Form 10-Q 2Q06
 
 


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 
   
THE SECURITIES EXCHANGE ACT OF 1934
 

For the Quarterly Period Ended June 30, 2006

or

 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 
   
THE SECURITIES EXCHANGE ACT OF 1934
 

For the transition period from _____________ to _______________

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 incorporation or organization)
(I.R.S. Employer 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)

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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filerx Accelerated filer o Non-accelerated filer o


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Common Stock, No Par Value
17,050,307 shares
July 27, 2006



LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES


 
INDEX
 
   
Page No.
 
PART I. FINANCIAL INFORMATION
 
     
ITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS:
 
     
 
Consolidated Balance Sheets
3
     
 
Consolidated Statements of Operations
5
     
 
Consolidated Statements of Cash Flows
6
     
 
Consolidated Statements of Changes in Shareholders’ Equity
7
     
 
Notes to Consolidated Financial Statements
8
     
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
24
     
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
40
     
ITEM 4.
CONTROLS AND PROCEDURES
40
     
     
 
PART II. OTHER INFORMATION
 
     
ITEM 1.
LEGAL PROCEEDINGS
41
     
ITEM 1A.
RISK FACTORS
41
     
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
41
     
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
42
     
ITEM 5.
OTHER INFORMATION
43
     
ITEM 6.
EXHIBITS
44
     
SIGNATURE
46





 

2


PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
   
June 30,
 
December 31,
 
ASSETS
 
2006
 
2005
 
           
INVESTMENTS:
         
Fixed maturities available-for-sale - at fair value (amortized cost: 2006- $1,192.6; 2005 - $1,154.2)
 
$
1,176.3
 
$
1,163.5
 
Equity securities - at fair value (cost: 2006 - $97.5; 2005 - $94.5)
   
108.6
   
102.4
 
Federal funds sold
   
10.5
   
4.2
 
Short term investments
   
415.4
   
484.6
 
               
Total Investments
   
1,710.8
   
1,754.7
 
               
CASH
   
80.9
   
89.1
 
               
LOANS RECEIVABLE
   
451.7
   
437.9
 
               
ACCRUED INTEREST RECEIVABLE
   
18.3
   
19.6
 
               
NOTES AND ACCOUNTS RECEIVABLE
             
Notes (less allowance for doubtful accounts: 2006 - $3.9; 2005 - $4.3)
   
15.9
   
16.0
 
Trade accounts receivable (less allowance for doubtful accounts: 2006 - $10.9; 2005 - $7.9)
   
131.1
   
124.6
 
               
Total Notes and Accounts Receivable
   
147.0
   
140.6
 
               
TAXES RECEIVABLE
   
21.4
   
-
 
               
PROPERTY AND EQUIPMENT - at cost (less accumulated depreciation and amortization: 2006- $212.5; 2005 - $209.5)
   
107.9
   
114.4
 
               
TITLE PLANTS
   
94.6
   
93.9
 
               
GOODWILL
   
594.6
   
584.3
 
               
INTANGIBLE ASSETS (less accumulated amortization 2006 - $73.8; 2005 - $61.3)
   
145.2
   
156.3
 
               
DEFERRED INCOME TAXES
   
136.3
   
130.2
 
               
OTHER ASSETS
   
198.8
   
174.0
 
               
Total Assets
 
$
3,707.5
 
$
3,695.0
 


See Notes to Consolidated Financial Statements.

 
3



LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In millions, except share amounts)
(Unaudited)

   
June 30,
 
December 31,
 
LIABILITIES
 
2006
 
2005
 
           
POLICY AND CONTRACT CLAIMS
 
$
714.0
 
$
697.6
 
               
DEPOSITS
   
588.6
   
547.2
 
               
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
   
364.1
   
399.1
 
               
NOTES PAYABLE
   
466.3
   
479.3
 
               
DEFERRED SERVICE ARRANGEMENTS
   
216.8
   
211.2
 
               
TAXES PAYABLE
   
-
   
18.1
 
               
OTHER
   
68.3
   
64.0
 
               
Total Liabilities
   
2,418.1
   
2,416.5
 
               
COMMITMENTS AND CONTINGENCIES
             
               
SHAREHOLDERS’ EQUITY 
             
               
Common stock, no par value, 45,000,000 shares authorized, shares issued and outstanding: 2006 - 17,071,307; 2005 - 17,291,213
   
425.6
   
443.1
 
               
Accumulated other comprehensive loss
   
(57.0
)
 
(42.3
)
               
Retained earnings
   
920.8
   
877.7
 
               
Total Shareholders’ Equity
   
1,289.4
   
1,278.5
 
               
Total Liabilities and Shareholders’ Equity
 
$
3,707.5
 
$
3,695.0
 
               


See Notes to Consolidated Financial Statements.

 

4


LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(In millions, except per share amounts)
(Unaudited)


   
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
   
2006
 
2005
 
2006
 
2005
 
       
(as restated)
     
(as restated)
 
REVENUE
                 
Operating revenue
 
$
971.1
 
$
952.4
 
$
1,873.4
 
$
1,765.9
 
Investment and other income
   
32.5
   
24.4
   
62.2
   
45.7
 
Net realized investment (losses) gains
   
(1.5
)
 
0.3
   
(0.6
)
 
1.1
 
     
1,002.1
   
977.1
   
1,935.0
   
1,812.7
 
EXPENSES
                         
Agents’ commissions
   
404.2
   
371.6
   
787.3
   
696.2
 
Salaries and employee benefits
   
288.8
   
282.9
   
565.5
   
530.2
 
General, administrative and other
   
173.3
   
197.8
   
341.5
   
338.4
 
Provision for policy and contract claims
   
50.9
   
46.8
   
101.3
   
91.5
 
Premium taxes
   
11.9
   
10.6
   
22.3
   
20.3
 
Interest expense
   
9.3
   
8.1
   
18.9
   
16.0
 
Amortization of intangibles
   
6.3
   
7.7
   
12.6
   
14.7
 
Write-off of intangible and long-lived assets
   
-
   
-
   
9.7
   
-
 
     
944.7
   
925.5
   
1,859.1
   
1,707.3
 
INCOME BEFORE INCOME TAXES
   
57.4
   
51.6
   
75.9
   
105.4
 
                           
INCOME TAX EXPENSE
   
21.8
   
21.4
   
26.6
   
42.0
 
                           
NET INCOME
 
$
35.6
 
$
30.2
 
$
49.3
 
$
63.4
 
                           
NET INCOME PER COMMON SHARE
 
$
2.13
 
$
1.72
 
$
2.92
 
$
3.60
 
                           
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
   
16.7
   
17.6
   
16.9
   
17.6
 
                           
NET INCOME PER COMMON SHARE ASSUMING DILUTION
 
$
2.06
 
$
1.70
 
$
2.82
 
$
3.56
 
                           
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING ASSUMING DILUTION
   
17.3
   
17.8
   
17.5
   
17.8
 
                           
CASH DIVIDENDS DECLARED PER COMMON SHARE
 
$
0.18
 
$
0.15
 
$
0.36
 
$
0.30
 


See Notes to Consolidated Financial Statements.

