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, 2001
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.)
101 Gateway Centre Parkway
Richmond, Virginia 23235-5153
(Address of principal executive offices) (Zip Code)
(804) 267-8000
(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:
None
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
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The aggregate market value of voting stock held by non-affiliates of the
registrant on March 18, 2002 was approximately $594.9 million. Executive
officers and directors of the registrant 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 18, 2002 was 18,550,924.
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 2002 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. (the "Company") is a holding company
organized under the laws of the Commonwealth of Virginia on June 24, 1991. The
Company, through its subsidiaries, is engaged in the business of issuing title
insurance policies and performing other real estate-related services for both
residential and commercial real estate transactions. 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.
The Company has its principal executive offices at 101 Gateway Centre
Parkway, Richmond, Virginia 23235-5153. Its telephone number is (804) 267-8000.
Unless the context otherwise requires, the Company, as used herein, refers to
the Company and each of its subsidiaries.
Overview of the Company's Operations
Title Insurance. The Company issues title insurance policies through its
various title underwriting subsidiaries. The Company's three principal title
underwriting subsidiaries are Commonwealth Land Title Insurance Company
("Commonwealth"), Lawyers Title Insurance Corporation ("Lawyers Title") and
Transnation Title Insurance Company ("Transnation"). The Company also owns six
other title insurance underwriters, including Commonwealth Land Title Insurance
Company of New Jersey, Title Insurance Company of America and Industrial Valley
Title Insurance Company. The collective operations of these subsidiaries cover
the entire United States (with the exception of Iowa, which does not recognize
title insurance), certain territories of the United States and Canada.
In connection with the issuance of title insurance policies, the Company
performs title search and examination services and also offers closing
protection letters to lenders and owners who purchase title insurance. The
Company also furnishes certificates of title and abstracts of title in some
states.
Escrow and Closing Services. In addition to the issuance of title insurance
policies, the Company provides escrow and closing services to a broad-based
customer group that includes lenders, developers, real estate agents, attorneys
and home buyers and sellers. In California and a number of 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 premiums paid for
title insurance policies and other real estate-related services.
Real Estate Transaction Management Services. Through its LandAmerica
OneStop operation, the Company offers to the national and regional mortgage
lending community a full range of integrated residential real estate services
and the ability to manage the delivery of those services through a centralized
source. LandAmerica OneStop provides these mortgage originators with a single,
convenient point of contact through which they may place all of their orders for
title insurance and real estate-related services. The transaction management
services of LandAmerica OneStop include the coordination and delivery of title
insurance, credit reporting, flood certification, property appraisal and
valuation, closing and escrow services, real
estate tax services, document preparation and property inspections. These
services are provided by LandAmerica OneStop, other subsidiaries of the Company
or through joint ventures or strategic alliances with third parties.
The Company also is a provider of certain specialized services usually
associated with real estate transactions through LandAmerica Exchange Company.
LandAmerica Exchange Company facilitates property exchanges pursuant to Section
1031 of the Internal Revenue Code generally by holding the sale proceeds from
one transaction until a second acquisition occurs, thereby assisting customers
in deferring the recognition of taxable income.
Principal Title Underwriting Subsidiaries
Commonwealth. 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.
Lawyers Title. Lawyers Title, a Virginia corporation, has been engaged
primarily in the title insurance business since 1925. Lawyers Title conducts
business 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.
Transnation. Transnation, an Arizona corporation, is the successor to
Transamerica Title Insurance Company, which commenced business on March 26,
1910. Transnation is licensed by the insurance departments of 40 states and the
District of Columbia.
Title Insurance and Underwriting
Title Insurance. Title insurance policies are insured statements of the
condition of title to real property. Such 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. Title insurance is generally
accepted as the most efficient means of determining title to, and priority of
interests in, real estate in nearly all parts of the United States. 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 using real property as
security. 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.
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, 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.
Underwriting. The Company issues title insurance policies on the basis of a
title report, which is prepared pursuant to underwriting guidelines prescribed
by the Company, after a search
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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 the Company. 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 designated supervising office. The Company's
contracts with independent agents require that the agent seek prior approval of
the Company in order to commit the Company to assume a risk over a stated dollar
limit.
The Company owns a number of title plants and in some areas leases or
participates with other title insurance companies or agents in the cooperative
operation 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, the Company continually updates its
records by regularly adding current information from the public records and
other sources. In this way, the Company maintains the ability to produce quickly
and at a reduced expense a statement of the instruments that constitute the
chain of title to a particular property.
Direct and Agency Operations
The Company issues title insurance policies through its direct operations
(which include branch offices of its title insurers and wholly owned subsidiary
agencies of the Company) or through independent title insurance agents. Where
the policy is issued through its direct operations, the search is performed by
or at the direction of the Company, and the premium is collected and retained by
the Company. Where the policy is issued through an independent 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 Company 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. The Company is obligated to pay
title claims in accordance with the terms of its policies, regardless of whether
it issues policies through direct operations or independent agents.
The premium for title insurance is due in full when the real estate
transaction is closed. Title insurance premium revenues from direct operations
are recognized by the Company upon the closing of the transaction, whereas
premium revenues from agency operations are recognized by the Company upon
receipt of such premiums. Premiums from independent agents are typically
remitted to the Company an average of 90 days after the closing of the real
estate transaction.
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.
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In the ordinary course of business, the Company's underwriting subsidiaries
represent and defend the interests of their insureds, and provide on the
Company's consolidated 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 exceed the
stated liability limits of the policies involved. While the Company in the
ordinary course of its business has been subject from time to time to these
types of claims, the Company's losses to date on such claims have not been
significant in number or material in dollar amount to the Company's financial
condition.
Liabilities for estimated losses and loss adjustment expenses represent the
estimated ultimate net cost of all reported and unreported losses incurred
through December 31, 2001. 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. Independent actuaries review the adequacy of reserves on an
interim basis and certify as to their adequacy on an annual basis. The reserve
estimates are continually reviewed and adjusted as the Company's loss experience
develops or new information becomes known. Any adjustments to loss reserve
estimates are included as a current operating expense. The provision for policy
and contract claims as a percentage of operating revenues for the fiscal years
ended December 31, 2001, 2000 and 1999 was 4.0%, 4.4% and 4.9%, respectively.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations."
The Company 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.
Standard & Poors Corporation ("S&P") has assigned a financial strength
rating of "A-" to the title insurance operations of the Company. According to
S&P, an insurer rated "A" has strong financial security characteristics, but is
somewhat more likely to be affected by adverse business conditions than are
insurers with higher ratings, and the minus (-) rating indicates relative
standing within the "A" category. S&P assigns a ratings outlook along with its
letter ratings to indicate its expectations of trends that relate to the
financial strength rating for the rated company. The ratings outlook assigned by
S&P may be either "positive," "stable" or "negative." According to S&P, the
ratings outlook for the Company is "stable." Fitch, Inc. ("Fitch") has assigned
an "A" rating to the financial strength of the Company. According to Fitch, an
"A" rating is assigned to those companies that possess strong capacity to meet
policyholder and contract obligations, where risk factors are moderate and the
impact of any adverse business and economic factors is expected to be small.
Fitch also assigns a ratings outlook along with its letter ratings to indicate
its expectations of trends that relate to the financial strength rating for the
rated company. The ratings outlook assigned by Fitch may be either "positive,"
"stable" or "negative." According to Fitch, the ratings outlook for the Company
is "stable." The S&P and Fitch ratings are not designed for the protection of
investors and do not constitute recommendations to buy, sell or hold any
security.
The Company places a high priority on maintaining effective quality
assurance and claims administration programs. The Company's quality assurance
program focuses on quality control, claims prevention and product risk
assessment for its 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, the
Company has established due
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diligence requirements in connection with the appointment of new agents,
procedures for renewing existing agents and an Agency Audit Program. The Company
continues to refine its systems for maintaining effective quality assurance and
claims administration programs.
Reinsurance and Coinsurance
The Company distributes large title insurance risks through the mechanisms
of reinsurance and coinsurance. In reinsurance agreements, the reinsurer accepts
that part of the risk 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. The Company may
reinsure from among its own title insurance subsidiaries or may reinsure with
unaffiliated reinsurers. As a general rule, when the Company purchases
reinsurance on a particular risk from unaffiliated reinsurers, it will generally
retain a primary risk of $5.0 million and may participate with such reinsurers
on liability amounts above the primary level on a secondary level. Reinsurance
is generally purchased from unaffiliated reinsurers if the risk is greater than
$300.0 million.
The Company's title insurance subsidiaries assume reinsurance from
unaffiliated title insurance underwriters pursuant to a standard reinsurance
agreement concerning specific title insurance risks for properties on which they
assume a portion of the liability. The Company's title insurance subsidiaries
have entered into numerous reinsurance agreements with other title insurance
underwriters on specific transactions. The Company's exposure on all reinsurance
assumed is reduced due to the ceding company's retention of a substantial amount
of primary risk. 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 the Company has assumed. The
Company provides loss reserves on assumed reinsurance business on a basis
consistent with reserves for direct business.
The Company utilizes coinsurance to enable it to provide coverage in
amounts greater than it would be willing or able to undertake individually. In
coinsurance transactions, each individual underwriting company issues a separate
policy and assumes a fraction of the overall total risk. Each coinsurer is
liable only for the particular fraction of the risk it assumes.
The Company's title insurance subsidiaries enter 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 the Company's business as a whole.
The Company maintains excess of loss catastrophic insurance through Lloyd's
of London and Ace Capital Title Reinsurance Company totaling $200.0 million. The
Lloyd's policy provides fidelity and title loss coverage up to $100.0 million
with a $20.0 million deductible for title losses and a lesser deductible for
other losses. The Ace policy covers an additional $100.0 million in title
exposure for any covered loss that exceeds $100.0 million.
Title Insurance Revenues
The table below sets forth, for the years ended December 31, 2001, 2000 and
1999, the approximate dollars and percentages of the Company's revenues for the
ten states representing the largest percentages of such revenues and for all
other states combined:
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Revenues by State
(Dollars in thousands)
Years Ended December 31,
------------------------------------------------------------
2001 2000 1999
------------------ ------------------ -------------------
Texas $ 299,688 14.1% $ 277,547 15.9% $ 275,271 13.8%
California 254,281 12.0% 195,016 11.1% 222,319 11.1%
Florida 139,756 6.6% 136,976 7.8% 168,808 8.4%
Michigan 130,499 6.2% 96,688 5.5% 111,992 5.6%
Pennsylvania 130,282 6.1% 117,131 6.7% 138,028 6.9%
New York 109,592 5.2% 98,041 5.6% 113,510 5.7%
Colorado 82,485 3.9% 48,357 2.8% 53,530 2.7%
New Jersey 78,022 3.7% 74,620 4.3% 76,897 3.8%
Virginia 70,214 3.3% 56,290 3.2% 53,511 2.7%
Arizona 64,207 3.0% 52,759 3.0% 60,914 3.0%
Other 656,022 31.0% 553,060 31.5% 657,802 32.9%
---------- ----- ---------- ----- ---------- -----
Total Title Revenues 2,015,048 95.1% 1,706,485 97.4% 1,932,582 96.6%
Non-Title Revenues 104,426 4.9% 44,785 2.6% 67,432 3.4%
---------- ----- ---------- ----- ---------- -----
Total Revenues $2,119,474 100.0% $1,751,270 100.0% $2,000,014 100.0%
========== ===== ========== ===== ========== =====
Sales and Marketing
The Title Insurance Market. For sales and marketing purposes, the Company
generally views residential real estate activities and commercial real estate
activities as two distinct sources of title insurance business. Residential real
estate business results from the construction, sale, resale and refinancing of
residential properties, while commercial real estate business results from
similar activities with respect to properties with a business or commercial use.
The Company has emphasized the development of its residential real estate
business over the last decade, while maintaining a leadership position in
insuring commercial real estate transactions. Although precise data is not
available to compare the percentage of total premium revenues of the Company
derived from commercial versus residential real estate activities, approximately
83% of such revenues in 2001 resulted from policies providing coverage of $1.0
million or less (which tend to be residential) and approximately 17% of such
revenues resulted from policies providing coverage in excess of $1.0 million.
Residential Transactions. The Company's primary source of residential
business is from the local real estate community, such as attorneys, real estate
brokers and developers, financial institutions, mortgage brokers and independent
escrow agents. Maintenance and expansion of these referral sources is integral
to the Company's marketing strategy for local residential business. Although
most of the Company's residential business arises from these local
relationships, large national and regional residential mortgage originators
continue to expand their role in the residential real estate market. These
lenders are attracted to title insurance providers who can offer a centralized
source for title insurance and a broad array of services related to residential
real estate transactions. The Company has responded to this trend in the market
by establishing LandAmerica OneStop as a transaction manager offering a single,
convenient point of contact through which national and regional mortgage lenders
can place orders for title insurance and other services related to real estate
transactions. See "Overview of the Company's Operations - Real Estate
Transaction Management Services."
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The Company continues to develop its national affiliated agency
relationships that include builders, realtors, lenders and vendor managers.
Often these relationships attract residential transactions on a regional or
statewide basis.
Commercial Transactions. The Company is one of the leading providers of
title insurance for commercial transactions. The Company's National Commercial
Services ("NCS") division specializes in the sale and servicing of title
insurance for complex commercial and multi-property transactions. The Company
has NCS offices in 20 strategic metropolitan areas in the United States. Each
NCS office markets title insurance products, appraisals, surveys and related
services to large commercial customers located in its sales territory and acts
as a single point of contact for the customer's title insurance needs throughout
the country. The Company also markets title insurance for commercial
transactions through local direct operations and independent agents.
In addition, the Company is one of the most strongly capitalized title
insurers in the industry, with an aggregate statutory surplus of $451.2 million
as of December 31, 2001. The financial strength of the Company is an important
factor in marketing the Company's commercial title business capabilities,
enabling it to underwrite larger title policies and retain higher levels of risk
without purchasing reinsurance from a third party. The Company's capital
position supports financial strength ratings of "A-" from Standard & Poors and
"A" from Fitch. These ratings are important in competing for commercial title
insurance business.
Marketing Strategy. The Company has begun a transition from title insurance
product delivery to real estate transaction solution provider. This strategy
entails becoming more of a single source provider of market specific products
and services.
Customers
As of December 31, 2001, no single independent agent was responsible for
more than 5% of the Company's title insurance revenues. In addition, the Company
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 the
Company.
Competition
The business of providing real estate transaction services is very
competitive. Competition for residential title insurance business is based
primarily on service and, to a lesser extent, price. Service quality is based
upon a number of factors, including technological capabilities (resulting in a
readily accessible, efficient and reliable product) and the ability to respond
quickly to customers. With respect to national and regional mortgage lenders,
service quality includes a large distribution network and the ability to deliver
a broad array of real estate services quickly, efficiently and through a single
point of contact. Competition for commercial title business is based primarily
on price, service, expertise in complex transactions and the size and financial
strength of the insurer. Title insurance underwriters also compete for agents on
the basis of service and commission levels.
The Company is one of the largest title insurance underwriters in the
United States based on title premium revenues. Its principal competitors are
other major title insurance underwriters and their agency networks. The
Company's principal competitors during 2001 were Fidelity National Financial,
Inc., Old Republic International Corporation, Stewart Information Services,
Inc., and The First American Corporation. Of the more than one hundred title
insurance underwriting companies licensed in the United States, the top five
companies accounted for approximately 89% of the title insurance market in 2000
based on public filings made by those companies.
