sale:
United States Government
and government agencies
and authorities $ 55,359 $ 59,592 $ 59,592
States, municipalities
and political sub-
divisions 96,493 100,223 100,223
Foreign Government 347 387 387
Public utilities 4,586 4,681 4,681
All other corporate bonds 73,814 75,941 75,941
Mortgage-backed securities 19,696 20,288 20,288
-------- -------- --------
Total fixed maturities $250,295 $261,112 $261,112
======== ======== ========
Equity securities:
Common stocks:
Banks, trust and insurance
companies $ 47 $ - $ -
Industrial, miscellaneous
and all other 840 1,664 1,664
-------- -------- --------
Total equity securities $ 887 $ 1,664 $ 1,664
======== ======== ========
Mortgage loans on real estate $ 448 XXX $ 448
======== ======== ========
Deposits with banks:
Invested cash $ 34,420 XXX $ 34,420
======== ======== ========
Total investments $286,050 XXX $297,644
======== ======== ========
F-29
Schedule II
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(In thousands of dollars)
1997 1996
---- ----
ASSETS
Cash $ 165 $ -
Stock of subsidiaries at equity 291,109 263,456
Notes receivable from affiliate 4,305 -
Other assets 3,359 806
-------- --------
Total assets $298,938 $264,262
======== ========
LIABILITIES
Due to (from) subsidiaries $ 2,129 $ 30
Note payable 4,000 1,000
Other liabilities 405 1,064
-------- --------
Total liabilities 6,534 2,094
SHAREHOLDERS' EQUITY
Preferred stock, no par value,
authorized 5,000,000 shares,
none issued or outstanding - -
Common stock, no par value,
authorized 45,000,000 shares,
issued and outstanding,
8,964,633 in 1997 and
8,889,791 in 1996 168,066 167,044
Unrealized investment gains 7,536 2,694
Retained earnings 116,802 92,430
-------- --------
Total shareholders' equity 292,404 262,168
-------- --------
$298,938 $264,262
======== ========
F-30
Schedule II
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(In thousands of dollars)
1997 1996 1995
---- ---- ----
REVENUES
Dividends received from
consolidated subsidiaries $ 3,387 $ 2,526 $ 2,610
Management fee from
consolidated subsidiary 1,793 1,153 740
-------- -------- --------
5,180 3,679 3,350
EXPENSES
Administrative expenses 1,793 1,153 740
-------- -------- --------
INCOME BEFORE EQUITY
IN UNDISTRIBUTED INCOME
OF SUBSIDIARIES 3,387 2,526 2,610
EQUITY IN UNDISTRIBUTED
INCOME OF CONSOLIDATED
SUBSIDIARIES 22,770 33,993 14,441
-------- -------- --------
NET INCOME $ 26,157 $ 36,519 $ 17,051
======== ======== ========
F-31
Schedule II
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(In thousands of dollars)
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income $ 26,157 $ 36,519 $ 17,051
Undistributed net income
of subsidiary (22,473) (33,993) (14,441)
Note receivable from
subsidiary (3,944) - -
Accounts payable 2,129 - -
Other (1,897) 589 -
-------- -------- --------
Net cash provided by (used
in) operating activities (28) 3,115 2,610
-------- -------- --------
Cash flows from investing activities:
Additional investment
in subsidiaries (1,022) (2,358) (994)
-------- -------- --------
Net cash used in investing
activities (1,022) (2,358) (994)
-------- -------- --------
Cash flows from financing activities:
Proceeds from note payable 3,000 1,000 -
Dividends paid (1,785) (1,778) (1,599)
-------- -------- --------
Net cash provided by (used
in) financing activities 1,215 (778) (1,599)
-------- -------- --------
Net increase (decrease) in
cash 165 (21) 17
Cash at beginning of year - 21 4
-------- -------- --------
Cash at end of year $ 165 $ - $ 21
======== ======== ========
F-32
Schedule II
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO PARENT COMPANY FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING POLICIES
Basis of presentation - The accompanying parent company financial statements
should be read in conjunction with the Company's Consolidated Financial
Statements.
F-33
ITEM 14(a)(3)
INDEX TO EXHIBITS
Exhibit Number
and Applicable
Section of Item 601 of
Regulation S-K Document
- -------------- --------
2.1 Amended and Restated Stock Purchase Agreement, dated December
11, 1997, by and among the Registrant, Lawyers Insurance
Corporation, Reliance Insurance Company and Reliance Group
Holdings, Inc., incorporated by reference to Appendix A to the
Registrant's definitive Proxy Statement for its Special
Meeting of Shareholders held on February 27, 1998, filed with
the Commission on January 29, 1998.