 

5


LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(In millions)
(Unaudited)
   
2006
 
2005
 
       
(as restated)
 
Cash flows from operating activities:
         
Net income
 
$
49.3
 
$
63.4
 
Depreciation and amortization
   
27.7
   
29.2
 
Write-off of intangible and long-lived assets
   
9.7
   
-
 
Amortization of bond premium
   
2.5
   
3.2
 
Net realized investment losses (gains )
   
0.6
   
(1.1
)
Deferred income tax expense
   
2.4
   
7.4
 
Change in assets and liabilities, net of businesses acquired:
             
Accounts and notes receivable
   
(9.6
)
 
(8.4
)
Income taxes receivable/payable
   
(40.1
)
 
7.8
 
Accounts payable and accrued expenses
   
(35.5
)
 
8.9
 
Policy and contract claims
   
16.4
   
22.4
 
Deferred service arrangements
   
3.8
   
(9.5
)
Other
   
2.2
   
(1.8
)
Net cash provided by operating activities
   
29.4
   
121.5
 
Cash flows from investing activities:
             
Purchase of title plant, property and equipment, net
   
(28.5
)
 
(15.9
)
Purchase of business, net of cash acquired
   
(8.7
)
 
(25.7
)
Investments in unconsolidated subsidiaries
   
(0.8
)
 
(11.2
)
Change in cash surrender value of life insurance
   
(1.7
)
 
(1.6
)
Change in short-term investments
   
69.2
   
(10.2
)
Cost of investments acquired:
             
Fixed maturities
   
(230.3
)
 
(209.1
)
Equity securities
   
(14.1
)
 
(7.0
)
Proceeds from investment sales or maturities:
             
Fixed maturities
   
187.3
   
157.3
 
Equity securities
   
12.4
   
6.2
 
Net change in federal funds sold
   
(6.3
)
 
4.2
 
Change in loans receivable
   
(14.3
)
 
(42.7
)
Net cash used in investing activities
   
(35.8
)
 
(155.7
)
Cash flows from financing activities:
             
Net change in deposits
   
41.4
   
40.9
 
Proceeds from the exercise of options and incentive plans
   
1.4
   
5.5
 
Tax benefit of stock options exercised
   
0.6
   
-
 
Cost of common shares repurchased
   
(24.6
)
 
(9.1
)
Dividends paid
   
(6.2
)
 
(5.3
)
Proceeds from issuance of notes payable
   
11.9
   
12.4
 
Payments on notes payable
   
(26.3
)
 
(5.2
)
Net cash (used in) provided by financing activities
   
(1.8
)
 
39.2
 
Net (decrease) increase in cash
   
(8.2
)
 
5.0
 
Cash at beginning of period
   
89.1
   
73.0
 
Cash at end of period
 
$
80.9
 
$
78.0
 


See Notes to Consolidated Financial Statements.

 

6



LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(In millions, except per share amounts)
(Unaudited)
 
   
Common Stock
 
Accumulated Other Comprehensive
 
Retained
 
Total Shareholders’
 
   
Shares
 
Amounts
 
Income (Loss)
 
Earnings
 
Equity
 
                       
                       
BALANCE - December 31, 2004 (as restated)
   
18.0
 
$
491.5
 
$
(17.6
)
$
723.8
 
$
1,197.7
 
                                 
Comprehensive income:
                               
Net income
   
-
   
-
   
-
   
63.4
   
63.4
 
Other comprehensive loss
                               
    Net unrealized loss on securities - net of tax benefit $(1.9)
   
-
   
-
   
(3.9
)
 
-
   
(3.9
)
                                 
                             
59.5
 
                                 
Purchase of call options, net of tax
   
-
   
(0.7
)
 
-
   
-
   
(0.7
)
Common stock retired
   
(0.2
)
 
(9.1
)
 
-
   
-
   
(9.1
)
Stock options and incentive plans
   
0.3
   
7.5
   
-
   
-
   
7.5
 
Common dividends ($0.30/share)
   
-
   
-
   
-
   
(5.3
)
 
(5.3
)
                                 
BALANCE - June 30, 2005 (as restated)
   
18.1
   
489.2
   
(21.5
)
 
781.9
   
1,249.6
 
                                 
BALANCE - December 31, 2005
   
17.3
   
443.1
   
(42.3
)
 
877.7
   
1,278.5
 
                                 
Comprehensive income:
                               
Net income
   
-
   
-
   
-
   
49.3
   
49.3
 
Other comprehensive loss
                               
    Net unrealized loss on securities - net of tax benefit $(7.9)
   
-
   
-
   
(14.7
)
 
-
   
(14.7
)
                                 
                             
34.6
 
                                 
Common stock retired
   
(0.4
)
 
(24.6
)
 
-
   
-
   
(24.6
)
Stock options and incentive plans
   
0.2
   
7.1
   
-
   
-
   
7.1
 
Common dividends ($0.36/share)
   
-
   
-
   
-
   
(6.2
)
 
(6.2
)
                                 
BALANCE - JUNE 30, 2006
   
17.1
 
$
425.6
 
$
(57.0
)
$
920.8
 
$
1,289.4
 
                                 
 

 

See Notes to Consolidated Financial Statements.

 

7



LANDAMERICA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.    INTERIM FINANCIAL INFORMATION

 
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all information and notes required by generally accepted accounting principles for complete financial statements. These statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K of LandAmerica Financial Group, Inc. for the year ended December 31, 2005. In the opinion of management, all adjustments (including normal and recurring adjustments) considered neces-sary for a fair presentation of this infor-mation have been reflected. Operating results for the interim periods are not necessarily indicative of results for a full year.

 
When used in these notes, the terms “LandAmerica,” “we,” “us” or “our” means LandAmerica Financial Group, Inc. and all entities included in our Consolidated Financial Statements.

 
Reclassification
 
Certain 2005 amounts have been reclassified to conform to the 2006 presentation.

Restatement

On February 13, 2006, we announced that we would restate previously filed financial results to correct the accounting for policy and contract claims reserves. The error resulted in a net understatement of reported earnings. We have restated the consolidated financial statements contained herein for the six months ended June 30, 2005. The restatement had no effect on our net cash provided by or used in operating, investing or financing activities. For further information refer to Note 1 to the Notes to Consolidated Financial Statements on Form 10-K for the year ended December 31, 2005.