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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. The Company has
underwriting limits that are comparable to its competitors. 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. In addition, the Company may spread the risk of a
large underwriting liability over its three principal title underwriting
subsidiaries. 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.
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 the Company's title insurance
subsidiaries may make. These state authorities also regulate insurance rates,
forms of policies, claims handling procedures and the form and content of
required annual statements, and have the power to audit and examine the
financial and other records of these companies. Some states require title
insurers to own or lease title plants. A substantial portion of the assets of
the Company's title underwriting subsidiaries consists of their portfolios of
investment securities. Each of these subsidiaries is required by the laws of its
state of domicile to maintain assets of a statutorily defined quality and
amount. See "Investment Policies" below. 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. Generally, all of the title
underwriters that meet certain financial thresholds are required to engage
independent auditors to audit their statutory basis financial statements which,
along with the auditor's report, must be filed with the state insurance
regulators.
The National Association of Insurance Commissioners (the "NAIC") 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. A number of states have adopted legislation similar to some of the
provisions contained in the NAIC model legislation. The Company cannot predict
whether all or any portion of the proposed legislation or any similar
legislation will be adopted in any other states. Also, the NAIC has adopted an
instruction requiring an annual certification of reserve adequacy by a qualified
actuary. Because all of the states in which the Company's title insurance
subsidiaries are domiciled require adherence to NAIC filing procedures, each
such subsidiary, unless it qualifies for an exemption, must file an actuarial
opinion with respect to the adequacy of its reserves.
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 Arizona, California, New Jersey, New York, Ohio,
Pennsylvania, Tennessee, Texas, and Virginia. Such a requirement could have the
effect of delaying or preventing certain transactions affecting the control of
the Company or the ownership of the
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Company's Common Stock, including transactions that could be advantageous to the
shareholders of the Company.
Investment Policies
The Company earns investment income from its portfolio consisting primarily
of fixed-maturity debt securities issued principally by corporations and United
States, state and local jurisdictions, as well as by United States government
agencies. Substantially all of this portfolio is located in the Company's title
underwriting subsidiaries. At December 31, 2001, approximately 98% of the
Company's investment portfolio consisted of investment grade securities. Under
the Company's investment guidelines, up to 15% of the investment portfolio may
be invested in non-investment grade securities. The Company's portfolio is
managed to comply with the various state regulatory requirements while
maximizing net after-tax yield. The Company generally does not invest in common
stock issued by unaffiliated entities. The investment portfolio is managed by
professional investment advisors under guidelines that govern the types of
permissible investments, investment quality, maturity and duration, and
concentration of issuer. These guidelines, and the Company's investment
strategies, are established and periodically re-examined by the Investment Funds
Committee of the Company's Board of Directors. This Committee also reviews the
performance of the investment advisors on a quarterly basis. See Note 3 to the
Consolidated Financial Statements.
Cyclicality and Seasonality
The title insurance business is closely related to the overall level of
residential and commercial real estate activity, which is generally affected by
the relative strength or weakness of the United States economy. In addition,
title insurance volumes fluctuate based on the effect changes in interest rates
have on the level of real estate activity. Economic downturns, or periods of
increasing interest rates, usually have an adverse impact on real estate
activity and therefore premium and fee revenues. In contrast, real estate
activity usually increases when interest rates fall.
Historically, residential real estate activity has been generally slower in
the winter, when fewer families buy or sell homes, with increased volumes in the
spring and summer. Residential refinancing activity is generally more uniform
throughout the seasons, but is subject to interest rate variability. The Company
typically reports its lowest revenues in the first quarter, with revenues
increasing into the second quarter and through the third quarter. The fourth
quarter customarily may be as strong as the third quarter, depending on the
level of activity in the commercial real estate market.
Employees
As of December 31, 2001, the Company had 8,642 full time and 339 part time
employees. The Company's relationship with its employees is good. Except for
nine employees in Pittsburgh, Pennsylvania, no employees of the Company are
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.
-9-
The Company, through its subsidiaries, sometimes acts as a temporary title
holder to real estate under a nominee holding agreement and sometimes
participates in title holding agreements involving tax-deferred exchanges. The
Company'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 the Company might acquire title to real
estate, it will generally require that an appropriate environmental assessment
be made to evaluate and avoid any potential liability.
Business Strategy
The Company is one of the largest title insurers in the United States. The
Company's long term objective is to enhance its position as a premier, low cost
national provider of integrated real estate transaction management services and
to maximize its profitability throughout the real estate market cycle. To
accomplish this objective, the Company is pursuing various business strategies
designed to broaden its market position and provide the framework to enhance
growth and maximize profitability.
Increasing Focus on Real Estate Transaction Management Services. Throughout
the Company's customer base, there is an increased demand for centralized
transaction management solutions. This trend is particularly evident in the case
of national mortgage originators. These large national mortgage lenders
increasingly expect that necessary services related to the mortgage financing
process be available from and billed by a single source. Each lender also seeks
a quick and efficient response to avoid the loss of business to a competitor. As
a transaction manager offering the coordination and delivery of a broad range of
real estate-related services, LandAmerica OneStop responds to this market need
by providing national mortgage originators with a single, convenient point of
contact through which they may place all of their orders for title insurance and
real estate-related services. The Company believes that LandAmerica OneStop's
transaction management services coupled with its technology-enhanced national
distribution system enable it to increase the speed and efficiency of real
estate transactions. The Company expects that LandAmerica OneStop will be
increasingly important in the next few years in attracting and retaining the
business of the large national mortgage lenders as well as other multi-state
transaction originators.
Expanding Distribution Capabilities. The Company seeks to increase its
share of the title insurance market by expanding and enhancing its distribution
channels through the hiring and retention of experienced industry professionals
with strong local relationships, the opening of new direct offices in markets
with the potential for significant transaction volume, and selectively acquiring
or engaging in joint ventures with title insurance companies and agencies in
order to strengthen the Company's presence in particularly attractive markets.
In the case of the acquisition of agencies or small to medium-size underwriters,
the Company reviews the agency's or underwriter's profitability, location,
growth potential in its existing market, claims experience and, in the case of
an underwriter, the adequacy of its reserves.
Providing High Quality Service. High quality service, defined as the prompt
and accurate production and delivery of products and services, is a critical
competitive factor in developing successful long-term relationships with
customers. Service quality is particularly important to the growing national
lender customer base.
Maintaining Commercial Real Estate Market Strength. Participation in the
commercial real estate market is attractive since the operating margins are
generally better than those provided in residential real estate transactions. In
addition, commercial business partially offsets some of the cyclicality of the
residential real estate market, where transaction volumes are more susceptible
to changes in interest rates. The Company maintains its presence in the
commercial real estate market primarily due to the financial strength ratings of
its underwriting subsidiaries, its strong capital position, the high quality
service that it provides and its expertise in handling
-10-
complex transactions. In particular, the combined capital position of the
Company's three principal underwriting subsidiaries enables it to underwrite
large commercial policies while purchasing less reinsurance, thus increasing
profitability.
Reducing Costs and Expenses. Through cost control, the Company achieves
economies of scale in its core title insurance related operations as losses
resulting from claims under title insurance policies represent a relatively
small part of the Company's overall costs. The Company is implementing the
following plans to further improve efficiency:
. Service Center Expansion. Operating costs, the largest portion of
expenses relating to providing title insurance, are relatively high
compared to other types of insurers. In twelve major markets, the
Company has implemented the concept of Service Centers, in which its
three principal operating subsidiaries share a single back office
processing center in a geographic region while continuing to market
from separate storefronts under different brand names. This concept
has reduced the Company's cost per order in those markets. Service
Centers are now in place in Chicago, Denver, Detroit, Ft. Lauderdale,
Houston, Orlando, Philadelphia, Phoenix, Portland, San Francisco,
Seattle and Tampa.
. Workflow Process Redesign. The Company is committed to the redesign of
traditional workflow processes. In an effort to reduce expenses and
improve service, the Company has several pilot projects underway to
centralize escrow support and improve the workflow in Service Centers.
Using Technology. The Company has introduced an Internet portal that
connects existing title production and closing systems to the Internet so
customers can check the status of their orders and receive documents on-line.
The new system allows the Company to receive orders electronically and to
deliver the title report and closing statement as email attachments, thereby
improving service to customers. The residential portal was installed as a pilot
project in 2001 and is expected to be introduced throughout the Company's
closing operations during 2002 and 2003. Benefits of the system include a
reduction in staffing levels accompanied by an increase in the speed an order
can be processed.
Enhancing Cost Control Flexibility. The Company manages its personnel
expenses to reflect changes in the level of activity in the real estate market.
As a result, the Company's employee base expands and contracts over time. In
order to manage personnel costs more efficiently throughout the real estate
cycle, the Company uses temporary or part time employees where appropriate to
staff operations so the Company can respond promptly to changes in real estate
activity.
ITEM 2. PROPERTIES
The Company owns an office building and adjacent real estate in Richmond,
Virginia that it uses for its corporate headquarters. This property consists of
approximately 128,000 square feet of office space and parking facilities. The
Company's title insurance subsidiaries conduct their business operations
primarily in leased office space. As of December 31, 2001, the Company had
numerous leases for its branch offices and subsidiaries throughout the states in
which it operates. In addition, it owns several other properties that 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 indexed to specific properties in an area. The plants are generally
located at the office which serves a particular locality or in "service centers"
serving multiple localities in major metropolitan areas. They enable title
-11-
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 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") in connection with the acquisition of Commonwealth and Transnation. The
Consent Order required, and the Company completed, the divestiture of certain
title plants in 12 localities named in the Consent Order. Seven of such
localities were in Florida, three were in Michigan, and one each was in
Washington, D.C. and St. Louis, Missouri. Pursuant to the terms of the Consent
Order, the Company may not 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 its properties are maintained in good operating
condition and are suitable and adequate for its purposes.
ITEM 3. LEGAL PROCEEDINGS
General
The Company and its subsidiaries are involved in certain litigation arising
in the ordinary 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.
Litigation Not in the Ordinary Course of Business
The People of the State of California, the Controller of the State of
California and the Insurance Commissioner of the State of California have filed
a putative defendant class action suit in the Sacramento Superior Court against
Fidelity National Title Insurance Company and others (Case No. 99AS02793) (the
"Attorney General's Case"). While the subsidiaries of the Company that do
business in California (the "Company's California Subsidiaries") were not named
in the Attorney General's Case, they fall within the putative defendant class
definition which includes virtually all title insurance underwriters,
underwritten title companies, controlled escrow companies and independent escrow
companies in California. The Attorney General's Case alleges that the defendants
(i) failed to escheat unclaimed property to the Controller of the State of
California on a timely basis, (ii) charged California home buyers and other
escrow customers fees for services which were never performed, or which cost
less than the amount charged, and (iii) devised and carried out schemes with
financial institutions to receive interest, or monies in lieu of interest, on
escrow funds deposited by defendants with financial institutions in demand
deposits. The Attorney General's Case seeks injunctive relief, restitution and
civil penalties. The Company has reached an agreement in principle to settle the
claims made in the Attorney General's Case. The Company believes that if a final
settlement materially consistent
-12-
with the terms of the agreement in principle is consummated, such settlement
would not have a material adverse effect upon the Company's financial condition.
On or about June 16, 2000, Norman E. Taylor, Connie S. Taylor, Lynne
Thompson Jones-Brittle, Colin R. Callaghan and Miriam J. Callaghan
(collectively, the "Plaintiffs") filed a putative class action suit (the "Taylor
Suit") in the Superior Court of Los Angeles, California (Case No. BC 231917)
against the Company, Commonwealth Land Title Insurance Company, Commonwealth
Land Title Company, Lawyers Title Insurance Corporation and Lawyers Title
Company (collectively, the "Defendants"). The Plaintiffs purport to represent a
class defined in the First Amended Complaint dated November 20, 2000 (the
"Amended Complaint") as "[a]ll persons or entities who, from 1980 to the
present, incident to purchase, sale or refinancing of real property located in
California, deposited funds in escrow accounts controlled by the Defendants and
were not paid interest on their funds and/or were charged fees for services not
rendered by Defendants or excessive fees for the services Defendants performed."
The Plaintiffs allege in the Amended Complaint that the Defendants unlawfully
(a) received interest, other credits or payments that served as the functional
equivalent of interest, on customer escrow funds; (b) charged and retained fees
for preparing and recording reconveyances that they did not prepare or record,
and charged and retained excessive fees for other escrow-related services; and
(c) swept or converted funds in escrow accounts based upon contrived charges
prior to the time the funds escheated or should have escheated to the State of
California pursuant to the Unclaimed Property Law. The Plaintiffs assert claims
for relief against the Defendants based on (i) violation of California's Unfair
Business Practices Act, California Business and Professions Code Sections 17200,
et. seq.; (ii) violation of California's Deceptive, False and Misleading
-- ---
Advertising Act, California Business and Professions Code Sections 17500, et.
--
seq.; (iii) violation of California's Consumer Legal Remedies Act, California
---
Civil Code Sections 1750, et. seq.; (iv) breach of fiduciary duty; (v) breach of
-- ---
agents' duties to their principals; (vi) breach of undertaking of special duty;
(vii) conversion; (viii) unjust enrichment; (ix) conspiracy; and (x) negligence.
The Plaintiffs seek injunctive relief, restitution of improperly collected
charges and interest and the imposition of an equitable constructive trust over
such amounts, damages according to proof, punitive damages, costs and expenses,
attorneys' fees, pre- and post-judgment interest and such other and further
relief as the Court may deem necessary and proper. The Company intends to defend
vigorously the Taylor Suit. The suit is still in its initial stages, and at this
time no estimate of the amount or range of loss that could result from an
unfavorable outcome can be made.
Commonwealth Land Title Company, a subsidiary of the Company, was served
with a complaint in a putative class action suit filed on May 21, 2001 in the
Superior Court of Los Angeles, California, Central District, styled Thomas
Branick and Ardra Campbell v. First American Title, et al. (Case No. BC 250923).
The complaint, which named "Commonwealth Title" and numerous other title
companies and lenders as defendants, purported to allege causes of action for
unfair competition (California Business and Professions Code Sections 17200, et.
--
seq.) and unfair business practices (California Business and Professions Code
---
Sections 1750, et. seq.). Although the complaint contained no specific
-- ---
allegations against "Commonwealth Title," it generally alleged that the named
defendants improperly charged recordation and other fees. The complaint prayed
for relief in the form of statutory penalties, restitution, injunctive relief,
costs of suit and attorneys' fees. After the action was brought, amendments were
filed naming Lawyers Title Company and Lawyers Title Insurance Corporation as
defendants. Following a hearing on February 15, 2002, the court sustained
defendants' demurrers dismissing the suit without leave to amend, based only on
a misjoinder of parties. The plaintiffs could challenge this decision in the
Superior Court or appeal it.
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 2001.
-13-
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 18, 2002, 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. 59 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. In addition, since June 1, 1999,
Mr. Foster has served as Chairman and Chief Executive Officer of Commonwealth
and Transnation.
Janet A. Alpert 55 President of the Company since January 1993. Ms. Alpert also serves as President
of Lawyers Title, a position she has held for more than five years. In addition,
since March 1, 1998, Ms. Alpert has served as President of Commonwealth and
Transnation. Ms. Alpert also served as Chief Operating Officer of the Company
and Lawyers Title from January 1993 to February 27, 1998.
Theodore L. Chandler, Jr. 49 Senior Executive Vice President of the Company since January 31, 2000. Mr.
