Fidelity National Financial Inc. has closed a deal to acquire troubled LandAmerica Financial Group Inc.’s underwriting companies, making the company the nation’s largest title insurance underwriter.
Analysts at Fitch Ratings promptly downgraded ratings on $500 million in debt issued by Fidelity and cut the insurer financial strength of the company’s nine existing title insurance subsidiaries.
Fitch analysts cited Fidelity’s less favorable statutory capital position, further adverse reserve development, increased financial leverage at the holding company, and "general integration risk during an extraordinarily difficult operating environment."
LandAmerica filed for Chapter 11 bankruptcy protection on Nov. 26 and announced an agreement to sell its underwriting subsidiaries — Lawyers Title Insurance Corp., Commonwealth Land Title Insurance Co., and United Capital Title Insurance Co. — to Fidelity.
The acquisition of the three LandAmerica underwriting companies will give Fidelity control of roughly 45 percent of the U.S. title insurance business, vaulting the company ahead of current industry leader First American Corp. Together, Fidelity and First American are expected to underwrite more than 70 percent of title insurance policies in 11 of the 12 states that generate the most business (see story).
Antitrust regulators stood aside and allowed the deal to proceed after the U.S. Bankruptcy Court for the Eastern District of Virginia ruled that a competing offer by Stewart Title Guaranty Co. to acquire Lawyers and Commonwealth was "not credible, not bona fide and … incapable of being closed" (see ruling).
In a press release, Fidelity Chairman William Foley called the closing of the deal "an historic opportunity" for Fidelity, giving the company "dominant positions in both the residential and commercial markets."
Foley said Fidelity will have "an unrivaled balance sheet" including a $5.5 billion investment portfolio and more than $2.3 billion in reserves for claim losses.
The total purchase price for Commonwealth and Lawyers was approximately $235 million, Fidelity said, including $135 million in cash, $50 million in Fidelity common stock, and a $50 million subordinated note paying 2.36 percent interest due in 2013.
Fidelity has previously said it expects to pay fair market value for United Capital Title Insurance Co., or about $16 million, and close that deal in the first quarter with the approval of California regulators.
Nebraska regulators issued orders Monday releasing Lawyers and Commonwealth from receivership, after Fidelity agreed to provide a $157 million capital infusion to the companies to gain approval of the sale. On Nov. 18, the Nebraska Department of Insurance informed Commonwealth and Lawyers that it had determined the underwriting companies were in a "hazardous financial condition," derailing a previous agreement in which Fidelity was to acquire all of LandAmerica in a merge.
With the closure of the deal, analysts at Fitch ratings today upgraded the insurer financial strength ratings of Lawyers, Commonwealth and LandAmerica New Jersey Title Insurance Co. from "BB" to "BBB-".
At the same time, Fitch lowered the insurer financial strength ratings of nine Fidelity underwriting companies, including Fidelity National Title Insurance Co., Chicago Title Insurance Co. and Ticor Title Ins. Co., from "BBB" to "A-".
Fidelity’s debt-to-capital ratio of 32 percent at the close of the third quarter exceeds the companies’ long-term target of 20 to 25 percent, Fitch analysts said.
"While the $157 million payment will improve the quality of capital at the acquired underwriters, they will remain undercapitalized relative to Fidelity’s underwriters," Fitch analysts said. "In addition, Fidelity’s underwriters will also be in a weaker risk-adjusted capital position following the acquisition. "
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