8


The following tables set forth the effects of the restatement within our previously reported Consolidated Balance Sheet and Consolidated Statements of Operations:

   
For the Six Months Ended
June 30, 2005
 
   
As
Previously
Reported
 
As Restated
 
           
   
(In millions)
 
Effects on Consolidated Balance Sheet:
         
           
Deferred income taxes
 
$
146.3
 
$
118.2
 
Total assets
   
3,422.0
   
3,393.9
 
Policy and contract claims
   
746.4
   
666.2
 
Total liabilities
   
2,224.5
   
2,144.3
 
Shareholders’ equity
   
1,197.5
   
1,249.6
 


   
For the Three Months Ended
June 30, 2005
 
For the Six Months Ended
June 30, 2005
 
   
As
Previously
Reported
 
As Restated
 
As
Previously
Reported
 
As Restated
 
                   
   
(In millions, except per share amounts)
 
Effects on Consolidated Statements of Operations:
                 
                   
Provision for policy and contract claims
 
$
50.9
 
$
46.8
 
$
100.1
 
$
91.5
 
Income before income taxes
   
47.5
   
51.6
   
96.8
   
105.4
 
Income taxes
   
19.9
   
21.4
   
38.9
   
42.0
 
Net income
   
27.6
   
30.2
   
57.9
   
63.4
 
Net income per common share
 
$
1.57
 
$
1.72
 
$
3.28
 
$
3.60
 
Net income per common share assuming dilution
 
$
1.56
 
$
1.70
 
$
3.25
 
$
3.56
 

 
Stock-Based Compensation

Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123”) as revised by Financial Accounting Standards No. 123(R), Share-Based Payment ("SFAS No.123-(R)"). We have used the modified prospective adoption method. Under this method, the share-based compensation cost recognized beginning January 1, 2006 includes compensation cost for (i) all share-based payments granted prior to, but not vested as of January 1, 2006, based on the grant date fair value originally estimated in accordance with the provisions of SFAS No. 123 and (ii) all share-based payments
 
9

granted subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123-(R). Compensation cost under SFAS No. 123-(R) is recognized ratably using the straight-line attribution method over the expected vesting period or to the retirement eligibility date, if less than the vesting period when vesting is not contingent upon any future performance. In addition, pursuant to SFAS No. 123-(R), we are required to estimate the amount of expected forfeitures when calculating the compensation costs, instead of accounting for forfeitures as incurred, which was our previous method. As of June 30, 2006, the cumulative effect of adopting SFAS No. 123-(R) was not significant.

Prior to January 1, 2006, we accounted for share-based compensation plans in accordance with the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, as permitted by SFAS No. 123. Accordingly, no compensation expense was recognized for our stock options since all options granted had an exercise price equal to the market value of the underlying stock on the date of grant. There were no new options granted during 2005 or the first half of 2006.

The following pro forma information for the three and six months ended June 30, 2005 shows net income and earnings per basic and diluted share if compensation expense for our employee stock options had been determined on a fair value method of accounting:

   
Pro forma
 
   
Three Months Ended
June 30, 2005
 
Six Months Ended
June 30, 2005
 
   
(as restated)
 
           
   
(In millions, except per share amounts)
 
           
Net income, as reported
 
$
30.2
 
$
63.4
 
Add: Stock-based employee compensation included in reported net income, net of related tax effects
   
0.7
   
1.2
 
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects
   
(0.7
)
 
(1.3
)
               
Pro forma net income
 
$
30.2
 
$
63.3
 
               
Earnings per share:
             
Basic - as reported
 
$
1.72
 
$
3.60
 
Basic - pro forma
 
$
1.72
 
$
3.60
 
               
Diluted - as reported
 
$
1.70
 
$
3.56
 
Diluted - pro forma
 
$
1.70
 
$
3.55
 



10


Recent Accounting Pronouncements

On July 13, 2006, the Financial Accounting Standards Board finalized Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). The Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact that adopting FIN 48 will have on our financial statements.

2.    EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:

   
Three Months Ended June 30,
 
Six Months Ended June 30,
 
   
2006
 
2005
 
2006
 
2005
 
       
(as restated)
     
(as restated)
 
   
(In millions, except per share amounts)
 
Numerator:
     
Net income - numerator for basic and diluted earnings per share
 
$
35.6
 
$
30.2
 
$
49.3
 
$
63.4
 
                           
Denominator:
                         
Weighted average shares - denominator for basic earnings per share
   
16.7
   
17.6
   
16.9
   
17.6
 
                           
Effect of dilutive securities:
                         
Convertible debt
   
0.5
   
-
   
0.5
   
-
 
Employee stock options
   
0.1
   
0.2
   
0.1
   
0.2
 
                           
Denominator for diluted earnings per share
   
17.3
   
17.8
   
17.5
   
17.8
 
                           
Basic earnings per common share
 
$
2.13
 
$
1.72
 
$
2.92
 
$
3.60
 
                           
Diluted earnings per common share
 
$
2.06
 
$
1.70
 
$
2.82
 
$
3.56
 

3.    INCOME TAXES

Our effective income tax rate, which includes a provision for state income and franchise taxes for non-insurance subsidiaries, was 38.0% for second quarter 2006, 41.5% for second quarter 2005, 35.0% for the first half of 2006 and 39.8% for the first half of 2005. The difference in the effective tax rate was due primarily to changes in the ratio of permanent differences to income before taxes and the mix of state taxes related to our non-insurance subsidiaries.


11


4.    INVESTMENTS

Effective January 1, 2006, we have adopted the Financial Accounting Standards Board (“FASB”) Staff Position Nos. 115-1 and 124-1 (“FSPs”) which address the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of the impairment loss. The FSPs also provide guidance on the accounting subsequent to the recognition of an other-than-temporary impairment and require additional disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance amends FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities. The adoption did not have a material effect on our financial statements.

Gross unrealized losses and fair value aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position were as follows:

   
June 30, 2006
 
   
Less Than 12 Months
 
12 Months or More
 
Total
 
   
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
       
   
(In millions)
 
Fixed maturities:
                         
                           
U.S. treasuries and U.S. government corporations and agencies
 
$
16.1
 
$
(0.2
)
$
5.6
 
$
(0.2
)
$
21.7
 
$
(0.4
)
                                       
States and political subdivisions
   
164.5
   
(3.3
)
 
44.6
   
(1.8
)
 
209.1
   
(5.1
)
                                       
Fixed maturities issued by foreign governments
   
3.0
   
(0.1
)
 
0.3
   
-
   
3.3
   
(0.1
)
                                       
Public utilities
   
3.2
   
(0.1
)
 
0.4
   
-
   
3.6
   
(0.1
)
                                       
Corporate securities
   
300.0
   
(9.0
)
 
77.1
   
(2.8
)
 
377.1
   
(11.8
)
                                       
Mortgage-backed securities
   
87.0
   
(3.1
)
 
71.8
   
(3.2
)
 
158.8
   
(6.3
)
                                       
Preferred stock
   
2.1
   
-
   
0.5
   
(0.1
)
 
2.6
   
(0.1
)
                                       
Equity securities
   
31.9
   
(3.5
)
 
0.6
   
(0.2
)
 
32.5
   
(3.7
)
                                       
Total
 
$
607.8
 
$
(19.3
)
$
200.9
 
$
(8.3
)
$
808.7
 
$
(27.6
)


As of June 30, 2006, we held 1,078 securities with a total estimated fair value of $808.7 million which had gross unrealized losses of $27.6 million. Of the 1,078 securities, 238
 
12

 
were in a continuous unrealized loss position for greater than one year and had a total estimated fair value of $200.9 million and gross unrealized losses of $8.3 million. Almost all of the unrealized losses on the fixed maturity securities were due to rising interest rates.