Chandler also serves as Senior Executive Vice President of Lawyers Title,
Commonwealth and Transnation, positions he has held since February 23, 2000. Mr.
Chandler was a member of the law firm of Williams, Mullen, Clark & Dobbins until
January 31, 2000, a position he held for more than five years.
G. William Evans 47 Executive Vice President and Chief Financial Officer of the Company since
September 15, 1999. Mr. Evans also serves as Executive Vice President and Chief
Financial Officer of Lawyers Title, Commonwealth and Transnation, positions he
has held since September 15, 1999. Mr. Evans served as Executive Vice President
- Information Technology of the Company from February 27, 1998 to September 15,
1999. He served as Vice President and Treasurer of the Company from October 1991
to February 1998. He also served as Senior Vice President, Chief Financial
Officer and Treasurer of Lawyers Title from October 1991 to February 1998.
-14-
Name Age Office and Experience
---- --- ---------------------
John M. Carter 46 Executive Vice President - Law and Employee Relations of the Company since
February 27, 1998. Mr. Carter also serves as Executive Vice President - Law and
Employee Relations of Commonwealth, Lawyers Title and Transnation, positions he
has held since March 1, 1998. He served as Assistant Secretary of the Company
from February 1995 to February 1998. He also served as Senior Vice President -
Law and Employee Relations of Lawyers Title from April 1997 to February 1998.
Karen L. Schmidt 48 Executive Vice President - Markets of the Company since January 8, 2001. Ms.
Schmidt was the Executive Director of Marketing and Sales for BDO Seidman from
September 1997 until December 2000 and served as the Chief Marketing Officer of
Quantra Corporation from September 1995 until September 1997.
Russell W. Jordan, III 61 Executive Vice President, General Counsel and Secretary of the Company since
October 24, 2001. Mr. Jordan also serves as Executive Vice President and General
Counsel of Lawyers Title, Commonwealth and Transnation, positions he has held
since October 24, 2001. Mr. Jordan served as Senior Vice President, General
Counsel and Secretary of the Company from March 1, 1998 to October 24, 2001. In
addition, Mr. Jordan served as Senior Vice President and General Counsel for
Commonwealth and Transnation from March 1, 1998 until October 24, 2001 and held
the same position for Lawyers Title for more than five years until October 24,
2001. Mr. Jordan served as Secretary and General Counsel of the Company from
October 1991 to February 1998.
John R. Blanchard 53 Senior Vice President - Corporate Controller of the Company since February 27,
1998. Mr. Blanchard also serves as Senior Vice President and Corporate
Controller of Commonwealth, Lawyers Title and Transnation, positions he has held
since March 1, 1998. He served as Controller of the Company from February 1992
to February 1998. He also served as Senior Vice President and Controller of
Lawyers Title from October 1991 to February 1998.
Christopher L. Rosati 42 Senior Vice President - Operations Controller of the Company since February 27,
1998. Mr. Rosati also serves as Senior Vice President and Operations Controller
of Commonwealth, Lawyers Title and Transnation, positions he has held since
March 1, 1998. He served as Vice President and Controller of Commonwealth and
Transnation from March 1996 to February 1998.
-15-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market Price and Dividends
The Common Stock of the Company trades on the New York Stock Exchange
("NYSE") under the symbol "LFG."
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.
Price Range
----------------
High Low Dividends
------ ------ ---------
Year Ended December 31, 2000
First quarter $22.00 $16.31 $0.05
Second quarter 23.19 16.06 0.05
Third quarter 29.63 20.50 0.05
Fourth quarter 42.94 26.75 0.05
Year Ended December 31, 2001
First quarter $50.45 $30.75 $0.05
Second quarter 37.00 26.50 0.05
Third quarter 37.09 29.09 0.05
Fourth quarter 35.69 23.20 0.05
As of March 18, 2002, there were approximately 1,381 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,
approximately $59.7 million of the net assets of the Company's consolidated
subsidiaries are available for dividends, loans or advances to the Company
during 2002.
In addition to the minimum statutory surplus requirements described above,
these 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. The following table summarizes the
insurance regulations that restrict the amount of dividends that Commonwealth,
Lawyers Title and Transnation can distribute to the Company in any 12-month
period without prior regulatory approval:
-16-
Regulatory Financial
Subsidiary Agency Regulatory Limitation Limitation (1)
------------- ------------------ --------------------------------------------- --------------
Commonwealth Pennsylvania Payment of dividends or distributions may not $30.6 million
Department of exceed the greater of:
Insurance
. 10% of such insurer's surplus as of the
preceding year end, or
. the net income of such insurer for such
preceding year.
Lawyers Title Virginia Bureau of Payment of dividends or distributions is $22.9 million
Insurance limited to the lesser of:
. 10% of such insurer's surplus as of the
preceding December 31, or
. the net income, not including realized
capital gains, of such insurer for the
preceding calendar year.
Transnation Arizona Department Payment of dividends or distributions is $6.2 million
of Insurance limited to the lesser of:
. 10% of such insurer's surplus as of the
preceding December 31, or
. such insurer's net investment income for
the preceding calendar year.
----------
(1) Based on statutory financial results for the year ended December 31, 2001.
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, as amended, 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, 2001, approximately $31.1 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.
-17-
ITEM 6. SELECTED FINANCIAL DATA
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.
For the year ended
December 31: 2001 2000 1999 1998 1997
---------- ----------- ---------- ---------- --------
(In thousands of dollars, except for common share amounts)
Revenues ........... $2,170,477 $1,802,405 $2,048,013 $1,848,870 $639,099
Net (loss) income... 60,266(2) (80,766)(1) 54,317 93,028 26,157
Net income per
common share ....... 3.42 (6.60) 3.21 6.13 2.93
Net income per
common share
assuming dilution... 3.24 (6.60) 2.79 5.05 2.84
Dividends per
common share ....... 0.20 0.20 0.20 0.20 0.20
At December 31:
Total assets ....... 1,707,481 1,618,957 1,657,921 1,692,358 554,693
Shareholders'
equity ............. 727,493 644,100 730,703 771,189 292,404
----------
(1) The net loss reported by the Company for the fiscal year ended December 31,
2000 resulted from a change in the Company's method for assessing the
recoverability of goodwill (not associated with impaired assets) during the
fourth quarter of 2000 which resulted in net of tax charges of $110,369. See
Note 2 to the Consolidated Financial Statements.
(2) In the fourth quarter of 2001, the Company reassessed the carrying value of
intangibles and capitalized software which resulted in net of tax charges to
earnings of $32,893. See Note 15 to the Consolidated Financial Statements.
-18-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Critical Accounting Policies and Estimates
This discussion and analysis of LandAmerica's financial condition and
results of operations is based upon its consolidated financial statements which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements 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. The Company's significant accounting policies are
disclosed in Note 1 to the accompanying financial statements. The Company
believes that the following are the most critical of its accounting policies:
. 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.
. Policy and Contract Claims. A provision for estimated future claims
payments is recorded at the time policy revenue is recorded. Payment
experience for the Company and the industry extends for more than 20
years after the issuance of a policy. Due to the length of time over
which claim payments are made and regularly occurring changes in
underlying economic conditions, these estimates are subject to
variability. Loss provision rates are reviewed periodically and
adjusted by management as experience develops or new information
becomes known. In establishing loss provision rates, management
considers historical experience, current economic conditions and the
mix of business. Independent actuaries review the adequacy of reserve
levels on an interim basis and certify to their adequacy on an annual
basis.
. Long-Lived Assets. The Company reviews long-lived assets 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.
. Deferred Tax Asset. The Company recorded net deferred tax assets at
December 31, 2001 and 2000 related primarily to policy and contract
claims, the write off of intangibles (See Note 2 to Consolidated
Financial Statements) and employee benefit plans. Based upon the
Company's historical results of operations, the existing financial
condition of the Company and management's assessment of all other
available evidence, management believes that the benefit of these
assets will more likely than not be realized. A valuation allowance is
provided for deferred tax assets if it is more likely than not that
some portion or all of these items will expire before the Company is
able to realize their benefit.
. Goodwill. During the fourth quarter of 2000 the Company changed its
method for assessing the recoverability of goodwill not associated
with impaired assets from an undiscounted cash flow approach to a
discounted cash flow approach and wrote off a portion of its recorded
goodwill (See Note 2 to Consolidated Financial Statements). Prior to
July 1, 2001, goodwill was subject to periodic amortization on a
straight-line
-19-
basis over its estimated life. Subsequent to December 31, 2001,
goodwill is no longer subject to amortization. For fiscal years
beginning after December 15, 2001 the carrying amount of goodwill is
subject to impairment tests prescribed by the Financial Accounting
Standards Board ("FASB") Statements of Financial Accounting Standards
("SFAS") No. 142, Goodwill and Other Intangible Assets.
Overview
The Company's primary business is the provision of real estate transaction
services, including the insurance of titles to real property, which is greatly
influenced by the real estate economy. During the three-year period from 1999
through 2001, the Company's title operations benefited from the execution of
three distinct aspects of its business strategy. Operations were expanded
through the acquisition of title insurance agents, expenses were tightly
monitored and controlled and claims experience improved due to quality control
efforts and an improved claims environment.
During 2000, the Company decided to place increased emphasis on other
products and services related to real estate transactions. As a result, in
October 2000, the Company acquired Primis, Inc., a web-based provider of real
estate services. In 2001, the acceptance of Primis' technology by the Company's
customer base proved to be much slower than anticipated, necessitating a fourth
quarter non cash write off of intangibles, including goodwill, acquired in the
acquisition.
Revenues
The Company's operating revenues, consisting of premiums, title search,
escrow and other fees, are dependent on overall levels of real estate and
mortgage refinance activity, which are influenced by a number of factors
including interest rates and the general state of the economy. In addition, the
Company's revenues are affected by the Company's sales and marketing efforts and
its strategic decisions based on the rate structure and claims environment in
particular markets.
Premiums and fees are determined both by competition and by state
regulation. 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. This typically
results in delays averaging 90 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 portion of the Company's revenues attributable to agents.
In addition to the premiums and related fees, the Company earns investment
income from its investment portfolio of primarily fixed-maturity 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.
Factors Affecting Profit Margins and Pre-Tax Profits
The Company's profit margins are affected by several factors, including the
volume of real estate and mortgage refinance activity, policy amount and the
nature of real estate transactions. Volume is an important determinant of
profitability because the Company, like any other real estate services 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. Cancellations
affect profitability because costs incurred both in opening and in processing
orders typically are not offset by fees. Commercial transactions tend to be more
profitable than residential transactions.
-20-
The Company's largest expense is commissions paid to independent agents.
The Company regularly reviews the profitability of its agents, adjusting
commission levels or canceling 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, which is the
sum of salaries and employee benefits, agency commissions and other expenses
(exclusive of interest, goodwill, exit and termination costs and write off of
intangibles) expressed as a percentage of operating revenues.
Claims
Generally, title insurance claim rates are lower than 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 occurs for more than 20 years after
the policy is issued. Management considers historical claim payment patterns,
current economic conditions and changes in the mix of business in setting its
loss provision ratio. Independent actuaries review the adequacy of reserves on
an interim basis and certify as to their adequacy on an annual basis. Management
has continued to emphasize and strengthen claims prevention and product quality
programs.
Seasonality
Historically, residential real estate activity has been generally slower in
the winter, when fewer families buy or sell homes, with increased volumes in the
spring and summer. Residential refinancing activity is generally more uniform
throughout the seasons, but is subject to interest rate variability. The Company
typically reports its lowest revenues in the first quarter, with revenues
increasing into the second quarter and through the third quarter. The fourth
quarter customarily may be as strong as the third quarter, depending on the
level of activity in the commercial real estate market.
In the 1999 through 2001 period, the typical seasonality of the title
insurance business was influenced by changes in the levels of refinancing
activity. For additional information, see "Item 1 - Business - Cyclicality and
Seasonality."
Contingencies
For a discussion of pending legal proceedings, see "Item 3 - Legal
Proceedings."
Results of Operations
Comparison of Years Ended December 31, 2001,
December 31, 2000 and December 31, 1999
Net Income
The Company reported net income of $60.3 million or $3.24 per share on a
diluted basis for 2001 compared to a net loss of $80.8 million or $6.60 per
share on a diluted basis in 2000 and net income of $54.3 million or $2.79 per
share on a diluted basis in 1999. The years 2001 and 2000 were affected by
one-time write offs (discussed below) of intangibles and exit and termination
costs. Exclusive of these items, net income was $94.2 million or $5.06 per
diluted share in 2001 and $35.5 million or $1.94 per diluted share in 2000.
-21-
Operating Revenues
Operating revenues for 2001 were $2.1 billion compared to $1.8 billion in
2000 and $2.0 billion in 1999. The revenue increase in 2001 compared to 2000 was
primarily the result of a drop in average annual mortgage interest rates from
8.1% to 7.0% which gave rise to a large volume of refinance transactions in
2001. Direct revenue increased 25.7% exclusive of the effect of the Primis
acquisition while agency revenue increased 12.3% in 2001 compared to 2000. The
smaller increase in agency revenue was the result of the industry's typical time
lag in reporting business through independent agents. Orders opened in Company
offices increased 57.0% from 680,000 in 2000 to 1,069,000 in 2001. Due to a
higher interest rate environment during most of the year, the Company
experienced lower revenue levels in 2000 than in 1999.
Investment Income
The Company reported pre-tax investment income of $51.0 million, $51.1
million and $48.0 million in 2001, 2000 and 1999, respectively. Excluding
capital gains and losses, investment income was $50.8 million, $51.4 million and
$49.6 million in 2001, 2000 and 1999, respectively. The Company's investment
portfolio consists of primarily fixed maturity securities whose income includes
dividends and interest as well as realized gains and losses.
Expenses
Operating Expenses. The Company's expense ratio was 90.5% in 2001 compared
to 94.3% in 2000 and 92.2% in 1999. The expense ratio improved in 2001 compared
to 2000 due to the fact that the Company was able to more efficiently utilize
the level of fixed costs while closely controlling variable costs. This
improvement was partially offset by weaker than expected results attributable to
the Primis acquisition. The increase in the expense ratio in 2000 compared to
1999 was due to a significant decrease in revenue levels measured against costs
that do not vary in direct proportion to revenue changes.
Exit and Termination Costs. Exit and termination costs on a pre-tax basis
of approximately $1.7 million and $3.1 million were incurred in 2001 and 2000,
respectively, in connection with the closing of seven Primis office locations in
2001 and, the Primis acquisition and the formation of a title plant management
joint venture in 2000. No such costs were incurred in 1999.
Write Off of Intangibles. During the fourth quarter of 2001 the Company
made a decision to scale back and write down prior investments in specific
technology and appraisal business initiatives that resulted in two one-time
charges. The first of these is a non-cash pre-tax charge of approximately $11.2
million resulting from the Company's decision to stop development of TitleQuest,
its back office title production software. The second item is a one-time
non-cash pre-tax charge of $40.2 million related to impairment of acquisition
related intangibles that resulted from the Primis acquisition. The Primis
acquisition experienced performance levels below forecast due to slower than
anticipated acceptance of its technology by the Company's customer base.
In the fourth quarter of 2000, the Company elected to change its accounting
policy for assessing the recoverability of goodwill from one based on
undiscounted cash flows to one based on discounted cash flows. The Company
believes that using the discounted cash flow approach to assess recoverability
is a preferable policy as it is consistent with the methodology used by the
Company to evaluate investment and acquisition decisions (See Note 2 to
Consolidated Financial Statements). In connection with this change, the Company
incurred a non-cash pre-tax charge of $172.5 million.
