LandAmerica Financial Group Inc. faces "serious liquidity constraints" now that rival Fidelity National Financial Inc. has backed out of a deal to acquire the troubled title insurer, analysts at Fitch Ratings said in slashing LandAmerica’s debt rating and the insurer financial strength ratings of its subsidiaries.

LandAmerica, which reported a $599.6 million third quarter loss, has breached its covenants on $250 million in bank debt, and can’t access $290 million invested in auction-rate securities as part of its 1031 exchange business, Fitch analysts said.

After announcing an agreement to acquire LandAmerica Nov. 7, Fidelity said Friday it was exercising its right to pull out of the deal during a due diligence period (see story).

Several analysts have suggested LandAmerica may pursue bankruptcy protection in light of the failed merger, the Wall Street Journal reported in an article Monday.

LandAmerica may rack up more losses as the company is forced to liquidate other investments in order to meet its cash needs. Nebraska insurance regulators could grant the company some relief by allowing it to trade auction rate securities for more liquid investments at the company’s title underwriting subsidiaries, Fitch analysts said.

LandAmerica 1031 Exchange Services Company Inc. "is accepting no new customers and is terminating its operations," LandAmerica said in a regulatory filing Monday.

LandAmerica established the company in 1990 to facilitate tax-deferred exchanges of business or investment properties. LandAmerica said that for years it’s been investing 1031 deposits only in investment grade securities rated "A" or better. The investments included securities backed by federally guaranteed student loans.

"As has been widely publicized, the auction-rate securities market froze earlier this year, and that extenuating circumstance prevents us from liquidating the auction rate securities held in the exchange funds," LandAmerica said. Customers of LandAmerica 1031 Exchange Services "will be provided soon with details regarding the establishment of a process for submitting claims."

The situation does not affect LandAmerica’s title insurance subsidiaries, the company said. The assets of those "highly regulated companies" are "completely separate" from the 1031 exchange company, and are "more than sufficient" to meet obligations to policyholder and escrow customers.

Fitch analysts said the statutory surplus at LandAmerica’s title underwriting subsidiaries has fallen from $426 million at the end of 2007 to $300 million at the end of September.

LandAmerica Financial Group’s risk-adjusted capital ratio is "substantially below" 100 percent, Fitch analysts said, and new "BB" insurer financial strength ratings "reflect the potential vulnerability" of the title insurance subsidiaries’ obligations.

In a statement, officials with the Nebraska Department of Insurance — who regulate LandAmerica subsidiaries Lawyers Title Insurance Corp. and Commonwealth Land Title Insurance Co. — said they were willing to "explore all steps necessary and appropriate to ensure that the surplus and reserves remain sufficient to meet the obligations of the underwriters."


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