In connection with the previously announced redomestication of our principal underwriters to Nebraska, in the first quarter of 2007, we expect a significant dividend from one of our underwriters to the parent, LandAmerica Financial Group, Inc. The dividend will be funded by liquidating part of our fixed income portfolio. As we no longer have the intent to hold certain fixed income securities to recovery, we impaired 33 securities in our fixed income portfolio and realized a loss of $1.6 million during the quarter ended June 30, 2006. The remaining securities with unrealized losses in excess of twelve months are investment grade long-term bonds that we have the intent and the ability to hold to recovery.

Except as noted above, we have concluded that none of the available-for- sale securities with unrealized losses at June 30, 2006, has experienced an other-than-temporary impairment. This conclusion was based on a number of factors including: (1) the significance of the decline, (2) whether the securities were rated below investment grade, and (3) how long the securities have been in an unrealized loss position, and (4) our ability and intent to retain the investment for a sufficient period of time for it to recover.
 
At June 30, 2006, no industry group comprised more than 10 percent of our investment portfolio. This portfolio is widely diversified among various geographic regions in the United States, and is not dependent on economic stability of one particular region.

At June 30, 2006, we did not hold any fixed maturity securities in any single issuer which exceeded 10 percent of shareholder’s equity other than securities issued or guaranteed by the U.S. government.

5.    PENSIONS AND OTHER POST-RETIREMENT BENEFITS

The following presents the estimated net pension expense recorded in the financial statements for each of the three and six-month periods ending June 30, 2006, and 2005. The 2006 information is based on preliminary data provided by our independent actuaries.


13


The amounts are as follows:

   
Three Months Ended June 30,
 
   
Pension Benefits
 
Other Benefits
 
   
2006
 
2005
 
2006
 
2005
 
   
(In millions)
 
Components of net pension expense:
                 
Service cost
 
$
-
 
$
-
 
$
0.2
 
$
0.2
 
Interest cost
   
3.6
   
3.5
   
0.9
   
0.8
 
Expected return on plan assets
   
(4.5
)
 
(3.9
)
 
-
   
-
 
Amortization of unrecognized transition obligation
   
-
   
-
   
0.3
   
0.3
 
Prior service cost recognized
   
-
   
-
   
0.1
   
0.1
 
Recognized loss
   
1.8
   
1.0
   
0.2
   
-
 
Gain or loss due to settlement or curtailment
   
1.0
   
2.2
   
-
   
-
 
Net pension expense
 
$
1.9
 
$
2.8
 
$
1.7
 
$
1.4
 


   
Six Months Ended June 30,
 
   
Pension Benefits
 
Other Benefits
 
   
2006
 
2005
 
2006
 
2005
 
   
(In millions)
 
Components of net pension expense:
                 
Service cost
 
$
-
 
$
-
 
$
0.5
 
$
0.4
 
Interest cost
   
7.2
   
7.0
   
1.8
   
1.6
 
Expected return on plan assets
   
(9.0
)
 
(7.8
)
 
-
   
-
 
Amortization of unrecognized transition obligation
   
-
   
-
   
0.6
   
0.6
 
Prior service cost recognized
   
-
   
-
   
0.2
   
0.2
 
Recognized loss
   
3.6
   
2.0
   
0.3
   
-
 
Gain or loss due to settlement or curtailment
   
2.0
   
2.2
   
-
   
-
 
Net pension expense
 
$
3.8
 
$
3.4
 
$
3.4
 
$
2.8
 


 
On December 31, 2004, we froze the accumulation of benefits available under our principal pension plan.

 
Weighted-average assumptions used to determine net cost for each of the three and six-month periods ending June 30, 2006, and 2005 are as follows:

   
Pension Benefits
 
Other Benefits
 
   
2006
 
2005
 
2006
 
2005
 
                   
Discount rate
   
5.50
%
 
6.00
%
 
5.50
%
 
6.00
%
Expected return on plan assets
   
8.25
%
 
8.00
%
 
N/A
   
N/A
 
Rate of compensation increase
   
N/A
   
N/A
   
3.50
%
 
3.50
%

 
 
14

6.    COMMITMENTS AND CONTINGENCIES

Pending Legal Proceedings

General

We are involved in certain litigation arising in the ordinary course of our businesses. Although the ultimate outcome of these matters cannot be ascertained at this time and the results of legal proceedings cannot be predicted with certainty, we believe, based on current knowledge, that the resolution of these matters will not have a material adverse effect on our financial position or results of operations.

Litigation Not in the Ordinary Course of Business

On May 9, 2000, Romeo Jergess filed a putative class action suit (the “Jergess Suit”) in the United States District Court for the Eastern District of Michigan, Southern Division (Case No. 00-72124) against Transnation Title Insurance Company (“Transnation”), a subsidiary of LandAmerica. The suit alleged that Transnation’s rate for an owner’s title insurance policy, charged in accordance with rates for new construction filed with the Insurance Bureau of the State of Michigan, were less than the rate paid by the lender for a simultaneously issued lender’s title insurance policy, and that the lower rate paid by the builder/developer for the owner’s policy involved an illegal kickback for a referral and an illegal splitting of fees in violation of the Real Estate Settlement Procedures Act (“RESPA”). On April 27, 2001, a similar suit was filed by Elaine Miller (the “Miller Suit”) in the same court (Case No. 01-71647) against Lawyers Title Insurance Corporation (“Lawyers Title”), a subsidiary of LandAmerica. The plaintiffs in both suits sought an unspecified amount of damages equal to three times the amount of the charge for each simultaneously issued lender’s title insurance policy in connection with a new home purchase commencing with the period one year before the filing of each complaint, plus costs, interest and attorneys’ fees. Transnation and Lawyers Title engaged a forensic accountant to review plaintiffs’ estimate that the charges collected for such policies by Transnation and Lawyers Title from the class as originally defined was approximately $15.0 million. The Jergess Suit and the Miller Suit were consolidated on July 18, 2002 with cases pending against First American Title Insurance Company and Chicago Title Insurance Company. On December 5, 2002, the court certified a class defined as all individuals who, during the period commencing prior to one year of the filing of the applicable suit and ending on October 30, 2002, purchased a newly constructed one to four family dwelling or condominium and were charged for a lender’s title insurance policy allegedly in violation of RESPA. On February 12, 2003, the United States Court of Appeals for the Sixth Circuit denied Transnation’s and Lawyers Title’s petitions for an interlocutory appeal of the class certification order. On October 30, 2003, the judge ordered that individuals otherwise meeting the class definition, but who closed transactions involving relevant policies between October 31, 2002 through October 30, 2003, would not be subject to a statute of limitations defense raised by Transnation Title or Lawyers Title between October 30, 2003 and October 31, 2004. On October 28, 2004,
 