Salaries and Employee Benefits. Personnel-related expenses are a
significant portion of total operating expenses in the title insurance industry.
These expenses require intensive management through changing real estate cycles.
As a percentage of gross revenues, salary and
-22-
related expenses were 30.2%, 29.4% and 28.1% in 2001, 2000 and 1999,
respectively. These percentages, exclusive of the Primis acquisition, were 28.5%
and 29.2% in 2001 and 2000, respectively. Staffing levels, excluding these
attributable to the Primis acquisition, were 7,755, 8,905 and 8,500 at December
31, 2001, 2000 and 1999, respectively.
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 78.9% in 2001, 78.3% in 2000 and 77.8% in 1999. The trend
of increasing commission rates is attributable to increased competition for
agents and an increase in commission rates promulgated by states.
General, Administrative and Other Expenses. The most significant components
of other expenses are outside costs of title production, rent for office space,
communications, travel and taxes levied by states on premiums.
Provision for Policy and Contract Claims. The Company's claims experience
has shown improvement in recent years. The loss ratio (the provision for policy
and contract claims as a percentage of operating revenues) was 4.0%, 4.4% and
4.9% in 2001, 2000 and 1999, respectively. Claims paid as a percentage of
operating revenues were 3.7%, 4.3% and 3.2% in 2001, 2000 and 1999,
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 2001, 2000 and 1999 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, 2001 the Company had recorded gross deferred tax assets of
$155.4 million related primarily to policy and contract claims, intangibles and
employee benefit plans. A valuation allowance is provided for deferred tax
assets if it is more likely than not these items will either expire before the
Company is able to realize their benefit, or that future deductibility is
uncertain.
The Company did not record a valuation allowance at December 31, 2001. At
December 31, 2000 and 1999, the Company recorded a valuation allowance of $1.7
million and $11.5 million, respectively, related to deferred tax assets created
by the unrealized losses associated with the Company's investment portfolio. A
valuation allowance associated with unrealized losses is necessary because there
is no assurance that the capital losses will be offset by capital gains during
the statutory carryback and carryforward periods, and, therefore, would expire.
The Company reassesses the realization of deferred assets quarterly and, if
necessary, adjusts its valuation allowance accordingly.
Pending Accounting Changes
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets, effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill (and intangible assets
deemed to have indefinite lives) will no longer be amortized but will be subject
to annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives.
-23-
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
nonamortization provisions of the Statement is expected to result in an increase
in net income of $6.0 million ($0.32 per diluted share) per year.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets ("SFAS 144") which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of, and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of Operations for a
disposal of a segment of a business. SFAS 144 is effective for fiscal years
beginning after December 15, 2001, with earlier application encouraged. The
Company expects to adopt SFAS 144 as of January 1, 2002 and it does not expect
that the adoption of the Statement will have a significant impact on the
Company's financial position and results of operations.
Liquidity and Capital Resources
Cash provided by operating activities for the years ended December 31,
2001, 2000 and 1999 was $140.5 million, $82.6 million and $97.6 million,
respectively. As of December 31, 2001, the Company held cash and invested cash
of $168.8 million and fixed-maturity securities of $874.3 million.
In December 2001, the Board of Directors approved a program allocating
$25.0 million to repurchase up to 1.25 million shares or 7% of the Company's
outstanding stock over the following twelve months. The Company implemented this
program in December 2001. Through February 2002, the Company had repurchased
52,400 shares.
In 1999, the Board of Directors approved plans to repurchase 2.0 million of
the Company's issued and outstanding common shares. By December 31, 1999, the
Company had repurchased 1.7 million of such shares at a cost of $43.4 million.
The additional authorized repurchases of 0.3 million shares were completed in
the first quarter of 2000 at a cost of $4.9 million. Repurchases were funded
from available corporate funds.
During the first six months of 2001, 2.2 million shares of the Company's
preferred stock were converted to 4.8 million shares of common stock. This
conversion decreased the amount of preferred dividends paid by $7.7 million on
an annual basis. The new common shares will require dividends of the same rate
paid on all other outstanding common shares.
On August 31, 2001, the Company issued $150.0 million of senior notes
through a private placement. The notes were divided into three series with $50.0
million due 2006 bearing interest at 7.16%, $50 million due 2008 bearing
interest at 7.45% and $50 million due 2011 bearing interest at 7.88%. The
proceeds of this private placement were used to repay outstanding debt under the
Company's revolving credit facility.
In view of the historical ability of the Company to generate strong,
positive cash flows, and the strong cash position and relatively conservative
capitalization structure of the Company, management believes that the Company
will have sufficient liquidity and adequate capital resources to meet both its
short- and long-term capital needs. In addition, the Company has $94.5 million
available under a credit facility which was unused at December 31, 2001.
-24-
Interest Rate Risk
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. For investment
securities, the table presents principal cash flows and related weighted-average
interest rates by expected maturity dates. Actual cash flows could differ from
the expected amounts.
Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rate
---------------------
(dollars in thousands)
2007 and Fair
2002 2003 2004 2005 2006 after Total Value
------- ------- ------- ------- ------- -------- -------- --------
Assets:
Taxable
available-for-sale
securities:
Book value $25,010 $39,925 $27,577 $49,969 $38,506 $314,990 $495,977 $503,237
Average yield 6.0% 5.9% 6.9% 6.8% 6.1% 6.4% 6.4%
Non-taxable
available-for-sale
securities:
Book value 6,717 16,828 18,524 34,542 28,267 210,838 315,716 321,343
Average yield 4.5% 5.0% 4.7% 4.3% 4.5% 4.9% 4.8%
Preferred stock:
Book value -- -- -- -- -- 53,661 53,661 49,690
Average yield -- -- -- -- -- 7.8% 7.8%
The Company also has long-term debt of $208.6 million bearing interest at
an average rate of 6.0% at December 31, 2001. A 0.25% change in the interest
rate would affect income before income taxes by approximately $0.5 million
annually.
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
cautionary statements set forth in the following paragraph.
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
-25-
the following: (i) the costs of producing title evidence are relatively high,
whereas premium revenues are subject to regulatory and competitive restraints;
(ii) real estate activity levels have historically been cyclical and are
influenced by such factors as interest rates and the condition of the overall
economy; (iii) the value of the Company's investment portfolio is subject to
fluctuation based on similar factors; (iv) the title insurance industry may be
exposed to substantial claims by large classes of claimants and (v) 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 information required by this Item is set forth under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Interest Rate Risk" in Item 7 of 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 2002 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
Except for certain information set forth under the captions "Report of
Executive Compensation Committee" and "Stock Performance Graph," the definitive
proxy statement for the 2002 Annual Meeting of Shareholders to be filed within
120 days after the end of the last fiscal year are 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 2002 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 2002 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
-------------------
Form 8-K, dated December 17, 2001, reporting under Items 5 and 7 the
approval of a stock repurchase program by the Board of Directors of
the Company and containing management's comments on the Company's
outlook for the fourth quarter of 2001 and fiscal year 2002.
(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 28, 2002 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 28, 2002
----------------------------------- Officer and Director
Charles H. Foster, Jr. (Principal Executive Officer)
/s/ Janet A. Alpert President and Director March 28, 2002
-----------------------------------
Janet A. Alpert
/s/ Theodore L. Chandler, Jr. Senior Executive Vice President March 28, 2002
----------------------------------- and Director
Theodore L. Chandler, Jr.
/s/ G. William Evans Executive Vice President and March 28, 2002
----------------------------------- Chief Financial Officer
G. William Evans (Principal Financial Officer)
/s/ John R. Blanchard Senior Vice President - Corporate March 28, 2002
----------------------------------- Controller
John R. Blanchard (Principal Accounting Officer)
/s/ Michael Dinkins Director March 28, 2002
-----------------------------------
Michael Dinkins
-29-
Signature Title Date
--------- ----- ----
/s/ John P. McCann Director March 28, 2002
-----------------------------------
John P. McCann
/s/ Robert F. Norfleet, Jr. Director March 28, 2002
-----------------------------------
Robert F. Norfleet, Jr.
/s/ Robert T. Skunda Director March 28, 2002
-----------------------------------
Robert T. Skunda
/s/ Julious P. Smith, Jr. Director March 28, 2002
-----------------------------------
Julious P. Smith, Jr.
/s/ Thomas G. Snead, Jr. Director March 28, 2002
-----------------------------------
Thomas G. Snead, Jr.
/s/ Eugene P. Trani Director March 28, 2002
-----------------------------------
Eugene P. Trani
/s/ Marshall B. Wishnack Director March 28, 2002
-----------------------------------
Marshall B. Wishnack
-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, 2001
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, 2001 and 2000..................................................F-2
Consolidated Statements of Operations,
Years Ended December 31, 2001, 2000 and 1999...........................................................F-4
Consolidated Statements of Cash Flows,
Years Ended December 31, 2001, 2000 and 1999...........................................................F-5
Consolidated Statements of Changes in Shareholders'
Equity, Years Ended December 31, 2001, 2000
and 1999...............................................................................................F-6
Notes to Consolidated Financial Statements,
December 31, 2001, 2000 and 1999.......................................................................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-34
Schedule II Condensed Financial Information of
Registrant ...........................................................F-35
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. and subsidiaries as of December 31, 2001 and 2000, 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,
2001. 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 auditing standards generally accepted
in the United States. 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 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, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States. 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 2000 the Company changed
its method for assessing the recoverability of goodwill.
/s/ ERNST & YOUNG LLP
Richmond, Virginia
February 20, 2002
F-1
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
--------------------------------------------------
CONSOLIDATED BALANCE SHEETS, DECEMBER 31
----------------------------------------
(In thousands of dollars)
ASSETS 2001 2000
------ ---------- ----------
INVESTMENTS (Note 3):
Fixed maturities available-for-sale - at fair value
(amortized cost: 2001 - $865,354; 2000 -
$800,504) $ 874,270 $ 796,842
Equity securities - at fair value (cost: 2000 - $4,285) -- 3,235
Mortgage loans (less allowance for doubtful accounts:
2001 - $176; 2000 - $139) 1,536 9,652
Invested cash 133,185 80,976
---------- ----------
Total Investments 1,008,991 890,705
CASH 35,585 42,375
NOTES AND ACCOUNTS RECEIVABLE:
Notes (less allowance for doubtful accounts: 2001 -
$5,278; 2000 - $2,230) 8,773 11,011
Accounts receivable (less allowance for doubtful
accounts:2001 - $8,058; 2000 - $9,945) 58,564 36,857
Income tax recoverable -- 4,479
---------- ----------
Total Notes and Accounts Receivable 67,337 52,347
PROPERTY AND EQUIPMENT - at cost (less
accumulated depreciation and amortization: 2001 -
$123,301; 2000 - $92,715) 62,015 61,599
TITLE PLANTS 96,580 91,609
GOODWILL (less accumulated amortization: 2001 -
$37,588; 2000 - $32,072) 190,702 217,425
DEFERRED INCOME TAXES (Note 8) 142,543 139,006
OTHER ASSETS 103,728 123,891
---------- ----------
Total Assets $1,707,481 $1,618,957
========== ==========
F-2
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
--------------------------------------------------
CONSOLIDATED BALANCE SHEETS, DECEMBER 31
----------------------------------------
(In thousands of dollars)
LIABILITIES 2001 2000
----------- ---------- ----------
POLICY AND CONTRACT CLAIMS (Note 4) $ 561,438 $ 556,798
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 187,308 178,681
FEDERAL INCOME TAXES 3,653 --
NOTES PAYABLE (Note 12) 208,595 202,379
OTHER 18,994 16,999
---------- ----------
Total Liabilities 979,988 954,857
---------- ----------
COMMITMENTS AND CONTINGENCIES
(Notes 11 and 13)
SHAREHOLDERS' EQUITY (Notes 6 and 7)
--------------------
Preferred stock, no par value, authorized 5,000,000 shares,
no shares of Series A Junior Participating Preferred
Stock issued or outstanding; 2,200,000 shares of 7%
Series B Cumulative Convertible Preferred Stock issued
and outstanding in 2000 -- 175,700
Common stock, no par value, 45,000,000 shares authorized, shares
issued and outstanding: 2001 - 18,583,937; 2000
- 13,518,319 521,795 340,269
Accumulated other comprehensive loss (3,647) (4,712)
Retained earnings 209,345 152,843
---------- ----------
Total Shareholders' Equity 727,493 664,100
---------- ----------
Total Liabilities and Shareholders' Equity $1,707,481 $1,618,957
========== ==========
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)
2001 2000 1999
---------- ---------- ----------
REVENUES
Title and other operating revenues:
Direct operations $1,010,715 $ 764,133 $ 853,989
Agency operations 1,108,759 987,137 1,146,025
---------- ---------- ----------
2,119,474 1,751,270 2,000,014
Investment income (Note 3) 50,789 51,406 49,578
Gain (loss) on sales of investments 214 (271) (1,579)
---------- ---------- ----------
2,170,477 1,802,405 2,048,013
EXPENSES (Notes 2, 4, 10, 11 and 12)
Salaries and employee benefits 640,149 515,329 561,744
Agents' commissions 874,757 772,939 891,928
Provision for policy and contract claims 83,819 76,889 97,014
Exit and termination costs 1,685 3,079 --
Write off of intangibles and capitalized software 51,396 177,774 --
Interest expense 12,766 13,614 12,068
General, administrative and other 411,740 370,918 400,389
---------- ---------- ----------
2,076,312 1,930,542 1,963,143
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 94,165 (128,137) 84,870
INCOME TAX EXPENSE (BENEFIT) (Note 8)
Current 35,245 8,871 24,317
Deferred (1,346) (56,242) 6,236
---------- ---------- ----------
33,899 (47,371) 30,553
---------- ---------- ----------
NET INCOME (LOSS) 60,266 (80,766) 54,317
DIVIDENDS - PREFERRED STOCK (145) (7,700) (7,700)
---------- ---------- ----------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $ 60,121 $ (88,466) $ 46,617
========== ========== ==========
NET INCOME (LOSS) PER COMMON SHARE $ 3.42 $ (6.60) $ 3.21
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 17,574 13,397 14,532
NET INCOME (LOSS) PER COMMON SHARE ASSUMING
DILUTION $ 3.24 $ (6.60) $ 2.79
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING ASSUMING DILUTION 18,617 13,397 19,503
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)
2001 2000 1999
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) $ 60,266 $ (80,766) $ 54,317
Depreciation and amortization 34,640 35,818 35,463
Amortization of bond premium 2,942 1,992 1,773
Write off of intangibles and capitalized software (Note 2) 51,396 177,774 --
Realized investment (gains) losses (214) 271 1,579
Deferred income tax (1,346) (56,242) 6,236
Change in assets and liabilities, net of businesses
acquired:
Notes receivable 2,238 1,690 (5,361)
Premiums receivable (21,707) (1,181) 25,661
Income taxes receivable/payable 8,132 (223) (5,097)
Policy and contract claims 4,640 2,348 32,556
Accounts payable and accrued expenses (6,125) 13,816 (31,044)
Other 5,603 (8,581) (11,326)
--------- --------- ---------
Net cash provided by operating activities 140,465 86,716 104,757
--------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment, net (35,439) (14,117) (62,711)
Proceeds from sale-leaseback of furniture and equipment
(Note 10) 10,000 5,996 24,932
Purchase of business, net of cash acquired (Note 14) (16,540) (48,230) (11,570)
Change in cash surrender value of life insurance (1,975) (4,096) (7,158)
Cost of investments acquired:
Fixed maturities - available-for-sale (379,619) (263,837) (553,945)