3.1 Articles of Incorporation, incorporated by reference to
Exhibit 3A of the Registrant's Form 10 Registration Statement,
as amended, File No. 0-19408.
3.2 Articles of Amendment of the Articles of Incorporation of the
Registrant, incorporated by reference to Exhibit 4.2 of the
Registrant's Form 8-A Registration Statement, filed February
27, 1998, File No. 1-13990.
3.3 Bylaws, incorporated by reference to Exhibit 3B of the
Registrant's Form 10 Registration Statement, as amended, File
No. 0-19408.
4.1 Amended and Restated Rights Agreement, dated as of August 20,
1997, between the Registrant and Wachovia Bank, N.A., as
Rights Agent, which Amended and Restated Rights Agreement
includes an amended Form of Rights Certificate, incorporated
by reference to Exhibit 4.1 of the Registrant's Current Report
on Form 8-K, dated August 20, 1997, File No. 1-13990.
4.2 First Amendment to Amended and Restated Rights Agreement,
dated as of December 11, 1997, between the Registrant and
Wachovia Bank, N.A., as Rights Agent, incorporated by
reference to Exhibit 4.1 of the Registrant's Current Report on
Form 8-K, dated December 11, 1997, File No. 1-13990..
4.3 Form of Common Stock Certificate, incorporated by reference to
Exhibit 4.6 of the Registrant's Form 8-A Registration
Statement, filed February 27, 1998, File No. 1-13990.
4.4 Form of 7% Series B Cumulative Convertible Preferred Stock
certificate, incorporated by reference to Exhibit 4.7 of the
Registrant's Form 8-A Registration Statement, filed February
27, 1998, File No. 1-13990.
10.1 Lawyers Title Corporation 1991 Stock Incentive Plan, as
amended May 16, 1995, May 21, 1996 and November 1, 1996,
incorporated by reference to Exhibit 10.1 of the Registrant's
Form 10-Q for the quarter ended September 30, 1996, File No.
1-13990.
10.2 Lawyers Title Insurance Corporation Deferred Income Plan,
incorporated by reference to Exhibit 10C of the Registrant's
Form 10 Registration Statement, as amended, File No. 0-19408.
10.3 Lawyers Title Insurance Corporation Benefit Replacement Plan,
incorporated by reference to Exhibit 10M of the Registrant's
Form 10 Registration Statement, as amended, File No. 0-19408.
10.4 Lawyers Title Insurance Corporation Supplemental Pension Plan,
incorporated by reference to Exhibit 10B of the Registrant's
Form 10 Registration Statement, as amended, File No. 0-19408.
10.5 Lawyers Title Corporation 1992 Stock Option Plan for
Non-Employee Directors, as amended May 21, 1996, incorporated
by reference to Exhibit 10.5 of the Registrant's Form 10-Q for
the quarter ended June 30, 1996, File No. 1-13990.
10.6 Distribution and Indemnity Agreement among Universal
Corporation, Lawyers Title Insurance Corporation and Lawyers
Title Corporation, dated as of October 1, 1991, incorporated
by reference to Exhibit 2.1 of the Registrant's Form 10-K for
the year ended December 31, 1991, File No. 0-19408.
10.7 Tax Sharing Agreement among Universal Corporation, Lawyers
Title Insurance Corporation and Lawyers Title Corporation,
dated as of October 1, 1991, incorporated by reference to
Exhibit 10.15 of the Registrant's Form 10-K for the year ended
December 31, 1991, File No. 0-19408.
10.8 Lawyers Title Insurance Corporation Senior Executive Severance
Agreement, incorporated by reference to Exhibit 10G of the
Registrant's Form 10 Registration Statement, as amended, File
No. 0-19408.
10.9 Lawyers Title Corporation Change of Control Employment
Agreement, incorporated by reference to Exhibit 10.12 of the
Registrant's Form 10-K for the year ended December 31, 1994,
File No. 0-19408.
10.10 Lawyers Title Insurance Corporation Change of Control
Employment Agreement, incorporated by reference to Exhibit
10.13 of the Registrant's Form 10-K for the year ended
December 31, 1994, File No. 0-19408.
10.11 Form of Lawyers Title Corporation Non-Qualified Stock Option
Agreement, dated October 29, 1991, with Schedule of Optionees
and amounts of options granted, incorporated by reference to
Exhibit 10.17 of the Registrant's Form 10-K for the year ended
December 31, 1991, File No. 0-19408.