 
15

 
Transnation and Lawyers Title stipulated to an order that individuals otherwise meeting the class definition, but who closed transactions involving relevant policies between October 31, 2002 through October 30, 2004, would not be subject to a statute of limitations defense raised by Transnation or Lawyers Title between October 30, 2004 and October 31, 2005. The court reserved decision on a Motion to proceed to trial with the certified class as originally defined. On January 13, 2005, the court denied Transnation’s and Lawyers Title’s motion to dismiss the case for lack of standing. On February 7, 2005, the court dismissed without prejudice Transnation’s and Lawyers Title’s Motion for Partial Summary Judgment with respect to those members of the class covered by the affiliated business exception under RESPA with the court indicating that the parties could resubmit the motion with additional information.  On April 21, 2005, Transnation and Lawyers Title filed various Motions for Summary Judgment and Limine with respect to multiple issues. The parties participated in nonbinding mediation beginning May 3, 2005. On May 19, 2005, Transnation and Lawyers Title entered into a binding term sheet to settle the consolidated suits. The parties entered into a final Settlement Agreement incorporating the provisions of the Term Sheet on February 8, 2006. The Settlement Agreement provides for the dismissal with prejudice of all claims by plaintiffs against Transnation and Lawyers Title and a release of all claims by plaintiffs except claims under their title policies. The court granted Motions for Preliminary Approval on February 10, 2006. A final settlement/fairness hearing was held on May 16, 2006. The settlement was approved and no appeal was filed. Pursuant to the Settlement Agreement, Transnation and Lawyers Title, who did not admit any liability in the settlement, made a single aggregate payment of $10.3 million out of an established reserve into a settlement fund established for the benefit of eligible class members.

On June 22, 2004, Gateway Title Company, Inc., Commonwealth Land Title Company, Inc. and LandAmerica Financial Group, Inc. (“Plaintiffs”) filed a Complaint, subsequently amended by a First Amended Complaint filed June 25, 2004, in the Superior Court of California, County of Los Angeles, Central District (the “Court”), against the Mercury Company and its affiliates Financial Title, Alliance Title, Investors Title and various individuals including Joseph DiChiacchio, a former manager of LandAmerica (Case No. BC 317441) (collectively, the “Defendants”). The lawsuit claims substantial monetary and punitive damages for unfair competitive business practices in conjunction with Plaintiffs’ loss of over 300 employees in California, most of which appears to have occurred within an approximately twenty-four month period. On August 12, 2004, the Court granted a Temporary Restraining Order, followed by a Preliminary Injunction granted September 27, 2004, against the Defendants based upon a showing of significant likelihood of Plaintiffs prevailing on the merits combined with irreparable harm to Plaintiffs if injunctive relief did not issue. The injunctive relief generally prohibited the solicitation of Plaintiffs’ employees. The preliminary injunctive relief has now expired. On December 13, 2004, Alliance Title Company, Inc., Financial Title Company, Inc., Roberto Olivera and Ray Arias filed a Cross-Complaint for unfair competitive business practices. On December 13, 2004, Mr. DiChiacchio also filed a Cross-Complaint alleging similar claims, including back wages and additional bonus payments. Plaintiffs
 
 
16

are disputing and intend to vigorously defend the Cross-Complaints. A mandatory settlement conference was held on August 1, 2005 and voluntary mediation on September 7, 2005. After completion of discovery, a jury trial began in early May 2006 and, as of the date of this filing, the jury is deliberating. Assuming liability, Plaintiffs’ expert witnesses on damages have estimated total damages in the range of $52.0 million. Defendants’ expert witnesses on damages have estimated total damages to Plaintiffs ranging between $5.0 million and $24.0 million. Management believes that damages caused to Plaintiffs by Defendants exceed any claim of offset raised in the Cross-Complaints.

We are defendants in a number of purported class action cases pending in various states that include allegations that certain consumers were overcharged for title insurance and/or related services. The dollar amount of damages sought has generally not been specified in these cases except for jurisdictional limits. We intend to vigorously defend these actions.

Regulatory Investigations and Inquiries

We have received certain information requests and subpoenas from various regulatory authorities relating to our business practices and the title insurance industry. As detailed below, a number of these inquiries focus on captive reinsurance, among other matters.

Captive reinsurance involves the provision of reinsurance by a reinsurance company that is owned by another entity, typically a lender, developer or other party that is a provider of real estate-related services. From the inception of our captive reinsurance programs in 1997 through 2004, reinsurance premiums paid by us to captive reinsurers totaled approximately $12.0 million. The revenues from these programs were not material to our results of operations. We voluntarily terminated our captive reinsurance arrangements as of February 2005, notwithstanding our belief that we had operated the programs in accordance with applicable law. In addition, as set out on pages 18 and 19, we settled certain of these investigations without admitting any liability.

Specifically, we have received the following regulatory inquiries:

In 2004, the Office of the Attorney General of the State of New York (“NYAG”) initiated an investigation into the business practices of companies engaged in the title insurance business. We have received subpoenas and requests from the NYAG seeking information and documents related to certain industry business practices, including, among other things, competitive market practices, the compensation of title insurance agents and producers by underwriters, and captive and other reinsurance arrangements, and we continue to respond to those subpoenas and requests. The Company is participating in settlement discussions with the NYAG and the insurance department of the State of New York with regard to alleged violations of New York Insurance Law that they perceive as a result of the NYAG’s investigation.
 
We also received initial inquiries in 2004 and responded to or continue to respond to inquiries regarding the title industry’s business practices from the following state
 
17

 
agencies: the California Department of Insurance and the Colorado Division of Insurance regarding captive reinsurance; the insurance departments of North Carolina and Pennsylvania as part of their review of competitive market practices and agent compensation in the title insurance industry; and the State of Washington Office of Insurance Commissioner regarding captive reinsurance, potential illegal inducements and rebates by title insurance companies and title insurance rates. 