Equity securities -- (1,008) --
Proceeds from investment sales or maturities:
Fixed maturities - available-for-sale 312,133 225,686 542,453
Equity securities -- -- 150
Change in mortgage loans 8,116 (2,528) 4,489
--------- --------- ---------
Net cash used in investing activities (103,324) (102,134) (63,360)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from the exercise of options 5,923 3,037 2,712
Cost of common shares repurchased (97) (4,906) (43,402)
Dividends paid (3,764) (10,391) (10,611)
Proceeds from issuance of notes payable 160,322 -- --
Payments on notes payable (154,106) (12,955) (139)
--------- --------- ---------
Net cash provided by (used in) financing activities 8,278 (25,215) (51,440)
--------- --------- ---------
Net increase (decrease) in cash and invested cash 45,419 (40,633) (10,043)
Cash and invested cash at beginning of year 123,351 163,984 174,027
--------- --------- ---------
Cash and invested cash at end of year $ 168,770 $ 123,351 $ 163,984
========= ========= =========
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, 2001, 2000 AND 1999
--------------------------------------------
(In thousands of dollars except per common share amounts)
Accumulated
Other
Preferred Stock Common Stock Comprehensive
Shares Amounts Shares Amounts Income
---------- --------- ---------- -------- -------------
Balance - December 31, 1998 2,200,000 $ 175,700 15,294,572 $382,828 $ 12,367
Comprehensive income:
Net income -- -- -- -- --
Other comprehensive income, net of
tax $6,659
Net unrealized losses
on securities (Note 6) -- -- -- -- (43,502)
Common stock retired -- -- (1,712,700) (43,402) --
Stock options and incentive plans -- -- 98,549 2,712 --
Preferred dividends (7%) -- -- -- -- --
Common dividends ($0.20/share) -- -- -- -- --
---------- --------- ---------- -------- --------
Balance - December 31, 1999 2,200,000 175,700 13,680,421 342,138 (31,135)
Comprehensive income:
Net loss -- -- -- -- --
Other comprehensive income
Net unrealized gains
on securities (Note 6) -- -- -- -- 26,423
Common stock retired -- -- (287,300) (4,906) --
Stock options and incentive plans -- -- 125,198 3,037 --
Preferred dividends (7%) -- -- -- -- --
Common dividends ($0.20/share) -- -- -- -- --
---------- --------- ---------- -------- --------
Balance - December 31, 2000 2,200,000 175,700 13,518,319 340,269 (4,712)
Comprehensive income:
Net income -- -- -- -- --
Other comprehensive income, net of
tax $(2,191)
Net unrealized gains
on securities -- -- -- -- 10,507
Minimum pension liability
adjustment (Note 10) -- -- -- -- (9,442)
Common stock retired -- -- (3,600) (97) --
Stock options and incentive plans -- -- 244,659 5,923 --
Preferred stock conversion (2,200,000) (175,700) 4,824,559 175,700 --
Preferred dividends (7%) -- -- -- -- --
Common dividends ($0.20/share) -- -- -- -- --
---------- --------- ---------- -------- --------
Balance - December 31, 2001 -- $ -- 18,583,937 $521,795 $ (3,647)
========== ========= ========== ======== ========
Total
Retained Shareholders'
Earnings Equity
---------- -------------
Balance - December 31, 1998 $ 200,294 $ 771,189
Comprehensive income:
Net income 54,317 54,317
Other comprehensive income, net of
tax $6,659
Net unrealized losses
on securities (Note 6) -- (43,502)
---------
10,815
---------
Common stock retired -- (43,402)
Stock options and incentive plans -- 2,712
Preferred dividends (7%) (7,700) (7,700)
Common dividends ($0.20/share) (2,911) (2,911)
--------- ---------
Balance - December 31, 1999 244,000 730,703
Comprehensive income:
Net loss (80,766) (80,766)
Other comprehensive income
Net unrealized gains
on securities (Note 6) -- 26,423
---------
(54,343)
---------
Common stock retired -- (4,906)
Stock options and incentive plans -- 3,037
Preferred dividends (7%) (7,700) (7,700)
Common dividends ($0.20/share) (2,691) (2,691)
--------- ---------
Balance - December 31, 2000 152,843 664,100
Comprehensive income:
Net income 60,266 60,266
Other comprehensive income, net of
tax $(2,191)
Net unrealized gains
on securities (Note 6) -- 10,507
Minimum pension liability
adjustment (Note 10) -- (9,442)
---------
61,331
---------
Common stock retired -- (97)
Stock options and incentive plans -- 5,923
Preferred stock conversion -- --
Preferred dividends (7%) (145) (145)
Common dividends ($0.20/share) (3,619) (3,619)
--------- ---------
Balance - December 31, 2001 $ 209,345 $ 727,493
========= =========
F-6
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------
(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. (the "Company") and its wholly owned subsidiaries have been
prepared in conformity with accounting principles generally accepted in the
United States which differ from statutory accounting practices prescribed
or permitted by regulatory authorities for the insurance company
subsidiaries.
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. The Company'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 47% of consolidated title revenues generated in
the states of Texas, Florida, California, Michigan and Pennsylvania. The
Company manages its business and reports its financial information as one
segment.
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 Commonwealth
Land Title Insurance Company, Lawyers Title Insurance Corporation and
Transnation Title Insurance Company.
Investments
-----------
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.
F-7
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------
(In thousands of dollars except per common share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
For the mortgage-backed bond portion of the fixed maturity securities
portfolio, the Company recognizes income using a constant effective yield
based on anticipated prepayments and the estimated economic life of the
securities. When actual prepayments differ significantly from anticipated
prepayments, the effective yield is recalculated to reflect actual payments
to date and anticipated future payments. The net investment in the security
is adjusted to the amount that would have existed had the new effective
yield been applied since the acquisition of the security. That adjustment
is included in net investment income.
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
before July 1, 2001 (goodwill) is amortized on a straight line basis over
its estimated useful life, principally over a forty year period. As more
fully described in Note 2, during the fourth quarter of 2000 the Company
changed its method for assessing the recoverability of goodwill not
associated with impaired assets from an undiscounted cash flow approach to
a discounted cash flow approach. See Note 17 for treatment of goodwill
acquired after July 1, 2001 and impairment assessment in future periods.
Long-Lived Assets
-----------------
The Company reviews long-lived assets 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 recorded at cost less accumulated depreciation
and is depreciated principally on the straight-line method over the useful
lives of the various assets, which range from three to 40 years.
F-8
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------
(In thousands of dollars except per common share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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, 2001. 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. Title insurance reserve estimates
are subject to a significant degree of inherent variability due to the
effects of external factors such as general economic conditions. Although
management believes that the reserve for policy and contract claims is
reasonable, it is possible that the Company's actual incurred policy and
contract claims will not conform to the assumptions inherent in the
determination of these reserves. Accordingly, the ultimate settlement of
policy and contract claims may vary significantly from the estimates
included in the Company's financial statements. 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 $1,258,209 and $1,193,807 at
December 31, 2001 and 2000, 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.
F-9
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------
(In thousands of dollars except per common share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Like Kind Exchanges
-------------------
Through several non-insurance subsidiaries the Company facilitates tax
deferred property exchanges for customers pursuant to Section 1031 of the
Internal Revenue Code. Acting as a qualified intermediary, the Company
holds the proceeds from sales transactions until a qualifying acquisition
occurs, thereby assisting its customers in deferring the recognition of
taxable income. At December 31, 2001 and 2000, the Company was holding
$261,786 and $496,259, respectively, of such proceeds which are not
considered assets of the Company and are, therefore, excluded from the
accompanying consolidated balance sheets. The Company also facilitates
tax-deferred property exchanges for customers pursuant to Revenue Procedure
2000-37, so-called "reverse exchanges." These reverse exchanges require the
Company to take title to the customer's property until a qualifying
acquisition occurs. Through these reverse exchanges the Company buys
property on behalf of customers using funds provided by the customers or
from loans arranged by the customer. The Company does not record these
reverse exchanges which amounted to $83,895 at December 31, 2001, on its
financial statements.
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.
Fair Values of Financial Instruments
------------------------------------
The carrying amounts reported in the balance sheet for cash and invested
cash, short-term investments, premiums receivable, preferred stock and
certain other assets approximate those assets' fair values. Fair values for
investment securities are based on quoted market prices. The carrying value
of the Company's fixed-rate portion of long-term debt approximates fair
value and is estimated using discounted cash flow analyses, based on the
Company's current incremental borrowing rates for similar types of
borrowing arrangements. The remaining portion of the Company's long-term
debt approximates fair value since the interest rate is variable. 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
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"), and accordingly, recognizes no compensation expense
for the stock option grants.
F-10
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------
(In thousands of dollars except per common share amounts)
2. CHANGE IN ACCOUNTING FOR GOODWILL
During the fourth quarter of 2000, the Company elected to change its method
for assessing the recoverability of goodwill (not associated with impaired
assets) from one based on undiscounted cash flows to one based on
discounted cash flows. The Company believes that using the discounted cash
flow approach to assess the recoverability of goodwill is a preferable
policy because it is consistent with the methodology used by the Company to
evaluate investment decisions and provides a more current and realistic
valuation than the undiscounted approach. The discount rate used in
determining discounted cash flows was a rate corresponding to the Company's
cost of capital.
The Company's new accounting policy for assessing the recoverability of
goodwill is as follows:
The Company evaluates the recoverability of goodwill by estimating the
future discounted cash flows of the businesses to which the goodwill
relates. Estimated cash flows are determined by disaggregating the
Company's business to an operational and organizational level for which
meaningful identifiable cash flows can be determined. When estimated future
discounted cash flows are less than the carrying amount of the net assets
(tangible and identifiable intangible) and related goodwill, impairment
losses of goodwill are charged to operations. Impairment losses, limited to
the carrying amount of goodwill, represent the sum of the carrying amount
of the net assets (tangible and identifiable intangible) and goodwill in
excess of the discounted cash flows of the business being evaluated. In
determining the estimated future cash flows, the Company considers current
and projected future levels of income as well as business trends, prospects
and market and economic conditions. Prior to the fourth quarter of 2000,
the assessment of recoverability and measurement of impairment of goodwill
was based on undiscounted cash flows.
This change represents a change in accounting principle, which is
indistinguishable from a change in estimate. As a result of the change to a
discounted cash flow methodology, the Company recorded a non-cash
write-down of goodwill of $172,451 net of deferred taxes of $62,082 or
$8.24 per common share after taxes in the fourth quarter of 2000.
3. INVESTMENTS
The amortized cost and estimated fair value of investments in fixed
maturities at December 31, 2001, and 2000 were as follows:
F-11
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------
(In thousands of dollars except per common share amounts)
3. INVESTMENTS (Continued)
2001
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies $ 61,962 $ 2,814 $ 68 $ 64,708
Obligations of states and
political subdivisions 312,507 7,151 1,576 318,082
Fixed maturities issued by
foreign governments 2,504 1 689 1,816
Public utilities 69,729 1,314 3,020 68,023
Corporate securities 256,099 7,409 1,842 261,666
Mortgage-backed securities 108,892 2,403 1,010 110,285
Preferred stock 53,661 571 4,542 49,690
-------- ------- ------- --------
Fixed maturities
available-for-sale $865,354 $21,663 $12,747 $874,270
======== ======= ======= ========
F-12
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------
(In thousands of dollars except per common share amounts)
3. INVESTMENTS (Continued)
2000
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies $ 68,730 $ 2,563 $ 352 $ 70,941
Obligations of states and
political subdivisions 272,946 5,257 1,518 276,685
Fixed maturities issued by
foreign governments 1,878 28 5 1,901
Public utilities 93,100 722 4,690 89,132
Corporate securities 216,699 2,962 3,947 215,714
Mortgage-backed securities 89,053 1,322 1,357 89,018
Preferred stock 58,098 585 5,232 53,451
-------- ------- ------- --------
Fixed maturities
available-for-sale $800,504 $13,439 $17,101 $796,842
======== ======= ======= ========
The amortized cost and estimated fair value of fixed-maturity securities at
December 31, 2001 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-13
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------
(In thousands of dollars except per common share amounts)
3. INVESTMENTS (Continued)
Estimated
Amortized Fair
Cost Value
--------- ---------
Due in one year or less $ 31,727 $ 32,246
Due after one year through five years 254,135 261,794
Due after five years through ten years 241,833 246,233
Due after ten years 228,767 223,712
Mortgage-backed securities 108,892 110,285
-------- --------
$865,354 $874,270
======== ========
Earnings on investments and net realized gains (losses) for the three years
ended December 31, follow:
2001 2000 1999
------- ------- -------
Fixed maturities $48,981 $48,618 $45,507
Equity securities -- 12 25
Invested cash and other short-term
investments 3,102 4,006 5,334
Mortgage loans 107 79 356
Net realized gains (losses) 214 (271) (1,579)
------- ------- -------
Total investment income 52,404 52,444 49,643
Investment expenses (1,401) (1,309) (1,644)
------- ------- -------
Net investment income $51,003 $51,135 $47,999
======= ======= =======
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-14
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------
(In thousands of dollars except per common share amounts)
3. INVESTMENTS (Continued)
Change in
Realized Unrealized
-------- ----------
2001
Fixed maturities $ 289 $ 12,578
Equity securities (75) 1,050
------- --------
$ 214 $ 13,628
======= ========
2000
Fixed maturities $ (271) $ 26,002
Equity securities -- 421
------- --------
$ (271) $ 26,423
======= ========
1999
Fixed maturities $(1,497) $(47,912)
Equity securities (82) (2,249)
------- --------
$(1,579) $(50,161)
======= ========
Proceeds from sales of investments in fixed maturities, net of calls or
maturities during 2001, 2000 and 1999 were $273,798, $195,385 and $522,212,
respectively. Gross gains of $4,191, $1,908 and $2,646 in 2001, 2000 and
1999, respectively, and gross losses of $3,378, $2,039 and $4,321 in 2001,
2000 and 1999, respectively, were realized on those sales.
Proceeds from sales of investments in equity securities during 2001, 2000
and 1999 were $0, $0 and $285, respectively. There were no gross gains in
2001, 2000 or 1999 and gross losses of $0, $0 and $82 in 2001, 2000 and
1999, respectively, were realized on those sales.
F-15
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------
(In thousands of dollars except per common share amounts)
4. POLICY AND CONTRACT CLAIMS
Activity in the liability for unpaid claims and claim adjustment expenses
is summarized as follows:
2001 2000 1999
-------- -------- --------
Balance at January 1 $556,798 $554,450 $521,894
Incurred related to:
Current year 114,173 73,313 105,163
Prior years (30,354) 3,576 (8,149)
-------- -------- --------
Total incurred 83,819 76,889 97,014
-------- -------- --------
Paid related to:
Current year 6,651 8,980 8,959
Prior years 72,528 65,561 55,499
-------- -------- --------
Total paid 79,179 74,541 64,458
-------- -------- --------
Balance at December 31 $561,438 $556,798 $554,450
======== ======== ========
The favorable development on prior year loss reserves during 2001 and 1999
was attributable to lower than expected payment levels on recent 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.
The Company has not paid or recovered any reinsured losses during the three
years ended December 31, 2001. The total amount of premiums for assumed and
ceded risks was less than 1% of title premiums in each of the last three
years.