10.12 Form of Lawyers Title Corporation Employee Non-Qualified Stock
Option Agreement, dated January 8, 1992, with Schedule of
Optionees and amounts of options granted, incorporated by
reference to Exhibit 10.18 of the Registrant's Form 10-K for
the year ended December 31, 1991, File No. 0-19408.
10.13 Form of Lawyers Title Corporation Employee Non-Qualified Stock
Option Agreement, dated January 4, 1993, with Schedule of
Optionees and amounts of options granted, incorporated by
reference to Exhibit 10.21 of the Registrant's Form 10-K for
the year ended December 31, 1992, File No. 0-19408.
10.14 Form of Lawyers Title Corporation Non-Employee Director
Non-Qualified Stock Option Agreement, incorporated by
reference to Exhibit 10.18 of the Registrant's Form 10-K for
the year ended December 31, 1994, File No. 0-19408.
10.15 Lawyers Title Insurance Corporation Regional Manager's
Incentive Program for 1993, incorporated by reference to
Exhibit 10.24 of the Registrant's Form 10-K for the year ended
December 31, 1992, File No. 0-19408.
10.16 Deed of Lease, dated September 29, 1989, between The Life
Insurance Company of Virginia and Lawyers Title Insurance
Corporation, incorporated by reference to Exhibit 10.26 of the
Registrant's Form S-1 Registration Statement, as amended, File
No. 33-70134.
10.17 Form of Lawyers Title Corporation Employee Non-Qualified Stock
Option Agreement, dated January 4, 1994, with schedule of
optionees and amounts of options granted, incorporated by
reference to Exhibit 10.27 of the Registrant's Form 10-K for
the year ended December 31, 1993, File No. 0-19408.
10.18 Form of Lawyers Title Corporation Employee Non-Qualified Stock
Option Agreement, dated January 5, 1995, with schedule of
optionees and amounts of options granted, incorporated by
reference to Exhibit 10.22 of the Registrant's Form 10-K for
the year ended December 31, 1994, File No. 0-19408.
10.19 Lawyers Title Insurance Corporation 1995 Benefit Restoration
Plan, incorporated by reference to Exhibit 10.23 of the
Registrant's Form 10-K for the year ended December 31, 1994,
File No. 0-19408.
10.20 Lawyers Title Corporation Outside Directors Deferral Plan,
incorporated by reference to Exhibit 10.24 of the Registrant's
Form 10-K for the year ended December 31, 1994, File No.
0-19408.
10.21 Form of Lawyers Title Insurance Corporation Split-Dollar Life
Insurance Agreement and Collateral Assignment, incorporated by
reference to Exhibit 10.25 of the Registrant's Form 10-K for
the year ended December 31, 1994, File No. 0-19408.
10.22 Form of Lawyers Title Corporation Employee Non-Qualified Stock
Option Agreement, dated January 3, 1996, with Schedule of
Optionees and amounts of options granted, incorporated by
reference to Exhibit 10.26 of the Registrant's Form 10-K for
the year ended December 31, 1995, File No. 1-13990.
10.23 Form of Lawyers Title Corporation Employee Non-Qualified Stock
Option Agreement, dated January 7, 1997, with Schedule of
Optionees and amounts of options granted, incorporated by
reference to Exhibit 10.23 of the Registrant's Form 10-K for
the year ended December 31, 1996, File No. 1-13990.
10.24 Form of LandAmerica Financial Group, Inc. Employee
Non-Qualified Stock Option Agreement, dated March 5, 1998,
with Schedule of Optionees and amounts of options granted.*
10.25 Form of LandAmerica Financial Group, Inc. 1998 Restricted
Stock Agreement, with Schedule of Grantees and number of
shares granted.*
10.26 Voting and Standstill Agreement, dated February 27, 1998, by
and among the Registrant, Reliance Group Holdings, Inc. and
Reliance Insurance Company.*
10.27 Registration Rights Agreement, dated February 27, 1998, by and
among the Registrant and Reliance Insurance Company.*
10.28 Revolving Credit Agreement, dated November 7, 1997, between
the Registrant and Bank of America National Trust and Savings
Association, individually and as Administrative Agent for a
syndicate of 11 other financial institutions, incorporated by
reference to Exhibit 99 of the Registrant's Current Report on
Form 8-K, dated November 7, 1997, File No. 1-13990.
10.29 Agreement Containing Consent Order, dated February 6, 1998, by
and between the Registrant and the Federal Trade Commission.*
10.30 LandAmerica Financial Group, Inc. Outside Directors Deferral
Plan.*
11 Statement re: Computation of Earnings Per Share.*
21 Subsidiaries of the Registrant.*
23 Consent of Ernst & Young LLP. *
27 Financial Data Schedule.* (electronic copy only)
* Filed Herewith