Additionally, in 2005, we received and responded to or continue to respond to inquiries regarding the title industry’s business practices from the following state agencies: the California Department of Real Estate regarding captive reinsurance; the California Department of Insurance regarding our community development and investment, California title plants, and examinations of our adherence to filed premium rates and claims handling practices, including whether refunds of overcharges to certain consumers may be required; the Colorado Attorney General regarding captive reinsurance; the Colorado Department of Insurance regarding affiliated business arrangements; the Connecticut Department of Insurance regarding producer compensation and captive reinsurance arrangements; the Florida Department of Financial Services regarding affiliated business arrangements; the Hawaii Insurance Division regarding producer compensation arrangements and captive reinsurance; the Idaho Department of Insurance regarding captive reinsurance and premium splits between agent and underwriter; the Massachusetts Attorney General regarding reinsurance and the title insurance market; the Minnesota Department of Commerce regarding captive and other reinsurance arrangements; the Tennessee Department of Insurance regarding producer compensation arrangements and competitive market practices of Title Insurance Company of America, and requiring the submission of an attestation regarding any finite reinsurance arrangements existing in that state; and regulatory departments from seven other states, excluding those that have been settled, regarding captive reinsurance arrangements. We also received and responded in 2005 to a request for information from the United States Department of Housing and Urban Development in conjunction with its investigation involving various builders, lenders and real estate brokers in connection with their participation in captive reinsurance companies.

In 2006, we received and are responding to an Administrative Subpoena from the Minnesota Department of Commerce with regard to a market examination. The insurance department of the State of New York has commenced a market conduct exam and indicated its intent to determine the Company’s adherence to filed premium rates, including whether refunds of overcharges to certain consumers may be required. The Maryland Department of Insurance has requested captive reinsurance information. The California Department of Insurance has requested information regarding any technology arrangements with settlement services providers.

We also reached agreements with the insurance departments of the states of California and Arizona in 2005 and Virginia and Nevada in 2006 to settle filed or potential claims regarding captive reinsurance and other regulatory matters except overcharges of certain consumers in California, without admitting any liability. These four states accounted for approximately 80% of our captive reinsurance business.

 
18

 
In June 2005, we established reserves of $19.0 million to cover anticipated exposure to regulatory matters nationwide, an amount which includes the settlements with the California, Arizona, Nevada and Virginia departments of insurance. Based on actual settlements, we released $6.7 million of this reserve back into earnings in fiscal year 2005. The remaining reserve at June 30, 2006 was approximately $6.1 million.

Also, in addition to or in connection with the above-referenced inquiries, multiple states, including California, Florida, Louisiana, Nevada, New Mexico, Texas and New York, are examining pricing levels and/or competition in the title insurance industry, with a view to determining whether prices are justified, and if not, to implement rate changes, including potential reductions.

On April 27, 2006, notice was issued that the Texas Commissioner will begin the hearing of the current Texas title rate case on August 16, 2006. In the course of prehearing discovery, the Department has sought and we have provided statistical data and testimony relating to the types and level of expenses for both underwriters and agents, captive reinsurance, rebating and other practices that may have the effect of raising the expenses of title insurers and agents.

On June 30, 2006, the Acting Superintendent of Insurance for New Mexico issued an Interim Order that the 2006 title insurance rates announced in a March 2006 order and scheduled to take effect on July 1, 2006 are to be implemented on an interim basis, subject to later revision if it is ultimately determined that the rates should be reduced and subject to refund.

Subsequent to a June 19, 2006 hearing of the Nevada Division of Insurance, on July 3, 2006 the Nevada Division of Insurance issued an additional request for information to the title industry, and advised that a Commissioner order will be issued in fall 2006 relating to title insurance. That order may result in further rate proceedings and rate changes as a result of those proceedings or may address potential changes in the rate filing process.

On July 3, 2006, California issued a Notice of Proposed Action which sets forth proposed regulations governing the rating of title insurance and related services, including the imposition of interim rate reductions and future filing of mandated statistical plans that would impose substantially higher costs on title insurance operations in California, and provides for a hearing on August 30, 2006.

On July 17, 2006, the Florida Office of Insurance Regulation announced the completion of a review of title insurance regulation in the state and said the information from the study would be used to begin a full review of title insurance rates charged in Florida. The Florida Office of Insurance Regulation is presently developing a rule to govern the upcoming rate analysis and rate setting process.


19


We may receive additional subpoenas and/or requests for information in the future from state or federal government agencies. We will evaluate, and we intend to cooperate in connection with, all such subpoenas and requests.

Based on the information known to management at this time, it is not possible to predict the outcome of any of the currently pending governmental inquiries and investigations into the title insurance industry’s market, business practices, pricing levels, and other matters described above, or the market’s response thereto. However, any material change in our business practices may have an adverse effect on our business, operating results and financial condition.

Other Commitments and Contingencies

We had guarantees of indebtedness of others of approximately $3.7 million at June 30, 2006 and $3.9 million at December 31, 2005

Our industrial bank subsidiary regularly commits to fund real estate loans. The amount of such commitments was not material as of June 30, 2006.

7.
SHAREHOLDERS’ EQUITY

In December 2004, the Board of Directors approved a share repurchase program with an expiration of February 2006 that authorized us to repurchase up to one million shares of our common stock at a cost not to exceed $60.0 million. During the fourth quarter 2005, we fully executed that share repurchase program. As a result, in October 2005, the Board of Directors approved a share repurchase program expiring July 2007 that authorized us to repurchase an additional 1.25 million shares of our common stock. We have repurchased 375,000 shares during the first six months of 2006 at an average price of $65.49 per share. At June 30, 2006, we had approximately 812,000 shares remaining in our authorized repurchase program.

8.
WRITE-OFF OF INTANGIBLE AND OTHER LONG-LIVED ASSETS

In January 2006, we announced our plan to relocate and consolidate our national headquarters and shared resources operations. In connection with this move, we intend to sell our existing headquarters building and related assets. As a result, we wrote down the building and related assets to the fair value less cost to sell. We have estimated that the impairment charge for the write down is approximately $9.7 million, which has been reflected in our results of operations for the six months ended June 30, 2006.

9.
SEGMENT INFORMATION

We are engaged in the business of providing title insurance as well as a broad array of real estate transaction-related services. We have three reporting segments that fall within three primary business segments, Title Operations, Lender Services and Financial
 
 
20

 
Services. The remaining immaterial reportable segments have been combined into a group called Corporate and Other.

Based on changes in our organizational structure and the combination of service offerings in our Lender Services segment, we have reclassified LandAmerica One Stop, Inc.’s services operations, which provide title and closing services to national lenders, to the Lender Services segment from the Title Operations segment. Amounts from 2005 have been reclassified to conform to the 2006 presentation.

Title Operations includes title insurance policies, escrow and closing services, and other real estate transaction management services for the residential and commercial market.

Lender Services provides services consisting primarily of title and closing, real estate tax processing, flood zone certifications, mortgage loan subservicing, consumer mortgage credit reporting and default management services for the lender market.

Financial Services consists of Orange County Bancorp and its wholly-owned subsidiary, Centennial Bank, a California industrial bank primarily engaged in the business of providing real estate loans in the Southern California market.