F-16
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------
(In thousands of dollars except per common share amounts)
6. SHAREHOLDERS' EQUITY
Rights Agreement
----------------
The Company has issued one preferred share purchase right (a "Right") for
each outstanding share of Common Stock. Each Right entitles the holder to
purchase, upon certain triggering events, shares of the Company's Series A
Junior Participating Preferred Stock ("Junior Preferred Stock") or Common
Stock or other securities, as set forth in the Rights Agreement, as
amended, between the Company and State Street Bank and Trust Company, the
parent company of the Company's transfer agent. Generally, the Rights will
become exercisable if a person or group acquires or announces a tender
offer for 20% or more of the outstanding shares of 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
described above, each Right will entitle the holder, other than such
acquiring person or group, to purchase one one-hundredth of a share of
Junior Preferred Stock at an exercise price of $85, subject to certain
adjustments. The Junior Preferred Stock has dividend, liquidation and
voting rights that are intended to equate the value of one one-hundredth
interest in a share of Junior Preferred Stock with the value of one share
of Common Stock. As an alternative to purchasing shares of Junior Preferred
Stock, 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, at the then current exercise price of the Right, shares
of Common Stock having a total market value of twice the exercise price. In
addition, the Company's Board of Directors may exchange each Right for one
share of Common Stock. 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, at the then current exercise price
of the Right, 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 APB 25 and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided under Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation ("SFAS 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.
F-17
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------
(In thousands of dollars except per common share amounts)
6. SHAREHOLDERS' EQUITY (Continued)
Under the Company's 1991 Stock Incentive Plan, as amended (the "1991
Plan"), officers, directors and key employees of the Company and its
subsidiaries were eligible to receive grants and/or awards of Common Stock,
restricted stock, phantom stock, incentive stock options, non-qualified
stock options and stock appreciation rights. The 1991 Plan expired as to
new grants or awards October 31, 2000; however, grants and awards made
prior to expiration of the 1991 Plan remain subject to the 1991 Plan and
the applicable provisions of the grant or award. As of October 31, 2000,
the Company had made grants or awards covering 1,509,480 shares of Common
Stock under the 1991 Plan.
Pursuant to the 1992 Stock Option Plan for Non-Employee Directors (the
"Directors' Plan"), each non-employee director was eligible to receive an
option grant to purchase 1,500 shares of Common Stock on the first business
day following the annual meeting of shareholders. Up to 60,000 shares of
Common Stock were available for issuance under the Directors' Plan, and as
of May 21, 1997, the Company had granted options covering all 60,000
shares. Stock option grants to non-employee directors from 1998 to 2000
were made under the 1991 Plan. Beginning on June 17, 1998, annual stock
option grants to non-employee directors were increased from 1,500 to 2,000
shares of Common Stock.
The Company has adopted the 2000 Stock Incentive Plan, as amended (the
"2000 Plan"), which provides for grants and/or awards of Common Stock,
restricted stock, stock options, stock appreciation rights and phantom
stock to officers, directors, employees, agents, consultants and advisors
of the Company and its subsidiaries, as determined in the discretion of the
Compensation Committee of the Board of Directors. The maximum number of
shares of Common Stock authorized for issuance under the 2000 Plan is
3,000,000, subject to adjustment as described in the 2000 Plan.
All options which have been granted under the 1991 Plan, the 2000 Plan and
the Directors' Plan are non-qualified stock options with an exercise price
equal to the fair market value of a share of 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 1991 Plan and 2000 Plan
expire seven years from the date of grant. Options generally vest ratably
over a four-year period. At December 31, 2001, there were 2,178,968 shares
available for future grant under the 2000 Plan.
Pro forma information regarding net income and earnings per share is
required by SFAS 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 2001: risk-free interest rate of 4.75%,
dividend yield of 0.65%, volatility factor of the expected market price of
the Company's Common Stock of .505 and a weighted-average expected life of
the options of approximately four years.
F-18
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------
(In thousands of dollars except per common share amounts)
6. SHAREHOLDERS' EQUITY (Continued)
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.
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:
2001 2000 1999
------- -------- -------
Pro forma net income (loss) $57,741 $(82,215) $53,244
Pro forma net income (loss) available
to common shareholders 57,596 (89,915) 45,544
Pro forma net income (loss) per
common share 3.28 (6.71) 3.13
Pro forma net income (loss) per
common share assuming dilution
(Note 9) 3.10 (6.71) 2.73
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, 1998
(458,762 exercisable) 681,187 $19
Granted 199,000 43 $13.05
Exercised 99,069 11
Forfeited 18,000 44
Options outstanding, December 31, 1999
(474,368 exercisable) 763,118 $25
Granted 403,000 19 $ 8.33
Exercised 113,618 15
Forfeited 10,500 19
Options outstanding, December 31, 2000
(489,000 exercisable) 1,042,000 $24
Granted 710,000 31 $12.56
Exercised 246,099 15
Forfeited 12,000 45
Options outstanding, December 31, 2001
(421,145 exercisable) 1,493,901 $29
F-19
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------
(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, 2001:
Weighted Weighted Weighted
Range of Number Average Average Number Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/01 Life Price at 12/31/01 Price
----------- ------------- --------- -------- ----------- --------
$ 7 - $19 299,938 4.34 $18 129,160 $17
20 - 22 235,963 4.48 21 123,235 21
27 - 27 352,000 6.97 27 -- --
28 - 29 32,000 8.51 28 32,000 28
37 - 54 574,000 5.29 40 136,750 45
--------- -------
$ 7 - $54 1,493,901 5.44 $29 421,145 28
========= ========
Savings and Stock Ownership Plan
--------------------------------
The Company has registered 3,000,000 shares of Common Stock for use in
connection with the LandAmerica Financial Group, Inc. Savings and Stock
Ownership Plan. Substantially all of the employees of the Company are
eligible to participate in the Plan.
The Plan Trustee purchases 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. The number of
shares purchased and allocated to employees in 2001, 2000 and 1999 were
265,262, 238,993 and 313,167, respectively, at a cost of $8,223, $7,220 and
$7,579, respectively.
Series B Preferred Stock
------------------------
On February 27, 1998, the Company issued 2,200,000 shares of its 7% Series
B Cumulative Convertible Preferred Stock (the "Series B Preferred Stock")
to Reliance Insurance Company ("RIC") in connection with the acquisition of
Commonwealth Land Title Insurance Company and Transnation Title Insurance
Company (the "Acquisition"). The terms of the Series B Preferred Stock
provided for the payment of quarterly cumulative cash dividends at an
annual rate of 7% of the stated value of $50.00 per share, or $3.50 per
share.
The Series B Preferred Stock was convertible at the option of the holder
into shares of Common Stock at a conversion price of $22.80 per share of
Common Stock (equivalent to a conversion ratio of approximately 2.193
shares of Common Stock for each share of Series B Preferred Stock or
4,824,561 shares of Common Stock in the aggregate), subject to adjustment
as described in the terms of the Series B Preferred Stock. The Series B
Preferred Stock was not convertible into shares of Common Stock by RIC and
its
F-20
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------
(In thousands of dollars except per common share amounts)
6. SHAREHOLDERS' EQUITY (Continued)
affiliates until such time as RIC and its affiliates had sold, conveyed or
transferred all of the 4,039,473 shares of Common Stock received by RIC
from the Company in connection with the Acquisition.
In the first quarter of 2001, RIC sold all of the 4,039,473 shares of
Common Stock acquired in connection with the Acquisition and an additional
4,460,561 shares of Common Stock acquired upon conversion of 2,034,017
shares of the Series B Preferred Stock. The sales were made in connection
with an underwritten public offering. Following the sale of the shares, RIC
owned 1 share of Common Stock and 165,983 shares of Series B Preferred
Stock. In June 2001, RIC converted its remaining 165,983 shares of
Preferred Stock into 363,997 shares of Common Stock. As a result, there are
no outstanding shares of Series B Preferred Stock.
Comprehensive Income
--------------------
The Company has elected to display comprehensive income in the statements
of shareholders' equity, net of reclassification adjustments.
Reclassification adjustments are made to avoid double counting in
comprehensive income items that are displayed as part of net income for a
period that also had been displayed as part of other comprehensive income
in that period or earlier periods.
A summary of unrealized gains (losses) and reclassification adjustments,
net of tax, of available-for-sale securities for the years ended December
31, 2001, 2000 and 1999 follows:
2001 2000 1999
------- ------- --------
Unrealized holding gains (losses)
arising during the period $10,175 $26,750 $(26,838)
Reclassification adjustment for gains
(losses) previously included in other
comprehensive income (net of tax
(benefit) expense of $(186) - 2001;
$(706) - 2000 and $3,020 - 1999) (332) (1,369) 5,144
Adjustment for valuation allowance for
deferred tax -- 1,696 11,520
------- ------- --------
Net unrealized holding gains (losses)
arising during the period $10,507 $26,423 $(43,502)
======= ======= ========
F-21
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------
(In thousands of dollars except per common share amounts)
7. STATUTORY FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United
States which differ in some respects from statutory accounting practices
prescribed or permitted in the preparation of financial statements for
submission to insurance regulatory authorities. Combined statutory equity
of the Company's insurance subsidiaries was $451,155 and $358,562 at
December 31, 2001 and 2000, respectively. The difference between statutory
equity and equity determined on the basis of accounting principles
generally accepted in the United States 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 and
limit the recognition of goodwill and deferred income tax assets. Combined
statutory net income of the Company's primary insurance subsidiaries was
$79,309, $17,558 and $65,480 for the years ended December 31, 2001, 2000
and 1999, respectively.
In a number of states, the Company's insurance subsidiaries are 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 by various statutes in the state of domicile
of the subsidiary insurer. Under such statutory regulations, net assets of
consolidated subsidiaries aggregating $59,655 is available for dividends,
loans or advances to the Company during the year 2001.
In addition, the credit agreement with Bank of America (See Note 12)
contains certain covenants which would limit future dividend payments by
the Company. Management does not believe, however, that these restrictions
will, in the foreseeable future, adversely affect the Company's ability to
pay cash dividends at the current dividend rate.
In 1998, the National Association of Insurance Commissioners adopted
codified statutory accounting principles ("Codification"). Codification has
changed, to some extent, prescribed statutory accounting practices, and
resulted in changes to the accounting practices that the Company's
insurance subsidiaries use to prepare their statutory financial statements.
Most states adopted Codification effective January 1, 2001 with varying
degrees of modification. The combined statutory equity of the Company's
insurance subsidiaries increased $4,686 due to the adoption of Codification
on January 1, 2001.
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, 2001 and 2000 are as follows:
F-22
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------
(In thousands of dollars except per common share amounts)
8. INCOME TAXES (Continued)
2001 2000
-------- --------
Deferred tax assets:
Policy and contract claims $ 63,369 $ 72,956
Pension liability 6,992 7,214
Employee benefit plans 21,090 18,356
Allowance for bad debts 4,864 3,838
Unrealized losses -- 1,696
Other intangible assets 57,307 48,804
Other 1,774 786
-------- --------
Total deferred tax assets 155,396 153,650
Valuation allowance for deferred tax assets -- (1,696)
-------- --------
Net deferred tax assets 155,396 151,954
-------- --------
Deferred tax liabilities:
Title plant basis differences 8,910 7,374
Capitalized system development costs 823 5,574
Unrealized gains 3,120 --
-------- --------
Total deferred tax liabilities 12,853 12,948
-------- --------
Net deferred tax asset $142,543 $139,006
======== ========
A valuation allowance will be established for any portion of a deferred tax
asset that management believes may not be realized. At December 31, 2001
and 2000, the Company recorded a valuation allowance of $0 and $1,696,
respectively, related to the deferred tax assets created by the unrealized
losses associated with the Company's investment portfolio.
The provision for income tax differs from the amount of income tax
determined by applying the U.S. statutory income tax rate (35%) to pre-tax
income as a result of the following:
2001 2000 1999
------- -------- -------
Tax expense (benefit) at federal statutory rate $32,958 $(44,848) $29,705
Non-taxable interest (4,452) (3,651) (3,302)
Dividend deductions (795) (863) (883)
Company-owned life insurance (654) (1,176) (612)
Meals and entertainment 3,421 3,200 2,200
State income taxes, net of federal benefit 1,135 (1,615) 655
Other, net 2,286 1,582 2,790
------- -------- -------
Income tax expense $33,899 $(47,371) $30,553
======= ======== =======
Taxes paid were $25,979 in 2001, $10,400 in 2000 and $30,574 in 1999.
F-23
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------
(In thousands of dollars except per common share amounts)
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the years ended December 31:
2001 2000 1999
-------- -------- -------
Numerator:
Net income (loss) - numerator for diluted
earnings per share $ 60,266 $(80,766) $54,317
Less preferred dividends (145) (7,700) (7,700)
-------- -------- -------
Numerator for basic earnings per share $ 60,121 $(88,466) $46,617
======== ======== =======
Denominator:
Weighted average shares - denominator for
basic earnings per share 17,574 13,397 14,532
Effect of dilutive securities:
Assumed weighted average conversion of
preferred stock 852 -- 4,825
Employee stock options 191 -- 146
-------- -------- -------
Denominator for diluted earnings per share 18,617 13,397 19,503
Basic earnings per common share $ 3.42 $ (6.60) $ 3.21
======== ======== =======
Diluted earnings per common share $ 3.24 $ (6.60) $ 2.79
======== ======== =======
In accordance with accounting principles generally accepted in the United
States, the effect of dilutive securities was excluded from the calculation
of the diluted loss per common share for the year ended December 31, 2000,
as such inclusion would result in antidilution.
10. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Prior to May 31, 2000, the Company sponsored two postretirement benefit
plans that provide postretirement health care and life insurance benefits
to employees hired by the Company before January 1, 2000. Effective June 1,
2000, the two benefit plans were combined. This change did not affect the
plan participants or their coverage.
During 1998 the Company had two noncontributory defined benefit retirement
plans. Effective January 1, 1999, the plans were merged and amended to
change the pension benefit formula to a cash balance formula from the
existing benefit calculation based on years of service and average
earnings. Under the amended plan, each participant's account is credited
annually with an amount equal to 2-5% of the participant's annual
compensation based on the participant's age plus years of credited service.
Additionally,
F-24
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------
(In thousands of dollars except per common share amounts)
10. PENSIONS AND OTHER POSTRETIREMENT BENEFITS (Continued)
each participant's account balance will be credited with interest based on
the 10-year treasury bond rate published in November preceding the
applicable plan year. Those participants in the plans on December 31, 1998,
who meet the requirements for early retirement on that date, may elect to
receive their retirement benefit under the applicable prior plan or
formula.