Corporate and Other includes home warranty, residential inspection and commercial appraisals and assessments, as well as the unallocated portion of the corporate expenses related to our corporate offices in Richmond, Virginia and unallocated interest expense.

We provide title services through direct operations and agents throughout the United States. We also offer title insurance in Mexico, Europe, Canada, the Caribbean and Latin America. Commercial assessment services are provided in Europe. The international operations account for less than 1 percent of our income before income taxes. Tax-related services are offered nationwide. Appraisal services are provided in 48 states.


21


The following tables provide selected financial information about our operations by segment for the three and six-month periods ending June 30, 2006, and 2005:

   
Three Months Ended June 30,
 
   
Operating
Revenue
 
Personnel Cost
 
Depreciation
 
Amortization of Intangible Assets
 
Income Before
Taxes
 
   
(In millions)
 
2006
                     
Title Operations
 
$
882.0
 
$
240.6
 
$
5.6
 
$
3.1
 
$
72.8
 
Lender Services
   
59.7
   
23.5
   
1.2
   
2.6
   
6.5
 
Financial Services
   
0.3
   
0.6
   
-
   
0.1
   
4.4
 
Corporate and Other
   
29.1
   
24.1
   
0.5
   
0.5
   
(26.3
)
Total
 
$
971.1
 
$
288.8
 
$
7.3
 
$
6.3
 
$
57.4
 
                                 
2005 (as restated)
                               
Title Operations
 
$
861.7
 
$
241.3
 
$
5.2
 
$
3.0
 
$
61.8
 
Lender Services
   
64.9
   
22.3
   
1.1
   
3.8
   
8.5
 
Financial Services
   
0.3
   
0.6
   
-
   
0.1
   
2.8
 
Corporate and Other
   
25.5
   
18.7
   
1.4
   
0.8
   
(21.5
)
Total
 
$
952.4
 
$
282.9
 
$
7.7
 
$
7.7
 
$
51.6
 


   
Six Months Ended June 30,
 
   
Operating
Revenue
 
Personnel
Cost
 
Depreciation
 
Amortization
of Intangible
Assets
 
Income
Before
Taxes
 
   
(In millions)
 
2006
                     
Title Operations
 
$
1,701.0
 
$
468.8
 
$
11.2
 
$
5.5
 
$
123.4
 
Lender Services
   
117.5
   
48.1
   
2.3
   
5.2
   
8.8
 
Financial Services
   
0.5
   
1.2
   
-
   
0.1
   
8.4
 
Corporate and Other
   
54.4
   
47.4
   
1.6
   
1.8
   
(64.7
)
Total
 
$
1,873.4
 
$
565.5
 
$
15.1
 
$
12.6
 
$
75.9
 
                                 
2005 (as restated)
                               
Title Operations
 
$
1,577.2
 
$
449.9
 
$
10.1
 
$
5.3
 
$
108.2
 
Lender Services
   
143.1
   
44.3
   
2.1
   
7.6
   
34.3
 
Financial Services
   
0.4
   
1.2
   
-
   
0.2
   
5.7
 
Corporate and Other
   
45.2
   
34.8
   
2.3
   
1.6
   
(42.8
)
Total
 
$
1,765.9
 
$
530.2
 
$
14.5
 
$
14.7
 
$
105.4
 

10.   SUBSEQUENT EVENT

On July 28, 2006, we entered into a Note Purchase and Master Shelf Agreement (the “Note Purchase Agreement”) with Prudential Investment Management, Inc. (“Prudential”) and the other purchasers thereunder. Under the Note Purchase Agreement, we will issue, on or prior to August 31, 2006, $50.0 million of our Senior Notes, Series D (the “Series D Notes”) to the Series D Note purchasers and, on or prior to November 17, 2006, issue $100.0 million of our Senior Notes, Series E (the “Series E Notes”) to the Series E Note purchasers. In addition, the Note Purchase Agreement contains provisions
 
 
22

 
for an uncommitted shelf facility by which we may issue, on or prior to July 28, 2009, up to $75.0 million of our Senior Notes (the “Shelf Notes”) to Prudential, upon mutually acceptable terms and conditions as may be agreed upon at the time of issuance.

The Series D Notes and Series E Notes will mature on the tenth anniversary of their issuance and will bear interest at a rate of 6.66% and 6.70% per annum, respectively. Shelf Notes, if issued, will bear interest at a to-be-determined per annum rate and will have maturities of no more than ten years. The Note Purchase Agreement, which governs the Series D Notes, Series E Notes and Shelf Notes, contains certain restrictive covenants, including a minimum debt to capitalization ratio and debt service ratio.

We will use the proceeds from the sale of the Series D Notes to pay our 7.16% Senior Notes, Series A that mature on August 31, 2006. The proceeds from the sale of the Series E Notes will be used to pay a percentage of the cash portion of the purchase price in connection with our pending acquisition of Capital Title Group, Inc.

On July 28, 2006, we entered into a Revolving Credit Agreement (the “Credit Agreement”) with SunTrust Bank, as administrative agent, issuing bank and swingline lender, and the other lenders party thereto. The Credit Agreement established a new, five-year revolving credit arrangement that replaced our previously existing five-year revolving credit arrangement that we entered into as of November 6, 2003.

The Credit Agreement establishes a credit facility in the aggregate principal amount of up to $200.0 million, which is the same amount established under the previously existing revolving credit arrangement. As of July 28, 2006, there were no borrowings outstanding under the Credit Agreement. The Credit Agreement contains certain restrictive covenants, including a minimum debt to capital ratio, an interest coverage ratio and maintenance of consolidated net worth requirement. With the respect to the consolidated net worth requirement, consolidated net worth cannot be less than an amount equal to the sum of (1) 85% of the consolidated net worth at December 31, 2005 plus (2) 50% of consolidated net income on a cumulative basis for each succeeding quarter starting with the quarter ending March 31, 2006 plus (3) 100% of the amount by which total shareholders’ equity is increased as a result of any public or private common stock offerings, excluding issuances of stock options and restricted stock to employees.
 



23


ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Overview

Our long-term goal is to enhance our position as one of the largest providers of real estate transaction services. To accomplish this objective, we have expanded operations through internal growth and selective strategic acquisitions. Our business operations are organized under three primary business segments: Title Operations, Lender Services and Financial Services. Other business operations not required to be reported separately are reported in a category called Corporate and Other. Based on changes in the organizational structure and combination of service offerings in the Lender Services segment, we have reclassified our LandAmerica OneStop services operations, which provide title and closing services to national lenders, to the Lender Services segment from the Title Operations segment. Amounts from 2005 have been reclassified to conform to the 2006 presentation. A description of these segments, including certain key factors impacting these businesses, are provided in Note 9 to Consolidated Financial Statements included herein and in our Annual Report on Form 10-K for the year ended December 31, 2005 as filed with the Securities and Exchange Commission on March 9, 2006. Also, starting with first quarter 2006, we are providing direct operating revenue from our commercial operations as opposed to the previous definition of commercial revenue as being premiums from policies providing coverage over $1 million in liability.

Critical Accounting Estimates

The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of certain assets, liabilities, revenue, expenses and related disclosures surrounding contingencies and commitments. A summary of our significant critical accounting estimates can be found in Management’s Discussion and Analysis in our Annual Report on Form 10-K for the year ended December 31, 2005 as filed with the Securities and Exchange Commission. Actual results could differ from these estimates.

Results of Operations

Operating Revenue 

The following table provides a summary of our operating revenue for the three and six-month periods ended June 30, 2006 and 2005:


24



   
Three Months Ended June 30,
 
   
2006
 
2005
 
           
(as restated)
 
   
(Dollars in millions)
 
Title Operations
                 
Direct Operations
 
$
376.7
   
38.8
%
$
397.5
   
41.7
%
Agency Operations
   
505.3
   
52.0
   
464.2
   
48.8
 
     
882.0
   
90.8
   
861.7
   
90.5
 
                           
Lender Services
   
59.7
   
6.2
   
64.9
   
6.8
 
                           
Financial Services
   
0.3
   
-
   
0.3
   
-
 
                           
Corporate and Other
   
29.1
   
3.0
   
25.5
   
2.7
 
                           
Total
 
$
971.1
   
100.0
%
$
952.4
   
100.0
%


   
Six Months Ended June 30,
 
   
2006
 
2005
 
           
(as restated)
 
   
(Dollars in millions)
 
Title Operations
                 
Direct Operations
 
$
717.5
   
38.3
%
$
706.1
   
40.0
%
Agency Operations
   
983.5
   
52.5
   
871.1
   
49.3
 
     
1,701.0
   
90.8
   
1,577.2
   
89.3
 
                           
Lender Services
   
117.5
   
6.3
   
143.1
   
8.1
 
                           
Financial Services
   
0.5
   
-
   
0.4
   
-
 
                           
Corporate and Other
   
54.4
   
2.9
   
45.2
   
2.6
 
                           
Total
 
$
1,873.4
   
100.0
%
$
1,765.9
   
100.0
%

Title Operations - Operating revenue from direct title operations decreased $20.8 million, or 5.2%, from second quarter 2005 to second quarter 2006 and increased $11.4 million, or 1.6%, in the first half of 2006 over the comparable period in 2005.

During second quarter 2006, direct operating revenue decreased as a result of a decline in order volume which was partially offset by an increase in the direct operating revenue per closed order and strong commercial activity. During the first half of 2006, direct operating revenue increased due to an increase in the direct operating revenue per closed order and strong commercial activity which more than offset a decline in order volume. Closed orders from our
 
 
25

 
direct title operations decreased 23.6% in second quarter 2006 from second quarter 2005, while direct operating revenue per closed order increased 24.1%. Closed orders for the first half of 2006 decreased 16.3% while the direct operating revenue per closed order increased 21.4%. Revenue from direct commercial operations was $98.0 million for second quarter 2006, an increase of 10.1% from $89.0 million in second quarter 2005 and $185.5 million for the first half of 2006, an increase of 18.7% from $156.3 million in the first half of 2005.

Operating revenue from agency title operations increased $41.1 million, or 8.9%, in second quarter 2006 over second quarter 2005. Operating revenue from agency title operations increased $112.4 million, or 12.9%, in the first half of 2006 over the first half of 2005. Growth in the agency business, particularly in certain southeastern and southwestern markets, contributed to the increase in agency revenue.

Lender Services - Operating revenue in second quarter 2006 decreased $5.2 million, or 8.0%, compared to second quarter 2005. Operating revenue in the first half of 2006 decreased $25.6 million, or 17.9%, compared to the first half of 2005. Results for 2005 included accelerated deferred revenue related to our tax and flood business of $6.9 million and $32.7 million in the second quarter and first half of 2005, respectively. Results for 2006 were impacted by growth in the loan subservicing and title and closing businesses offset in part by lower volume in the credit services business.

Corporate and Other -  Operating revenue in the Corporate and Other segment increased by $3.6 million, or 14.1%, in second quarter 2006 over second quarter 2005 and increased by $9.2 million, or 20.3%, in the first half of 2006 over the same period in 2005. Direct commercial revenue from our appraisal and assessment business was $14.3 million in second quarter 2006 compared to $12.8 million in second quarter 2005. Direct commercial revenue from our appraisal and assessment business was $26.5 million in the first half of 2006 compared to $22.3 million in the first half of 2005.

Investment and Other Income

Investment and other income increased $8.1 million, or 33.2%, in second quarter 2006 over second quarter 2005 and $16.5 million, or 36.1% in the first half of 2006 over the first half of 2005. The Financial Services segment generated $2.9 million of additional investment income in second quarter 2006 over second quarter 2005, and $5.7 million of additional investment income in the first half of 2006 over the first half of 2005. These increases were due to an increase in the portfolio of loans receivable and investments. The remaining increase was primarily attributable to higher dividend income from a shift in the portfolio toward equity securities and an increase in interest rates on fixed income securities combined with higher fixed income investment balances as of June 30, 2006 compared to the same period 2005.

Net Realized Investment Gains

Net realized investment (losses) gains were $(1.5) million in second quarter 2006 compared to $0.3 million in second quarter 2005 and $(0.6) million in the first half of 2006 compared to $1.1 million in the first half of 2005. We recognized approximately $1.6 million of
 
26

 
 
realized losses in second quarter 2006 on fixed income securities that were deemed to be other-than-temporarily impaired. For further details, see Note 4 of the Notes to Consolidated Financial Statements in Part I, Item 1 of this report.

Salary and Employee Benefits

The following table provides a summary of our salary and employee benefit costs for the three and six-month periods ending June 30, 2006 and 2005:

   
Three Months Ended June 30,
 
   
2006
 
2005
 
       
(as restated)
 
   
(Dollars in millions)
 
Title Operations
 
$
240.6
   
83.3
%
$
241.3
   
85.3
%
                           
Lender Services
   
23.5
   
8.1
   
22.3
   
7.9
 
                           
Financial Services
   
0.6
   
0.2
   
0.6
   
0.2
 
                           
Corporate and Other
   
24.1
   
8.4
   
18.7
   
6.6
 
                           
Total
 
$
288.8
   
100.0
%
$
282.9
   
100.0
%

   
Six Months Ended June 30,
 
   
2006
 
2005
 
       
(as restated)
 
   
(Dollars in millions)
 
Title Operations
 
$
468.8
   
82.9
%
$
449.9
   
84.8
%
                           
Lender Services
   
48.1
   
8.5
   
44.3
   
8.4
 
                           
Financial Services
   
1.2
   
0.2
   
1.2
   
0.2