Pension Benefits Other Benefits
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
Change in benefit obligation:
Benefit obligation at beginning of year $206,545 $204,061 $ 45,581 $ 40,561
Service cost 7,438 7,277 772 1,131
Interest cost 15,167 14,576 3,325 3,194
Plan participants' contributions -- -- 580 453
Plan amendments -- -- -- 3,347
Actuarial loss (gain) 6,315 1,045 (355) (62)
Benefits paid (20,908) (20,414) (3,682) (3,043)
-------- -------- -------- --------
Benefit obligation at end of year 214,557 206,545 46,221 45,581
-------- -------- -------- --------
Change in plan assets:
Fair value of plan assets at beginning
of year 217,224 198,797 1,760 1,842
Actual return on plan assets (21,762) 33,525 72 181
Refund of plan assets -- -- (1,454) --
Company contributions 19,336 5,316 2,686 2,327
Plan participants' contributions -- -- 580 453
Benefits paid (20,908) (20,414) (3,644) (3,043)
-------- -------- -------- --------
Fair value of plan assets at end of year 193,890 217,224 -- 1,760
-------- -------- -------- --------
Funded status of the plan (underfunded) (20,667) 10,679 (46,221) (43,821)
Unrecognized net actuarial loss (gain) 28,229 (17,263) (1,275) (2,355)
Unrecognized transition (asset) obligation -- (10) 12,909 14,083
Unrecognized prior service cost (10,665) (12,507) 2,590 3,068
Contribution made between measurement date
and year end -- 1,299 -- --
Minimum pension liability adjustment (14,752) -- -- --
-------- -------- -------- --------
Accrued benefit cost $(17,855) $(17,802) $(31,997) $(29,025)
======== ======== ======== ========
Pension Benefits Other Benefits
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
Weighted average assumptions
as of December 31:
Discount rate 7.50% 7.75% 7.50% 7.75%
Expected return on plan assets 9.00% 9.00% 6.00% 6.00%
Rate of compensation increase 4.63% 4.63% 4.63% 4.63%
F-25
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------
(In thousands of dollars except per common share amounts)
10. PENSIONS AND OTHER POSTRETIREMENT BENEFITS (Continued)
Pension Benefits Other Benefits
-------------------------------- --------------------------
2001 2000 1999 2001 2000 1999
-------- -------- -------- ------ ------ ------
Components of net
periodic pension cost:
Service cost $ 7,438 $ 7,277 $ 7,183 $ 771 $1,131 $1,564
Interest cost 15,167 14,576 14,062 3,325 3,194 2,749
Expected return on
plan assets (17,415) (16,773) (15,875) (91) (96) (121)
Amortization of
unrecognized
transition
obligation or
(asset) (10) (21) (21) 1,174 1,174 1,174
Prior service cost
recognized (1,842) (1,842) (1,842) 478 279 --
Recognized (gains)
losses -- -- 595 -- -- --
-------- -------- -------- ------ ------ ------
Net periodic
benefit cost $ 3,338 $ 3,217 $ 4,102 $5,657 $5,682 $5,366
======== ======== ======== ====== ====== ======
The assumed health care cost trend rate used to measure the expected cost
of covered health care benefits for the Company's plan was 7.50% for 2001
and 7.00% for 2002 and is assumed to decrease 0.50% per year until 2004,
0.25% per year until 2006 and remain level at 5.50% thereafter.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
One Percentage One Percentage
Point Increase Point Decrease
-------------- --------------
Effect on total of service and interest
cost components in 2001 $ 96 $ (87)
Effect on postretirement benefit
obligation as of 2001 $1,350 $(1,231)
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.
F-26
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------
(In thousands of dollars except per common share amounts)
11. LEASE COMMITMENTS (Continued)
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, 2001.
2002 $ 49,845
2003 40,975
2004 27,637
2005 14,325
2006 7,127
Thereafter 5,678
--------
$145,587
========
Rent expense was $62,943, $58,989 and $53,069 for the years ended December
31, 2001, 2000 and 1999, respectively.
In December 2001, the Company entered into a sale-leaseback transaction,
totaling $10,000 whereby the Company sold and leased back assets classified
as furniture and equipment. These assets were leased back from the
purchaser over periods of 5 and 7 years. The resulting lease is being
accounted for as an operating lease and the resulting gain of $171 is being
amortized over the life of the lease. The lease requires the Company to pay
customary operating and repair expenses and to observe certain covenants.
This lease contains a renewal option at lease termination and a purchase
option at an amount approximating fair market value at lease termination.
In December 2000, the Company entered into a sale-leaseback transaction,
totaling $5,996 whereby the Company sold and leased back assets classified
as furniture and equipment. These assets were leased back from the
purchaser over periods of 5 and 7 years. The resulting lease is being
accounted for as an operating lease and the resulting gain of $212 is being
amortized over the life of the lease. The lease requires the Company to pay
customary operating and repair expenses and to observe certain covenants.
This lease contains a renewal option at lease termination and a purchase
option at an amount approximating fair market value at lease termination.
In December 1999, the Company entered into three sale-leaseback
transactions, totaling $24,932 whereby the Company sold and leased back
assets classified as furniture and equipment. These assets were leased back
from the purchasers over periods of 7 and 8 years. The $895 is being
amortized over the life of the lease. The leases require the Company to pay
customary operating and repair expenses and to observe certain covenants.
The leases contain renewal options at lease termination and purchase
options at amounts approximating fair market value at lease termination.
F-27
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------
(In thousands of dollars except per common share amounts)
11. LEASE COMMITMENTS (Continued)
Future scheduled minimum lease payments under the non-cancelable operating
leases as of December 31, 2001 are as follows:
2002 $ 6,423
2003 6,423
2004 6,423
2005 6,423
2006 5,773
Thereafter 5,426
-------
Total minimum lease payments $36,891
=======
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 $237,500, was established. The credit facility is
a six-year senior unsecured revolving credit facility which will terminate
with all outstanding amounts being due and payable November 7, 2003, unless
extended as provided in the credit agreement. At December 31, 2001, the
amount due under the credit agreement was $55,500.
Interest accrues on the outstanding principal balance of the loans, at the
Company's option, based upon (i) IBOR (reserve adjusted) for thirty, sixty,
ninety or one hundred and eighty days plus a margin determined by the
Company's debt to capitalization ratio, or (ii) Bank of America's Base Rate
as defined in the credit agreement. In the event of any default, interest
on the outstanding principal balance of the loans will accrue at a rate
equal to Bank of America's Base Rate plus two percent (2.0%) per annum.
On August 31, 2001, the Company issued $150,000 of senior notes through a
private placement managed by First Union Securities, Inc. and SunTrust
Equitable Securities. The $150,000 was divided into three series with
$50,000 due in 2006 and bearing interest at 7.16%; $50,000 due in 2008 and
bearing interest at 7.45% and $50,000 due in 2011 and bearing interest at
7.88%.
The proceeds from the private placement were used to repay $150,000 of the
debt under the bank revolving credit facility. The principal amount of the
credit facility was reduced to $150,000 of which $94,500 was available at
December 31, 2001.
Interest paid was $11,020, $13,255 and $11,955, in 2001, 2000 and 1999,
respectively.
F-28
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------
(In thousands of dollars except per common share amounts)
13. PENDING LEGAL PROCEEDINGS
General
-------
The Company and its subsidiaries are involved in certain litigation arising
in the ordinary 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.
Litigation Not in the Ordinary Course of Business
-------------------------------------------------
The People of the State of California, the Controller of the State of
California and the Insurance Commissioner of the State of California have
filed a putative defendant class action suit in the Sacramento Superior
Court against Fidelity National Title Insurance Company and others (Case
No. 99AS02793) (the "Attorney General's Case"). While the subsidiaries of
the Company that do business in California (the "Company's California
Subsidiaries") were not named in the Attorney General's Case, they fall
within the putative defendant class definition which includes virtually all
title insurance underwriters, underwritten title companies, controlled
escrow companies and independent escrow companies in California. The
Attorney General's Case alleges that the defendants (i) failed to escheat
unclaimed property to the Controller of the State of California on a timely
basis, (ii) charged California home buyers and other escrow customers fees
for services which were never performed, or which cost less than the amount
charged, and (iii) devised and carried out schemes with financial
institutions to receive interest, or monies in lieu of interest, on escrow
funds deposited by defendants with financial institutions in demand
deposits. The Attorney General's Case seeks injunctive relief, restitution
and civil penalties. The Company has reached an agreement in principle to
settle the claims made in the Attorney General's Case. The Company believes
that if a final settlement materially consistent with the terms of the
agreement in principle is consummated, such settlement would not have a
material adverse effect upon the Company's financial condition.
On or about June 16, 2000, Norman E. Taylor, Connie S. Taylor, Lynne
Thompson Jones-Brittle, Colin R. Callaghan and Miriam J. Callaghan
(collectively, the "Plaintiffs") filed a putative class action suit (the
"Taylor Suit") in the Superior Court of Los Angeles, California (Case No.
BC 231917) against the Company, Commonwealth Land Title Insurance Company,
Commonwealth Land Title Company, Lawyers Title Insurance Corporation and
Lawyers Title Company (collectively, the "Defendants"). The Plaintiffs
purport to represent a class defined in the First Amended Complaint dated
November 20, 2000 (the "Amended Complaint") as "[a]ll persons or entities
who, from 1980 to the present, incident to purchase, sale or refinancing of
real property located in California, deposited funds in escrow accounts
controlled by the Defendants and were not paid
F-29
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------
(In thousands of dollars except per common share amounts)
13. PENDING LEGAL PROCEEDINGS (Continued)
interest on their funds and/or were charged fees for services not rendered
by Defendants or excessive fees for the services Defendants performed." The
Plaintiffs allege in the Amended Complaint that the Defendants unlawfully
(a) received interest, other credits or payments that served as the
functional equivalent of interest, on customer escrow funds; (b) charged
and retained fees for preparing and recording reconveyances that they did
not prepare or record, and charged and retained excessive fees for other
escrow-related services; and (c) swept or converted funds in escrow
accounts based upon contrived charges prior to the time the funds escheated
or should have escheated to the State of California pursuant to the
Unclaimed Property Law. The Plaintiffs assert claims for relief against the
Defendants based on (i) violation of California's Unfair Business Practices
Act, California Business and Professions Code Sections 17200, et. seq.;
-- ---
(ii) violation of California's Deceptive, False and Misleading Advertising
Act, California Business and Professions Code Sections 17500, et. seq.;
-- ---
(iii) violation of California's Consumer Legal Remedies Act, California
Civil Code Sections 1750, et. seq.; (iv) breach of fiduciary duty; (v)
-- ---
breach of agents' duties to their principals; (vi) breach of undertaking of
special duty; (vii) conversion; (viii) unjust enrichment; (ix) conspiracy;
and (x) negligence. The Plaintiffs seek injunctive relief, restitution of
improperly collected charges and interest and the imposition of an
equitable constructive trust over such amounts, damages according to proof,
punitive damages, costs and expenses, attorneys' fees, pre- and
post-judgment interest and such other and further relief as the Court may
deem necessary and proper. The Company intends to defend vigorously the
Taylor Suit. The suit is still in its initial stages, and at this time no
estimate of the amount or range of loss that could result from an
unfavorable outcome can be made.
Commonwealth Land Title Company, a subsidiary of the Company, was served
with a complaint in a putative class action suit filed on May 21, 2001 in
the Superior Court of Los Angeles, California, Central District, styled
Thomas Branick and Ardra Campbell v. First American Title, et al. (Case No.
BC 250923). The complaint, which named "Commonwealth Title" and numerous
other title companies and lenders as defendants, purported to allege causes
of action for unfair competition (California Business and Professions Code
Sections 17200,et. seq.)and unfair business practices (California Business
-- ---
and Professions Code Sections 1750, et. seq.). Although the complaint
-- ---
contained no specific allegations against "Commonwealth Title," it
generally alleged that the named defendants improperly charged recordation
and other fees. The complaint prayed for relief in the form of statutory
penalties, restitution, injunctive relief, costs of suit and attorneys'
fees. After the action was brought, amendments were filed naming Lawyers
Title Company and Lawyers Title Insurance Corporation as defendants.
Following a hearing on February 15, 2002, the court sustained defendants'
demurrers dismissing the suit without leave to amend, based only on a
misjoinder of parties. The plaintiffs could challenge this decision in the
Superior Court or appeal it.
F-30
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------
(In thousands of dollars except per common share amounts)
14. ACQUISITIONS
On October 31, 2000, the Company acquired all of the outstanding shares of
Primis, Inc. ("Primis"). Primis is a web based provider of property
information and appraisal services. The acquisition has been accounted for
by the Company using the "purchase" method of accounting. The assets and
liabilities of Primis have been revalued to their respective fair market
values. Total cost and goodwill recognized in all acquisitions made by the
Company were $16,540 and $15,794 in 2001 and $51,049 and $54,266 in 2000.
On August 1, 2000, the Company entered into a joint venture agreement with
The First American Corporation contributing certain assets of its
wholly-owned subsidiary, Datatrace, creating Data Trace Information
Services ("Data Trace"). The financial statements of the Company reflect
Data Trace as an investment in affiliates, included in Other Assets on the
balance sheet.
Pursuant to EITF 94-3, the Company has recorded exit and termination costs
of $3,079 associated with these transactions, all of which were paid as of
December 31, 2001. Costs incurred relate to exiting certain leases and
license and maintenance agreements and to the termination of employees for
which employee severance benefits have been accrued.
15. IMPAIRMENT CHARGES
Due to continued performance levels below original forecasts, the Company
reassessed the carrying value of intangibles associated with the Primis
acquisition during the fourth quarter of 2001. The assessment of the
recoverability of intangibles related to the acquisition was based upon an
analysis of discounted cash flows. The discount rate used in determining
discounted cash flows was a rate corresponding to the Company's cost of
capital. As a result of this analysis, the carrying value of intangibles
was written down. This charge amounted to $40,181 and is included under the
caption "Write off of intangibles and capitalized software" in the
Consolidated Statements of Operations.
During the fourth quarter of 2001 the Company determined that it would no
longer pursue the development of TitleQuest, its back office title
production software and recorded a non-cash charge of approximately $11,215
relating to the TitleQuest project which is included under the caption
"Write off of intangibles and capitalized software" in the Consolidated
Statements of Operations.
F-31
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------
(In thousands of dollars except per common share amounts)
16. UNAUDITED QUARTERLY FINANCIAL DATA
Selected quarterly financial information follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- ---------
2001
----
Premiums, title search, escrow and
other $426,096 $541,126 $528,032 $ 624,220
Net investment income 12,509 12,496 13,049 12,949
Income before income taxes 10,376 44,555 29,295 9,939
Net income 6,641 28,515 18,750 6,360
Net income per common share 0.43 1.58 1.02 0.34
Net income per common share -
assuming dilution 0.36 1.54 1.01 0.34
2000
----
Premiums, title search, escrow and
other $393,779 $454,203 $439,633 $ 463,653
Net investment income 12,860 12,377 12,763 13,136
Income (loss) before income taxes (3,108) 26,875 11,867 (163,770)
Net income (loss) (2,051) 17,736 7,832 (104,283)
Net income (loss) per common share (0.30) 1.18 0.44 (7.88)
Net income (loss) per common share -
assuming dilution (0.30) 0.97 $ 0.43 (7.88)
In the fourth quarter of 2000, the Company changed its method of assessing
the recoverability of goodwill which resulted in a net of tax charge to
earnings of $110,369 (See Note 2). In the fourth quarter of 2001, the
Company reassessed the carrying value of intangibles and capitalized
software which resulted in net of tax charges to earnings of $32,893 (See
Note 15).
17. PENDING ACCOUNTING CHANGES
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets, effective for fiscal years beginning after December 15,
2001. Under the new rules, goodwill (and intangible assets deemed to have
indefinite lives) will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets
will continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of
the nonamortization provisions of the Statement is expected to result in an
increase in net income of $6,016 ($0.32 per diluted share) per year.
F-32
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------
17. PENDING ACCOUNTING CHANGES (Continued)
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets ("SFAS 144"). which addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets and supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the
accounting and reporting provisions of APB Opinion No. 30, Reporting the
Results of Operations for a disposal of a segment of a business. SFAS 144
is effective for fiscal years beginning after December 15, 2001, with
earlier application encouraged. The Company expects to adopt SFAS 144 as of
January 1, 2002 and it does not expect that the adoption of the Statement
will have a significant impact on the Company's financial position and
results of operations.
F-33
Schedule I
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
DECEMBER 31, 2001
(In thousands of dollars)
Column A Column B Column C Column D
-------- ---------- --------- --------------
Amount at
Estimated which
Amortized Fair shown in the
Type of investment Cost Value Abalance sheet
---------- --------- --------------
Fixed maturities:
Available-for-sale:
Bonds:
United States Government and
government agencies and
authorities $ 61,962 $ 64,708 $ 64,708
States, municipalities and
political subdivisions 312,507 318,082 318,082
Foreign Government 2,504 1,816 1,816
Public Utilities 69,729 68,023 68,023
All other corporate bonds 256,099 261,666 261,666
Mortgage-backed securities 108,892 110,285 110,285
Preferred stock 53,661 49,690 49,690
---------- --------- ----------
Total fixed maturities $ 865,354 $ 874,270 $ 874,270
========== ========= ==========
Mortgage loans on real estate $ 1,536 XXX $ 1,536
========== ========= ==========
Deposits with banks:
Invested cash $ 133,185 XXX $ 133,185
========== ========= ==========
Total investments $1,000,075 XXX $1,008,991
========== ========= ==========
F-34
Schedule II
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
(In thousands of dollars)
2001 2000
---------- --------
ASSETS
-------
Fixed maturities available for sale - at fair value
(amortized cost: 2001 - $15, 296; 2000 - $10,409) $ 15,365 $ 10,190
Cash and short term investments 23,555 10,299
Stock of subsidiaries at equity 914,042 865,810
Notes receivable from affiliates -- 775
Notes receivable other (less allowance for doubtful accounts: 2001
- $1,000; 2000 - $500) 1,130 3,379
Income tax recoverable 17,332 6,213
Accounts receivable from affiliates 22,456 39,828
Other assets 19,994 6,199
---------- --------
Total Assets $1,013,874 $942,693
========== ========
LIABILITIES
-----------
Notes payable $ 205,500 $195,500
Other liabilities 80,881 83,093
---------- --------
Total Liabilities 286,381 278,593
---------- --------
SHAREHOLDERS' EQUITY
--------------------
Preferred stock, no par value, authorized 5,000,000 shares, no shares of Series
A Junior Participating Preferred Stock issued or outstanding; 2,200,000
shares of 7% Series B Cumulative
Convertible Preferred Stock issued and outstanding in 2000 -- 175,700
Common stock, no par value, 45,000,000 shares authorized, shares
issued and outstanding: 2001 - 18,583,937; 2000 - 13,518,319 521,795 340,269
Accumulated other comprehensive loss (3,647) (4,712)
Retained earnings 209,345 152,843
---------- --------
Total Shareholders' Equity 727,493 664,100
---------- --------
Total Liabilities and Shareholders' Equity $1,013,874 $942,693
========== ========
F-35
Schedule II
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(In thousands of dollars)
2001 2000 1999
------- --------- --------
REVENUES
Dividends received from consolidated subsidiaries $32,250 $ 62,602 $55,300
Management fee from consolidated subsidiaries 8,381 10,156 5,125
Other income 3,551 7,996 3,001
------- --------- -------
44,182 80,754 63,426
------- --------- -------
EXPENSES
Interest expense 12,548 13,477 12,155
Administrative expenses 8,381 19,064 5,951
------- --------- -------
20,929 32,541 18,106
------- --------- -------
INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF
SUBSIDIARIES 23,253 48,213 45,320
FEDERAL INCOME TAX BENEFIT (3,358) (5,627) (3,492)
EQUITY IN UNDISTRIBUTED INCOME (LOSS) OF CONSOLIDATED
SUBSIDIARIES 33,655 (134,606) 5,505
------- --------- -------
NET INCOME (LOSS) $60,266 $ (80,766) $54,317
======= ========= =======
F-36
Schedule II
LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(In thousands of dollars)
2001 2000 1999
--------- -------- --------
Cash flows from operating activities:
Net income (loss) $ 60,266 $(80,766) $ 54,317
Undistributed net (income) loss of subsidiaries (33,655) 134,606 (5,505)
Receivable from affiliates 17,372 (28,490) (15,102)
Income taxes (11,119) (5,059) --
Accounts payable (2,212) -- --
Other (19,101) 19,319 9,556
--------- -------- --------
Net cash provided by operating activities 11,551 39,610 43,266
--------- -------- --------
Cash flows from investing activities:
Cost of fixed maturity securities acquired (15,429) (10,413) --
Proceeds from sale of fixed maturity securities 9,430 -- --
Additional investment in subsidiaries (4,358) (35,740) --
--------- -------- --------
Net cash used in investing activities (10,357) (46,153) --
--------- -------- --------
Cash flows from financing activities:
Common shares issued (retired) 5,826 (1,869) (40,690)
Proceeds from note payable 160,000 -- --
Payments on notes payable (150,000) -- --
Dividends paid (3,764) (10,391) (10,611)
--------- -------- --------
Net cash provided by (used in) financing activities 12,062 (12,260) (51,301)
--------- -------- --------
Net increase (decrease) in cash 13,256 (18,803) (8,035)
Cash at beginning of year 10,299 29,102 37,137
--------- -------- --------
Cash at end of year $ 23,555 $ 10,299 $ 29,102
========= ======== ========
F-37
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-38
ITEM 14(a)(3)
INDEX TO EXHIBITS
Exhibit Number
and Applicable
Section of Item 601 of
Regulation S-K
--------------
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 Second Amendment to Amended and Restated Rights Agreement,
dated as of June 1, 1999, between the Registrant, Wachovia
Bank, N.A., as Rights Agent, and State Street Bank and Trust
Company, as Successor Rights Agent, incorporated by reference
to Exhibit 4.1 of the Registrant's Current Report on Form 8-K,
dated June 1, 1999, File No. 1-13990.
4.4 Third Amendment to Amended and Restated Rights Agreement,
dated as of July 26, 2000, between the Registrant and State
Street Bank and Trust Company, as Rights Agent, incorporated
by reference to Exhibit 4.1 of the Registrant's Current Report
on Form 8-K, dated July 26, 2000, File No. 1-13990.
4.5 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.
4.6 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.
ITEM 14(a)(3)
INDEX TO EXHIBITS
Exhibit Number
and Applicable
Section of Item 601 of
Regulation S-K
--------------
4.7 Note Purchase Agreement, dated as of August 31, 2001, by and
among the Registrant and the purchasers named therein, with
accompanying forms of 7.16% Senior Notes, Series A, due 2006,
7.45% Senior Notes, Series B, due 2008 and 7.88% Senior Notes,
Series C, due 2011. The foregoing exhibits need not be filed
herewith pursuant to Item 601(b)(4)(iii) of Regulation S-K.
The Registrant, by signing this Report on Form 10-K, agrees to
furnish the Securities and Exchange Commission, upon its
request, a copy of any instrument which defines the rights of
holders of long-term debt of the Registrant and its
consolidated subsidiaries, and for any unconsolidated
subsidiaries for which financial statements are required to be
filed that authorizes a total amount of securities not in
excess of 10% of the total assets of the Registrant and its
subsidiaries on a consolidated basis.
10.1 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.
10.2 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.
10.3 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.
10.4 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.
10.5 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.
10.6 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.
10.7 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.
10.8 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.
ITEM 14(a)(3)
INDEX TO EXHIBITS
Exhibit Number
and Applicable
Section of Item 601 of
Regulation S-K
--------------
10.9 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.
10.10 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.
10.11 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.
10.12 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.
10.13 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.
10.14 LandAmerica Financial Group, Inc. Benefit Restoration Plan,
as amended and restated effective July 1, 1999, incorporated
by reference to Exhibit 10.14 of the Registrant's Form 10-K
for the year ended December 31, 1999, File No. 1-13990.
10.15 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.
10.16 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.
10.17 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.
ITEM 14(a)(3)
INDEX TO EXHIBITS
Exhibit Number
and Applicable
Section of Item 601 of
Regulation S-K
--------------
10.18 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.
10.19 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,
incorporated by reference to Exhibit 10.24 of the Registrant's
Form 10-K for the year ended December 31, 1997, File No.
1-13990.
10.20 Form of LandAmerica Financial Group, Inc. 1998 Restricted
Stock Agreement, with Schedule of Grantees and number of
shares granted, incorporated by reference to Exhibit 10.25
of the Registrant's Form 10-K for the year ended December
31, 1997, File No. 1-13990.
10.21 Registration Rights Agreement, dated February 27, 1998, by and
among the Registrant and Reliance Insurance Company,
incorporated by reference to Exhibit 10.27 of the Registrant's
Form 10-K for the year ended December 31, 1997, File No.
1-13990.
10.22 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.
10.23 Agreement Containing Consent Order, dated February 6, 1998, by
and between the Registrant and the Federal Trade Commission,
incorporated by reference to Exhibit 10.29 of the Registrant's
Form 10-K for the year ended December 31, 1997, File No.
1-13990.
10.24 Employment Agreement, dated March 1, 1998, between the
Registrant and Charles H. Foster, Jr., incorporated by
reference to Exhibit 10.3 of the Registrant's Form 10-Q for
the quarter ended June 30, 1998, File No. 1-13990.
10.25 Form of LandAmerica Financial Group, Inc. Employee
Non-Qualified Stock Option Agreement, dated February 16, 1999,
with Schedule of Optionees and Options Awarded, incorporated
by reference to Exhibit 10.29 of the Registrant's Form 10-K
for the year ended December 31, 1998, File No. 1-13990.
10.26 LandAmerica Financial Group, Inc. Outside Directors Deferral
Plan, as amended and restated December 1, 1998, February 17,
1999 and January 1, 2002.*
ITEM 14(a)(3)
INDEX TO EXHIBITS
Exhibit Number
and Applicable
Section of Item 601 of
Regulation S-K
--------------
10.27 LandAmerica Financial Group, Inc. Executive Voluntary
Deferral Plan, as amended and restated effective January 1,
2002.*
10.28 Form of LandAmerica Financial Group, Inc. Change of Control
Employment Agreement, with Schedule of Officers and
Multiplier.*
10.29 LandAmerica Financial Group, Inc. 1991 Stock Incentive Plan,
as amended May 16, 1995, May 21, 1996, November 1, 1996,
June 16, 1998, May 18, 1999 and February 23, 2000,
incorporated by reference to Exhibit 10.30 of the
Registrant's Form 10-K for the year ended December 31, 1999,
File No. 1-13990.
10.30 LandAmerica Financial Group, Inc. 2000 Stock Incentive Plan,
as amended February 21, 2001, incorporated by reference to
Exhibit 10.30 of the Registrant's Form 10-K for the year
ended December 31, 2000, File No. 1-13990.
10.31 Non-Qualified Stock Option Agreement, dated January 31,
2000, between the Registrant and Theodore L. Chandler, Jr.,
incorporated by reference to Exhibit 10.31 of the
Registrant's Form 10-K for the year ended December 31, 1999,
File No. 1-13990.
10.32 Restricted Stock Agreement, dated January 31, 2000, between
the Registrant and Theodore L. Chandler, Jr., incorporated
by reference to Exhibit 10.32 of the Registrant's Form 10-K
for the year ended December 31, 1999, File No. 1-13990.
10.33
Employment Agreement, dated January 31, 2000, between the
Registrant and Theodore L. Chandler, Jr., incorporated by
reference to Exhibit 10.33 of the Registrant's Form 10-K for
the year ended December 31, 1999, File No. 1-13990.
10.34
Change of Control Employment Agreement, dated January 31,
2000, between the Registrant and Theodore L. Chandler, Jr.,
incorporated by reference to Exhibit 10.34 of the
Registrant's Form 10-K for the year ended December 31, 1999,
File No. 1-13990.
10.35 Form of LandAmerica Financial Group, Inc. Employee
Non-Qualified Stock Option Agreement, dated February 23, 2000,
with Schedule of Optionees and Options Awarded, incorporated
by reference to Exhibit 10.35 of the Registrant's Form 10-K
for the year ended December 31, 1999, File No. 1-13990.
10.36 Form of LandAmerica Financial Group, Inc. Employee
Non-Qualified Stock Option Agreement, dated May 17, 2000, with
Schedule of Optionees and Options Awarded, incorporated by
reference to Exhibit 10.1 of the Registrant's Form 10-Q for
the quarter ended June 30, 2000, File No. 1-13990.
ITEM 14(a)(3)
INDEX TO EXHIBITS
Exhibit Number
and Applicable
Section of Item 601 of
Regulation S-K
--------------
10.37 Employee Non-Qualified Stock Option Agreement, dated May 17,
2000, between the Registrant and Charles H. Foster, Jr.,
incorporated by reference to Exhibit 10.2 of the
Registrant's Form 10-Q for the quarter ended June 30, 2000,
File No. 1-13990.
10.38 Form of LandAmerica Financial Group, Inc. Amendment to
Non-Qualified Stock Option Agreements, dated June 20, 2000,
with Schedule of Optionees and Agreements Being Amended,
incorporated by reference to Exhibit 10.3 of the Registrant's
Form 10-Q for the quarter ended June 30, 2000, File No.
1-13990.
10.39 Form of LandAmerica Financial Group, Inc. Non-Employee
Director Non-Qualified Stock Option Agreement, incorporated
by reference to Exhibit 10.4 of the Registrant's Form 10-Q
for the quarter ended June 30, 2000, File No. 1-13990.
10.40 First Amendment of Credit Agreement, dated February 19, 1998,
by and among the Registrant, Bank of America National Trust
and Savings Association and the financial institutions named
therein, incorporated by reference to Exhibit 10.36 of the
Registrant's Form 10-K for the year ended December 31, 1999,
File No. 1-13990.
10.41 Second Amendment to Credit Agreement, dated December 22, 1999,
by and among the Registrant, Bank of America, N.A. and the
financial institutions named therein, incorporated by
reference to Exhibit 10.37 of the Registrant's Form 10-K for
the year ended December 31, 1999, File No. 1-13990.
10.42 Third Amendment to Credit Agreement, dated December 31, 2000,
by and among the Registrant, Bank of America, N.A. and the
financial institutions named therein, incorporated by
reference to Exhibit 10.42 of the Registrant's Form 10-K for
the year ended December 31, 2000, File No. 1-13990.
10.43 Form of LandAmerica Financial Group, Inc. Employee
Non-Qualified Stock Option Agreement, dated February 20, 2001,
with Schedule of Optionees and Options Awarded, incorporated
by reference to Exhibit 10.43 of the Registrant's Form 10-K
for the year ended December 31, 2000, File No. 1-13990.
10.44 Form of LandAmerica Financial Group, Inc. Employee
Non-Qualified Stock Option Agreement, dated December 20,
2001, with Schedule of Optionees and Options Awarded.*
10.45 Form of Split-Dollar Life Insurance Agreement, between the
Registrant and the named executive officers listed in the
attached Schedule.*
10.46 Form of Modification to Agreement between the Registrant and
the named executive officers listed in the attached
Schedule.*
ITEM 14(a)(3)
INDEX TO EXHIBITS
Exhibit Number
and Applicable
Section of Item 601 of
Regulation S-K
--------------
10.47 Form of Modification to Agreement, dated as of January 23,
2002, between the Registrant and the named executive officers
listed in the attached Schedule.*
11 Statement re: Computation of Earnings Per Share.*
21 Subsidiaries of the Registrant.*
23 Consent of Ernst & Young LLP.*
* Filed Herewith